nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒09‒20
seventeen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Resuscitating the wage channel in models with unemployment fluctuations By Kai Christoffel; Keith Kuester
  2. Existence of competitive equilibrium in an optimal growth model with heterogeneous agents and endogenous leisure By LE VAN Cuong; NGUYEN Manh-Hung
  3. Why Tax Capital? By Junsang Lee; Yili Chien
  4. Optimal Capital Taxation Under Limited Commitment By Junsang Lee; Yili Chien
  5. Money laundering in a two sector model: using theory for measurement By Amedeo Argentiero; Michele Bagella; Francesco Busato
  6. The Dynamics of General Equilibrium: A Comment on Professor Gintis By Ennio Bilancini; Fabio Petri
  7. The Effects of Labor Market Conditions on Working Time: the US-EU Experience By Claudio Michelacci; Josep Pijoan-Mas
  8. Wage Posting Without Full Commitment By Jacob Wong; Matthew Doyle
  9. Testing a DSGE model of the EU using indirect inference By David Meenagh; Patrick Minford; Michael Wickens
  10. Productivity Dispersion across Plants, Emission Abatement, and Environmental Policy By Li, Zhe
  11. Life expectancy and the environment By Fabio Mariani; Agustin Pérez-Barahona; Natacha Raffin
  12. Do Frictionless Models of Money and the Price level Make sense? By Colin Rogers
  13. Management Compensation and Firm-Level Income Inequality By Frederiksen, Anders; Poulsen, Odile
  14. Strategic Interaction Among Heterogeneous Price-Setters In An Estimated DSGE Model By Olivier Coibion; Yuriy Gorodnichenko
  15. Comparing Seasonal Forecasts of Industrial Production By Keith Blackburn; Kyriakos C. Neanidis; M. Emranul Haque
  16. Money as Friction: Conceptual dissonance in Woodford's Interest and Prices By Colin Rogers
  17. Estimating the Speed of Convergence in the Neoclassical Growth Model: An MLE Estimation of Structural Parameters Using the Stochastic Neoclassical Growth Model, Time-Series Data, and the Kalman Filter By Daniel G. Swaine

  1. By: Kai Christoffel (DG-Research, European Central Bank, Kaiserstraße 29, 60311 Frankfurt am Main, Germany); Keith Kuester (Monetary Policy Strategy Division, European Central Bank, Kaiserstraße 29, 60311 Frankfurt am Main, Germany.)
    Abstract: All else equal, higher wages translate into higher inflation. More rigid wages imply a weaker response of inflation to shocks. This view of the wage channel is deeply entrenched in central banks’ views and models of their economies. In this paper, we present a model with equilibrium unemployment which has three distinctive properties. First, using a search and matching model with right-to-manage wage bargaining, a proper wage channel obtains. Second, accounting for fixed costs associated with maintaining an existing job greatly magnifies profit fluctuations for any given degree of wage fluctuations, which allows the model to reproduce the fluctuations of unemployment over the business cycle. And third, the model implies a reasonable elasticity of steady state unemployment with respect to changes in benefits. The calibration of the model implies low profits, but does not require a small gap between the value of working and the value of unemployment for the worker. JEL Classification: E31, E32, E24, J64.
    Keywords: Bargaining, Unemployment, Business Cycle, Real Rigidities.
    Date: 2008–08
  2. By: LE VAN Cuong; NGUYEN Manh-Hung
    Date: 2008–09
  3. By: Junsang Lee; Yili Chien
    Abstract: We study optimal capital income taxation with a Ramsey problem and relate this optimal taxation problem to the question that has been asked in the asset pricing literature, which is why the risk free interest rate is too low. We show that the Ramsey planner chooses the optimal level of capital stock to be one that satisfies the modified golden rule in the steady state under some conditions. The conditions include suffcient government tax instruments and ability to issue bonds. We argue that the optimal capital level is different from that chosen in a competitive equilibrium unless the competitive equilibrium risk free interest rate is same as the time discount rate in the steady state. This difference in the choice of capital motivates imposing a positive capital income tax (or subsidy) on households to induce them to invest at the socially optimal amount. As examples, we investigate optimal capital taxation in a decentralized economy with limited commitment and one with private information. However, the result still holds in various types of economies with risk free interest rate that is too low.
    JEL: D86 E23 E44 E62
    Date: 2008–06
  4. By: Junsang Lee; Yili Chien
    Abstract: We study optimal capital taxation under limited commitment. We prove that the optimal tax rate on capital income should be positive in steady state provided that full risk-sharing is not feasible. In a limited commitment environment, a one unit increase of capital investment by an agent increases all individuals' autarky values in the economy and generates externality costs in the economy. This externality cost provides a rationale for positive capital taxation even in the absence of government expenditure. Moreover, we show that both this externality cost of capital investment and the optimal tax rate are potentially much bigger than one might expect.
    Date: 2008–08
  5. By: Amedeo Argentiero (Faculty of Economics, University of Rome "Tor Vergata"); Michele Bagella (Faculty of Economics, University of Rome "Tor Vergata"); Francesco Busato (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper implements a methodology that exploits firms and households’ optimality conditions to measure money laundering for the Italian economy. This approach, first implemented by Ingram, Kocherlakota, and Savin (1997) to the household production sector, and by Busato, Chiarini and Di Maro (2006) for measuring the underground economy, allows to generate high frequency series for the money laundering using a theoretical two-sector dynamic general equilibrium model calibrated over the sample 1981:01-2001:04. The analysis of the generated series suggests two main results. First, money laundering accounts for approximately 12 percent of aggregate GDP; second, money laundering is more volatile than aggregate GDP, and it is negatively correlated with it.
    Keywords: E26,E32,K40
    JEL: E26 E32 K40
    Date: 2008–09–09
  6. By: Ennio Bilancini; Fabio Petri
    Abstract: This is a comment on Gintis (2007, 'The Dynamics of General Equilibrium', Economic Journal 117 (523) , 1280–1309), who provides an agent-based model of a Walrasian economy where the tâtonnement is replaced by imitation. His simulations show that the economy converges to the Walrasian equilibrium. Gintis concludes that 1) his stability results provide some justification for the importance placed upon the Walrasian model, and 2) models allowing agents to imitate successful others lead to an economy with a reasonable level of stability and efficiency. Since these conclusions appear to be intended as general, we caution that Gintis's findings can only be accepted for Walrasian models without capital goods; in models with capital goods imitation-based adjustments alter the equilibrium's data (which makes the demonstration of stability impossible) and raise other important problems (absent from Gintis's simulations) still awaiting exploration.
    Keywords: Walrasian equilibrium, imitation, stability, agent-based simulations, capital goods
    JEL: D51 D58 B12 B13
    Date: 2008–08
  7. By: Claudio Michelacci (CEMFI and CEPR, Spain and The Rimini Centre for Economic Analysis, Italy); Josep Pijoan-Mas (CEMFI and CEPR, Spain)
    Abstract: We consider a labor market search model where, by working longer hours, individuals acquire greater skills and thereby obtain better jobs. We show that job inequality, which leads to within-skill wage differences, gives incentives to work longer hours. By contrast, a higher probability of losing jobs, a longer duration of unemployment, and in general a less tight labor market discourage working time. We show that the different evolution of labor market conditions in the US and in Continental Europe over the last three decades can quantitatively explain the diverging evolution of the number of hours worked per employee across the two sides of the Atlantic. It can also explain why the fraction of prime age male workers working very long hours has increased substantially in the US, after reverting a trend of secular decline.
    Keywords: working hours, wage inequality, unemployment, search, human capital filtering
    JEL: G31 J31 E24
    Date: 2008–01
  8. By: Jacob Wong (School of Economics, University of Adelaide); Matthew Doyle
    Abstract: Wage posting models of job search typically assume that firms can commit to paying workers the posted wage. This paper investigates the consequences of relaxing this assumption. Under ``downward'' commitment, ¯rms can commit only to paying at least their advertised wage. We show that wage posting is always an equilibrium, although in special cases other equilibria can exist. Surprisingly, the wage posting equilibrium in our economy is identical to the equilibrium when firms can commit to paying exactly their posted wage. When firms cannot even commit to paying at least their advertised wage, equilibrium exhibits job auctions with wage dispersion which generally is not constrained efficient.
    JEL: E24 J64
    Date: 2008–09
  9. By: David Meenagh; Patrick Minford; Michael Wickens
    Abstract: We use the method of indirect inference, using the bootstrap, to test the Smets and Wouters model of the EU against a VAR auxiliary equation describing their data; the test is based on the Wald statistic. We find that their model generates excessive variance compared with the data. But their model passes the Wald test easily if the errors have the properties assumed by SW but scaled down. We compare a New Classical version of the model which also passes the test easily if error properties are chosen using New Classical priors (notably excluding shocks to preferences). Both versions have (different) difficulties fitting the data if the actual error properties are used.
    Date: 2008–09
  10. By: Li, Zhe
    Abstract: Empirical studies suggest systematic relationships between plant’s productivity and plant’s emissions and emission-abatement costs. This paper demonstrates that productivity dispersion across plants is an important factor that influences the transmission of environmental policy. Within a general equilibrium framework, I model heterogeneous polluting plants by allowing them to be differing in productivity and to choose optimally a discrete emission-reduction technology taking into account both the costs of reducing emissions and the competition in the goods market. An emission-reduction policy affects the distribution of plants with the advanced abatement technology and relocates resources and market shares across plants. As a result, the aggregate effects of an environmental policy depend on the degree of productivity dispersion. Using Canadian data, I show quantitatively that the aggregate effects of an environmental policy significantly affected by the degree of productivity dispersion both in the transition periods and in the long-run steady-state equilibrium.
    JEL: Q52 E00 Q58
    Date: 2008–09–14
  11. By: Fabio Mariani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I); Agustin Pérez-Barahona (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Natacha Raffin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I)
    Abstract: We present an OLG model in which life expectancy and environmental quality dynamics are jointly determined. Agents may invest in environmental quality, depending on how much they expect to live, but also in order to leave good environmental conditions to future generations. In turn, environmental conditions affects life expectancy.The model produces multiple steady states development regimes) and initial conditions do matter. In particular, some countries may be trapped in a low life expectancy /low environmental quality trap. This outcome is consistent with stylized facts relating life expectancy and environmental performance measures. Possible strategies to escape from this kind of trap are also discussed. Finally, this result is robust to the introduction of human capital through parental education expenditures.
    Keywords: Environmental quality; life expectancy; poverty traps.
    Date: 2008–09
  12. By: Colin Rogers (School of Economics, University of Adelaide)
    Abstract: No. As well-specified Walrasian general equilibrium systems, frictionless models are isomorphic with the Arrow-Debreu (A-D) world. It is well known that the A-D world has no role for money, credit or banks. Grafting a role for money onto a frictionless model by appending a quantity equation or cash-in-advance constraint makes the error of converting money into a friction. Furthermore, as frictionless models have no use for money or nominal values it makes no sense to use them to adjudicate between theories of the price level or to claim that they provide the theoretical foundations for monetary policy.
    Keywords: Frictionless models; `monetary frictions'; nominal and numeraire prices; theories of the price level.
    JEL: B40 E40 E42 E50
    Date: 2008–09
  13. By: Frederiksen, Anders (Aarhus School of Business); Poulsen, Odile (University of East Anglia)
    Abstract: In recent decades, most developed countries have experienced a simultaneous increase in income inequality and management compensation. In this paper, we study the relation between management compensation and firm-level income dynamics in a general equilibrium model. Empirical estimation, of the model’s key parameters show that the rising management premium is indeed the main driving force behind the observed increase in income inequality. This is the case even when other potential sources such as technological progress and skill-biased technological change are taken into account. We also show that a rising management premium produces income distribution dynamics at the firm level which are similar to those observed at the market level, i.e. rising income inequality overall as well as within and between education groups.
    Keywords: income inequality, two-sector search model, skill-biased technological change, personnel data
    JEL: J3 J6 M5 O3
    Date: 2008–09
  14. By: Olivier Coibion; Yuriy Gorodnichenko
    Abstract: We consider a DSGE model in which firms follow one of four price-setting regimes: sticky prices, sticky-information, rule-of-thumb, or full-information flexible prices. The parameters of the model, including the fractions of each type of firm, are estimated by matching the moments of the observed variables of the model to those found in the data. We find that sticky-price firms and sticky-information firms jointly account for over 95% of firms in the model, with the two receiving approximately equal shares. We compare the performance of our hybrid model to pure sticky-price and sticky-information models along various dimensions, including monetary policy implications.
    JEL: E3 E5
    Date: 2008–09
  15. By: Keith Blackburn; Kyriakos C. Neanidis; M. Emranul Haque
    Abstract: This paper presents an analysis of the effect of bureaucratic corruption on economic growth through a public ?nance transmission channel. At the theoretical level, we develop a simple dynamic general equilibrium model in which fi?nancial intermediaries make portfolio decisions on behalf of agents, and bureaucrats collect tax revenues on behalf of the government. Corruption takes the form of the embezzlement of public funds, the effect of which is to increase the government's reliance on seigniorage ?nance. This leads to an increase in inflation which, in turn, reduces capital accumulation and growth. At the empirical level, we use data on 82 countries over a 20-year period to test the predictions of our model. Taking proper account of the government's budget constraint, we ?find strong evidence to support these predictions under different estimation strategies. Our results are robust to a wide range of sensitivity tests.
    Date: 2008
  16. By: Colin Rogers (School of Economics, University of Adelaide)
    Abstract: In Interest and Prices Woodford employs a frictionless model to derive nominal interest rate rules that can be applied by central banks to achieve price level stability. But frictionless models are Walrasian general equilibrium models that preclude any role for money. Furthermore frictionless model have no role for nominal values or the price level and therefore no role for a central bank. Consequently, conceptual anomalies arise in Woodford's attempt to analyse questions of monetary theory and policy that are precluded by construction in frictionless models. In some states of the model money is converted into a ‘friction', contra economic theory.
    Keywords: Frictionless models; time-0 auction; ‘monetary frictions'
    JEL: B E40 E42 E50
    Date: 2008–09
  17. By: Daniel G. Swaine (Department of Economics, College of the Holy Cross)
    Abstract: An important question is whether underdeveloped countries will converge to the per-capita income level of developed countries. Economists have used the disequilibrium adjustment property of growth models to justify the view that convergence should occur. Unfortunately, the empirical literature does not obey the "Lucas" admonition of estimating the structural parameters of a growth model that has the conditional convergence property and then computing the speed of convergence implied by the estimated structural parameters. In this paper, we use U.S. time-series data to estimate the structural parameters of a stochastic neoclassical growth model and compute the speed of conditional convergence in the non-stochastic model from the structural parameter estimates. We follow an approach used to econometrically estimate business cycle models via maximum likelihood. We obtain a speed of conditional convergence of 12.8 percent per-year for logarithmic consumer preferences and find that the data rejects the hypothesis of the 2 percent per-year speed of conditional convergence obtained in the empirical literature.
    Keywords: Convergence, Transitional Dynamics, Economic Growth, Economic Development, Real Business Cycle Models, Stochastic Growth Models, Time-Series Analysis
    JEL: C30 C32 E E32 O10 O11 O40 O41
    Date: 2008–09

This nep-dge issue is ©2008 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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