|
on Dynamic General Equilibrium |
| By: | Mauro Bambi (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Aurélien Saïdi (Economix, Université Paris X, Nanterre) |
| Abstract: | We consider a real business cycle model with a productive externality and an aggregate non- convex technology set µa la Benhabib and Farmer embodying capacity utilization, which exhibits indeterminacy of the steady state and multiplicity of deterministic equilibria under plausible values of the increasing returns to scale. The aim of the paper is to rank these different equilibria according to the initial value of consumption using both a linear-quadratic approximation, extensively explained by Benigno and Woodford [2006a, 2006b], and simulation methods. We study the implications of such a ranking in terms of smoothness of the welfare-maximizing trajectory and show that the welfare- maximizing consumption and labor paths are all the smoother since the level of increasing returns is low. At last, we show that this solution provides a good benchmark for judging the desirability of the stabilization policy proposed by Guo and Lansing [1997]. |
| Keywords: | Increasing returns, Local indeterminacy, Welfare analysis, Numerical Methods |
| JEL: | E32 E4 H61 O42 O47 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:08-99&r=dge |
| By: | Jahn, Elke J. (Aarhus School of Business); Wagner, Thomas (University of Applied Sciences Nuremberg) |
| Abstract: | To reduce unemployment targeted hiring subsidies for long-term unemployed are often recommended. To explore their effect on employment and wages, we devise a model with two types of unemployed and two methods of search, a public employment service (PES) and random search. The eligibility of a new match depends on the applicant's unemployment duration and on the method of search. The hiring subsidy raises job destruction and extends contrary to Mortensen-Pissarides (1999, 2003) the duration of a job search, so that equilibrium unemployment increases. Like the subsidy, organizational reforms, which advance the search effectiveness of the PES, crowd out the active jobseekers and reduce overall employment as well as social welfare. Nevertheless, reforms are a visible success for the PES and its target group, as they significantly increase the service's placement rate and lower the duration of a job search via the PES. |
| Keywords: | matching model, hiring subsidy, endogenous separation rate, active labour market policy, PES, random search |
| JEL: | J41 J63 J64 J68 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3768&r=dge |
| By: | Ricardo J. Caballero; Pierre Yared |
| Abstract: | The conventional wisdom is that politicians' rent-seeking motives increase public debt and deficits. This is because myopic politicians face political risk and prefer to extract political rents as early as possible. An implication of this argument is that governments will under-save during a boom, leaving the economy unprotected in the event of a downturn. This view motivates a number of fiscal rules which are aimed at cutting deficits and constraining borrowing so as to limit the size of this political distortion. In this paper we study the determination of government debt and deficits in a dynamic model of debt which characterizes political distortions. We find that in our model the conventional wisdom always applies in the long run, but only does so in the short run when economic volatility is low. Instead, when economic volatility is high, a rent-seeking government over-saves and over-taxes along the equilibrium path relative to a benevolent government. Paradoxically, the over-saving bias can also be solved in this case by a rule of capping deficits, although the mechanism operates through its effect on expectations of future rent extraction rather than though the contemporary constraint. However, these rules are ineffective in solving the high taxation problem caused by the political friction, which in the short run is more acute in the high income volatility scenario. |
| JEL: | E6 H2 H6 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14417&r=dge |
| By: | Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna,) |
| Abstract: | In this paper I derive the optimal portfolio mix between a funded and an unfunded pension system when people care about their consumption relative to a reference group. Pay-as-you-go systems with fixed contribution rates have the property that pension benefits are tied to labor income. This lowers the uncertainty of individuals’future relative position and thus increases the attractiveness of unfunded systems. The paper shows analytically that in an OLG model the optimal share of funding decreases with the strength of individuals’ concern for relative standing. A calibrated version of the model that uses data for various countries and time periods suggests that the sensitivity of the optimal share of funding to the concern of relative standing is also quantitatively important. For reasonable assumptions about reference standards it is typically around 20%. |
| Keywords: | Pension Systems; Social Security; Risk sharing; Portfolio Choice; Relative Consumption. |
| JEL: | H55 G11 E60 |
| Date: | 2008–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:146&r=dge |
| By: | Audrey Desbonnet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, University of Vienna - University of Vienna); Sumudu Kankanamge (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | This paper assesses the long-run optimal level of public debt in a framework where aggregate fluctuations are taken into account. Households are subject to both aggregate and idiosyncratic shocks and the market structure prevents them from perfectly insuring against risk. We find that the long-run optimal level of public debt is generally higher in a setting embedding aggregate fluctuations than in a setting without. Aggregate fluctuations modify both the cost and the motive for precautionary saving. Higher levels of public debt, by effectively reducing the cost of precautionary saving, help agents to smooth consumption when they face price and employment fluctuations. |
| Keywords: | Public debt, aggregate risk, precautionary saving, credit constraints. |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00175877_v2&r=dge |
| By: | Mauro Bambi (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland) |
| Abstract: | Several contributions have recently reconsidered the role of the time to build assumption in explaining some relevant stylized facts. In this paper, the similarities and differences which may emerge when the time to build structure of capital is introduced in a continuous or discrete time framework are studied and enlightened. The most striking difference lies in the dimensionality of the two frameworks, which is always finite in discrete but infinite in continuous time. Then, the deterministic version of the traditional time to build model developed by Kydland and Prescott is presented, and it is shown how the typical time to build model setup in continuous time can be obtained. Moreover, the richest dynamics in continuous time is investigated and, more importantly, it is shown that the predictions in terms of capital, output, and consumption behavior are not signi¯cantly di®erent from its discrete version once the economy is calibrated properly. |
| Keywords: | Discrete and continuous time, time-to-build, mixed functional differential equa- tions. |
| JEL: | E00 E30 O40 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:08-98&r=dge |
| By: | Benjamin Lester (Department of Economics, University of Western Ontario); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Randall Wright (Department of Economics, University of Pennsylvania) |
| Abstract: | We study economies with multiple assets that are valued both for their return and liquidity. Exchange occurs in decentralized markets with frictions making a medium of exchange essential. Some assets are better suited for this role because they are more liquid - more likely to be accepted in trade - even if they have a lower return. The reason assets are more or less likely to be accepted is modeled using informational frictions, or recognizability. While everyone understands e.g. what currency is and what it is worth, some might be less sure about other claims. In our model, agents who do not recognize assets do not accept them in trade. Recognizability is endogenized by letting agents invest in information, potentially generating multiple equilibria with different liquidity. We discuss implications for asset pricing and for monetary policy. In particular, we show explicitly that what may look like a cash-in-advance constraint is not invariant to policy interventions or other changes in the economic environment |
| Keywords: | Money, Asset Pricing, Liquidity |
| JEL: | G12 E4 |
| Date: | 2008–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:08-039&r=dge |
| By: | Hugo Gerard; Kristoffer Nimark |
| Abstract: | This paper combines multivariate density forecasts of output growth, inflation and interest rates from a suite of models. An out-of-sample weighting scheme based on the predictive likelihood as proposed by Eklund and Karlsson (2005) and Andersson and Karlsson (2007) is used to combine the models. Three classes of models are considered: a Bayesian vector autoregression (BVAR), a factor-augmented vector autoregression (FAVAR) and a medium-scale dynamic stochastic general equilibrium (DSGE) model. Using Australian data, we find that, at short forecast horizons, the Bayesian VAR model is assigned the most weight, while at intermediate and longer horizons the factor model is preferred. The DSGE model is assigned little weight at all horizons, a result that can be attributed to the DSGE model producing density forecasts that are very wide when compared with the actual distribution of observations. While a density forecast evaluation exercise reveals little formal evidence that the optimally combined densities are superior to those from the best-performing individual model, or a simple equal-weighting scheme, this may be a result of the short sample available. |
| Keywords: | Density forecasts, combining forecasts, predictive criteria |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1117&r=dge |
| By: | Hans Fehr; Christian Habermann |
| Abstract: | The present paper studies the growth, welfare and efficiency consequences of the recent introduction of tax-favored retirement accounts in Germany in a general equilibrium overlapping generations model with idiosyncratic lifespan and labor income uncertainty. We focus on the implicit differential taxation of specific savings motives, the mandatory annuitization of benefits and the impact of special provisions for low-income households. The simulations indicate that the reform improves overall economic efficiency by about 0.6 percent of aggregate resources, but welfare decreases significantly for future generations. Finally, we show that special provisions could be very effective in raising the participation of low-income households despite their low budgetary cost. |
| Keywords: | Individual retirement accounts, annuities, stochastic general equilibrium |
| JEL: | H55 J26 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp133&r=dge |
| By: | Jose Emilio Boscá (University of Valencia); Rafael Domenech (University of Valencia); Javier Ferri (University of Valencia) |
| Abstract: | This paper uses REMS, a Rational Expectations Model of the Spanish economy designed by Boscá et al (2007), to analyse the effects of lowering the overall tax wedge to the level prevailing in the US. Our results partially confirm previous findings in the literature: a reduction in the overall tax wedge of 19.5 points, in order to reach the US levels, has a positive effect in the long run, increasing total hours by about 7 per cent and GDP by about 8 percentage points. In terms of GDP per adult, these results account for 1/4 of the gap with respect to the US, but imply a reduction of only one percentage point in the labour productivity gap. The rise in total hours per adult is explained by a similar increase in both hours per employee and the employment rate of about 3.5 percentage points, allowing hours per adult to converge to levels only slightly lower than those in the US. |
| Keywords: | general equilibrium, tax wedge, tax reforms, fiscal policy, labour market |
| JEL: | E32 E62 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:iei:wpaper:0804&r=dge |
| By: | Stefano Bosi (EQUIPPE - Université de Lille I, EPEE - Université d'Evry-Val d'Essonne); Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | The aim of this paper is to study the role of progressive tax rules on the allocations of steady state and the stability properties in a Ramsey economy with heterogeneous households and borrowing constraints. Since labor supply in elastic, considering different tax rates on capital and labor incomes is relevant. The steady state analysis allows us to highlight the existence of different types of stationary equilibria. While patient agents always hold capital, impatient ones have or not positive savings, depending on the leval of real interest rate. Furthermore, it is not always optimal for all households to have a positive labor supply. Studying the comparative statics and local dynamics, we focus on the steady state with a segmented population : patient households own the whole stock of capital, while the impatient ones are workers. Varying the population sizes and the tax rates, we underline the crucial role of fiscal progressivity and endogenous labor. Moreover, in contrast to many contributions, we prove that progressive tax rules can promote expectation-driven fluctuations and endogenous cycles which means that progressivity can be inopportune to stabilize macroeconomic volatility. |
| Keywords: | Progressive taxation, heterogeneous agents, borrowing constraint, endogenous labor supply, steady state allocation, macroeconomic stability. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00331299_v1&r=dge |
| By: | V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan |
| Abstract: | The central finding of the recent structural vector autoregression (SVAR) literature with a differenced specification of hours is that technology shocks lead to a fall in hours. Researchers have used this finding to argue that real business cycle models are unpromising. We subject this SVAR specification to a natural economic test by showing that when applied to data generated from a multiple-shock business cycle model, the procedure incorrectly concludes that the model could not have generated the data as long as demand shocks play a nontrivial role. We also test another popular specification, which uses the level of hours, and show that with nontrivial demand shocks, it cannot distinguish between real business cycle models and sticky price models. The crux of the problem for both SVAR specifications is that available data necessitate a VAR with a small number of lags and, when demand shocks play a nontrivial role, such a VAR is a poor approximation to the model's infinite order VAR. |
| JEL: | C32 C51 E13 E2 E3 E32 E37 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14430&r=dge |
| By: | Stefano Bosi (EQUIPPE - Université de Lille I, EPEE - Université d'Evry-Val d'Essonne); Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | The aim of this paper is to study the role of progressive tax rules on the allocations of steady state and the stability properties in a Ramsey economy with heterogeneous households and borrowing constraints. Since labor supply in elastic, considering different tax rates on capital and labor incomes is relevant. The steady state analysis allows us to highlight the existence of different types of stationary equilibria. While patient agents always hold capital, impatient ones have or not positive savings, depending on the leval of real interest rate. Furthermore, it is not always optimal for all households to have a positive labor supply. Studying the comparative statics and local dynamics, we focus on the steady state with a segmented population : patient households own the whole stock of capital, while the impatient ones are workers. Varying the population sizes and the tax rates, we underline the crucial role of fiscal progressivity and endogenous labor. Moreover, in contrast to many contributions, we prove that progressive tax rules can promote expectation-driven fluctuations and endogenous cycles which means that progressivity can be inopportune to stabilize macroeconomic volatility. |
| Keywords: | Progressive taxation, heterogeneous agents, borrowing constraint, endogenous labor supply, steady state allocation, macroeconomic stability. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00331299_v1&r=dge |
| By: | Audrey Desbonnet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, University of Vienna - University of Vienna); Sumudu Kankanamge (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | This paper assesses the long-run optimal level of public debt in a framework where aggregate fluctuations are taken into account. Households are subject to both aggregate and idiosyncratic shocks and the market structure prevents them from perfectly insuring against risk. We find that the long-run optimal level of public debt is generally higher in a setting embedding aggregate fluctuations than in a setting without. Aggregate fluctuations modify both the cost and the motive for precautionary saving. Higher levels of public debt, by effectively reducing the cost of precautionary saving, help agents to smooth consumption when they face price and employment fluctuations. |
| Keywords: | Public debt, aggregate risk, precautionary saving, credit constraints. |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00175877_v2&r=dge |
| By: | Martin F. Quaas (University of Kiel); Sjak Smulders (University of Calgary and Tilburg University) |
| Abstract: | We analyze the efficiency of urbanization patterns in a dynamic model of endogenous urban growth with two sectors of production. Production exhibits increasing returns to scale on aggregate. Urban environmental pollution, as a force that discourages agglomeration, is caused by domestic production. We show that cities are too large and too few in number in equilibrium, compared to the efficient urbanization path, if economic growth implies increasing aggregate emissions. If, on the other hand, production becomes cleaner over time (`quality growth') the urbanization path approximates the efficient outcome after finite time. |
| Keywords: | Cities, Urbanisation, Pollution, Growth, Migration, Sustainable Development |
| JEL: | Q56 R12 O18 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2008.75&r=dge |
| By: | Enrique G. Mendoza |
| Abstract: | This paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets' Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin’s Q driven by Irving Fisher’s debt-deflation mechanism, which causes a spiraling decline in credit access and in the price and quantity of collateral assets. Output and factor allocations decline because the collateral constraint limits access to working capital financing. This credit constraint induces significant amplification and asymmetry in the responses of macro-aggregates to shocks. Because of precautionary saving, Sudden Stops are low probability events nested within normal cycles in the long run. |
| JEL: | D52 E32 E44 F32 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14444&r=dge |