nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒11‒11
nineteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Non-convex Aggregate Technology and Optimal Economic Growth By Nguyen Manh Hung; Cuong Le Van; Philippe Michel
  2. Estimating the dynamics of R&D-based growth models By YATSENKO, Yuri; BOUCEKKINE, Raouf; HRITONENKO, Natali
  3. Productivity, aggregate demand and unemployment fluctuations By Regis Barnichon
  4. Housing market spillovers : evidence from an estimated DSGE model By Matteo Iacoviello; Stefano Neri
  5. Matching Models Under Scrutiny : Understanding the Shimer Puzzle By Gabriele, CARDULLO
  6. How do epidemics induce behavioral changes ? By Raouf, BOUCEKKINE; Rodolphe, DESBORDES; HŽlne, LATZER
  7. Financial (in)stability, supervision and liquidity injections : a dynamic general equilibrium approach By Gregory de Walque; Olivier Pierrard; Abdelaziz Rouabah
  8. Risk premiums and macroeconomic dynamics in a heterogeneous agent model By Ferre De Graeve; Maarten Dossche; Marina Emiris; Henri Sneessens; Raf Wouters
  9. Monetary policy and stock market boom-bust cycles By Lawrence Christiano; Cosmin Ilut; Roberto Motto; Massimo Rostagno
  10. Linear-Quadratic Approximation of Optimal Policy Problems By Pierpaolo Benigno; Michael Woodford
  11. The bond premium in a DSGE model with long-run real and nominal risks By Glenn D. Rudebusch; Eric T. Swanson
  12. Pareto-efficiency and endogenous fertility: a simple model By Philippe Michel; Bertrand Wigniolle
  13. Globalization of production and the technology transfer paradox By Edwin Lai
  14. Redistribution, Pension Systems and Capital Accumulation By Christophe Hachon
  15. RBCs and DSGEs: The Computational Approach to Business Cycle Theory and Evidence By Özer Karagedikli; Troy Matheson; Christie Smith; Shaun Vahey
  16. Family Labor Supply and Aggregate Saving By Santos Monteiro, Paulo
  17. Income Dispersion and Counter-Cyclical Markups By Chris Edmond; Laura Veldkamp
  18. Tariff and Equilibrium Indeterminacy By Zhang, Yan
  19. Heterogeneity and Cyclical Unemployment By Mark Bils; Yongsung Chang; Sun-Bin Kim

  1. By: Nguyen Manh Hung (Université de Laval - Université de Laval); Cuong Le Van (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); Philippe Michel (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: This paper examines a model of optimal growth where the aggregation of two separate well behaved and concave production technologies exhibits a basic non-convexity. First, we consider the case of strictlyconcave utility function: when the discount rate is either low enough or high enough, there will be one steady state equilibrium toward which the convergence of the optimal paths is monotone and asymptotic. When the discount rate is in some intermediate range, we find sufficient conditions for having either one equilibrium or multiple equilibria steady state. Depending to whether the initial capital per capita is located with respect to a critical value, the optimal paths converge to one single appropriate equilibrium steady state. This state might be a poverty trap with low per capita capital, which acts as the extinction state encountered in earlier studies focused on S-shapes production functions. Second, we consider the case of linear utility and provide sufficient conditions to have either unique or two steady states when the discount rate is in some intermediate range . In the latter case, we give conditions under which the above critical value might not exist, and the economy attains one steady state infinite time, then stays at the other steady state afterward.
    Keywords: Non-convex agreggative technology – optimal economic growth – steady state
    Date: 2008–03–26
  2. By: YATSENKO, Yuri; BOUCEKKINE, Raouf (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); HRITONENKO, Natali
    Abstract: Several R&D-based models of endogenous economic growth are investigated under the Solow-like assumption of fixed allocation of resources across activities. We identify model parameters that lead to explosive dynamics and analyze various economic techniques to avoid it. The techniques include adding stricter constraints on model trajectories and limiting factors in technology equation. In particular, we demonstrate that our vintage version of the well known R&D-based model of economic growth (Jones, 1995) exhibits the same balanced dynamics as the original model.
    Keywords: vintage capital models, endogenous technological change, R&D investment, explosive dynamics, nonlinear Volterra integral equations.
    JEL: E20 O40 C60
    Date: 2008–09
  3. By: Regis Barnichon
    Abstract: This paper presents new empirical evidence on the cyclical behavior of US unemployment that poses a challenge to standard search and matching models. The correlation between cyclical unemployment and the cyclical component of labor productivity switched sign in the mid 80s: from negative it became positive, while standard search models imply a negative correlation. I argue that the inconsistency arises because search models do not allow output to be demand determined in the short run, and I present a search model with nominal rigidities that can rationalize the empirical findings. In addition, I show that the interaction of hiring frictions and nominal frictions can generate a new propagation mechanism absent in standard New-Keynesian models.
    Date: 2008
  4. By: Matteo Iacoviello (Boston College, Department of Economics); Stefano Neri (Banca d'Italia, Research Department)
    Abstract: We study sources and consequences of fluctuations in the housing market. The upward trend in real housing prices of the last 40 years can be explained by slow technological progress in the housing sector. Over the business cycle, housing demand and housing technology shocks explain one-quarter each of the volatility of housing investment and housing prices. Monetary factors explain 20 percent, but they played a bigger role in the housing cycle at the turn of the century. We show that the housing market spillovers are non-negligible, concentrated on consumption rather than business investment, and have become more important over time.
    Keywords: Housing, Wealth E¤ects, Bayesian Estimation, Two-sector Models
    JEL: E32 E44 E47 R21 R31
    Date: 2008–10
  5. By: Gabriele, CARDULLO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Two papers have recently questioned the quantitative consistency of the search and matching models. Shimer (2005) has argued that a text-book matching model is unable to explain the cyclical variation of unemployment and vacancies in the U.S. economy. Costain and Reiter (2007) have found the existence of a trade-off in the modelÕs performance : any attempt to change the calibrated values in order to amend such business cycle inability would jeopardize the modelÕs predictions about the impact of unemployment benefits on the hazard rate. In surveying the literature originated in these findings, I distinguish three different avenues that have been followed to corret the model : change in wage formation, change in the calibration, changes in the model specification. The last approach seems to reach the best results both from a business cycle and from a microeconomic viewpoint.
    Keywords: Search-matching equilibrium, Business Cycles, Labour markets
    JEL: E24 E32 J63 J64
    Date: 2008–04–28
  6. By: Raouf, BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Rodolphe, DESBORDES; HŽlne, LATZER
    Abstract: This paper develops a theory of optimal fertility behavior under mortality schocks. In a 3-periods OLG model, young adults determine their optimal fertility, labor supply and life-cycle consumption with both exogenous child and adult mortality risks. For fixed prices (real wages and interest rate), it is shown that both child and adult one-period mortality shocks raise fertility due to insurance and life-cycle mechanisms respectively. In general equilibrium, adult mortality shocks give risse to price effects (notably through rising wages) lowering fertility, in contrast to child mortality shocks. We complement our theory with an empirical analysis on a sample of 39 Sub-Saharan African countries over the 1980-2004 period, checking for the overall effects of the adult and child mortality channels on optimal fertility behavior. We find child mortality to exert a robust, positive impact on fertility, whereas the reverse is ture for adult mortality. We further find this negative effect fertility of a rise in adult mortality to dominate in the long-term the positive effect on demand for children resulting from an increase in child mortality.
    Keywords: fertility, mortality, epidemics, HIV
    JEL: J13 J22 O41
    Date: 2008–08–25
  7. By: Gregory de Walque (National Bank of Belgium, Research Department; University of Namur); Olivier Pierrard (Central Bank of Luxembourg; Catholic University of Louvain); Abdelaziz Rouabah (Central Bank of Luxembourg)
    Abstract: This paper develops a dynamic stochastic general equilibrium model with interactions between an heterogeneous banking sector and other private agents. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbankmarket. Our aim is to understand the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real data and used for simulations. We show that liquidity injections reduce financial instability but have ambiguous effects on output fluctuations. The model also confirms the partial equilibrium literature results on the procyclicality of Basel II.
    Keywords: DSGE, Banking sector, Default risk, Supervision, Money
    JEL: E13 E20 G21 G28
    Date: 2008–10
  8. By: Ferre De Graeve (Federal Reserve Bank of Dallas); Maarten Dossche (National Bank of Belgium, Research Department); Marina Emiris (National Bank of Belgium, Research Department); Henri Sneessens (Catholic University of Louvain-La-Neuve); Raf Wouters (National Bank of Belgium, Research Department)
    Abstract: We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in terms of risk aversion. Aggregate productivity and distribution risk are shared among these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. We discuss the implications for the real and nominal component of the risk premium on equity and bonds. We show how these premiums react to changes in the volatility of the shocks, as experienced during the great moderation. We also analyze the effects of changes in monetary policy behavior and the resulting inflation dynamics.
    JEL: E32 E44 G12
    Date: 2008–10
  9. By: Lawrence Christiano (Northwestern University, 2003 Sheridan Road, Evanston, IL 60208, USA.); Cosmin Ilut (Northwestern University, 2003 Sheridan Road, Evanston, IL 60208, USA.); Roberto Motto (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic. We find that it is difficult to generate a boom-bust cycle (a period in which stock prices, consumption, investment and employment all rise and then crash) in response to such a news shock, in a standard real business cycle model. However, a monetized version of the model which stresses sticky wages and a Taylorrule based monetary policy naturally generates a welfare-reducing boom-bust cycle in response to a news shock. We explore the possibility that integrating credit growth into monetary policy may result in improved performance. We discuss the robustness of our analysis to alternative specifications of the labor market, in which wage-setting frictions do not distort on going firm/worker relations. JEL Classification: C11, C51, E5, E13, E32.
    Keywords: DSGE Models, Monetary Policy, Asset price boom-busts.
    Date: 2008–10
  10. By: Pierpaolo Benigno (Full Professor, LUISS Guido Carli); Michael Woodford (Columbia University - Department of Economics)
    Abstract: We consider a general class of nonlinear optimal policy problems involving forward-looking constraints (such as the Euler equations that are typically present as structural equations in DSGE models), and show that it is possible, under regularity conditions that are straightforward to check, to derive a problem with linear constraints and a quadratic objective that approximates the exact problem. The LQ approximate problem is computationally simple to solve, even in the case of moderately large state spaces and flexibly parameterized disturbance processes, and its solution represents a local linear approximation to the optimal policy for the exact model in the case that stochastic disturbances are small enough. We derive the second-order conditions that must be satisfied in order for the LQ problem to have a solution, and show that these are stronger, in general, than those required for LQ problems without forward looking constraints. We also show how the same linear approximations to the model structural equations and quadratic approximation to the exact welfare measure can be used to correctly rank alternative simple policy rules, again in the case of small enough shocks.
    Date: 2008
  11. By: Glenn D. Rudebusch (Federal Reserve Bank of San Francisco); Eric T. Swanson (Federal Reserve Bank of San Francisco)
    Abstract: The term premium on nominal long-term bonds in the standard dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to empirical measures obtained from the data - an example of the "bond premium puzzle." However, in models of endowment economies, researchers have been able to generate reasonable term premiums by assuming that investors face long-run economic risks and have recursive Epstein-Zin preferences. We show that introducing these two elements into a canonical DSGE model can also produce a large and variable term premium without compromising the model's ability to fit key macroeconomic variables.
    Date: 2008–10
  12. By: Philippe Michel (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Bertrand Wigniolle (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 article is devoted to the study of the Pareto-efficiency of the competitive equilibrium for a simple overlapping generations economy with endogenous fertility. For CES utility and production functions, it is proved that the economic properties of the economy are closely related to the two elasticitiesof substitution. First, the competitive equilibrium exists and is unique if the sum of the two elasticities is not smaller than one. Secondly, a set of parameters is provided such that the equilibrium is both in under-accumulation and inefficient. Thirdly, a sufficient condition is proved that ensures that an equilibrium converging in under-accumulation is Pareto-efficient: the sum of the two elasticities must not be greater than two.
    Keywords: endogenous fertility ; Pareto-efficiency
    Date: 2008–07–25
  13. By: Edwin Lai
    Abstract: This paper develops a growth model aimed at understanding the effects of globalization of production on rate of innovation, distribution of labor income between the North and South and welfare of workers in both regions. We adopt a dynamic general equilibrium productcycle model, assuming that the North specializes in innovation and the South specializes in imitation. Globalization of production resulting from trade liberalization and imitation of the North?s technology by the South increases the rate of innovation. When the South?s participation in the product cycle is not too deep, further deepening of globalization of production lowers the wage of Southern labor relative to that of its counterpart in the North. This poses a technology transfer paradox similar to that discovered by Jones and Ruffin (forthcoming, JIE): an increase in the uncompensated technology transfer from the North to the South makes the North better off. However, a point will be reached where further deepening of globalization leads to increases in relative wage of the South. For this reason, the North would eventually lose from uncompensated technology transfer as globalization deepens.
    Keywords: Globalization ; Technology ; International trade ; Developing countries ; Production (Economic theory)
    Date: 2008
  14. By: Christophe Hachon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: In this paper we study the macroeconomic impact of a policy which changes the redistributive properties of an unfunded pension system. Using an overlapping generations model with a closed economy and heterogenous agents, we show that a weaker linkbetween contributions and benefits has an impact on the level of capital per capita if and only if there are inequalities of length of life. Furthermore, this policy has positive implications for every agent of the economy if the system has a defined-benefitstructure. The tax rate and inequalities decrease, whereas the wealth of each agent increases. However, with a defined-contribution pension system, this policy has a negative impact on every macroeconomic variable except on the wealth of the poorest agents.
    Keywords: Inequality; Pension Systems; Redistribution;Capital
    Date: 2008–05–14
  15. By: Özer Karagedikli (Bank of England); Troy Matheson (Reserve Bank of New Zealand); Christie Smith (Norges Bank (Central Bank of Norway)); Shaun Vahey (Melbourne Business School, Norges Bank (Central Bank of Norway) , and Reserve Bank of New Zealand)
    Abstract: Real Business Cycle (RBC) and Dynamic Stochastic General Equilibrium (DSGE) methods have become essential components of the macroeconomist’s toolkit. This literature review stresses recently developed techniques for computation and inference, providing a supplement to the Romer (2006) textbook, which stresses theoretical issues. Many computational aspects are illustrated with reference to the simple divisible labour RBC model. Code and US data to replicate the computations are provided on the Internet, together with a number of appendices providing background details.
    Keywords: RBC, DSGE, Computation, Bayesian Analysis, Simulation
    JEL: C11 C50 E30
    Date: 2008–10–24
  16. By: Santos Monteiro, Paulo (University of Warwick)
    Abstract: I study the impact of idiosyncratic risk on savings and employment in a small open economy populated by two-member families. Families incur a fixed cost of participation when both members are employed. Because of market incompleteness and information asymmetries, this cost coupled with labor market frictions can generate multiple equilibria. In particular, there might be one equilibrium with high employment and low saving and another one with low employment and high saving. The model predicts that aggregate saving and employment rates are negatively correlated across countries. I present empirical evidence that supports the general equilibrium prediction of the model
    Keywords: Saving ; Employment ; Family labor supply ; Multiple equilibria
    JEL: D52 D90 E13 E21 J21 J22
    Date: 2008
  17. By: Chris Edmond; Laura Veldkamp
    Abstract: Recent advances in measuring cyclical changes in the income distribution raise new questions: How might these distributional changes affect the business cycle itself? We show how counter-cyclical income dispersion can generate counter-cyclical markups in the goods market, without any preference shocks or price-setting frictions. In recessions, heterogeneous labor productivity shocks raise income dispersion, lower the price elasticity of demand, and increase imperfectly competitive firms' optimal markups. The calibrated model explains not only many cyclical features of markups, but also cyclical, long-run and cross-state patterns of standard business cycle aggregates.
    JEL: E32
    Date: 2008–10
  18. By: Zhang, Yan
    Abstract: We examine the role of tariffs levied on the imported production factor in a one-sector small open economy real business cycle model. We show that under perfect competition and constant returns-to-scale, the model may exhibit local indeterminacy and sunspots as tariff rates are endogenously determined by a balanced-budget rule with a constant level of government expenditures. Conversely, the economy in which the government finances endogenous public spending and transfers with fixed tariff rates is immune to indeterminacy.
    Keywords: Indeterminacy; Endogenous Tariff Rate; Small Open Economy; Exogenous Government Expenditure
    JEL: F41 Q43
    Date: 2008–11
  19. By: Mark Bils (University of Rochester and NBER); Yongsung Chang (University of Rochester and Yonsei University); Sun-Bin Kim (Department of Economics, Korea University)
    Abstract: We model worker heterogeneity in the rents from being employed in a Diamond-Mortensen-Pissarides model of matching and unemployment. We show that heterogeneity, reflecting differences in match quality and worker assets, reduces the extent of fluctuations in separations and unemployment. We find that the model faces a trade-off--it cannot produce both realistic dispersion in wages across workers and realistic cyclical fluctuations in unemployment.
    Date: 2008

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