nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒11‒18
eight papers chosen by
Christian Zimmermann
University of Connecticut

  1. Productivity, Preferences and UIP deviations in an Open Economy Business Cycle Model By Arnab Bhattacharjee; Jagjit S. Chadha; Qi Sun
  2. The case for a financial approach to money demand By Xavier Ragot
  3. Monetary Policy Rules for Managing Aid Surges in Africa By Adam, Chris-Datepher S.; Buffie, Edward; O'Connell, Stephen; Pattillo, Catherine
  4. The Inconsistency Puzzle Resolved: an Omitted Variable By Nikolay Arefiev
  5. A continuous-time model of the term structure of interest rates with fiscal-monetary policy interactions By Marzo , Massimiliano; Romagnoli , Silvia; Zagaglia, Paolo
  6. Luddites and the Demographic Transition By Kevin H. O'Rourke; Ahmed S. Rahman; Alan M. Taylor
  7. Optimal Induced Innovation and Growth with Congestion of a Limited Natural Resource By Tavani, Daniele
  8. R&D Spillovers in an Endogenous Growth Model with Physical Capital, Human Capital and Varieties By Sequeira, Tiago Neves

  1. By: Arnab Bhattacharjee; Jagjit S. Chadha; Qi Sun
    Abstract: We show that a ‡ex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii) preference shocks; (iv) deviations from UIP condition for the exchange rates; and (v) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.
    Keywords: Current account dynamics, real exchange rates, incomplete markets, financial frictions.
    JEL: E32 F32 F41
    Date: 2008–11
  2. By: Xavier Ragot
    Abstract: The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption levels, even controlling for life-cycle effects. This is a puzzle for theories which directly link money demand to consumption, such as cash-in-advance (CIA), money-in-the-utility function (MIUF) or shopping-time models. This paper shows that the joint distribution of money and nancial assets can be explained by an incomplete-market model when frictions are introduced into financial markets. Money demand is modeled as a portfolio choice with a fixed transaction cost in financial markets.
    Date: 2008
  3. By: Adam, Chris-Datepher S.; Buffie, Edward; O'Connell, Stephen; Pattillo, Catherine
    Abstract: We examine the properties of alternative monetary policy rules in response -Date large aid surges in low-income countries characterized by incomplete capital market integration and currency substitution. Using a dynamic s-Datechastic general equilibrium model, we show that simple monetary rules that stabilize the path of expected future seigniorage for a given aid flow have attractive properties relative -Date a range of conventional alternatives, including those involving heavy reliance on bond sterilization or a commitment -Date a pure exchange rate float. These simple rules, which are shown -Date be robust across a range of fiscal responses -Date aid inflows, appear -Date be consistent with actual responses -Date recent aid surges in a range of post-stabilization countries in Sub-Saharan Africa.
    Keywords: monetary policy, currency substitution, aid, Africa, DSGE models
    Date: 2008
  4. By: Nikolay Arefiev
    Abstract: The contemporary version of the dynamic Ramsey problem omits expectations of a household’s initial lump-sum wealth taxation due to policy revision; therefore, the attainable resource allocation set in this problem is ill-defined. This omission leads to misleading conclusions about the optimal policy in the short run and, in particular, that the Ramsey policy is dynamically inconsistent. The effect of introducing the expectations into the analysis of dynamic inconsistency is similar to that of introducing expected inflation into the Phillips curve: we show that only an unexpected policy surprise affects the attainable resource allocation set and the optimal policy. In contrast to Chamley (1986), we show that intensive capital income taxation at the beginning of an optimal policy does not imply a lump-sum taxation of household wealth and cannot reduce the excess tax burden. We also demonstrate that the Ramsey policy is dynamically consistent even without commitment. We resolve the Ramsey problem and compare our results to those of Chamley on optimal capital income taxation.
    Keywords: Consistency, Equilibrium policy, Optimal taxation
    JEL: E61 E62 H21
    Date: 2008–10–26
  5. By: Marzo , Massimiliano (Università di Bologna); Romagnoli , Silvia (Università di Bologna); Zagaglia, Paolo (Bank of Finland Research and Stockholm University)
    Abstract: We study the term structure implications of the fiscal theory of price level determination. We introduce the intertemporal budget constraint of the government in a general equilibrium model in continuous time. Fiscal policy is set according to a simple rule whereby taxes react proportionally to real debt. We show how to solve for the prices of real and nominal zero coupon bonds.
    Keywords: bond pricing; fiscal policy; mathematical methods
    JEL: D90 G12
    Date: 2008–10–17
  6. By: Kevin H. O'Rourke; Ahmed S. Rahman; Alan M. Taylor
    Abstract: Technological change was unskilled-labor-biased during the early Industrial Revolution, but is skill-biased today. This is not embedded in extant unified growth models. We develop a model which can endogenously account for these facts, where factor bias reflects profit-maximizing decisions by innovators. Endowments dictate that the early Industrial Revolution be unskilled-labor-biased. Increasing basic knowledge causes a growth takeoff, an income-led demand for fewer educated children, and the transition to skill-biased technological change. The simulated model tracks British industrialization in the 18th and 19th centuries and generates a demographic transition without relying on either rising skill premia or exogenous educational supply shocks.
    JEL: J13 J24 N10 O31 O33
    Date: 2008–11
  7. By: Tavani, Daniele
    Abstract: In a simple Neoclassical Growth Model with endogenous technical change, I expand on the hypothesis of Induced Innovation including a production externality from a xed input, called `land', which represents the carrying capacity of the earth's atmosphere. Land is assumed to be congested by the use of labor and capital in production. A market economy where land is free will fail to reach a steady state, and may end up in either of three possible cases: (i) a catastrophe driven by overaccumulation; (ii) a state in which Induced Innovation stops capital deepening but not environmental decline; (iii) a path of perpetual decumulation of capital resembling an industrial counterrevolution. A planned economy, instead, will assign a shadow-price to land, thus setting in motion the Induced Innovation engine and fostering land-augmenting technological progress which will reduce environmental stress. The unique equilibrium if this economy is found to be locally asymptotically stable in the numerical analysis for substitution elasticities smaller than 1. The corresponding direction of technical change is characterized by constant shares of all inputs, a positive growth rate of labor- and land-augmenting technologies, and by a rate of growth of capital-augmentation equal to zero.
    Keywords: Induced Innovation; Climate Change; Technological Change; Functional Distribution of Income.
    JEL: O30 Q55
    Date: 2008–11–10
  8. By: Sequeira, Tiago Neves
    Abstract: There is a family of models with Physical, Human capital and R&D for which convergence properties have been discussed (Arnold, 2000a; G´omez, 2005). However, spillovers in R&D have been ignored in this context. We introduce spillovers in this model and derive its steady-state and stability properties. This new feature implies that the model is characterized by a system of four differential equations. A unique Balanced Growth Path along with a two dimensional stable manifold are obtained under simple and reasonable conditions. Transition is oscillatory toward the steady-state for plausible values of parameters.
    Date: 2008

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