nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒11‒25
sixteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. The Composition of Government Expenditure in an Overlapping Generations Model By John Creedy; Shuyun May Li; Solmaz Moslehi
  2. The Spirit of Capitalism and Expectation Driven Business Cycles By Lilia Karnizova
  3. Estimating the dynamics of R&D-based growth models By YATSENKO, Yuri; BOUCEKKINE, Raouf; HRITONENKO, Natali
  4. How do epidemics induce behavioral changes? By BOUCEKKINE, Raouf; DESBORDES, Rodolphe; LATZER, Hélène
  5. On the Joint Dynamics of Pollution and Capital Accumulation By Dimitrios Varvarigos
  6. Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model By Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
  7. On the role of progressive taxation in a Ramsey Model with heterogeneous households. By Stefano Bosi; Thomas Seegmuller
  8. Luddites and the Demographic Transition By Kevin H. O'Rourke, Ahmed S. Rahman and Alan M. Taylor
  9. Do Nominal Rigidities Matter for the Transmission of Technology Shocks? By Zheng Liu; Louis Phaneuf
  10. Optimal Income Taxation with Endogenous Participation and Search Unemployment By Lehmann, Etienne; Parmentier, Alexis; Van der Linden, Bruno
  11. Life expectancy and the environment. By Fabio Mariani; Agustin Pérez-Barahona; Natacha Raffin
  12. Directed Search, Unemployment and Public Policy By Benoit Julien; John Kennes; Ian King; Sephorah Mangin
  13. An Exploration of the Japanese Slowdown during the 1990s By Diego A. Comin
  14. Price adjustments in a general model of state-dependent pricing By James Costain; Antón Nákov
  15. Forward and Backward Dynamics in implicitly defi…ned Overlapping Generations Models By Laura Gardini; Cars Hommes; Fabio Tramontana; Robin de Vilder
  16. Costly External Finance, Reallocation, and Aggregate Productivity By Shuyun May Li

  1. By: John Creedy; Shuyun May Li; Solmaz Moslehi
    Abstract: This paper examines the choice of government expenditure on public goods and transfer payments (in the form of pension) in an overlapping generations model, in which individuals live for two ‘periods’ and expenditure is financed on a pay-as-you-go (PAYG) basis. The condition required for majority support of the social contract involved in the PAYG scheme is established and shown to be independent of tax rates and expenditure levels. The choice of expenditure composition can thus be made conditional on acceptance of the social contract. Two decision mechanisms regarding the choice of government expenditure are considered. The first is positive and involves majority voting and the second is normative and involves maximizing a social welfare function. In each case the ratio of the transfer payment to public goods expenditure depends, among other things, on the ratio of median to mean income. A reduction in the skewness of the income distribution is associated with a reduction in this ratio, at a decreasing rate.
    Keywords: Overlapping Generations Equilibrium Growth Median Voter Optimal Expenditure Public Goods Pensions
    JEL: D72 H41 H53 H11
    Date: 2008
  2. By: Lilia Karnizova (Department of Economics, University of Ottawa)
    Abstract: While news shocks are believed to be instrumental in explaining business cycles, many existing models fail to predict an economic boom in consumption, investment, employment, output and the stock market in response to good news about future productivity. This paper proposes and evaluates a model with the intrinsic desire for wealth accumulation, or ‘the spirit of capitalism’ hypothesis, which generates the aforementioned responses. Restrictions for the existence of expectation driven business cycles are derived analytically. The restrictions are confirmed by an estimated version of the model. The proposed preference specification is supported with additional empirical evidence.
    Keywords: Spirit of Capitalism; News Shocks; Business Cycles
    JEL: E32
    Date: 2008
  3. 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
  4. By: BOUCEKKINE, Raouf (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); DESBORDES, Rodolphe; LATZER, Hélène
    Abstract: This paper develops a theory of optimal fertility behavior under mortality shocks. 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 rise 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 true for adult mortality. We further find this negative effect on 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: 2008–07
  5. By: Dimitrios Varvarigos
    Abstract: I construct an overlapping generations model in which (the endogenous) longevity is impeded by the stock of pollution and promoted by public health spending. I provide an alternative explanation for the so-called environmental Kuznets curve – an explanation which gives an active role to environmental quality as a contributing factor to capital accumulation and growth. I also examine how variations in environment-related parameters determine the effect of taxation in economic development.
    Keywords: Overlapping generations; Pollution; Capital accumulation; Endogenous longevity
    JEL: O41 Q56
    Date: 2008–11
  6. By: Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
    Abstract: This paper studies the transmission of shocks and the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank's empirical dynamic stochastic general equilibrium (DSGE) model of a small open economy. The main results are, first, that the transmission of shocks depends substantially on the conduct of monetary policy, and second, that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible.
    JEL: E52 E58 F33 F41
    Date: 2008–11
  7. By: Stefano Bosi (EQUIPPE - Université de Lille 1 et EPEE - Université d'Evry); Thomas Seegmuller (Centre d'Economie de la Sorbonne - Paris School of Economics)
    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.
    JEL: C62 H20 E32
    Date: 2008–06
  8. By: Kevin H. O'Rourke, Ahmed S. Rahman and 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.
    Date: 2008–11–07
  9. By: Zheng Liu; Louis Phaneuf
    Abstract: A commonly held view is that nominal rigidities are important for the transmission of monetary policy shocks. We argue that they are also important for understanding the dynamic effects of technology shocks, especially on labor hours, wages, and prices. Based on a dynamic general equilibrium framework, our closed-form solutions reveal that a pure sticky-price model predicts correctly that hours decline following a positive technology shock, but fails to generate the observed gradual rise in the real wage and the near-constance of the nominal wage; a pure sticky-wage model does well in generating slow adjustments in the nominal wage, but it does not generate plausible dynamics of hours and the real wage. A model with both types of nominal rigidities is more successful in replicating the empirical evidence about hours, wages and prices. This finding is robust for a wide range of parameter values, including a relatively small Frisch elasticity of hours and a relatively high frequency of price reoptimization that are consistent with microeconomic evidence.
    Keywords: Technology shock, nominal rigidities, monetary policy
    JEL: E31 E32
    Date: 2008
  10. By: Lehmann, Etienne (CREST-INSEE); Parmentier, Alexis (University of Evry); Van der Linden, Bruno (Catholic University of Louvain)
    Abstract: This paper characterizes the optimal redistributive taxation when individuals are heterogeneous in two exogenous dimensions: their skills and their values of non-market activities. Search-matching frictions on the labor markets create unemployment. Wages, labor demand and participation are endogenous. The government only observes wage levels. Under a Maximin objective, if the elasticity of participation decreases along the distribution of skills, at the optimum, the average tax rate is increasing, marginal tax rates are positive everywhere, while wages, unemployment rates and participation rates are distorted downwards compared to their laissez-faire values. A simulation exercise confirms some of these properties under a general utilitarian objective. Taking account of the wage-cum-labor demand margin deeply changes the equity-efficiency trade-off.
    Keywords: non-linear taxation, redistribution, adverse selection, random participation, unemployment, labor market frictions
    JEL: D82 H21 J64
    Date: 2008–10
  11. By: Fabio Mariani (Centre d'Economie de la Sorbonne - Paris School of Economics and IZA); Agustin Pérez-Barahona (Centre d'Economie de la Sorbonne); Natacha Raffin (Centre d'Economie de la Sorbonne)
    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 affect 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.
    JEL: D62 J13 J24 O11 Q56
    Date: 2008–07
  12. By: Benoit Julien; John Kennes; Ian King; Sephorah Mangin
    Abstract: We examine the effects of public policy parameters in a simple directed search model of the labour market, and contrast them with those in standard random matching models with Nash bargaining. Both finite and limit versions of the directed search model are considered, and the value of the limit model as an approximation of the finite one is assessed. As with the random matching model, job creation is the key channel through with the policy parameters effect the equilibrium of the directed search model. Both comparative static effects of the policy parameters and optimal configurations are identified.
    JEL: E24 J31 J41 J64 H20 D44
    Date: 2008
  13. By: Diego A. Comin
    Abstract: Why did the Japanese slowdown of the 90s last so long if none of the shocks that hit the Japanese economy had a comparable persistence? In this paper, I use the Comin and Gertler (2006) model of medium term fluctuations to explore whether their endogenous technology mechanisms can amplify and propagate the wage markup fluctuations observed in Japan over the early 90s to drive a Japanese productivity slowdown. The model can reproduce the observed decline, relative to trend of R&D expenditures and the slowdown in the diffusion of new technologies. This slowdown in the development and adoption of new technologies constitutes a powerful propagation mechanism. As a result, the model does a good job in reproducing the evolution of output, consumption, investment, TFP and hours worked in Japan during the "lost decade", specially up to 1998. During the last two years of the decade, the propagation mechanisms in the model seem to run out of steam, while the Japanese economy continued to deteriorate.
    JEL: E3
    Date: 2008–11
  14. By: James Costain (Banco de España); Antón Nákov (Banco de España)
    Abstract: In this paper, we show that a simple model of smoothly state-dependent pricing generates a distribution of price adjustments similar to that observed in microeconomic data, both for low and high inflation. Our setup is based on one fundamental assumption: price adjustment is more likely when it is more valuable. The constant probability model (Calvo 1983) and the fixed and stochastic menu cost models (Golosov and Lucas 2007; Dotsey, King and Wolman 1999) are nested as special cases of our framework. All parameterizations of our model can be ranked according to a measure of state dependence. The fixed menu cost model has the highest possible degree of state dependence; the parameterization which best fits US microdata has low state dependence. The fixed menu cost model is inconsistent with the evidence both because it never generates small price adjustments, and because it implies a large fall in the standard deviation of price adjustments as trend inflation increases. Even though the state dependence of our preferred parameterization is almost as low as that of the Calvo model, it is well-behaved when we change the steady state inflation rate, matching the data at least as well as Golosov and Lucas' model.
    Keywords: Price stickiness, state-dependent pricing, stochastic menu costs, generalized (S,s), bounded rationality
    JEL: E31 D81
    Date: 2008–11
  15. By: Laura Gardini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)); Cars Hommes (CeNDEF, Department of Quantitative Economics, University of Amsterdam); Fabio Tramontana (Università Politecnica delle Marche & Dipartimento di Economia e Metodi Quantitativi, Università di Urbino); Robin de Vilder (Department of Mathematics, University of Amsterdam)
    Abstract: In dynamic economic models derived from optimization principles, the forward equilibrium dynamics may not be uniquely de…fined, while the backward dynamics is well de…fined. We derive properties of the global forward equilibrium paths based on properties of the backward dynamics. We propose the framework of iterated function systems (IFS) to describe the set of forward equilibria, and apply the IFS framework to a one- and a two-dimensional version of the overlapping generations (OLG)-model. We show that, if the backward dynamics is chaotic and has a homoclinic orbit (a "snap-back repeller") the set of forward equilibrium paths converges to a fractal attractor. Forward equilibria may be interpreted as sunspot equilibria, where a random sunspot sequence determines equilibrium selection at each date.
    Keywords: forward and backward dynamics, chaos, homoclinic orbit, snap-back repellor, sunspot equilibria, overlapping generations models.
    JEL: E32 C62 C02
    Date: 2008
  16. By: Shuyun May Li
    Abstract: This paper develops an industry evolution model to explore the quantitative implications of endogenous financing constraints for job reallocation. In the model firms finance entry costs and per period labor costs with long-term financial contracts signed with banks, which are subject to asymmetric information and limited commitment problems. Financing constraints arise as a feature of the optimal contract. The model generates endogenous firm exit and job reallocation in a stationary industry equilibrium. A quantitative analysis shows that endogenous financing constraints can account for a substantial amount of job reallocation observed in U.S. manufacturing and the observed negative relationship between job reallocation rates and firm size as measured by employment.
    Keywords: Asymmetric information; Limited liability; Limited commitment; Dynamiccontract; Job reallocation; Stationary competitive equilibrium; Stationary firm distribution.
    JEL: E24 D82 L14
    Date: 2008

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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