nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒01‒03
23 papers chosen by
Christian Zimmermann
University of Connecticut

  1. The taxation of capital returns in overlapping generations economies without financial assets By Julio Dávila
  2. Schumpeterian Foundations of Real Business Cycles By Galo Nuño Barrau
  3. Welfare implications of public education spending rules By Konstantinos Angelopoulos; Jim Malley; Apostolis Philippopoulos
  4. Inequality and aggregate savings in the neoclassical growth model By Reto Foellmi
  5. Trading Frictions and House Price Dynamics By Andrew Caplin; John Leahy
  6. DSGE Models and Central Banks By Tovar, Camilo Ernesto
  7. Environmental Tax and the Distribution of Income with Heterogeneous Workers By Mireille Chiroleu-Assouline; Mouez Fodha
  8. Shocks and rigidities as determinants of CEE labor markets' performance. A panel SVECM approach By Bukowski, Maciej; Koloch, Grzegorz; Lewandowski, Piotr
  9. International portfolios, capital accumulation and foreign assets dynamics By Coeurdacier, Nicolas; Kollmann, Robert Miguel W. K.; Martin, Philippe J.
  10. Interactions between Private and Public Sector Wages By António Afonso; Pedro Gomes
  11. Sticky Prices, Limited Participation, or Both? By Niki X. Papadopoulou
  12. A note about credit rationing on research and development By [Fiaschi], [Alessandro]
  13. A Golden Rule of Public Finance or a Fixed Deficit Regime? Growth and Welfare Effects of Budget Rules By Groneck, Max
  14. Measuring Unemployment Insurance Generosity By Pallage, Stéphane; Scruggs, Lyle; Zimmermann, Christian
  15. Financial Intermediation, Liquidity and Inflation By Jonathan Chiu; Cesaire Meh
  16. Consumption Velocity in a Cash Costly-Credit Model By Scheffel, Eric
  17. "Euler Equation Branching" By David R. Stockman and Brian E. Raines
  18. The Effect of Social Security, Demography and Technology on Retirement By Santos, Marcelo Rodrigues dos; Ferreira, Pedro Cavalcanti
  19. The Nature of Equilibrium in Macroeconomics: A Critique of Equilibrium Search Theory By Aoki, Masanao; Yoshikawa, Hiroshi
  20. How Large are Learning Externalities? Measurement by Calibration By Seung Mo Choi
  21. New Shocks, Exchange Rates and EquityPrices By Akito Matsumoto; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
  22. Unequal longevities and lifestyles transmission By Grégory Ponthière
  23. Unemployment Insurance Generosity: A Trans-Atlantic Comparison By Pallage, Stéphane; Scruggs, Lyle; Zimmermann, Christian

  1. By: Julio Dávila (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, CORE - Université Catholique de Louvain)
    Abstract: I show in this paper that in an overlapping generations economy with production à la Diamond (1970) in which the agents can only save in terms of capital (i.e. with not asset bubbles à la Tirole (1985) or public debt as in Diamond (1965)), there is a period-by-period balanced fiscal policy supporting a steady state allocation that Pareto-improves upon the laissez-faire competitive equilibrium steady state (whithout having to resort to intergenerational transfers) if there is no first generation or the economy starts there. A transition from the competitive equilibrium steady state to this other allocation is also Pareto-improving if the former is dynamically inefficient, but even in the dynamically efficient case if the elasticity of output to capital is high enough. This intervention allows every subsequent generation to attain, as a competitive equilibrium outcome, the highest utility attainable at a steady state through the existing markets for the consumption good and the production factors. The active fiscal policy consists of taxing (or subsidizing, in the dynamically efficient case) linearly the returns to capital, while balancing the budget period by period through a lump-sum transfer (or tax, respectively) on second period income. This policy does not finance any public spending, since there is none in the model. The only purpose of the intervention is to decentralize as a competitive equilibrium the steady state allocation that maximizes the utility of the representative agent among all steady state allocations attainable through the existing markets.
    Keywords: Taxation of capital, overlapping generations.
    Date: 2008–11
  2. By: Galo Nuño Barrau (Research Department, Banco Bilbao Vizcaya Argentaria)
    Abstract: Technology shocks are at the core of real business cycle models. Although tra- ditionaly described as exogenous, technology shocks can be the result of the endoge- nous decisions by economic agents under uncertainty. To demostrate it, in this paper I develop a dynamic stochastic general equilibrium model that incorporates Schum- peterian endogenous growth features that affect the convergence to the steady-state. In this model, technology advances are due to the introduction of vertical innovations by entrepreneurs who try to become monopolists in different economic sectors. En- trepreneurs? ventures are ?nanced by banks. The model is solved and estimated by bayesian methods for the United States economy to compute the value of some of its structural parameters. Results show that for a country close to the technology fron- tier, the presented innovation mechanism is roughly equivalent in terms of volatilies, correlations and impulse responses to technology shocks in real business cycle mod- els. Therefore, the behavior of the productivity can be due not only to technology considerations but also to ?nancial and entrepreneurial reasons.
    JEL: C50 E27 O40
    Date: 2008–12
  3. By: Konstantinos Angelopoulos; Jim Malley; Apostolis Philippopoulos
    Abstract: In this paper, we quantitatively assess the welfare implications of alternative public education spending rules. To this end, we employ a dynamic stochastic general equilibrium model in which human capital externalities and public education expenditures, financed by distort- ing taxes, enhance the productivity of private education choices. We allow public education spending, as share of output, to respond to various aggregate indicators in an attempt to minimize the market imperfection due to human capital externalities. We also expose the economy to varying degrees of uncertainty via changes in the variance of total factor productivity shocks. Our results indicate that, in the face of increasing aggregate uncertainty, active policy can signi.cantly outperform passive policy (i.e. maintaining a constant public educa- tion to output ratio) but only when the policy instrument is successful in smoothing the growth rate of human capital.
    Date: 2008–12
  4. By: Reto Foellmi
    Abstract: Within the context of the neoclassical growth model I investigate the implications of (initial) endowment inequality when the rich have a higher marginal savings rate than the poor. More unequal societies grow faster in the transition process, and therefore exhibit a higher speed of convergence. Furthermore, there is divergence in consumption and lifetime wealth if the rich exhibit a higher intertemporal elasticity of substitution. Unlike the Solow-Stiglitz model, the steady state is always unique although the consumption function is concave.
    Keywords: Marginal propensity to consume, income distribution, growth, concave consumption function.
    JEL: O40 D30 O10
    Date: 2008–11
  5. By: Andrew Caplin; John Leahy
    Abstract: We construct a model of trade with matching frictions. The model provides a simple characterization for the joint proces of prices, sales and inventory. We compare the implications of the model to certain properties of housing markets. The model can generate the large price changes and the positive correlation between prices and sales that we see in the data. Unlike the data, prices are negatively autocorrelated and high inventory predicts price appreciation. We investigate several amendments to the model.
    JEL: D83 E3
    Date: 2008–12
  6. By: Tovar, Camilo Ernesto
    Abstract: Over the past 15 years there has been remarkable progress in the specification and estimation of dynamic stochastic general equilibrium (DSGE) models. Central banks in developed and emerging market economies have become increasingly interested in their usefulness for policy analysis and forecasting. This paper reviews some issues and challenges surrounding the use of these models at central banks. It recognises that they offer coherent frameworks for structuring policy discussions. Nonetheless, they are not ready to accomplish all that is being asked of them. First, they still need to incorporate relevant transmission mechanisms or sectors of the economy; Second, issues remain on how to empirically validate them; and finally, challenges remain on how to effectively communicate their features and implications to policy makers and to the public. Overall, at their current stage DSGE models have important limitations. How much of a problem this is will depend on their specific use at central banks.
    Keywords: DSGE models, Central Banks, Communication, Estimation, Modelling
    JEL: B4 C5 E0 E32 E37 E50 E52 E58 F37 F41 F47
    Date: 2008
  7. By: Mireille Chiroleu-Assouline (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); Mouez Fodha (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 analyzes the environmental tax policy issues within an overlapping generations models framework. The objective is to analyze whether an environmental tax policy can respect the two equity principles simultaneously, the vertical as well the horizontal one. We characterize the necessary conditions for the obtaining of a Pareto improving shift when the revenue of the pollution tax is recycled by a change in the labor tax rate or by a change in the distributive properties of the labor tax. We show that, depending on the production function elasticities and on the heterogeneity characteristics of labor supply, an appropriate policy mix could be designed in order to leave each workers' class unharmed by the environmental tax reform. It will consist in an increase of the progressivity of the labor tax together with a decrease of the minimal wage tax rate.
    Keywords: Environmental tax, double dividend, tax progressivity, overlapping generations model.
    Date: 2008–12
  8. By: Bukowski, Maciej; Koloch, Grzegorz; Lewandowski, Piotr
    Abstract: In this paper the dynamic responses of labor markets to macroeconomic shocks in eight CEE countries are empirically analyzed in panel SVECM. Identification of shocks, interpreted as real wage, productivity, labor demand and supply shocks, is based on DSGE model with labor market explicitly modeled after Mortensen and Pissarides (1994). Fluctuations in foreign demand are controlled for and the model is estimated with panel procedure, which improves estimation's precision. We show that propagation of shocks on NMS labor markets fairly resembles that characterizing OECD countries. Productivity improving shocks temporarily increase unemployment. Positive labor demand shocks increase employment, depress unemployment, rise real average wages, and were found to be the main determinant of variability of employment and unemployment in the short-run. In the medium term, in Czech Republic, Latvia, Lithuania and Poland innovations in wages seem to be prevalent drivers of employment and unemployment. The retrospective simulations of the model show that Baltic states and Poland were significantly affected by the collapse of Russian exports in late 1990s, and in 2000 an adverse labor demand shock hit all NMS, except for Hungary and Slovenia. However, the flexibility of wages is found to be crucial factor behind the diverse labor market performance in the region. Slovenia and Estonia fared best when it comes to flexibility of wages on macro level, on the other hand in Czech Republic, Lithuania and Poland downward wage rigidities were especially binding after employment-contracting shocks.
    Keywords: Unemployment; Rigidities; Transition economies; Cointegration;;Structural VECM; Panel econometrics; DSGE models
    JEL: C32 E32 E24 J60
    Date: 2008–12–01
  9. By: Coeurdacier, Nicolas; Kollmann, Robert Miguel W. K.; Martin, Philippe J.
    Abstract: Despite the liberalisation of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanation of equity home bias: transaction costs that impede international diversification, and terms of trade responses to supply shocks that provide risk sharing, so that there is little incentive to hold diversified portfolios. We show that the interaction of the following ingredients generates a realistic equity home bias: capital accumulation, shocks to the efficiency of physical investment, as well as international trade in stocks and bonds. In our model, domestic stocks are used to hedge fluctuation in local wage income. Terms of trade risk is hedged using bonds denominated in local goods and in foreign goods. In contrast to related models, the low level of international diversification does not depend on strongly countercyclical terms of trade. The model also reproduces the cyclical dynamics of foreign asset positions and of international capital flows.
    Keywords: capital accumulation, international equity and bond portfolios, capital flows, current account, valuation effects, terms of trade
    JEL: F2 F3 G1
    Date: 2008
  10. By: António Afonso; Pedro Gomes
    Abstract: We analyse the interactions between public and private sector wages per employee in OECD countries. We motivate the analysis with a dynamic labour market equilibrium model with search and matching frictions to study the effects of public sector employment and wages on the labour market, particularly on private sector wages. Our empirical evidence shows that the growth of public sector wages and of public sector employment positively affects the growth of private sector wages. Moreover, total factor productivity, the unemployment rate, hours per worker, and inflation, are also important determinants of private sector wage growth. With respect to public sector wage growth, we find that, in addition to some market related variables, it is also influenced by fiscal conditions.
    Keywords: public wages; private wages; employment.
    JEL: E24 E62 H50
    Date: 2008–11
  11. By: Niki X. Papadopoulou (Central Bank of Cyprus)
    Abstract: This paper investigates the micro mechanisms by which monetary policy affects and is transmitted through the U.S economy, by developing a unified, dynamic, stochastic, general equilibrium model that nests two classes of models. The first sticky prices and the second limited participation. Limited participation is incorporated by assuming that households’ are faced with quadratic portfolio adjustment costs. Monetary policy is characterized by a generalized Taylor rule with interest rate smoothing. The model is calibrated and investigates whether the unified model performs better in replicating empirical stylized facts, than the models that have only sticky price or limited participation. The unified model replicates the second moments of the data better than the other two types of models. It also improves on the ability of the sticky price model to deliver the hump-shaped response of output and inflation. Moreover, it also delivers on the ability of the limited participation model to replicate the fall in profits and wages, after a contractionary monetary policy.
    JEL: E31 E32 E44 E52
    Date: 2008–06
  12. By: [Fiaschi], [Alessandro]
    Abstract: This note develops an overlapping generations model with credit rationing on research and development, in which both are determined simultaneously and endogenously. The model provides a useful tool to examine different policies that may help alleviate the negative effect of …financial constraints faced by fi…rms.
    Keywords: R&D; credit constraints; overlapping generations
    JEL: D91 D82 D92
    Date: 2008–09
  13. By: Groneck, Max
    Abstract: In this paper, we compare growth and welfare e¤ects of various budget rules within an endogenous growth model with productive public capital, utility enhancing public consumption and public debt. We find that a fixed deficit regime does not affect the long run growth rate compared to a balanced budget while the growth rate is increased by a golden rule. Welfare effects are ambiguous. Simulations indicate that economies populated by households who have a strong tendency to smooth consumption should adhere to a balanced budget rather than a golden rule or a fixed deficit rule from a welfare point of view.
    Keywords: Budget rules, golden rule of public finance, fiscal policy, endogenous growth, welfare
    JEL: E62 H50 H62 H63 O40
    Date: 2008
  14. By: Pallage, Stéphane (University of Québec at Montréal); Scruggs, Lyle (University of Connecticut); Zimmermann, Christian (University of Connecticut)
    Abstract: In this paper, we develop a methodology to summarize the various policy parameters of an unemployment insurance scheme into a single generosity parameter. Unemployment insurance policies are multdimensional objects. They are typically defined by waiting periods, eligibility duration, benefit levels and asset tests when eligible, which makes intertemporal or international comparisons difficult. To make things worse, labor market conditions, such as the likelihood and duration of unemployment matter when assessing the generosity of different policies. We build a first model with such complex characteristics. Our model features heterogeneous agents that are liquidity constrained but can self-insure. We then build a second model that is similar, except that the unemployment insurance is simpler: it is deprived of waiting periods and agents are eligible forever with constant benefits. We then determine which level of benefits in this second model makes agents indifferent between both unemployment insurance policies. We apply this strategy to the unemployment insurance program of the United Kingdom and study how its generosity evolved over time.
    Keywords: unemployment insurance, labor market policy evaluation
    JEL: E24 J65
    Date: 2008–12
  15. By: Jonathan Chiu; Cesaire Meh
    Abstract: This paper develops a search-theoretic model to study the interaction between banking and monetary policy and how this interaction affects the allocation and welfare. Regarding how banking affects the welfare costs of inflation: First, we find that, with banking, inflation generates smaller welfare costs. Second, we show that, lowering inflation improves welfare not just by reducing consumption/production distortions, but also by avoiding intermediation costs. Therefore, understanding the nature of intermediation cost is critical for accurately assessing the welfare gain of lowering the inflation target. Regarding how monetary policy affects the welfare effects of banking: First, banking always improves efficiency of production, but the banking technology has to be efficient to improve welfare (especially in low inflation economy). Second, welfare effects of banking depend on monetary policy. For low inflation, banking is not active. For high inflation, banking is active and improves welfare. For moderate inflation, banking is active but reduces welfare. Owing to general equilibrium feedback, banking is supported in equilibrium even though welfare is higher without banking.
    Keywords: Monetary policy framework
    JEL: E40 E50
    Date: 2008
  16. By: Scheffel, Eric (Cardiff Business School)
    Abstract: In a seminal study Hodrick et al. (1991) evaluate the ability of a simple cash-credit model to produce realistic variability in consumption velocity while at the same time successfully explaining other key statistics. Sufficient variability in the latter is found to be associated with far too volatile interest rate behaviour. Introducing habit-formation in consumption into a production-based cash costly-credit model (see Gillman and Benk, 2007) makes the evolution of deposits more rigid relative to credit. The same deposit rigidity leads to a more volatile price of credit, causing credit production overshooting relative to deposits. But only by introducing adjustment costs to investment in addition to habit persistence does credit production overshoot sufficiently to produce realistic variability in consumption velocity. The model succeeds in capturing sufficient variability in consumption velocity without obtaining too volatile interest rates. Also, this model of endogenous velocity does not suffer from indeterminacy problems discussed in Auray et al. (2005). In contrast to Gillmand and Benk (2007), the present study examies the role of the price-channel of credit production at business cycle frequency, ignoring or holding fixed the marginal cost channel stemming from credit productivity shocks.
    Keywords: Velocity; Consumption; Interest Rates
    JEL: E0 E2 E3 E4
    Date: 2008–12
  17. By: David R. Stockman and Brian E. Raines (Department of Economics,University of Delaware; Department of Mathematics,Baylor University)
    Abstract: Some macroeconomic models exhibit a type of global indeterminacy known as Euler equation branching (e.g., the one-sector growth model with a production externality). The dynamics in such models are governed by a differential inclusion. In this paper, we show that in models with Euler equation branching there are multiple equilibria and that the dynamics are chaotic. In particular, we provide sufficient conditions for a dynamical system on the plane with Euler equation branching to be chaotic and show analytically that in a neighborhood of a steady state, these sufficient conditions will typically be satisfied. We also extend the results of Christiano and Harrison (JME, 1999) for the one-sector growth model with a production externality. In a more general setting, we provide necessary and sufficient conditions for Euler equation branching in this model. We show that chaotic and cyclic equilibria are possible and that this behavior is not dependent on the steady state being "locally" determinate or indeterminate.
    Keywords: global indeterminacy, Euler equation branching, multiple equilibria, cycles,chaos, increasing returns to scale, externality, regime switching
    JEL: E13 E32 E62
    Date: 2008
  18. By: Santos, Marcelo Rodrigues dos; Ferreira, Pedro Cavalcanti
    Abstract: This article investigates the causes in the reduction of labor force participation of the old. We argue that the changes in social security policy, in technology and in demography may account for most of the changes in retirement over the second part of the last century in the U.S. economy. We develop a dynamic general equilibrium model with endogenous retirement that embeds social security legislation. The model is able to match very closely the increase in the retirement rate of males aged 65 and older. It also quanti es the isolated impact on retirement and on the solvency of the social security system of the di¤erent factors. The model suggests that technological and demographic changes had a strong in uence on retirement, so that it would have increased signi cantly even if the social security rules had not changed. However, as the latter became much more generous in the past, changes in social security policy can account not only for a sizeable part of the expansion of retirement, but also for the most of the observed increase in the social security expenses as a share of GDP.
    Date: 2008–12
  19. By: Aoki, Masanao; Yoshikawa, Hiroshi
    Abstract: The standard Walrasian equilibrium theory requires that the marginal value product of production factor such as labor is equal across firms and industries. However, productivity dispersion is widely observed in the real economy. Search theory allegedly fills this gap by encompassing apparent disequilibrium phenomena in the neoclassical equilibrium framework. Taking up Lucas and Prescott (1974) as a primary example, we show that the neoclassical search theory cannot explain the observed pattern of productivity dispersion. Non-self-averaging, a concept little known to economists, plays the major role. Empirical observation suggests strongly the presence of disturbing forces which dominate equilibrating forces due to optimizing behavior of economic agents. We must seek a new concept of equilibrium different from the standard Walrasian equilibrium in macroeconomics.
    Keywords: Equilibrium, search theory, productivity dispersion, power-law, non-self-averaging
    JEL: D50 E50 J64
    Date: 2008
  20. By: Seung Mo Choi (School of Economic Sciences, Washington State University)
    Abstract: Quantitative features on human capital externalities are not fully understood. This paper measures the social returns on human capital that arise from learning externalities, through the calibration of a growth model. The calibration uses an equilibrium condition that equates private returns on physical capital and on human capital. Results suggest that learning externalities contribute substantially to human capital production. In a benchmark model, the social value of human capital is about 37% higher than the private value. The social rate of return on human capital is 2 to 4% points higher than the private rate of return, 8%.
    Keywords: Growth, Human Capital, Learning Externalities
    JEL: J24 O41
    Date: 2008–11
  21. By: Akito Matsumoto; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
    Abstract: We study exchange rate and equity price dynamics, in general equilibrium, in the presence of news shocks about future productivity and monetary policy. We identify a condition under which these asset prices become more volatile without affecting the volatility of the underlying processes-a positive correlation between news and current shocks. This condition also explains why persistent underlying processes generate volatile asset prices. In addition, we show that the correlation between exchange rate and equity returns depends critically on the currency denomination of the equity return and the monetary policy reaction to productivity shocks. The model we set up does well at matching second moments of exchange rate and equity returns for major floating currencies.
    Keywords: External shocks , Exchange rates , Stock prices , Productivity , Monetary policy , Asset prices , Floating exchange rates , Economic models ,
    Date: 2008–12–10
  22. By: Grégory Ponthière
    Abstract: Whereas studies on the optimal taxation under endogenous longevity assume a fixed heterogeneity of lifestyles, this paper considers the optimal tax policy in an economy where unequal longevities are the unintended outcome of differences in lifestyles, and where lifestyles are transmitted across generations. For that purpose, we develop a three-period OLG model where the population, who ignores the negative impact of excessive work on longevity, is partitioned in two groups with different tastes for leisure, and follows an adaptation/imitation process à la Bisin and Verdier (2001). The optimal short-run and long-run Pigouvian taxes on wages are shown to differ, because the latter correct agents'myopia, but also internalize intergenerational externalities due to the socialization process.
    Date: 2008
  23. By: Pallage, Stéphane (University of Québec at Montréal); Scruggs, Lyle (University of Connecticut); Zimmermann, Christian (University of Connecticut)
    Abstract: The goal of this paper is to establish if unemployment insurance policies are more generous in Europe than in the United States, and by how much. We take the examples of France and one particular American state, Ohio, and use the methodology of Pallage, Scruggs and Zimmermann (2008) to find a unique parameter value for each region that fully characterizes the generosity of the system. These two values can then be used in structural models that compare the regions, for example to explain the differences in unemployment rates.
    Keywords: unemployment insurance, labor market policy evaluation
    JEL: E24 J65
    Date: 2008–12

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