nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒01‒17
sixteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Matching Heterogeneous Agents with a Linear Search Technology By Thomas Tröger; Georg Nöldeke
  2. Budgetary Policies in a DSGE Model with Finite Horizons By Annicchiarico, Barbara; Giammarioli, Nicola; Piergallini, Alessandro
  3. Assortative matching through signals By Friedrich Poeschel
  4. R&D policy in Economies with Endogenous Growth and Non Renewable Resources By Betty Agnani; Mª José Gutiérrez; Amaia Iza
  5. The home bias of the poor: terms of trade effects and portfolios across the wealth distribution By Tobias Broer
  6. The Two Sector Endogenous Growth Model: An Atlas By Michael Ben-Gad
  7. Basel II Capital Requirements, Firms' Heterogeneity, and the Business Cycle By Ines Drumond; José Jorge
  8. Tax, Credit Constraints, and the Big Costs of Small Inflation By Andrew Coleman
  9. Accounting for the changing role of family income in determining college entry By Christoph Winter
  10. The Non-Convexity Issues in a Limited-Commitment Economy By Christian Calmès; Raymond Théoret
  11. Deep Habits and the Dynamic Effects of Monetary Policy Shocks By Morten O. Ravn; Stephanie Schmitt-Grohe; Martín Uribe; Lenno Uuskula
  12. Tradeoff between Inflation Stabilization and Growth Maximization By Hiroki Arato
  13. Net Foreign Assets, Productivity and Real Exchange Rates in Constrained Economies By Dimitris K. Christopoulos; Karine Gente; Miguel A. Leon-Ledesma
  14. Inventories, Markups, and Real Rigidities in Menu Cost Models By Oleksiy Kryvtsov; Virgiliu Midrigan
  15. Banking competition, housing prices and macroeconomic stability By Javier Andrés; Óscar J. Arce
  16. Regional Labor Markets and Aging in Germany By Carsten Ochsen

  1. By: Thomas Tröger; Georg Nöldeke
    Abstract: Steady state equilibria in heterogeneous agent matching models with search frictions have been shown to exist in Shimer and Smith (2000) under the assumption of a quadratic search technology. We extend their analysis to the commonly investigated linear search technology.
    Keywords: Search, Matching, Steady State Equilibrium
    JEL: C78 D83
    Date: 2009–01
  2. By: Annicchiarico, Barbara; Giammarioli, Nicola; Piergallini, Alessandro
    Abstract: This paper presents a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite horizons. Our New Keynesian framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. When calibrated to euro area quarterly data, the model predicts that fiscal expansions generate a trade-off in output dynamics between short-term gains and medium-term losses. It is shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.
    Keywords: Fiscal Policy; Monetary Policy; Nominal Rigidities; Capital Accumulation; Finite Lifetime; Simulations.
    JEL: E52 D58 E63
    Date: 2009–01
  3. By: Friedrich Poeschel
    Abstract: We model signalling in two-sided sequential search with heterogeneous agents and transferable utility. Search via meetings is time-consuming and thereby costly due to discounting. Search via signals is costless, so that agents can avoid almost all search costs if only the signals are truthful. We show that signals will indeed be truthful if the match output function is su ciently super- modular. The unique separating equilibrium is then characterised by perfect positive assortative matching despite the search frictions. In this equilibrium, agents successfully conclude their search after a single meeting, and overall match output is maximised. These results continue to hold when there are also explicit search costs in addition to discounting.
    Date: 2008
  4. By: Betty Agnani (Universidad de Granada); Mª José Gutiérrez (Universidad del País Vasco); Amaia Iza (Universidad del País Vasco)
    Abstract: The aim of this paper is to analyze how active R&D policies affect the growth rate of an economy with endogenous growth and non-renewable resources. We know from Scholz and Ziemens (1999) and Groth (2006) that in infinitely lived agents (ILA) economies, any active R&D policy increases the growth rate of the economy. To see if this result also appears in economies with finite lifetime agents, we developed an endogenous growth overlapping generations (OLG) economy à la Diamond which uses non-renewable resources as essential inputs in final good’s production. We show analytically that any R&D policy that reduces the use of natural resources implies a raise in the growth rate of the economy. Numerically we show that in economies with low intertemporal elasticity of substitution (IES), active R&D policies lead the economy to increase the depletion of non-renewable resources. Nevertheless, we find that active R&D policies always imply increases in the endogenous growth rate, in both scenarios. Furthermore, when the IES coefficient is lower (greater) than one, active R&D policies affect the growth rate of the economy in the ILA more (less) than in OLG economies.
    Keywords: Crecimiento endógeno, I+D, recursos no renovables, sendas de crecimiento, estable,endogenous growth, R&D, non-renewable resources, overlapping generations, infinitely lived agents, balanced growth path.
    JEL: O13 O40 Q32
    Date: 2008
  5. By: Tobias Broer
    Abstract: Wealthier people generally hold a larger part of their savings in risky assets. Using the US Survey of Consumer Finances, I show that wealthier households also have a higher portfolio share of foreign assets. This relative home bias of the poor does not seem to be explained by fixed participation costs alone, as the portfolio share of foreign assets increases with financial wealth even among participants in foreign asset markets. This paper shows how both biases of poorer agents' portfolios, towards safe and home assets, can arise in a simple 2 country economy with income and portfolio heterogeneity. Poor investors are naturally biased against domestic equity when wages and capital returns are positively correlated, making equity a bad hedge against fluctuations in labour income relative to bonds. Moreover poor investors prefer home to foreign bonds if equilibrium terms of trade movements systematically lead to a fall in the purchasing power of domestic assets in periods of high wages. I show that this is likely to be the case if aggregate supply shocks at home are more important than abroad. Finally, the model shows that aggregate home bias in the country portfolio implies relative home bias of the poor and vice versa.
    Keywords: Heterogeneous Agents, Home Bias, Inequality, International Asset Diversification, Portfolio Choice
    JEL: F36 G11 E21 D11 D31
    Date: 2008
  6. By: Michael Ben-Gad (Department of Economics, City University, London)
    Abstract: In this paper we investigate the underlying structure of the Lucas (1988) endogenous growth model. We derive analytically, the restrictions on the parameter space that are necessary and sufficient for the existence of balanced growth paths and saddle-path stable local dynamics. We demonstrate that in contrast to the original model, with the addition of an external effect and depreciation in the human capital sector, the Lucas model can be made consistent with the high degrees of intertemporal elasticities of substitution increasingly estimated in the empirical literature---even if there is a significant degree of increasing returns to scale in the physical production sector of the economy. Finally we demonstrate that for a given baseline rate of steady state growth, with the inclusion of modest degrees of depreciation and external effects to the human capital production process, the model can accommodate the widest possible range of economies---including those characterized by low discount factors, high elasticities of intertemporal substitution, increasing returns in the final goods sector, and also both the high rates of population growth and steady state per-capita output growth we observe in many parts of the world today.
    Keywords: Two-Sector Endogenous Growth Model, Intertemporal Elasticity of Substitution, Necessary and Sufficient Conditions
    JEL: O41 D62
    Date: 2009–01
  7. By: Ines Drumond (CEMPRE and Faculdade de Economia, Universidade do Porto); José Jorge (CEMPRE and Faculdade de Economia, Universidade do Porto)
    Abstract: This paper assesses the potential procyclical effects of Basel II capital requirements by evaluating to what extent those effects depend on the composition of banks' asset portfolios and on how borrowers' credit risk evolves over the business cycle. By developing a heterogeneous-agent general equilibrium model, in which firms' access to credit depends on their financial position, we find that regulatory capital requirements, by forcing banks to finance a fraction of loans with costly bank capital, have a negative effect on firms' capital accumulation and output in steady state. This effect is amplified with the changeover from Basel I to Basel II, in a stationary equilibrium characterized by a significant fraction of small and highly leveraged firms. In addition, to the extent that it is more costly to raise bank capital in bad times, the introduction of an aggregate technology shock into a partial equilibrium version of the model supports the Basel II procyclicality hypothesis: Basel II capital requirements accentuate the bank loan supply effect underlying the bank capital channel of propagation of exogenous shocks.
    Keywords: Business Cycles, Procyclicality, Financial Constraints, Bank Capital Channel, Basel II, Heterogeneity
    JEL: E44 E32 G28 E10
    Date: 2009–01
  8. By: Andrew Coleman (Motu Economic and Public Policy Research)
    Abstract: This paper develops an overlapping generations model incorporating credit constraints, owner-occupier and rental sectors, and detailed tax regulations to examine how the interaction of inflation and the tax system affect the housing market. It shows that even modest rates of inflation can have very large effects on the home-ownership rates of young households, particularly at low real interest rates. This occurs even if there is a large supply response in the quantity of housing. The model suggests that the welfare costs of inflation could be ameliorated by exempting the inflation component of interest payments from income tax.
    Keywords: Inflation, credit constraints, capital income taxes, housing markets, home-ownership rates, monetary policy
    JEL: E40 E58
    Date: 2008–12
  9. By: Christoph Winter
    Abstract: I present a computable dynamic general equilibrium model with overlapping generations and incomplete markets to measure the fraction of households constrained in their college entry decision. College education is financed by family transfers and public subsidies, where transfers are generated through altruism on part of the parents. Parents face a trade-off between making transfers to their children and own savings. Ceteris paribus, parents who expect lower future earnings transfer less and save more. Data from the 1986 Survey of Consumer Finances give support to this mechanism. I show that this trade-off leads to substantially higher estimates of the fraction of constrained households compared to the results in the empirical literature (18 instead of 8 percent). The model also predicts that an increment in parents' earnings uncertainty decreases their willingness to provide transfers. In combination with rising returns to education, which makes college going more attractive, this boosts the number of constrained youths and explains why family income has become more important for college access over the last decades in the U.S. economy.
    Keywords: Dynamic general equilibrium models with overlapping generations,parental transfers, college enrolment and borrowing constraints
    JEL: D91 H2 I2
    Date: 2009–01
  10. By: Christian Calmès (Département des sciences administratives, Université du Québec (Outaouais), et LRSP); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle)
    Abstract: After reviewing some basic self-enforcing labour contracts models, we expose how self-enforcing labour market theory can help explain some important dynamic properties of key macroeconomic variables. Calmès (1999, 2003) detail how self-enforcing labour contracts improve the way macroeconomic models account for the response of the economy to external shocks. The introduction of a state-dependent outside opportunity for the manager is the first step in generalizing the theory (Calmès 2007, Thomas and Worrall 2007). In this paper, we discuss the next step, the endogenization of capital. Although desirable, this task is not straightforward as the contract set might no longer be compact in this case. Relatedly, we also discuss the introduction of a third agent (the financial intermediary) in the model. We also analyse the link between stationarity and set convexity when incorporating growth in the model. A stochastic trend may be considered but then the non-convexity issue arises again. The aggregation of heterogeneous individual contracts can also lead to the same problem.
    Keywords: Internal propagation mechanisms; Real business cycle; Self-enforcing contract; Risk-sharing hypothesis; Non-convexity.
    JEL: E12 E49 J30 J31 J41
    Date: 2009–01–05
  11. By: Morten O. Ravn; Stephanie Schmitt-Grohe; Martín Uribe; Lenno Uuskula
    Abstract: This paper introduces deep habits into a sticky-price sticky-wage economy and asks whether the countercyclical markup movements induced by deep habits is helpful for accounting for the dynamic effects of monetary policy shocks. We find that this is the case: When allowing for deep habits, the model can account very precisely for the persistent impact of monetary policy shocks on aggregate consumption and for the impact on inflation that other models have hard a time explaining. In particular, the model can account both for the price puzzle and for inflation persistence. We also show that the deep habits mechanism and nominal rigidities are complementary: The deep habits model can account for the dynamic effects of monetary policy shock at low to moderate levels of nominal rigidities. We show that the results are stable over time and are not caused by monetary policy changes.
    Keywords: deep habits, monetary policy, price puzzle, inflation persistence, countercyclical markups
    JEL: E21 E31 E32 E52
    Date: 2008
  12. By: Hiroki Arato (Japan Society for the Promotion of Science and Graduate School of Economics, Kyoto University)
    Abstract: This paper analyzes monetary policy implication in an endogenous growth model in which the average growth rate is inefficiently low and in which the capital accumulation technology is concave. This paper does two exercises. First, we derive the utility-based welfare criterion of the model. The welfare measure suggests that even if the natural rate of growth moves parallel to its efficient rate, the increase of inflation volatility may improve welfare through the increase of average growth. Second, we test this hypothesis numerically and show that in our calibrated model the tradeoff between inflation stabilization and average growth maximization exists. In addition, the tradeoff is resolved by highly growth-stimulating (investment stabilization) policy. The reason is the existence of concavity in the capital accumulation technology, through which investment stabilization rises average growth.
    Keywords: Endogenous Growth; Monetary Stabilization Policy
    JEL: E3
    Date: 2009–01
  13. By: Dimitris K. Christopoulos (Panteion University); Karine Gente (University of Aix-Marseilles); Miguel A. Leon-Ledesma (University of Kent)
    Abstract: Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an exogenous 2-sector growth model in which RER determination depends on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high domestic savings, the country converges to the world per capita income and RER only depends on productivity spread between sectors (Balassa-Samuelson effect). If the constraint is too tight and/or domestic savings too low, RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, RER is mainly driven by productivity and net foreign assets in constrained countries and exclusively by productivity in unconstrained countries.
    Keywords: Real exchange rate; capital inflows constraint; overlapping generations
    JEL: E39 F32 F41
    Date: 2008–10
  14. By: Oleksiy Kryvtsov; Virgiliu Midrigan
    Abstract: Real rigidities that limit the responsiveness of real marginal cost to output are a key ingredient of sticky price models necessary to account for the dynamics of output and inflation. We argue here, in the spirit of Bils and Kahn (2000), that the behavior of marginal cost over the cycle is directly related to that of inventories, data on which is readily available. We study a menu cost economy in which firms hold inventories in order to avoid stockouts and to economize on fixed ordering costs. We find that, for low rates of depreciation similar to those in the data, inventories are highly sensitive to changes in the cost of holding and acquiring them over the cycle. This implies that the model requires an elasticity of real marginal cost to output approximately equal to the inverse of the elasticity of intertemporal substitution in order to account for the countercyclical inventory-to-sales ratio in the data. Stronger real rigidities lower the cost of acquiring and holding inventories during booms and counterfactually predict a procyclical inventory-to-sales ratio.
    JEL: E31 E32
    Date: 2009–01
  15. By: Javier Andrés (Universidad de Valencia); Óscar J. Arce (Banco de España)
    Abstract: We develop a dynamic general equilibrium model with an imperfectly competitive bank-loans market and collateral constraints that tie investors credit capacity to the value of their real estate holdings. Banks set optimal lending rates taking into account the effects of their price policies on their market share and on the volume of funds demanded by each customer. Lending margins have a significant effect on aggregate variables. Over the long run, fostering banking competition increases total consumption and output by triggering a reallocation of available collateral towards investors. However, as regards the short-run dynamics, we find that most macroeconomic variables are more responsive to exogenous shocks in an environment of highly competitive banks. Key to this last result is the reaction of housing prices and their effect on borrowers' net worth. The response of housing prices is more pronounced when competition among banks is stronger, thus making borrowers' net worth more vulnerable to adverse shocks and, specially, to monetary contractions. Thus, regarding changes in the degree of banking competition, the model generates a trade-off between the long run level of economic activity and its stability at the business cycle frequency.
    Keywords: banking competition, collateral constraints, housing prices
    JEL: E32 E43 E44 G21
    Date: 2009–01
  16. By: Carsten Ochsen (University of Rostock)
    Abstract: This paper analyzes how the aging labor force a¤ects the unem- ployment rate at the regional level in Germany. A theoretical model of equilibrium unemployment with spatial labor market interactions is used to study the e¤ects of age-related changes in job creation and job destruction. Using data for 343 districts, we then examine empirically the consequences of an aging labor force for the local labor markets in Germany. We apply di¤erent estimation techniques to a spatial and time dynamic panel data model. According to the estimates, aging causes an increase in job destruction. In addition, aging in the local labor market increases job creation, while the spatial aging e¤ect on job creation in the local district is negative.
    Keywords: Regional Unemployment, Vacancies and Separations, Job Creation, Regional Mobility, Spatial Interactions and Matching, Aging of the Labor Force
    JEL: J64 J63 J23 J61 R12 J10
    Date: 2009

This nep-dge issue is ©2009 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.