nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒01‒31
seventeen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Block Recursive Equilibria for Stochastic Models of Search on the Job By Guido Menzio; Shouyong Shi
  2. The Econometrics of DSGE Models By Jesús Fernández-Villaverde
  3. Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico By Konstantinos Angelopoulos; George Economides; Vangelis Vassilatos
  4. A Small Open Economy DSGE Model for Pakistan By Haider, Adnan; Khan, Safdar Ullah
  5. Consumption Taxation, Social Status and Indeterminacy in Models of Endogenous Growth with Elastic Labor Supply By Itaya, Jun-ichi; Kanamori, Naoshige
  6. The Demand for Youth: Implications for the Hours Volatility Puzzle By Nir Jaimovich; Seth Pruitt; Henry E. Siu
  7. Multiple filtering devices for the estimation of cyclical DSGE models By Fabio Canova; Filippo Ferroni
  8. A monetary approach to asset liquidity By Guillaume Rocheteau
  9. TFP Growth Slowdown and the Japanese Labor Market in the 1990s By Julen ESTEBAN-PRETEL; NAKAJIMA Ryo; TANAKA Ryuichi
  10. Regional debt in monetary unions : is it inflationary ?. By Russell Cooper; Hubert Kempf; Dan Peled
  11. The Term Structures of Equity and Interest Rates By Martin Lettau; Jessica A. Wachter
  12. Timeless Perspective Policymaking: When is Discretion Superior? By Richard Dennis
  13. Accounting for Oil Price Variation and Weakening Impact of the Oil Crisis By Naohisa Hirakata; Nao Sudo
  14. Interactions between Labor Market Reforms and Monetary Policy under Slowly Changing Habits By Ana Paula Ribeiro
  15. Technological Change and the Growing Inequality in Managerial Compensation By Hanno Lustig; Chad Syverson; Stijn Van Nieuwerburgh
  16. Horizontal Multinational Firms, Vertical Multinational Firms and Domestic Investment By Julian Emami Namini; Enrico Pennings
  17. Liquidity Premium and International DSeigniorage Payments By Benjamin Eden

  1. By: Guido Menzio (Department of Economics, University of Pennsylvania); Shouyong Shi (Department of Economics, University of Toronto)
    Abstract: In this paper, we develop a general stochastic model of directed search on the job. Like in the analogous models of random search on the job, the state of the economy in our model includes the infinite-dimensional distribution of workers across different employment states (unemployment, and employment at different wages). Unlike the analogous models of random search on the job, our model admits an equilibrium in which the agents’ value and policy functions does not depend on the distribution of workers. We refer to this type of equilibrium as a Block Recursive Equilibrium. Therefore, while solving the equilibrium of a random search model in a stochastic environment is a difficult task both analytically and computationally, solving the Block Recursive Equilibrium of our model is as easy as solving a representative agent model.
    Keywords: Directed Search, On the Job Search, Heterogeneity, Aggregate Fluctuations
    JEL: E24 E32 J64
    Date: 2009–01–26
  2. By: Jesús Fernández-Villaverde
    Abstract: In this paper, I review the literature on the formulation and estimation of dynamic stochastic general equilibrium (DSGE) models with a special emphasis on Bayesian methods. First, I discuss the evolution of DSGE models over the last couple of decades. Second, I explain why the profession has decided to estimate these models using Bayesian methods. Third, I briefly introduce some of the techniques required to compute and estimate these models. Fourth, I illustrate the techniques under consideration by estimating a benchmark DSGE model with real and nominal rigidities. I conclude by offering some pointers for future research.
    JEL: C11 C13 E10
    Date: 2009–01
  3. By: Konstantinos Angelopoulos; George Economides; Vangelis Vassilatos
    Abstract: This paper shows that introducing weak property rights in the standard real business cycle (RBC) model can help to explain economic fluctuations. This is motivated by the empirical observation that changes in institutions in emerging markets are related to the evolution of the main macroeconomic variables. In particular, in Mexico, the movements in productivity in the data are associated with changes in institutions, so that we can explain productivity shocks to a large extent as shocks to the quality of institutions. We find that the model with shocks to the degree of protection of property rights only - without technology shocks - can match the second moments in the data for Mexico well. In particular, the fit is better than that of the standard neoclassical model with full protection of property rights regarding the auto-correlations and cross-correlations in the data, especially those related to labor. Viewing productivity shocks as shocks to institutions is also consistent with the stylized fact of falling productivity and non-decreasing labor hours in Mexico over 1980-1994, which is a feature that the neoclassical model cannot match.
    Keywords: Economic fluctuations, institutions, property rights.
    JEL: E32 E62 D7
    Date: 2008–12
  4. By: Haider, Adnan; Khan, Safdar Ullah
    Abstract: This paper estimates a small open economy Dynamic Stochastic General Equilibrium (DSGE) model for Pakistan using Bayesian simulation approach. Model setup is based on new Keynesian framework, characterized by nominal rigidity in prices with habit formation in household’s consumption. The core objective is to study whether an estimated small open economy DSGE model provides a realistic behavior about the structure Pakistan economy with fully articulated description of the monetary policy transmission mechanism vis-à-vis domestic firm’s price setting behavior. To do so, we analyze the impulse responses of key macro variables; domestic inflation, imported inflation, output, consumption, interest rate, exchange rate, term of trade to different structural/exogenous shocks. From several interesting results, few are; (a) high inflation in Pakistan do not hit domestic consumption significantly; (b) Central bank of Pakistan responds to high inflation by increasing the policy rate by 100 to 200 bps; (c) exchange rate appreciates in both the cases of high domestic and imported inflation; (d) tight monetary policy stance helps to curb domestic inflation as well as imported inflation but appreciates exchange rate significantly (f) pass through of exchange rate to domestic inflation is very low; finally parameter value of domestic price stickiness shows that around 24 percent domestic firms do not re-optimize their prices which implies averaged price contract is about two quarters.
    Keywords: New-Keynesian economics; open economy DSGE models; nominal rigidities; monetary policy transmission mechanism; Bayesian Approach
    JEL: F37 E32 E52 F47 E47
    Date: 2008–11–06
  5. By: Itaya, Jun-ichi; Kanamori, Naoshige
    Abstract: This paper examines the effects of consumption taxation on longrun growth in an infinity-lived representative agent model of endogenous growth in which the desire for social status induces private agents to care about others’ wealth or consumption levels. We also allow for nonseparable preferences in own consumption, labor supply and social status that may cause indeterminacy of equilibrium. This analysis shows that consumption taxation generally raises (reduces) a long-run growth rate when the balanced growth path is indeterminate (determinate) in the models of wealth-induced social status and consumption externalities.
    Keywords: Social Status, Endogenous Growth, Consumption Externality, Indeterminacy, Consumption Taxation, Endogenous Labor Supply,
    Date: 2008–04
  6. By: Nir Jaimovich; Seth Pruitt; Henry E. Siu
    Abstract: The employment and hours worked of young individuals fluctuate much more over the business cycle than those of prime-aged individuals. Understanding the mechanism underlying this observation is key to explaining the volatility of aggregate hours over the cycle. We argue that the joint behavior of age-specific hours and wages in the U.S. data point to differences in the cyclical characteristics of labor demand. To articulate this view, we consider a production technology displaying capital-experience complementarity. We estimate the key parameters governing the degree of complementarity and show that the model can account for the behavior of age-specific hours and wages while generating a series of aggregate hours that is nearly as volatile as output.
    JEL: E0 E32
    Date: 2009–01
  7. By: Fabio Canova; Filippo Ferroni
    Abstract: We propose a method to estimate time invariant cyclical DSGE models using the information provided by a variety of filtering approaches. We treat data filtered with alternative procedures as contaminated proxy of the relevant model-based quantities and estimate structural and nonstructural parameters jointly using an unobservable component structure. We employ simulated data to illustrate the properties of the procedure and compare our estimates with those obtained when just one filter is used. We revisit the role of money in the transmission of monetary business cycles.
    Keywords: DSGE models, Filters, Structural estimation, Business cycles
    JEL: E32 C32
    Date: 2009–01
  8. By: Guillaume Rocheteau
    Abstract: This paper offers a monetary theory of asset liquidity—one that emphasizes the role of assets in payment arrangements—and it explores the implications of the theory for the relationship between assets’ intrinsic characteristics and liquidity, and the effects of monetary policy on asset prices and welfare. The environment is a random-matching economy where fiat money coexists with a real asset, and norestrictions are imposed on payment arrangements. The liquidity of the real asset is endogenized by introducing an informational asymmetry in regard to its fundamental value.
    Keywords: Money ; Payment systems ; Liquidity (Economics)
    Date: 2009
    Abstract: Unemployment in Japan nearly tripled during the 1990s. Underlying this upsurge lie an increase in the probability of workers to lose their jobs and a decrease in the probability that the unemployed find jobs. This paper analyzes the sources responsible for these labor market changes in Japan in the decade of the 1990s. We build, calibrate and simulate a neo-classical growth model with search frictions in the labor market. Using actual TFP data, the model is able to reproduce the path of unemployment and the job flows, as well as that of output. We find it to be the decrease in productivity, coupled with the reduction in hours worked, which curtails the profits of firms, inducing a drop in employment and an increase in unemployment.
    Date: 2009–03
  10. By: Russell Cooper (University of Texas - Department of Economics); Hubert Kempf (Paris School of Economics - Centre d'Economie de la Sorbonne); Dan Peled (University of Haifa - Department of Economics)
    Abstract: This paper studies the inflationary implications of interest bearing regional debt in a monetary union. Is this debt simply backed by future taxation with non inflationary consequences ?. Or will the circulation of region debt induce monetization by a central bank ?. We argue here that both outcomes can arise in equilibrium. In the model economy, there are multiple equilibria which reflect the perceptions of agents regarding the manner in which the debt obligations will be met. In one equilibrium, termed Ricardian, the future obligations are met with taxation by a regional government while in the other, termed Monetization, the central bank is induced to print money to finance the region's obligations. The multiplicity of equilibria reflects a commitment problem of the central bank. A key indicator of the selected equilibrium is the distribution of the holdings of the regional debt. We show that regional governments, anticipating central bank financing of their debt obligations, have an incentive to create excessively large deficits. We use the model to assess the impact of policy measures within a monetary union.
    Keywords: Monetary union, inflation tax, Seigniorage, public debt.
    JEL: E31 E42 E58 E62
    Date: 2008–12
  11. By: Martin Lettau; Jessica A. Wachter
    Abstract: This paper proposes a dynamic risk-based model capable of jointly explaining the term structure of interest rates, returns on the aggregate market and the risk and return characteristics of value and growth stocks. Both the term structure of interest rates and returns on value and growth stocks convey information about how the representative investor values cash flows of different maturities. We model how the representative investor perceives risks of these cash flows by specifying a parsimonious stochastic discount factor for the economy. Shocks to dividend growth, the real interest rate, and expected inflation are priced, but shocks to the price of risk are not. Given reasonable assumptions for dividends and inflation, we show that the model can simultaneously account for the behavior of aggregate stock returns, an upward-sloping yield curve, the failure of the expectations hypothesis and the poor performance of the capital asset pricing model.
    JEL: G12 G13
    Date: 2009–01
  12. By: Richard Dennis (Federal Reserve Bank of San Francisco)
    Abstract: In this paper I show that discretionary policymaking can be superior to timeless perspective policymaking and identify model features that make this outcome more likely. Developing a measure of conditional loss that treats the auxiliary state variables that characterize the timeless perspective equilibrium appropriately, I use a New Keynesian DSGE model to show that discretion can dominate timeless perspective policymaking when the Phillips curve is relatively flat, due, perhaps, to firm-specific capital (or labor) and/or Kimball (1995) aggregation in combination with nominal price rigidity. These results suggest that studies applying the timeless perspective might also usefully compare its performance to discretion, paying careful attention to how policy performance is evaluated.
    Keywords: Discretion, timeless perspective, policy evaluation.
    JEL: C61 E52 E58
    Date: 2009–01–20
  13. By: Naohisa Hirakata (Associate Director, Financial Systems and Bank Examination Department, Bank of Japan (E-mail:; Nao Sudo (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Recent empirical studies reveal that the oil price-output relationship is weakening in the US. Oil price-output correlation is less negative, and output reduction in response to oil price rise is more moderate after mid 1980s. In contrast to the conventional view that there have been changes in the economic structures that have made output less responsive to oil price shocks, we show that what have changed are the sources of oil price variation. We develop a DSGE model where oil price and US output are endogenously determined by the exogenous movements of US TFP and the oil supply. Having no changes in economic structure, our model yields dynamics of the oil price and output that show a weakening in the oil price-output relationship. There are changes in the way that the exogenous variables evolve. Two changes are important. First, oil supply variation has become moderate in recent years. Second, oil supply shortage is no longer followed by a large decline in TFP. We show that less volatile oil supply variation results in less negative oil price- output correlations, and a smaller TFP decline during oil supply shortfall implies a smaller output decline during oil price increases.
    Keywords: Oil Price Accounting, DSGE Model, Total Factor Productivity (TFP)
    JEL: E32 E37 Q41
    Date: 2009–01
  14. By: Ana Paula Ribeiro (CEMPRE and Faculdade de Economia, Universidade do Porto)
    Abstract: Although central banks often advocate labor market reforms, the latter may lead to higher stabilization costs in the presence of habit persistence in consumption. This is more likely to occur when strong habit persistence is coupled with an inflation-averse central bank. The presence of habit formation is a non-negligible assumption: theoretically, it is now a well-established device used in New-Keynesian models in order to be data-consistent with the response of real spending to several shocks. Moreover, estimates of habit formation are, according to the literature, quite large. To capture the interactions between monetary policy and structural reforms, our model improves on the one presented in Aguiar and Ribeiro (2008) by including a job matching process that introduces additional labor market features through which a labor market reform can operate. Within this framework, we assess, across different policy rules, how labor market institutional changes impinge on the effectiveness of monetary policy. We have concluded that labor market reform reduces central banks' losses, as long as the degree of habit persistence is not too strong; however, alternative reform devices impinge differently on monetary policy effectiveness. Moreover, the inflation targeting rule accommodates positive permanent effects from the reform for a wider range of habit persistence. Even when habit persistence is high, reform may still reduce stabilization costs if the importance of both demand and technology shocks is low relative to cost-push ones.
    Keywords: Monetary policy rules, Labor market reform, Labor market search and matching, New-Keynesian models
    JEL: E24 E37 E52
    Date: 2009–01
  15. By: Hanno Lustig; Chad Syverson; Stijn Van Nieuwerburgh
    Abstract: Three of the most fundamental changes in US corporations since the early 1970s have been (1) the increased importance of organizational capital in production, (2) the increase in managerial income inequality and pay-performance sensitivity, and (3) the secular decrease in labor market reallocation. Our paper develops a simple explanation for these changes: a shift in the composition of productivity growth away from vintage-specific to general growth. This shift has stimulated the accumulation of organizational capital in existing firms and reduced the need for reallocating workers to new firms. We characterize the optimal managerial compensation contract when firms accumulate organizational capital but risk-averse managers cannot commit to staying with the firm. A calibrated version of the model reproduces the increase in managerial compensation inequality and the increased sensitivity of pay to performance in the data over the last three decades.
    JEL: E2 G3
    Date: 2009–01
  16. By: Julian Emami Namini (Erasmus University Rotterdam); Enrico Pennings (Erasmus University Rotterdam)
    Abstract: We build a dynamic general equilibrium model with 2 countries, horizontal and vertical multinational activity and endogenous domestic and foreign investment. It is found that horizontal multinational activity always leads to a complementary relationship between domestic and foreign investment. Vertical multinational activity, in contrast, leads to either a substitutional or complementary relationship between domestic and foreign investment, depending on the firms' technologies. We test the theoretical implications with a panel of U.S. multinationals and find empirical support.
    Keywords: Horizontal multinational firms; vertical multinational firms; domestic investments; neoclassical growth model
    JEL: E22 F21 F23
    Date: 2009–01–15
  17. By: Benjamin Eden (Department of Economics, Vanderbilt University)
    Abstract: Why do people hold dollar denominated assets when higher rate of return alternatives are available? Can a country collect seigniorage payments from other countries in the long run? Does the supplier of the international currency benefit from doing so? I provide qualitative answers to these related questions in terms of a model with price dispersion, heterogeneous agents and two government-backed assets (interest-bearing monies). In the steady state one of the assets is used primarily in low price transactions and earns a relatively low (measured) real rate of return. The stable demand country that issues the relatively liquid asset gets seigniorage but its welfare may be less than under autarky because trade increases the uncertainty about demand in the relevant markets and uncertainty sometimes leads to ex-post pricing mistakes and waste.
    Keywords: Liquidity, sequential trade, international currency, currency substitution, the Friedman rule, seigniorage <br><br>
    JEL: E42 G12
    Date: 2009–01

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