nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒02‒07
ten papers chosen by
Christian Zimmermann
University of Connecticut

  1. Sudden stops, financial crises and leverage: a Fisherian deflation of Tobin's Q* By Enrique G. Mendoza
  2. Accumulation Regimes in Dynastic Economies with Resource Dependence and Habit Formation By Simone Valente
  3. Sources of the Great Moderation: shocks, friction, or monetary policy? By Zheng Liu; Daniel F. Waggoner; Tao Zha
  4. On-the-job search, sticky prices, and persistence By Willem Van Zandweghe
  5. Matching International Financial Shocks in Emerging Markets By Almira Buzaushina; Michael Brei
  6. Tariff and Equilibrium Indeterminacy By Zhang, Yan
  7. The Shimer puzzle and the identification of productivity shocks By Regis Barnichon
  8. Social Security reform with imperfect substitution between less and more experienced workers By Juan A. Rojas
  9. Pollution Adverse Tourists and Growth By Fabio Cerina; Sauveur Giannoni
  10. A Theory of the Corrupt Keynesian By Aidt, T.S.; Dutta, J.

  1. By: Enrique G. Mendoza
    Abstract: This paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets' Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin's Q driven by Irving Fisher's debt-deflation mechanism, which causes a spiraling decline in credit access and in the price and quantity of collateral assets. Output and factor allocations decline because the collateral constraint limits access to working capital financing. This credit constraint induces significant amplification and asymmetry in the responses of macro-aggregates to shocks. Because of precautionary saving, Sudden Stops are low probability events nested within normal cycles in the long run.
    Date: 2008
  2. By: Simone Valente (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: We analyze the consequences of habit formation for income levels and long-term growth in an overlapping generations model with dynastic altruism and resource dependence. If the strength of habits is below a critical level, the competitive economy displays an altruistic (Ramsey-like) equilibrium where consumption sustainability obeys the Stiglitz condition, and habits yield permanent effects on output levels due to transitional effects on growth rates, capital profitability and speed of resource depletion. If the strength of habits is above the critical threshold, the economy achieves a selfish (Diamond-like) equilibrium in which habits increase growth rates and resource depletion even in the long run, sustainability conditions are less restrictive, consumption and output grow faster than in Ramsey equilibria, but welfare is much lower. Results hinge on resource dependence, as different depletion rates modify the intergenerational distribution of wealth and thereby the growth rate attained in either equilibrium.
    Keywords: Dynastic Altruism, Overlapping Generations, Capital-Resource Model, Habit Formation
    JEL: Q30 D91 E21
    Date: 2009–01
  3. By: Zheng Liu; Daniel F. Waggoner; Tao Zha
    Abstract: We study the sources of the Great Moderation by estimating a variety of medium-scale DSGE models that incorporate regime switches in shock variances and in the inflation target. The best-fit model, the one with two regimes in shock variances, gives quantitatively different dynamics in comparison with the benchmark constant-parameter model. Our estimates show that three kinds of shocks accounted for most of the Great Moderation and business-cycle fluctuations: capital depreciation shocks, neutral technology shocks, and wage markup shocks. In contrast to the existing literature, we find that changes in the inflation target or shocks in the investment-specific technology played little role in macroeconomic volatility. Moreover, our estimates indicate much less nominal rigidities than those suggested in the literature.
    Keywords: Econometric models ; Business cycles
    Date: 2009
  4. By: Willem Van Zandweghe
    Abstract: Models of the monetary transmission mechanism often generate empirically implausible business fluctuations. This paper analyzes the role of on-the-job search in the propagation of monetary shocks in a sticky price model with labor market search frictions. Such frictions induce long-term employment relationships, such that the real marginal cost is determined by real wages and the cost of an employment relationship. On-the-job search opens up an extra channel of employment growth that dampens the response of these two components. Because real marginal cost rigidity induces small price adjustments, on-the-job search gives rise to a strong propagation of monetary shocks that increases output persistence.
    Date: 2009
  5. By: Almira Buzaushina; Michael Brei
    Abstract: In the present paper, we develop a two-sector general equilibrium model of a small open economy to explore the transmission mechanisms of external financial shocks. In particular, we use a cash-in- advance model with limited participation augmented with a financial friction in the form of a fundamentals-related risk premium on external funds. The friction amplifies the effects of external financial shocks, especially when the economy is highly indebted in foreign currency. For a set of Latin American economies, the theoretical model is calibrated to match the empirical impulse responses of output, investment, trade balance, and domestic credits in response to an adverse shock to the country risk premium. In addition, we analyze the role of monetary policy during the financial crisis.
    Keywords: Emerging Markets, Financial Crises, International Capital Markets
    JEL: F34 F36 G21
    Date: 2009–01
  6. By: Zhang, Yan
    Abstract: We study the effect of tariffs in a one-sector small open economy that imports oil. We find that (1) the model may exhibit local indeterminacy and sunspots when tariff rates are endogenously determined by a balanced-budget rule with a constant level of government expenditures (or lump-sum tansfers); and (2) indeterminacy disappears if the government finances endogenous public spending and transfers with fixed tariff rates. Under the first type of balanced budget formulation, we provide numerical (calibration) examples to illustate that the government shouldn't distort the oil price paid by firms with tariffs in order to avoid aggregate instability. Under the second type of balanced budget formulation, we prove that the economy exhibits equilibrium uniqueness, regardless of the existence of lump-sum transfers.
    Keywords: Indeterminacy; Endogenous Tariff Rate; Small Open Economy; Balanced-budget Rule
    JEL: F41 Q43
    Date: 2009–02–01
  7. By: Regis Barnichon
    Abstract: Shimer (2005) argues that the Mortensen-Pissarides (MP) model of unemployment lacks an amplification mechanism because it generates less than 10 percent of the observed business cycle fluctuations in unemployment given labor productivity shocks of plausible magnitude. This paper argues that part of the problem lies with the identification of productivity shocks. Because of the endogeneity of measured labor productivity, filtering out the trend component as in Shimer (2005) may not correctly identify the shocks driving unemployment. Using a New-Keynesian framework to control for the endogeneity of productivity, this paper estimates that the MP model can account for a third, and possibly as much as 60 percent, of fluctuations in labor market variables.
    Date: 2009
  8. By: Juan A. Rojas (Banco de España)
    Abstract: In this paper we study the quantitative properties of a policy reform aimed at funding the pension system in the standard model economy with perfect substitution across workers with different experience levels and a model economy where this substitutability is imperfect. With compulsory retirement, the welfare gains for young cohorts are underestimated in the standard model economy with perfect substitution as compared to the imperfect substitution case. However these additional welfare gains displayed in the imperfect substitution case come at the cost of higher welfare losses for the generations living at the time of the policy reform, due to the fall in the experience premium that follows after the elimination of social security. When the policy reform consists of the elimination of both social security and compulsory retirement, we find that in the standard model the status quo problem disappears. However, such policy change is not able to solve the status quo problem when less and more experienced workers are imperfect substitutes because the fall in the experience premium is more pronounced, providing a rationale for the lack of political support in favour of pension reform in the Spanish economy.
    Keywords: Social Security, overlapping generations
    JEL: E62 H55 J11
    Date: 2009–01
  9. By: Fabio Cerina; Sauveur Giannoni
    Abstract: We build a growth model in which tourism development generates pollution while tourists are pollution adverse. We establish that long run positive growth exists only for a particular value of tourists pollution adversion. Furthermore, we show that an intensive use of facilities is associated with a lower growth rate for destinations specialized in green tourism. We also see that if the destination can choose the degree of use of facilities, tourism will generate positive growth only if tourists are not too much pollution adverse. In this case the growth rate of the economy will be a negative function of tourists' adversion to pollution so that the "greener" the kind of tourism the destination address to, the slower its growth.
    Keywords: Pollution, Growth, Tourism Specialization, Use of Facilities
    JEL: O41 Q56 L83
    Date: 2008
  10. By: Aidt, T.S.; Dutta, J.
    Abstract: We evaluate the impact of real business cycle shocks on corruption and economic policy in a model of entry regulation in a representative democracy. We .nd that corruption is procyclical and regulation policy is counter-cyclical. Corrupt politicians engage in excessive stabilization of aggregate fluctuations and behave as if they were Keynesian. We also find that business cycle shocks can induce political instability with politicians losing office in recessions.
    Keywords: Corruption; entry regulation; performance voting; business cycles.
    JEL: D72 K42 O41
    Date: 2008–12

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