nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒02‒14
thirty-two papers chosen by
Christian Zimmermann
University of Connecticut

  1. An estimated DSGE model of the Hungarian economy By Zoltán M. Jakab; Balázs Világi
  2. Endogenous fertility, family policy and multiple equilibria By Luciano Fanti
  3. The Role of Trends and Detrending in DSGE Models By Andrle, Michal
  4. Solving Portfolio Problems with the Smolyak-Parameterized Expectations Algorithm By Ángel Gavilán; Juan A. Rojas
  5. Optimal Irrational Behavior By James Feigenbaum; Frank N. Caliendo; Emin Gahramanov
  6. On economic growth and minimum wages By Luciano Fanti; Luca Gori
  7. Uninsurable Investment Risks and Capital Income Taxation By Césaire A. Meh; Yaz Terajima
  8. Oil Price Shocks and the Optimality of Monetary Policy By Anna Kormilitsina
  9. Growth, Fiscal Policy and the Informal Sector in an Informal Economy By Pedro, de Mendonça
  10. Inventories, Markups, and Real Rigidities in Menu Cost Models By Oleksiy Kryvtsov; Virgiliu Midrigan
  11. Awareness and AIDS: A Political Economy Model By Gani Aldashev; Jean-Marie Baland
  12. ‘Backyard’ technology and regulated wages in a neoclassical OLG growth model By Luciano Fanti; Luca Gori
  13. Economies of scale in banking, confidence shocks, and business cycles By Dressler, Scott J.
  14. Liquidity Effects and Cost Channels in Monetary Transmission By Yunus Aksoy; Henrique S Basso; Javier Coto Matinez
  15. Migration and human capital in an endogenous fertility model By Luca Marchiori; Patrice Pieretti; Benteng Zou
  16. Longevity, fertility and PAYG pension systems sustainability By Luciano Fanti; Luca Gori
  17. Brain drain, remittances, and fertility model By Luca Marchiori; Patrice Pieretti; Benteng Zou
  18. On the International Dimension of Fiscal Policy By Gianluca Benigno; Bianca De Paoli
  19. Migration and Education Decisions in a Dynamic General Equilibrium Framework By Dessus, Sebastien; Nahas, Charbel
  20. Child policy solutions for the unemployment problem By Luciano Fanti; Luca Gori
  21. Solovian and New Growth Theory from the Perspective of Allyn Young on Macroeconomic Increasing Returns By Roger Sandilands
  22. Maturity, Indebtedness, and Default Risk By Satyajit Chatterjee; Burcu Eyigungor
  23. Job Search, Bargaining, and Wage Dynamics By Shintaro Yamaguchi
  24. Complexity and Bounded Rationality in Individual Decision Problems By Theodoros M. Diasakos
  25. Fertility and regulated wages in an OLG model of neoclassical growth: Pensions and old age support By Luciano Fanti; Luca Gori
  26. Agglomeration and population aging in a two region model of exogenous growth By Theresa Grafeneder-Weissteiner; Klaus Prettner
  27. Forecasting Consumption Growth with the Real Term Structure By Kwok Ping Tsang
  28. Social Security, Differential Fertility, and the Dynamics of the Earnings Distribution By Kai Zhao
  29. Price setting and competition with search frictions By Kudoh, Noritaka
  30. Barriers to Technology Adoption and Entry By Igor D. Livshits; James C. MacGee
  31. Bounding the CRRA Utility Functions By Suen , Richard M. H.
  32. What Accounts for the U.S.-Canada Education-Premium Difference? By Oleksiy Kryvtsov; Alexander Ueberfeldt

  1. By: Zoltán M. Jakab (Magyar Nemzeti Bank); Balázs Világi (Magyar Nemzeti Bank)
    Abstract: This paper presents and estimates a dynamic stochastic general equilibrium (DSGE) small-open-economy model for the Hungarian economy. The model features different types of frictions, real and nominal rigidities which are necessary to replicate the empirical persistence of Hungarian data. Bayesian methods are applied, and the structural break due to changing monetary regime over the studied period is explicitly taken into account in the estimation procedure. A real-time adaptive learning mechanism describes agents’ perception on underlying inflation. This creates an additional inertia in inflation. We describe the properties of the estimated model by impulse-response analysis, variance decomposition and the analysis of identified structural shocks. Our results are compared with that of estimated euro-area DSGE models, and estimated non-DSGE models of the Hungarian economy. As a robustness check, a model without real time adaptive learning is also estimated and it’s results are also compared to those of the original model.
    Keywords: New Keynesian models, DSGE models, small open economy, Bayesian econometrics.
    JEL: E40 E50
    Date: 2008
  2. By: Luciano Fanti
    Abstract: In this paper we assess the role of direct monetary transfers to the benefit of households in raising children in a textbook Diamond (1965) style overlapping generations model. In particular, we examine how both the dynamics of capital and fertility of households are connected to a specific balanced budget policy to support child-rearing. We found that when the child allowance is higher than the fixed cost to children multiple equilibria are possible. As regards fertility, it is shown that increasing the child grant at too high a level may actually reduce the long-run population growth rate.
    Keywords: Childcare Policy; Endogenous fertility; Multiple equilibria; OLG model
    JEL: H24 J13 J18
    Date: 2009–02–01
  3. By: Andrle, Michal
    Abstract: The paper discusses the role of stochastic trends in DSGE models and effects of stochastic detrending. We argue that explicit structural assumptions on trend behavior is convenient, namely for emerging countries. In emerging countries permanent shocks are an important part of business cycle dynamics. The reason is that permanent shocks spill over the whole frequency range, potentially, including business cycle frequencies. Applying high- or band-pass filter to obtain business cycle dynamics, however, does not eliminate the influence of permanent shocks on comovements of time series. The contribution of the paper is to provide a way how to calculate the role of permanent shocks on the detrended/ filtered business cycle population dynamics in a DSGE model laboratory using the frequency domain methods.
    Keywords: detrending; band-pass filter; spectral density; DSGE.
    JEL: E32 C53 D58
    Date: 2008–08–01
  4. By: Ángel Gavilán (Banco de España); Juan A. Rojas (Banco de España)
    Abstract: We propose a new numerical method to solve stochastic models that combines the parameterized expectations (PEA) and the Smolyak algorithms. This method is especially convenient to address problems with occasionally binding constraints (a feature inherited from PEA) and/or a large number of state variables (a feature inherited from Smolyak), i.e. DSGE models that incorporate portfolio problems and incomplete markets. We describe the proposed Smolyak-PEA algorithm in the context of a one-country stochastic neoclassical growth model and compare its accuracy with that of a standard PEA collocation algorithm. Despite estimating fewer parameters, the former is able to reach the high accuracy levels of the latter. We further illustrate the working of this algorithm in a two-country neoclassical model with incomplete markets and portfolio choice. Again, the Smolyak-PEA algorithm approximates the solution of the problem with a high degree of accuracy. Finally, we show how this algorithm can efficiently incorporate both occasionally binding constraints and a partial information approach.
    Keywords: Portfolio Choice, Dynamic Macroeconomics, Computational Methods
    JEL: E2 C68
    Date: 2009–02
  5. By: James Feigenbaum (University of Pittsburgh); Frank N. Caliendo (Department of Economics and Finance, Utah State University); Emin Gahramanov (Deakin University)
    Abstract: Contrary to the usual presumption that welfare is maximized if consumers behave rationally, we show in a two-period overlapping generations model that there always exists a rule of thumb that can weakly improve upon the lifecycle/permanent-income rule in general equilibrium with irrational households. The market-clearing mechanism introduces a pecuniary externality that individual rational households do not consider when making decisions, but a publically shared rule of thumb can exploit this effect. For typical calibrations, the improvement of the welfare of irrational households is robust to the introduction of rational agents. Generalizing to a more realistic lifecycle model, we find in particular that the Save More Tomorrow(TM) (SMarT) Plan can confer higher lifetime utility than the permanent-income rule in general equilibrium.
    Keywords: consumption, saving, coordination, lifecycle/permanent-income hypothesis, SMarT Plan, general equilibrium, rules of thumb, pecuniary externality
    JEL: C61 D11 E21
    Date: 2009–02–03
  6. By: Luciano Fanti; Luca Gori
    Abstract: We offer an analysis of the existence of a positive relationship between minimum wages and economic growth in a fairly standard general equilibrium, one-sector, two-period overlapping generations model, where the usual Romer-typed knowledge spill-over mechanism in production represents the engine of endogenous growth. It is shown that – contrary to the conventional view which has failed to pay due attention to dynamic contexts with labour market rigidities – the minimum-wage economy may grow faster than the competitive-wage economy in spite of a reduced employment rate and, in particular, a growth-maximising minimum wage does exist. A straightforward message is therefore that policymakers may appropriately use minimum wage policies to promote economic growth and individuals’ welfare.
    Keywords: Endogenous growth; Minimum wage; Unemployment; OLG model
    JEL: H24 J60 O41
    Date: 2009–01–01
  7. By: Césaire A. Meh; Yaz Terajima
    Abstract: This paper studies the capital accumulation and welfare implications of reducing capital income taxation in a general equilibrium economy with uninsurable investment risks. It has been shown that, with uninsurable investment risks, under-accumulation of capital may result compared to the complete markets economy. We show that reducing somewhat the capital income tax rate increases the capital stock and leads to a welfare gain. The complete elimination of the capital income tax, however, is not necessarily welfare improving.
    Keywords: Economics models
    JEL: E21 E22 E62 G32 H24 H25
    Date: 2009
  8. By: Anna Kormilitsina (Southern Methodist University)
    Abstract: The observed tightening of interest rates in the aftermath of the post-World War II oil price hikes led some to argue that U.S. monetary policy exacerbated the recessions induced by oil price shocks. This paper provides a critical evaluation of this claim. Within an estimated dynamic stochastic general equilibrium model with the demand for oil, I contrast Ramsey optimal with estimated monetary policy. I find that monetary policy amplified the negative effect of the oil price shock. The optimal response to the shock would have been to raise inflation and interest rates above what had been seen in the past.
    Keywords: Oil price, Optimal monetary policy, DSGE model.
    JEL: C68 E52 Q43
    Date: 2009–01
  9. By: Pedro, de Mendonça
    Abstract: We discuss the implications of informality on growth and fiscal policy by considering an informal sector based on low tech firms, in an open economy model of endogenous growth, where labour supply is elastic and increasing returns arise from public spending. We allow for both labour and capital to allocate between sectors and examine the dynamic and policy issues that arise in an economy, where long run outcomes are still dominated by formal activities, but long macroeconomic transitions arise as a result of informal microeconomic activities, which take advantage of both government taxation and limited fiscalization.
    Keywords: Endogenous Growth Theory; Optimal Fiscal Policy; Informal Sector; Public Capital
    JEL: E62 O41 O17 C61 F43
    Date: 2009–02–05
  10. 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.
    Keywords: Business fluctuations and cycles; Transmission of monetary policy
    JEL: E31 F12
    Date: 2009
  11. By: Gani Aldashev; Jean-Marie Baland
    Abstract: We present a simple political economy model that explains two major puzzles of government policies to combat HIV/AIDS epidemic: the lack of policy response in many countries where the epidemic is massive and the reversal of the downward trend in HIV prevalence in the countries that have adopted early agressive prevention campaigns. The model builds on the assumption that the unaware citizens impose a negative externality on the aware by increasing the risk of contagion. Prevention campaigns raise awareness of the current generation, which then partially transmit this awareness to the next generation, thus creating political support for the next-period awareness campaigns. The economy has two steady-state equilibria: the "good" one (with high awareness and low prevalence) and the "bad" one (low awareness, high prevalence). The "good" equilibrium is fragile, i.e. a sufficiently large exogenous drop in HIV prevalence undermines the next-generation political support for campaigns and makes the economy drift away towards the "bad" equilibrium.
    Keywords: HIV/AIDS, voting, overlapping generations, awareness
    JEL: I18 H51
    Date: 2008
  12. By: Luciano Fanti; Luca Gori
    Abstract: This paper formally explores the joint roles played, on the one side, by the regulation of wages and, on the other side, by the existence of a “backyard” (or home) technology exploited by the unemployed people, in a standard neoclassical OLG growth model. The main findings are the following: 1) the introduction of a “binding” regulated wage fosters the capital accumulation and lead to a higher long term capital stock (and thus to higher output and welfare as well) in comparison with a competitive wage economy, provided that both the labour productivity at “home” and the capital weight in the firms technology are sufficiently high; 2) however, if the regulated wage is set at a too high level, the capital accumulation will be inferior to that of the competitive wage economy. These results, so far escaped closer scrutiny by economic growth literature, shed a new light on the effects of the regulation of wages and may have interesting policy implications.
    Keywords: Regulated wage; Unemployment; Home production; OLG model
    JEL: D13 E24 J22 O41
    Date: 2008–09–01
  13. By: Dressler, Scott J.
    Abstract: This paper quantitatively investigates equilibrium indeterminacy due to economies of scale (ES) in financial intermediation. Financial intermediation provides deposits (inside money) which can substitute with currency to purchase consumption, and depositing decisions are susceptible to non-fundamental confidence (sunspot) shocks. With the intermediation sector calibrated to match US data: (i) indeterminacy arises for small degrees of ES; (ii) sunspot shocks qualitatively resemble monetary shocks; and (iii) monetary policies can stabilize the real impact of sunspot shocks, but only under complete information. The analysis also assesses the removal of these shocks on the volatility decline observed during the US Great Moderation.
    Keywords: Financial Intermediation; Inside Money; Indeterminacy; Business Cycles
    JEL: E32 C68 E44
    Date: 2009–01
  14. By: Yunus Aksoy; Henrique S Basso; Javier Coto Matinez (School of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We study liquidity effects and cost channels within a model of nominal rigidities and imperfect competition that gives explicit role for money-credit markets and investment decisions. We find that cost channels matter for monetary transmission, amplifying the impact of supply shocks and dampening the effects of demand shocks. Liquidity effects only obtain when the policy is specified by an interest rate policy rule and money-credit conditions are determined endogenously. We also find that determinacy issues are particularly relevant when models include the cost channel and explicit money-credit markets.’s score is variable along its life cycle or if he search process uses resources. It is shown that the discount effect of gradual recognition of popularity tends to reduce growth. Hence, growth is enhanced if the search engine is less sensitive to popularity. Also, growth is lower when the search engine rewards "web page quality" better because of the resources diverted away from R and D into advertising. But these mechanisms generate opposite level effects on the average quality selected by consumers. As a result the net effect on welfare is ambiguous.
    Date: 2009–01
  15. By: Luca Marchiori (IRES, Université catholique de Louvain); Patrice Pieretti (CREA, Université du Luxembourg); Benteng Zou (CREA, Université du Luxembourg)
    Abstract: How do high and low skilled migration affect fertility and human capital in migrants’ origin countries? This question is analyzed within an overlapping generations model where parents choose the number of high and low skilled children they would like to have. Individuals migrate with a certain probability and remit to their parents. It is shown that a brain drain induces parents to have more high and less low educated children. Under certain conditions fertility may either rise or decline due to a brain drain. Low skilled emigration leads to reversed results, while the overall impact on human capital of either type of migration remains ambiguous. Subsequently, the model is calibrated on a developing economy. It is found that increased high skilled emigration reduces fertility and fosters human capital accumulation, while low skilled emigration induces higher population growth and a lower level of education.
    Keywords: migration, human capital, fertility
    JEL: F22 J13 J24
    Date: 2008–12
  16. By: Luciano Fanti; Luca Gori
    Abstract: Recently Fanti and Gori (2008) showed – in the basic overlapping generations (OLG) model of neoclassical growth with exogenous fertility (Diamond, 1965) – that a positive relationship between longevity and pay-as-you-go (PAYG) pensions may exist independently of the size of the contribution rate burdening on the currently active generation (the young workers). We extend such a model to analyse how the balanced PAYG pension budget is affected by an increasing longevity in a fairly standard Diamond-style OLG model with endogenous fertility. It is shown that the positive relationship between longevity and pensions may be thought to be a robust feature of OLG economies. In particular, (1) the demand for children may either increase or decrease along with an increased longevity, though the latter is not very likely, and (2) the endogeneisation of fertility rates may strengthen or weaken the beneficial effects that the reduction in adult mortality plays on PAYG pensions, and this result depends exclusively on the size of the households’ preference for raising children. Therefore, even in a context in which agents choose endogenously the number of children raised, there would be room for an increase, rather than the often threatened reduction, in future pensions by keeping unaltered the contribution rate to the PAYG scheme paid by current workers, and this holds especially in the case in which parents have a strong preference for having children.
    Keywords: Pensions; Fertility; OLG model
    JEL: J26 O41
    Date: 2009–01–01
  17. By: Luca Marchiori (IRES, Université catholique de Louvain); Patrice Pieretti (CREA, Université du Luxembourg); Benteng Zou (CREA, Université du Luxembourg)
    Abstract: How do high and low skilled migration affect fertility and human capital in migrants’ origin countries? This question is analyzed within an overlapping generations model where parents choose the number of high and low skilled children they would like to have. Individuals migrate with a certain probability and remit to their parents. It is shown that a brain drain induces parents to have more high and less low educated children. Under certain conditions fertility may either rise or decline due to a brain drain. Low skilled emigration leads to reversed results, while the overall impact on human capital of either type of migration remains ambiguous. Subsequently, the model is calibrated on a developing economy. It is found that increased high skilled emigration reduces fertility and fosters human capital accumulation, while low skilled emigration induces higher population growth and a lower level of education.
    Keywords: Skilled emigration, remittances, fertility, human capital
    JEL: F22 F24 J13 J24
    Date: 2008–11
  18. By: Gianluca Benigno; Bianca De Paoli
    Abstract: This paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non-state-contingent debt. The main finding of the paper is that, once the open economy aspect of the policy problem is considered, it is not optimal to smooth taxes following idiosyncratic shocks. Even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium, the presence of a terms of trade externality lead to movements in the tax rate. Also in contrast with the closed economy, the introduction of sticky prices can reduce the optimal volatility of taxes.
    Keywords: optimal policy, fiscal policy, small open economy
    JEL: E62 E63 F41
    Date: 2009–01
  19. By: Dessus, Sebastien (The World Bank); Nahas, Charbel (The World Bank)
    Abstract: With growing international skilled labor mobility, education and migration decisions have become increasingly inter-related, and potentially have a large impact on the growth trajectories of source countries, through their effects on labor supply, savings, or the cost of education. The authors develop a generic dynamic general equilibrium model to analyze the education-migration nexus in a consistent framework. They use the model as a laboratory to test empirical conditions for the existence of net brain gain, that is, greater domestic accumulation of human capital (in per capita terms) with greater migration of skilled workers. The results suggest that although some structural parameters can favor simultaneously greater human capital accumulation and greater skilled migration --such as high ratio of remittances over domestic incomes, high dependency ratios in migrant households, low dependency ratios in source countries, increasing returns to scale in the education sector, technological transfers and export market access with Diasporas, and efficient financial markets -- this does not necessarily mean that greater migration encourages the constitution of greater stocks of human capital in source countries.
    Keywords: Migration; Education; Brain Gain; Brain Drain; General Equilibrium Models
    JEL: C68 P36 R23
    Date: 2008–11–01
  20. By: Luciano Fanti; Luca Gori
    Abstract: Unemployment and population ageing are probably two of the most important concerns in developed countries. Since reforming labour markets is high on the political agenda, a theoretical knowledge of the possible long-run interaction between unemployment and the childcare system may be highly valuable. Applying a fairly standard OLG model with endogenous fertility and minimum wages, we show that a child tax (rather than the more conventional child subsidy) can be used as an instrument (1) to promote population growth and (2) to reduce unemployment and, in particular, to restore the full employment equilibrium.
    Keywords: Child Tax; Fertility; OLG model; Unemployment
    JEL: H24 J13 J18
    Date: 2009–01–01
  21. By: Roger Sandilands (Department of Economics, University of Strathclyde)
    Abstract: This paper evaluates, from an Allyn Youngian perspective, the neoclassical Solow model of growth and the associated empirical estimates of the sources of growth based on it. It attempts to clarify Young’s particular concept of generalised or macroeconomic “increasing returns” to show the limitations of a model of growth based on an assumption that the aggregate production function is characterised by constant returns to scale but “augmented” by exogenous technical progress. Young’s concept of endogenous, self-sustaining growth is also shown to differ in important respects (including in its policy implications) from modern endogenous growth theory.
    Keywords: Solow model; aggregate production function; Allyn Young; endogenous growth theory; macroeconomic increasing returns.
    JEL: B22 B31 O30 O40 O47
    Date: 2009–01
  22. By: Satyajit Chatterjee (Federal Reserve Bank of Philadelphia); Burcu Eyigungor
    Abstract: We present a novel and tractable model of long-term sovereign debt. We make two sets of contributions. First, on the substantive side, using Argentina as a test case we show that unlike one-period debt models, our model of long-term sovereign debt is capable of accounting for the average spread, the average default frequency, and the average debt-tooutput ratio of Argentina over the 1991-2001 period without any deterioration in the model’s ability to account for Argentina’s cyclical facts. Using our calibrated model we determine what Argentina’s debt, default frequency and welfare would have been if Argentina had issued only short-term debt. Second, on the methodological side, we advance the theory of sovereign debt begun in Eaton and Gersovitz (1981) by establishing the existence of an equilibrium pricing function for long-term sovereign debt and by providing a fairly complete set of characterization results regarding equilibrium default and borrowing behavior. In addition, we identify and solve a computational problem associated with pricing long-term unsecured debt that stems from nonconvexities introduced by the possibility of default.
    Keywords: Unsecured Debt, Sovereign Debt, Long Duration Bonds, Debt Dilution, Random Maturity Bonds, Default Risk
    JEL: F34 F41 G12 G33
    Date: 2009–02
  23. By: Shintaro Yamaguchi
    Abstract: This paper constructs and estimates a model of strategic wage bargaining with on-the-job search to explore three different components of wages: general human capital, match-specific capital, and outside option. As the workers find better job opportunities, the current employer has to compete with outside firms to retain them. This between-firm competition results in wage growth even when productivity remains the same. The model is estimated by a simulated minimum distance estimator and data from the NLSY79. The results indicate that the improved value of outside option raises wages of ten-year-experienced workers by 16%.
    Date: 2009–01
  24. By: Theodoros M. Diasakos
    Abstract: I develop a model of endogenous bounded rationality due to search costs, arising implicitly from the decision problem's complexity. The decision maker is not required to know the entire structure of the problem when making choices. She can think ahead, through costly search, to reveal more of its details. However, the costs of search are not assumed exogenously; they are inferred from revealed preferences through choices. Thus, bounded rationality and its extent emerge endogenously: as problems become simpler or as the benefits of deeper search become larger relative to its costs, the choices more closely resemble those of a rational agent. For a fixed decision problem, the costs of search will vary across agents. For a given decision maker, they will vary across problems. The model explains, therefore, why the disparity, between observed choices and those prescribed under rationality, varies across agents and problems. It also suggests, under reasonable assumptions, an identifying prediction: a relation between the benefits of deeper search and the depth of the search. In decision problems with structure that allows the optimal foresight of search to be revealed from choices of plans of action, the relation can be tested on any agent-problem pair, rendering the model falsifiable. Moreover, the relation can be estimated allowing the model to make predictions with respect to how, in a given problem, changes in the terminal payoffs affect the depth of search and, consequently, choices. My approach provides a common framework for depicting the underlying limitations that force departures from rationality in different and unrelated decision-making situations. I show that it is consistent with violations of timing-independence in temporal framing problems, dynamic inconsistency and diversification bias in sequential versus simultaneous choice problems, and with plausible but contrasting risk attitudes across small- and large-stakes gambles.
    Keywords: bounded rationality, complexity, search
    JEL: D80 D83
    Date: 2008
  25. By: Luciano Fanti; Luca Gori
    Abstract: Since little attention has been paid to the effects of the regulation of wages on individuals' fertility choice, this paper investigates such effects within a standard OLG model of neoclassical growth. Some new results, so far escaped closer scrutiny by the increasing literature investigating economic growth and fertility, and which may have interesting policy implications, emerge: introducing minimum wages may, under suitable conditions, (1) have a favourable impact on the long-run outcomes of the economy; and (2) reduce the population growth rate. This occurs more likely when both sufficiently high capital's weight in technology and unemployment benefits do exist. Interestingly, these results are robust to different extensions introducing pensions and intra-family transfers. Therefore, to the extent that the absence of unions and of any regulation of wages are related with low wages, and the weight of capital in the distribution is increasing, the findings of this work also offer some policy implications which are, especially for developing countries in which the population growth may be too high, very interesting.
    Keywords: Minimum wage, Unemployment, Endogenous fertility
    JEL: E24 J13 O41
    Date: 2008–01–01
  26. By: Theresa Grafeneder-Weissteiner (Department of Economics, Vienna University of Economics & B.A.); Klaus Prettner (Vienna Institute of Demography, Austrian Academy of Sciences)
    Abstract: This article investigates the effects of introducing demography into the New Economic Geography. We generalize the constructed capital approach, which relies on infinite individual planning horizons, by introducing mortality. The resulting overlapping generation framework with heterogeneous individuals allows us to study the effects of aging on agglomeration processes by analytically identifying the level of trade costs that triggers catastrophic agglomeration. Interestingly, this threshold value is rather sensitive to changes in mortality. In particular, the introduction of a positive mortality rate makes the symmetric equilibrium more stable and therefore counteracts agglomeration tendencies. In sharp contrast to other New Economic Geography approaches, this implies that deeper integration is not necessarily associated with higher interregional inequality.
    JEL: C61 F12 F15
    Date: 2009–02
  27. By: Kwok Ping Tsang
    Abstract: From the log-linearized consumption Euler equation, consumption growth of any horizon m is a function of the expected real return of maturity m, and they are linked through the elasticity of intertemporal substitution (EIS). Instead of using only the 1- period return and consumption growth, this result allows us to use the term structure of interest rates to identify the EIS. Using quarterly US data from 1954Q1 to 2007Q4, GMM results show that the real term structure is unrelated to future consumption growth: after controlling for small sample bias, we cannot reject the hypothesis that the EIS is zero. However, allowing a break in 1979 changes the results dramatically: the EIS is around 0.4 in the first period and it drops to around 0.2 in the second period. Not only is the EIS smaller, the out-sample forecasting power of ex post real return also drops in the second subsample compared to a simple AR(1) model for consumption growth. I find a lower EIS also for annual data.
    Keywords: Consumption Euler Equation, Term Structure of Interest Rates, Inflation, Forecast, Elasticity of Intertemporal Substitution, GMM
    Date: 2008
  28. By: Kai Zhao (University of Western Ontario)
    Abstract: Economists and demographers have long argued that fertility differs by income (differential fertility), and that social security creates incentives for people to rear fewer children. Does the effect of social security on fertility differ by income? How does social security change the cross-sectional relationship between fertility and income? Does social security further affect the dynamics of the earnings distribution by changing differential fertility? We answer these questions in a three-period OLG model with heterogeneous agents and endogenous fertility. We argue that given its redistributional property, social security affects people's fertility behavior differentially by income. In the model, earning ability is transmitted from parents to children. Hence, social security can have a significant impact on the dynamics of the earnings distribution through its effects on differential fertility. The mechanism used in the model to generate differential fertility is novel. We follow the line of the "old-age security" hypothesis and assume that children are an investment good in parents' old-age consumption. Thus,the optimal fertility choice depends on how much transfer is expected from children in relation to the cost of rearing these children to adult life. Since the intergenerational earnings process is mean-reverting, poor (rich) parents tend to have more (fewer) children because they have lower (higher) child-rearing cost and expect their children will have higher (lower) earnings than themselves and give back relatively more (less) in transfers. Social security reduces fertility by substituting children out of parents' old-age portfolio. It reduces fertility of the poor proportionally more than it reduces fertility of the rich because social security payments are a larger portion of old-age savings for poor people. These results are consistent with features of the U.S. fertility data. We calibrate the model to the U.S. data and find that social security can explain 32% of the decline in poor-rich fertility differential between the cohort of women born during 1891-1895 and the cohort of women born during 1946-1950.
    Keywords: Social Security; Differential Fertility; Earnings Distribution; Growth
    JEL: E60 H31 J13 O15
    Date: 2009
  29. By: Kudoh, Noritaka
    Abstract: This paper investigates price determination in a decentralized economy in which buyers' valuations are stochastic and unobservable. In such a market, each buyer's reservation utility depends both on the prevailing price and on the price he actually encounters. The buyer's willingness to trade is shown to be decreasing in the price, and this creates the trade-off for the sellers' price setting. Even though the sellers have incentives to manipulate the buyer's willingness to trade, the economy is not fully competitive; it does not converge to the Walrasian outcome as search frictions disappear. The model is used to study various market structures to explore the nature of market power in search equilibrium. It is shown that price dispersion arises as a result of search frictions and oligopolistic price setting.
    Keywords: random search, price setting, competition, oligopoly,
    JEL: C78 D40
    Date: 2009–02
  30. By: Igor D. Livshits (University of Western Ontario); James C. MacGee (University of Western Ontario)
    Abstract: A key feature of recent work on barriers to technology adoption is the assumption that monopoly rights of insiders are limited by the ability of industry outsiders to enter. This paper endogenizes the decision of a government to provide barriers to technology adoption alone or in combination with barriers to entry of outsiders. Using a political economy model, we find that a government provides barriers to both technology adoption and outsider entry. If governments are not too "corrupt", restricting their ability to provide barriers to entry may eliminate barriers to adoption. However, for sufficiently "corrupt" governments, prohibiting barriers to entry leads to more extreme barriers to technology adoption.
    Keywords: monopoly rights; technology adoption; lobbying; entry
    JEL: O4 F43 D72
    Date: 2008
  31. By: Suen , Richard M. H.
    Abstract: The constant-relative-risk-aversion (CRRA) utility function is now predominantly used in quantitative macroeconomic studies. This function, however, is not bounded and thus creates problems when applying the standard tools of dynamic programming. This paper devises a method for "bounding" the CRRA utility functions. The proposed method is based on a set of conditions that can establish boundedness among a broad class of utility functions. These results are then used to construct a bounded utility function that is identical to a CRRA utility function except when consumption is very small or very large. It is shown that the constructed utility function also satisfies the Inada condition and is consistent with balanced growth.
    Keywords: Utility Function; Elasticity of Marginal Utility; Boundedness
    JEL: O41 C61
    Date: 2009–02–07
  32. By: Oleksiy Kryvtsov; Alexander Ueberfeldt
    Abstract: This paper analyzes the differences in wage ratios of university graduates to less than university graduates, the education premium, in Canada and the United States from 1980 to 2000. Both countries experienced a similar increase in the fraction of university graduates and a similar increase in skill biased technological change based on capital-embodied technological progress, but only the United States had a large increase in the education premium. Using a calibrated Krussel et al. (2000) model, the paper finds that the cross country difference is in equal proportion due to the effective stock of capital equipment, the growth in skilled labor supply relative to unskilled labor and the relative abundance of skilled population in 1980. Growth in the working age population is unimportant for the difference.
    Keywords: Labour markets; Productivity
    JEL: E24 E25 J24 J31
    Date: 2009

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