nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒02‒22
twelve 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. The distribution of wealth and fiscal policy in economies with finitely lived agents By Jess Benhabib; Alberto Bisin
  4. Bargaining structures, rent-seeking effect and endogenous growth. By Isabelle TERRAZ
  5. THE BALASSA-SAMUELSON HYPOTHESIS AND ELDERLY MIGRATION By Hernando Zuleta; Oscar Avila; Mauricio Rodriguez
  6. International Portfolio Allocation under Model Uncertainty By Pierpaolo Benigno; Salvatore Nisticò
  7. Sequential bargaining in a new-Keynesian model with frictional unemployment and staggered ware negotiation. By Gregory de Walque; Olivier Pierrard; Henri Sneessens; Raf Wouters
  8. Housing Liquidity, Mobility, and the Labour Market By Allen Head; Huw Lloyd-Ellis
  9. Job Search, Bargaining, and Wage Dynamics By Shintaro Yamaguchi
  10. A Sticky-Information General-Equilibrium Model for Policy Analysis By Ricardo Reis
  11. Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm By Lilia Maliar; Fernando Valli; Serguei Maliar
  12. Should we tax overtime, subsidize the wage or subsidize employment? By Victoria Osuna

  1. By: Guido Menzio; Shouyong Shi
    Abstract: In this paper, we develop a general stochastic model of directed search on the job. Analogous to 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 models of random search on the job, our model admits an equilibrium in which agents' value and policy functions do not depend on the distribution of workers. We refer to this type of equilibrium as a Block Recursive Equilibrium (BRE). 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. We prove existence of a BRE under various specifications of workers' preferences and contractual environments, including dynamic contracts and fixed-wage contracts.
    Keywords: Directed Search; On the Job Search; Heterogeneity; Aggregate Fluctuations
    JEL: E24 E32 J64
    Date: 2009–02–13
  2. By: Jesús Fernández-Villaverde (Department of Economics, University of Pennsylvania)
    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.
    Keywords: DSGE Models, Likelihood Estimation, Bayesian Methods
    JEL: C11 C13 E30
    Date: 2009–01–19
  3. By: Jess Benhabib; Alberto Bisin
    Abstract: We study the dynamics of the distribution of overlapping generation economy with finitely lived agents and inter-generational transmission of wealth. Financial markets are incomplete, exposing agents to both labor income and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth, of wealth inequality in particular, on various fiscal policy instruments like capital income taxes and estate taxes. We show that capital income and estate taxes can significantly reduce wealth inequality. Finally, we characterize optimal redistributive taxes with respect to a utilitarian social welfaremeasure. Social welfare is maximized short of minimal wealth inequality and with zero estate taxes. Finally, we study the effects of different degrees of social mobility on the wealth distribution.
    JEL: E21 E25
    Date: 2009–02
  4. By: Isabelle TERRAZ
    Abstract: Market power of workers on wages is bound to affect economic performances. This paper focuses on this issue and analyse the influence of bargaining structures on growth and labor market functioning. To achieve this, we construct an endogenous growth model where growth appears as the result of a learning-by-doing process whereas imperfect information in the labor market implies matching frictions in the hiring process. If investment occurs before wage bargaining, the growth process can be durably altered. In this case, a higher bargaining power of worker does not give a clear-cut effect on growth.
    Keywords: Bargaining structures; Equilibrium Unemployment; Endogenous growth; Learning-by-doing.
    JEL: E24 J50 J64 O40
    Date: 2009
  5. By: Hernando Zuleta; Oscar Avila; Mauricio Rodriguez
    Abstract: We present an Overlapping Generations Model with two final goods: tradable goods are produced with a standard Cobb-Douglas production function and non-tradable goods are produced with linear production function where the only factor is labor. We maintain the fundamental assumption of factor mobility between sectors so model is consistent with the Balassa-Samuelson hypothesis. Given the general equilibrium structure of our model we can examine the effect of the saving rate on migration and non-tradable relative prices. Under this setting, we find that the elderly have incentives to migrate from economies where productivity is high to economies with low productivity because of the lower cost of living. In more general terms the elderly migration is likely to go from rich to poor countries. We also find that, for poor countries, the elderly migration has a positive effect in wages and capital accumulation.
    Date: 2009–02–06
  6. By: Pierpaolo Benigno; Salvatore Nisticò
    Abstract: In a rational-expectation model of international portfolio and consumption decisions, international home bias in equities depends on the correlation between non-diversifiable labor income risk and the cross-country equity returns, when agents have log utility in consumption. We show that there is weak empirical evidence for this channel. Moreover standard preferences fail to account for other empirical evidence on international asset prices. We propose an alternative environment with model uncertainty populated by the sophisticated agents of the robust-control theory of Hansen and Sargent (2005). Maintaining the assumption of unitary intertemporal elasticity of substitution, we show that home bias in equity can also depend on the correlation between equity returns and the real exchange rate and its weight depends on a measure of the distrust that the agent has with respect to the objective probability distribution. This hedging component, which mainly refers to long-run risk in real exchange rate, is more relevant from an empirical point of view. The proposed model is successful along other dimensions, where instead the standard rational-expectation model fails.
    JEL: F3 G11 G15
    Date: 2009–02
  7. By: Gregory de Walque (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Olivier Pierrard (Central Bank of Luxembourg, 2 boulevard Royal, L–2983 Luxembourg, Luxembourg.); Henri Sneessens (Central Bank of Luxembourg, Economics and Research Department, 2 boulevard Royal, L–2983 Luxembourg, Luxembourg.); Raf Wouters (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.)
    Abstract: We consider a model with frictional unemployment and staggered wage bargaining where hours worked are negotiated every period. The workers’ bargaining power in the hours negotiation affects both unemployment volatility and inflation persistence. The closer to zero this parameter, (i) the more firms adjust on the intensive margin, reducing employment volatility, (ii) the lower the effective workers’ bargaining power for wages and (iii) the more important the hourly wage in the marginal cost determination. This set-up produces realistic labor market statistics together with inflation persistence. Distinguishing the probability to bargain the wage of the existing and the new jobs, we show that the intensive margin helps reduce the new entrants wage rigidity required to match observed unemployment volatility. JEL Classification: E31, E32, E52, J64.
    Keywords: DSGE, Search and Matching, Nominal Wage Rigidity, Monetary Policy.
    Date: 2009–02
  8. By: Allen Head (Queen's University); Huw Lloyd-Ellis (Queen's University)
    Abstract: The relationships among geographical mobility, unemployment and the value of owner-occupied housing are studied in an economy with heterogeneous locations and search frictions in the markets for both labour and houses. Di¤erences in labour market conditions between cities affect the speed with which houses may be sold--that is, the liquidity of housing. At the same time housing market conditions affect employment decisions and thus the allocation of labour across cities. In equilibrium, unemployment rates for home-owners are higher than for otherwise identical renters. Unemployment and home-ownership rates are, however, negatively correlated across cities. In a parameterized example we find that, although renters are much more mobile than owners, the impact of home-ownership on aggregate unemployment is quantitatively small.
    Keywords: liquidity, mobility, home-ownership, unemployment
    JEL: J61 J64 R23
    Date: 2008–12
  9. 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
  10. By: Ricardo Reis
    Abstract: This paper presents a dynamic stochastic general-equilibrium model with a single friction in all markets: sticky information. In this economy, agents are inattentive because of costs of acquiring, absorbing and processing information, so that the actions of consumers, workers and firms are slow to incorporate news. This paper presents the details of how an economy with pervasive inattentiveness functions, and develops a set of algorithms that solve the model quickly. It then applies these to estimate the model using data for the United States post-1986 and for the Euro-area post-1993, and to conduct counterfactual policy experiments. The end result is a laboratory that is rich enough to account for the dynamics of at least five macroeconomic series (inflation, output, hours, interest rates, and wages), and which can be used to inform applied monetary policy.
    JEL: E10 E30 E5
    Date: 2009–02
  11. By: Lilia Maliar (Universidad de Alicante); Fernando Valli (Universidad de Alicante); Serguei Maliar (Universidad de Alicante)
    Abstract: This paper studies the properties of the solution to the heterogeneous agents model in Den Haan, Judd and Juillard (2008). To solve for the individual policy rules, we use an Euler-equation method iterating on a grid of prespecified points. To compute the aggregate law of motion, we use the stochastic-simulation approach of Krusell and Smith (1998). We also compare the stochastic- and non-stochastic-simulation versions of the Krusell-Smith algorithm, and we find that the two versions are similar in terms of their speed and accuracy.
    Date: 2009–01
  12. By: Victoria Osuna (Department of Economics, Universidad Pablo de Olavide)
    Abstract: This paper compares the macroeconomic implications of taxing overtime and using two kinds of subsidies, an employment and a wage subsidy, in a model where team work and commuting costs subject to congestion are key determinants of the choice of the workweek. To obtain reliable estimates, I calibrate the model to the substitutability between the workweek and employment using business cycle information. I find that subsidizing employment can achieve the same employment increase than taxing overtime but at a lower cost in terms of output, productivity, wages and welfare. The wage subsidy that achieves the same employment increase turns out to be very costly from a fiscal point of view, 12.7% of output versus 4.57% of output in the employment subsidy experiment.
    Keywords: Overtime taxation, Subsidies, Workweek, Team Work, Commuting costs.
    JEL: E60 H25 J08 J22
    Date: 2009–02

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