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on Dynamic General Equilibrium |
| By: | Margarita Rubio (Banco de España) |
| Abstract: | The aim of this paper is twofold. First, I study how the proportion of fixed and variable-rate mortgages in an economy can affect the way shocks are propagated. Second, I analyze optimal implementable simple monetary policy rules and the welfare implications of this proportion. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given proportion of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. The model predicts that in an economy with mostly variable-rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed-rate economy. Aggregate effects are also larger for the variable-rate economy. For plausible parametrizations, differences are muted by wealth effects on labor supply and by the presence of savers. More persistent shocks, such as inflation target and technology shocks, cause larger aggregate differences. From a normative perspective I find that, in the presence of collateral constraints, the optimal Taylor rule is less aggressive against inflation than in the standard sticky-price model. Furthermore, for given monetary policy, a high proportion of fixed-rate mortgages is welfare enhancing. |
| Keywords: | Fixed/Variable-rate mortgages, monetary policy, housing market, collateral constraint |
| JEL: | E32 E44 E52 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0903&r=dge |
| By: | P R Agénor |
| Abstract: | Growth dynamics and health outcomes are studied in a three period overlapping generations model with public capital. Reproductive agents face a non-zero probability of death in both childhood and adulthood. In addition to working, adults allocate time to their own health and child rearing. Health status in adulthood depends on health in childhood. With partial persistence in health, pure stagnation may occur. With full persistence, a stagnating equilibrium with low growth and high fertility may result from poor access to public capital. With threshold effects in health status, multiple growth regimes may emerge. A reallocation of public spending toward health or infrastructure may shift the economy from a low-growth equilibrium to a high-growth, low-fertility steady state. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:115&r=dge |
| By: | Antoci, Angelo; Sodini, Mauro |
| Abstract: | We analyze an overlapping generations model where agent’s welfare depends on three goods: leisure, environmental quality and consumption of a private good. We assume that the production process of the private good depletes the natural resource and that the consumption of the private good alleviates the damages due to environmental deterioration. In such context, we show that individuals’ reactions to environmental deterioration may lead to complex dynamics, in particular to the rise of periodic orbits and chaos. |
| Keywords: | Defensive environmental expenditures; overlapping generations models; indeterminacy; undesirable economic growth |
| JEL: | Q26 D62 C02 Q56 O13 Q20 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13750&r=dge |
| By: | Oleksiy Kryvtsov; Virgiliu Midrigan |
| Abstract: | Kryvtsov and Midrigan (2008) study the behavior of inventories in an economy with menu costs, fixed ordering costs and the possibility of stock-outs. This paper extends their analysis to a richer setting that is capable of more closely accounting for the dynamics of the US business cycle. We find that the original conclusion survives in this setting: namely, the model requires an elasticity of real marginal cost to output approximately equal to the inverse intertemporal elasticity of substitution in consumption in order to account for the countercyclicality of the aggregate inventory-to-sales ratio in the data. |
| Keywords: | Business fluctuations and cycles; Transmission of monetary policy |
| JEL: | E31 F12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-9&r=dge |
| By: | Luca Zamparelli |
| Abstract: | This paper develops a growth model combining elements of endogenous growth and induced innovation literatures. In a standard induced innovation model firms select at no cost innovations from an innovation possibilities frontier describing the trade-off between increasing capital or labor productivity. The model proposed allows firms to choose not only the direction but also the size of innovation by representing the innovation possibilities through a cost function of capital and labor augmenting innovations. By so doing, it provides a micro-foundation both of the intensity and of the direction of technical change. The policy analysis implies that an increase in subsidies to R&D as opposed to capital accumulation raises per capita steady state growth, employment rate and wage share. |
| Keywords: | Induced innovation, endogenous growth, direction of technical change |
| JEL: | O31 O33 O40 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:dsc:wpaper:4&r=dge |
| By: | Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante |
| Abstract: | Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynamics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household heterogeneity, with a special emphasis on the "standard" incomplete markets model. We organize the vast literature according to three themes that are central to understanding how inequality matters for macroeconomics. First, what are the most important sources of individual risk and cross-sectional heterogeneity? Second, what are individuals' key channels of insurance? Third, how does idiosyncratic risk interact with aggregate risk? |
| JEL: | E2 J22 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14768&r=dge |
| By: | Páscoa, Mário R.; Petrassi, Myrian; Torres-Martínez, Juan Pablo |
| Abstract: | We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for inter-temporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of inter-temporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience. |
| Keywords: | Binding credit constraints; Fundamental value of money; Asset pricing bubbles. |
| JEL: | C61 E44 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13782&r=dge |
| By: | Simone Valente (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland) |
| Abstract: | We study a two-phase endogenous growth model in which the adoption of a backstop technology (e.g. solar) yields a sustained supply of essential energy inputs previously obtained from exhaustible resources (e.g. oil). Growth is knowledge-driven and the optimal timing of technology switching is determined by welfare maximization. The optimal path exhibits discrete jumps in endogenous variables: technology switching implies sudden reductions in consumption and output, an increase in the growth rate, and instantaneous adjustments in saving rates. Due to the positive growth e¤ect, it is optimal to implement the new technology when its current consumption bene.ts are substantially lower than those generated by old technologies. |
| Keywords: | Backstop technology, Discrete jumps, Endogenous growth, Exhaustible resources, Optimal Control |
| JEL: | O33 Q32 Q43 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:09-104&r=dge |
| By: | Che, Natasha Xingyuan |
| Abstract: | Most traditional explanations for the decreasing aggregate output volatility - so-called "Great Moderation" - fail to accommodate, or even directly contradict, another aspect of empirical data: the average sales volatility for publicly-traded US firms has been increasing during the same period. The paper aims to reconcile the opposite trends of firm-level and aggregate volatilities. I argue that the rise of organization capital, or firm-specific intangible capital, is the origin of the volatility divergence. Firms in the modern economy have been investing heavily in intangible and organizational assets, such as R&D, management processes, intellectual property, software, and brand name - the "soft" capitals that distinguish a firm from the sum of its physical properties. Most intangible assets are firm-specific, inseparable from the company that originally produced them, and difficult to trade on outside market. Investing in these organization-specific capitals insulates a firm from market-wide shocks, but introduces higher firm-specific risk that does not equally affect its peers. When value creation is increasingly relying on organization capital, the impact of idiosyncratic risk factor rises, while that of general risk factor declines. The former elevates firm-level volatility; the latter reduces aggregate volatility, mainly through weakening the positive co-movements among firms. Therefore, the decrease in aggregate output volatility is not because of less turbulent macro environment, but a result of more heterogeneity among production units. In this sense, the Great Moderation is rather a story of "Great Dissolution". It may indicate greater economic uncertainty faced by individual agents, instead of less. My empirical investigation found that, consistent with the paper's hypotheses, firm-level volatility increases with organizational investment, but general factors' impact on firm performance and a firm's correlation with others decrease with organizational investment. Simulations of the general equilibrium model featuring organization capital investment are capable of replicating the volatility trends at both aggregate and firm level for the past two decades. |
| Keywords: | organization capital; intangible capital; great moderation; firm volatility; business cycle; business investment |
| JEL: | D21 E22 D58 E10 E32 C23 E23 D24 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13701&r=dge |
| By: | Lars Ljungqvist; Harald Uhlig |
| Abstract: | Campbell and Cochrane (1999) formulate a model that successfully explains a wide variety of asset pricing puzzles, by augmenting the standard power utility function with a time-varying subsistence level, or "external habit", that adapts nonlinearly to current and past average consumption in the economy. This paper demonstrates, that this comes at the "price" of several unusual implications. For example, we calculate that a society of agents with the preferences and endowment process of Campbell and Cochrane (1999) would experience a welfare gain equivalent to a permanent increase of nearly 16% in consumption, if the government enforced one month of fasting per year, reducing consumption by 10 percent then. We examine and explain these features of the preferences in detail. We numerically characterize the solution to the social planning problem. We conclude that Campbell-Cochrance preferences will provide for interesting macroeconomic modeling challenges, when endogenizing aggregate consumption choices and government policy. |
| JEL: | C61 E21 E44 G12 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14772&r=dge |
| By: | James Bullard; George Evans; Seppo Honkapohja |
| Abstract: | We study how the use of judgement or “add-factors” in forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in a standard self-referential environment. Local indeterminacy is not a requirement for existence. We construct a simple asset pricing example and find that exuberance equilibria, when they exist, can be extremely volatile relative to fundamental equilibria. learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation. |
| Keywords: | Learning, expectations, excess volatility, bounded rationality. |
| JEL: | E52 E61 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0902&r=dge |
| By: | Chris Elbers (VU University Amsterdam) |
| Abstract: | This note describes methods for solving deterministic and stochastic versions of the discrete-time Ramsey model of economic growth. We derive an iterative procedure for solving the Euler equation and apply it to an example adapted from Pan (2007). |
| Date: | 2009–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090018&r=dge |
| By: | Dmitri Kolyuzhnov |
| Abstract: | I provide sufficient conditions and necessary conditions for stability of a structurally heterogeneous economy under heterogeneous learning of agents. These conditions are written in terms of the structural heterogeneity independent of heterogeneity in learning. I have found an easily interpretable unifying condition which is sufficient for convergence of an economy under mixed RLS/SG learning with different degrees of inertia towards a rational expectations equilibrium for a broad class of economic models and a criterion for such a convergence in the univariate case. The conditions are formulated using the concept of a subeconomy and a suitably defined aggregate economy. I demonstrate and provide interpretation of the derived conditions and the criterion on univariate and multivariate examples, including two specifications of the overlapping generations model and the model of simultaneous markets with structural heterogeneity. |
| Keywords: | Adaptive learning, stability of equilibrium, heterogeneous agents. |
| JEL: | C62 D83 E10 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp378&r=dge |
| By: | Carrillo Julio A. (METEOR) |
| Abstract: | This paper compares two approaches towards the empirical inertia of inflation and output. Two variants that produce persistence are added to a baseline DSGE model of sticky prices: 1) sticky information applied to firms, workers, and households; and 2) a backward-looking inflation indexation along with habit formation. The rival models are then estimated using U.S. data in order to determine their plausibility. It is shown that the sticky information model is better at predicting inflation, wage inflation, and the degree of price stickiness. Output dynamics, however, are better explained by habit persistence. |
| Keywords: | macroeconomics ; |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2009008&r=dge |
| By: | Michelle Alexopoulos; Jon Cohen |
| Abstract: | Difficulties in sorting out the empirical relationship between technical change and employment is attributable, at least in part, to the shortcomings associated with traditional measures of the former. In this paper, we use new indicators of technical change that we believe resolve many issues associated with other methods of identifying technology shocks, and use them to explore the impact of technical change on employment from 1909-49. The payoff to this effort is substantial for at least three reasons. First, it sheds light on the role of technology shocks in cyclical fluctuations during this period, second, it informs business cycle model selection (New Keynesian vs. Real Business Cycle), and, third, it contributes to our understanding of the part played by the New Deal Policies in the recovery from the Great Depression. |
| Keywords: | Business Cycles; Technical Change; Great Depression; Unemployment |
| JEL: | E2 E3 N1 O3 |
| Date: | 2009–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-351&r=dge |
| By: | Arturo Antón Sarabia |
| Abstract: | During the last years, Mexico has registered relatively large output falls. The business cycle accounting method of Chari, Kehoe and McGrattan (2007) is applied to the two most recent recessions in Mexico (including the “Tequila crisis”) in order to understand what are the most important wedges driving output over the cycle and to evaluate to what extent such falls may be smoothed. First, it is found that efficiency and labor wedges may reasonably account for output fluctuations in each recession. Second, counterfactual exercises suggest that the elimination of distortions represented in terms of the efficiency wedge might result in output falls about one third of those observed in the data. |
| Keywords: | Business cycle accounting, Tequila crisis, Total factor productivity, Mexico |
| JEL: | E32 O41 O54 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2008-05&r=dge |