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on Dynamic General Equilibrium |
| By: | Guido Menzio (Department of Economics, University of Pennsylvania); Shouyong Shi (Department of Economics, University of Toronto) |
| Abstract: | We build a directed search model of the labor market in which workers’ transitions between unemployment, employment, and across employers are endogenous. We prove the existence, uniqueness and efficiency of a recursive equilibrium with the property that the distribution of workers across employment states affects neither the agents’ values and strategies nor the market tightness. Because of this property, we are able to compute the equilibrium outside the non-stochastic steady-state. We use a calibrated version of the model to measure the effect of productivity shocks on the US labor market. We find that productivity shocks generate procyclical fluctuations in the rate at which unemployed workers become employed and countercyclical fluctuations in the rate at which employed workers become unemployed. Moreover, we find that productivity shocks generate large counter-cyclical fluctuations in the number of vacancies opened for unemployed workers and even larger procyclical fluctuations in the number of vacancies created for employed workers. Overall, productivity shocks alone can account for 80 percent of unemployment volatility, 30 percent of vacancy volatility and for the nearly perfect negative correlation between unemployment and vacancies. |
| Keywords: | Directed search, On the Job Search, Business Cycles |
| JEL: | E24 E32 J64 |
| Date: | 2008–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:09-010&r=dge |
| By: | Marcello D'Amato (Università di Salerno, CSEF and CELPE); Vincenzo Galasso (Università Bocconi, IGIER and CSEF) |
| Abstract: | TIn a stochastic two-period OLG model, featuring an aggregate shock to the economy, ex-ante optimality requires intergenerational risk sharing. We compare the level of time-consistent intergenerational risk sharing chosen by a benevolent government and by an office-seeking politician. In our political system, the transfer of resources across generations is determined as a Markov equilibrium of a probabilistic voting game. Low realized returns on the risky asset induce politicians to compensate the old through a PAYG system. This political system typically generates an intergenerational risk sharing scheme that is (i) larger, (ii) more persistent, and (iii) less responsive to the realization of the shock than the (time consistent) social optimum. This is because the current politician anticipates her transfers to the elderly to be compensated by future politicians through offsetting transfers, and hence overspends. Aging increases the optimal transfer, but surprisingly makes office-seeking politicians more conservative, by increasing the cost for future politicians to compensate the current young. |
| Keywords: | Pension Systems, Markov equilibria, social optimum |
| JEL: | H55 D72 |
| Date: | 2009–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:216&r=dge |
| By: | Jason Beeler; John Y. Campbell |
| Abstract: | The long-run risks model of asset prices explains stock price variation as a response to persistent fluctuations in the mean and volatility of aggregate consumption growth, by a representative agent with a high elasticity of intertemporal substitution. This paper documents several empirical difficulties for the model as calibrated by Bansal and Yaron (BY, 2004) and Bansal, Kiku, and Yaron (BKY, 2007a). BY's calibration counterfactually implies that long-run consumption and dividend growth should be highly persistent and predictable from stock prices. BKY's calibration does better in this respect by greatly increasing the persistence of volatility fluctuations and their impact on stock prices. This calibration fits the predictive power of stock prices for future consumption volatility, but implies much greater predictive power of stock prices for future stock return volatility than is found in the data. Neither calibration can explain why movements in real interest rates do not generate strong predictable movements in consumption growth. Finally, the long-run risks model implies extremely low yields and negative term premia on inflation-indexed bonds. |
| JEL: | E21 G12 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14788&r=dge |
| By: | Sandra Lizarazo (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)); Jose Maria Da-Rocha (Facultade de Ciencias Económicas e Empresariais, Universidade de Vigo) |
| Abstract: | This paper develops a quantitative model of unsecured debt, default, and money demand for heterogenous agents economies. The paper generates a theory of money demand for the case in which money is a dominate asset that is not needed to carry-out transactions. In this environment holding money helps the agents to smooth their consumption during those periods in which they are excluded from credit markets following a default in their debts. In the model the welfare of the individuals is affected by the inflation rate: high inflation rates preclude individuals of using money as an asset that helps them smooth their consumption profile but low inflation rates tend to make softer the punishment for default making it diffcult to sustain high levels of debt at equilibrium. This two opposite effects imply that in equilibrium the inflation rate that maximizes individuals welfare is positive but not too high. |
| Keywords: | Default, Inflation, Money, Endogenous Borrowing Constraint |
| JEL: | F34 F36 F42 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:0906&r=dge |
| By: | Eo, Yunjong |
| Abstract: | I estimate DSGE models with recurring regime changes in monetary policy (inflation target and reaction coefficients), technology (growth rate and volatility), and/or nominal price rigidities. In the models, agents are assumed to know deep parameter values but make probabilistic inference about prevailing and future regimes based on Bayes’ rule. I develop an estimation method that takes these probabilistic inferences into account when relating state variables to observed data. In an application to postwar U.S. data, I find stronger support for regime switching in monetary policy than in technology or nominal rigidities. In addition, a model with regime switching policy that conforms to the long-run Taylor principle given in Davig and Leeper (2007) is preferred to a determinacy-indeterminacy model motivated by Lubik and Schorfheide (2004). These empirical results indicate that, even though a passive policy regime produced more volatility in the economy from the early 1970s to the mid-1980s, the economy can be explained by determinacy over the entire postwar period, implying no role for sunspot shocks in explaining the changes in volatility. |
| Keywords: | New Keynesian DSGE; Markov-switching; Monetary Policy; Indeterminacy; Long-run Taylor Principle; Bayesian Analysis; |
| JEL: | C51 C32 E32 C52 E52 C11 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13910&r=dge |
| By: | Mariano Bosch (Departamento de Fundamentos del Analisis Economico, Universidad de Alicante); Julen Esteban-Pretel (Faculty of Economics, University of Tokyo) |
| Abstract: | The proportion of informal or unprotected workers in developing countries is large. In developing economies, the fraction of informal workers can be as high as 70% of total employment. For economies with significant informal sectors, business cycle fluctuations and labor market policy interventions can have important effects on the unemployment rate, and also produce large reallocations of workers between "regulated" and "unregulated" jobs. In this paper, we report the main cyclical patterns of one such labor market: Brazil. We then use the empirical regularities found in the data to build, calibrate, and simulate a two-sector search and matching labor market model, in which firms have the choice of hiring workers formally or informally. We find that our model, built in the spirit of traditional search and matching models, can explain well most of the cyclical properties found in the data. We also show that government policies that decrease the cost of formal jobs, or increase the cost of informality, raise the share of formal employment while reducing unemployment. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2009cf613&r=dge |
| By: | Leonardo Melosi (Department of Economics, University of Pennsylvania) |
| Abstract: | This paper develops a dynamic stochastic general equilibrium model where firms are imperfectly informed. We estimate the model through likelihood-based methods and find that it can explain the highly persistent real effects of monetary disturbances that are documented by a benchmark VAR. The model of imperfect information nests a model of rational inattention where firms optimally choose the variances of signal noise, subject to an information-processing constraint. We present an econometric procedure to evaluate the predictions of this rational inattention model. Implementing this procedure delivers insights on how to improve the fit of rational inattention models. |
| Keywords: | Imperfect common knowledge; rational inattention; Bayesian econometrics; real effects of nominal shocks; VAR identification |
| JEL: | E3 E5 C32 D8 |
| Date: | 2009–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:09-009&r=dge |
| By: | Wang, Wen-Yao; Hernandez-Verme, Paula |
| Abstract: | We model a typical Asian-crisis-economy using dynamic general equilibrium techniques. Meaningful exchange rates obtain from nontrivial demands for fiat currencies. Sudden stops/bank-panics are possible, and key for evaluating the relative merits of alternative exchange rate regimes in promoting stability. Strategic complementarities contribute to the severe indeterminacy of the continuum of equilibria; there is a strong association between the scope for existence and indeterminacy of equilibria, the properties along dynamic paths and the underlying policy regime. Binding multiple reserve requirements reduce the scope for financial fragility and panic equilibria; backing the money supply acts as a stabilizer only in fixed regimes. |
| Keywords: | Sudden stops; Exchange rate regimes; Multiple reserve requirements |
| JEL: | E31 E44 F41 |
| Date: | 2009–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13802&r=dge |
| By: | Sandra Lizarazo (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | This paper develops a quantitative model of debt and default for small open economies that interact with risk averse international investors. The model developed here extends the recent work on the analysis of endogenous default risk to the case in which international investors are risk averse agents with decreasing absolute risk aversion (DARA). By incorporating risk averse investors who trade with a single emerging economy, the present model oers two main improvements over the standard case of risk neutral investors: i.) the model exhibits a better fit of debt-to-output ratio and ii.) the model explains a larger proportion and volatility of the spread between sovereign bonds and riskless assets. The paper shows that if investors have DARA preferences, then the emerging economy’s default risk, capital flows, bond prices and consumption are a function not only of the fundamentals of the economy—as in the case of risk neutral investors—but also of the level of financial wealth and risk aversion of the international investors. In particular, as investors become wealthier or less risk averse, the emerging economy becomes less credit constrained. As a result, the emerging economy’s default risk is lower, and its bond prices and capital inflow are higher. Additionally, with risk averse investors, the risk premium in the asset prices of the sovereign countries can be decomposed into two components: a base premium that compensates the investors for the probability of default (as in the risk neutral case) and an “excess” premium that compensates them for taking the risk of default. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:0905&r=dge |
| By: | Mourinho Félix, Ricardo; Almeida, Vanda; Castro, Gabriela |
| Abstract: | This study assesses the macroeconomic impacts of increasing competition in the non-tradable goods and labour markets in Portugal. We lean on evidence that the maintenance of low competition in these markets may have contributed to the recent poor performance of the Portuguese economy. The analysis is performed using PESSOA, a dynamic general equilibrium model for a small-open economy integrated in a monetary union, featuring Blanchard-Yaari households, a multi-sectoral production structure and a number of nominal and real rigidities. We conclude that measures aimed at increasing competition in the Portuguese non-tradable goods and labour markets could induce important international competitiveness gains and be valuable instruments in promoting necessary adjustments within the monetary union framework. However, in the short run, real interest rates are likely to increase temporarily, driving consumption and output temporarily downwards. |
| Keywords: | competition; competitiveness; DSGE; small-open economy; Portugal |
| JEL: | F16 E2 E6 F41 |
| Date: | 2008–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13945&r=dge |