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on Dynamic General Equilibrium |
| By: | Martins, Guilherme; Sinigaglia, Daniel |
| Abstract: | This paper incorporates Rational Inattention as defined by Sims (2003a) to a traditional RBC model with multiple sources of uncertainty. Our model distinguishes between transitory and permanent labor and relative investment productivity shocks. The introduction of information frictions works as an endogenous adjustment cost: given the model parameters, the degree of sluggishness of endogenous variables in response to shocks is optimally determined. In practical terms, Rational Inattention increases the volatility and the contemporaneous correlations with output of consumption and decreases those of investment and hours. Moreover, it generates a trade-off between short-run and long-run shock variances. We believe these effects might have important welfare implications and can provide an analytical understanding on the links between business cycle fluctuations and the long-run performance of an economy. |
| Keywords: | Real Business Cycle; Rational Inattention; Technology Diffusion |
| JEL: | E32 D80 |
| Date: | 2009–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14089&r=dge |
| By: | Nicolas Coeurdacier; Robert Kollmann; Philippe Martin |
| Abstract: | Despite the liberalization of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanations of equity home bias: transaction costs that impede international diversification, and terms of trade responses to supply shocks that provide risk sharing, so that there is little incentive to hold diversified portfolios. We show that the interaction of the following ingredients generates a realistic equity home bias: capital accumulation, shocks to the efficiency of physical investment, as well as international trade in stocks and bonds. In our model, domestic stocks are used to hedge fluctuations in local wage income. Terms of trade risk is hedged using bonds denominated in local goods and in foreign goods. In contrast to related models, the low level of international diversification does not depend on strongly countercyclical terms of trade. The model also reproduces the cyclical dynamics of foreign asset positions and of international capital flows. |
| Keywords: | International finance ; Financial markets ; Capital movements |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:27&r=dge |
| By: | Lars Kunze; Christiane Schuppert |
| Abstract: | This paper examines the growth effects of an increase of capital income taxes with additional revenue being devoted to cut wage-related social security contributions to reduce unemployment. The analysis is carried out in an overlapping generations model with endogenous growth, unemployment and a social security system comprising pensions and unemployment benefits. It is shown that the reform not only promotes employment but may additionally stimulate economic growth. Calibrating the model to match data for the EU15 reveals that European countries can indeed gain in form of higher employment and growth if the initial capital income tax is not too high. |
| Keywords: | Capital income taxation, social security, imperfect labor market, overlapping generations, growth |
| JEL: | H24 H55 O40 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0090&r=dge |
| By: | Isaac Kleshchelski; Nicolas Vincent |
| Abstract: | This paper studies the quantitative implications of the interaction between robust control and stochastic volatility for key asset pricing phenomena. We present an equilibrium term structure model in which output growth is conditionally heteroskedastic. The agent does not know the true model of the economy and chooses optimal policies that are robust to model misspecification. The choice of robust policies greatly amplifies the effect of conditional heteroskedasticity in consumption growth, improving the model's ability to explain asset prices. In a robust control framework, stochastic volatility in consumption growth generates both a state-dependent market price of model uncertainty and a stochastic market price of risk. We estimate the model using data from the bond and equity market, as well as consumtion data. We show that the model is consistent with key empirical regularities that characterize the bond and equity markets. We also characterize empirically the set of models the robust representative agent entertains, and show that this set is "small". In other words, it is statistically difficult to distinguish between models in this set. |
| Keywords: | Yield curve, market price of uncertainty, robust control |
| JEL: | D81 E43 G11 G12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0907&r=dge |
| By: | Kenneth Beauchemin; Murat Tasci |
| Abstract: | We construct a multiple-shock version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to underpredict the volatility of key labor market variables. Data on U.S. job-finding and job separation probabilities are used to help estimate the parameters of a three-dimensional shock process comprising labor productivity, job separation, and matching or “allocative” effciency. Although our multiple-shock model generates some more volatility, it has counterfactual implications for the cyclicality of unemployment and vacancies. Our second exercise forces the model to be the data-generating process to uncover the necessary realizations of all three shocks. We show that the Mortensen-Pissarides labor market search model requires significantly procyclical and volatile matching efficiency and job separations to simultaneously account for high procyclical variations in job-finding probabilities as well as relatively small net employment changes in the data. Hence, the model is more fundamentally flawed than its inability to amplify shocks would suggest. We also show that variation in job separations accounts for most of the employment fluctuations, suggesting that endogenous separations could be the key feature of an improved model. This leads us to conclude that the model lacks mechanisms to generate procyclical matching efficiency and labor force reallocation. As for the latter, we conjecture that nontrivial labor force participation and job-to-job transitions are promising avenues of research. Note: This paper is a revised version of an earlier working paper of the same title, WP 07-20. |
| Keywords: | Labor market ; Business cycles |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0813&r=dge |
| By: | Nir Jaimovich; Seth Pruitt; Henry E. Siu |
| Abstract: | The employment and hours worked of young individuals fluctuate much more over the business cycle than those of prime-aged individuals. Understanding the mechanism underlying this observation is key to explaining the volatility of aggregate hours over the cycle. We argue that the joint behavior of age-specific hours and wages in the U.S. data point to differences in the cyclical characteristics of labor demand. To articulate this view, we consider a production technology displaying capital-experience complementarity. We estimate the key parameters governing the degree of complementarity and show that the model can account for the behavior of age-specific hours and wages while generating a series of aggregate hours that is nearly as volatile as output. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:964&r=dge |
| By: | Taeyoung Doh |
| Abstract: | What moves the yield curve? This paper specifies and estimates a dynamic stochastic general equilibrium (DSGE) model solved using a second order approximation to equilibrium conditions to answer this question. From the empirical analysis of U.S. data from 1983:Q1 to 2007:Q4, I find that the monetary policy response to the inflation gap defined by the difference between expected inflation and the inflation target of the central bank is a key channel transmitting macro shocks to the yield curve and that the degree of nominal rigidity determines which macro shocks are more important determinants of the yield curve. With the low degree of nominal rigidity, the inflation target of the central bank drives persistent movements of inflation and the yield curve while fluctuations of markups do so with the high degree of nominal rigidity. Although the estimated linear model puts nearly zero probability on the low degree of nominal rigidity, there is a positive probability mass in the nonlinear model. The analysis in this paper suggests caution on interpreting estimation results in which nonlinear terms of the DSGE model solution are ignored. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-04&r=dge |
| By: | James Albrecht (Department of Economics, Georgetown University, Washington, DC 20057, USA, and IZA, Bonn, Germany); Lucas Navarro (ILADES-Georgetown University, Universidad Alberto Hurtado); Susan Vroman (Department of Economics, Georgetown University, Washington, DC 20057, USA, and IZA, Bonn, Germany) |
| Abstract: | We show that in a search/matching model with endogenous participation in which workers are heterogeneous with respect to market productivity, satisfying the Hosios rule leads to excessive vacancy creation. The reason is that the marginal worker does not internalize the effect of his or her participation on average productivity. |
| Keywords: | search, matching, participation, Hosios rule, efficiency |
| JEL: | D3 J6 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv218&r=dge |
| By: | Giovanni L. Violante; Jonathan Heathcote; Kjetil Storesletten |
| 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? |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:420&r=dge |
| By: | Theodore Palivos (Department of Economics, University of Macedonia); Dimitrios Varvarigos (Department of Economics, University of Leicester) |
| Abstract: | We construct an overlapping generations model in which parents vote on the tax rate that determines publicly provided education and offspring choose their effort in learning activities. The technology governing the accumulation of human capital allows these decisions to be strategic complements. In the presence of coordination failure, indeterminacy and, possibly, growth cycles emerge. In the absence of coordination failure, the economy moves along a uniquely determined balanced growth path. We argue that such structural differences can account for the negative correlation between volatility and growth. |
| Keywords: | Human Capital, Economic Growth, Volatility. |
| JEL: | O41 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2009_05&r=dge |
| By: | Guillaume Rocheteau |
| Abstract: | I extend and discuss the model of asset liquidity by Lester, Postlewaite, and Wright (2007, 2008). I consider a model with decentralized trades in which claims on a real and divisible asset serve as means of payment. A recognizability problem is introduced by assuming that the claims on the asset can be counterfeited at a positive cost. This formalization nests the models by Lagos and Rocheteau (2008) and Geromichalos, Licari, and Suarez-Lledo (2007) in which there is no recognizability problem, and Lester, Postlewaite, and Wright (2007), in which counterfeits can be produced at no cost. Even though no counterfeiting occurs in equilibrium, the recognizability problem a¤ects the composition of trades: buyers consume less and spend a lower fraction of their asset holdings in matches where sellers are uninformed. Both the asset price and its liquidity (as measured by its transaction velocity) depend on the recognizability of the asset. The asset is more liquid and its return is lower if either the sellers’ ability to recognize counterfeits or the cost of producing counterfeits increases. |
| Keywords: | Money ; Asset pricing ; Counterfeits and counterfeiting ; Liquidity (Economics) |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0902&r=dge |
| By: | Pascal Stiefenhofer; |
| Abstract: | Short and long run production is introduced in a two period general equilibrium model with incomplete markets, where firms are profit maximizers. They maximize profits in the long run, which implies profit maximization over both periods. The sequential structure of the model is such that, firms issue shares in the short run in order to build up long run production capacity. Long run production takes place in the second period subject to long run technological feasibility and installed capacity constraints. It is shown that equilibrium exists generically. |
| Keywords: | General Equilibrium, Incomplete Markets, Production. |
| JEL: | D62 D52 D53 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:09/06&r=dge |
| By: | Kudoh, Noritaka; Sasaki, Masaru |
| Abstract: | This paper develops a dynamic model of the labor market in which the degree of substitution between employment and hours of work is determined as part of a search equilibrium. Each firm chooses its demand for working hours and number of vacancies, and the earnings profile is determined by Nash bargaining. The earnings profile is generally nonlinear in hours of work, and defines the trade-off between employment and hours of work. Concave production technology induces firms to overemploy and, as a result, hours of work are below their optimal level. The Hosios condition is not sufficient for efficiency. When there are two industries, workers employed by firms with higher recruitment costs work longer and earn more. That is, "good jobs" require longer hours of work. Interestingly, technology differentials cannot account for working hours differentials. |
| Keywords: | employment, hours of work, search frictions, |
| JEL: | J21 J23 J31 J64 |
| Date: | 2009–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:hok:dpaper:204&r=dge |
| By: | Rochelle M. Edge; Michael T. Kiley; Jean-Philippe Laforte |
| Abstract: | This paper considers the "real-time" forecast performance of the Federal Reserve staff, time-series models, and an estimated dynamic stochastic general equilibrium (DSGE) model--the Federal Reserve Board's new Estimated, Dynamic, Optimization-based (Edo) model. We evaluate forecast performance using out-of-sample predictions from 1996 through 2005, thereby examining over 70 forecasts presented to the Federal Open Market Committee (FOMC). Our analysis builds on previous real-time forecasting exercises along two dimensions. First, we consider time-series models, a structural DSGE model that has been employed to answer policy questions quite different from forecasting, and the forecasts produced by the staff at the Federal Reserve Board. In addition, we examine forecasting performance of our DSGE model at a relatively detailed level by separately considering the forecasts for various components of consumer expenditures and private investment. The results provide significant support to the notion that richly specified DSGE models belong in the forecasting toolbox of a central bank. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-10&r=dge |
| By: | Carlos Garriga; Fernando Sánchez-Losada |
| Abstract: | This article examines the properties of the optimal fiscal policy in an economy with warm-glow altruism (utility interdependence) and heterogeneous individuals. We propose a new efficiency concept, D-efficiency, that considers an implicit constraint in the act of giving: donors cannot bequeath to donees more than their existing resources. Considering this constraint, we show that the market equilibrium is not socially efficient. The efficient level of bequest transfers can be implemented by the market with estate and labor-income subsidies and a capital-income tax. In the absence of lump-sum taxation, the government faces a trade-off between minimizing distortions and eliminating external effects. The implied tax policy differs from Pigovian taxation since the government's ability to correct the external effects is limited. Finally, we show that the efficiency-equity trade-off does not affect the qualitative features of the optimal distortionary fiscal policy. |
| Keywords: | Altruism ; Taxation |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-04&r=dge |
| By: | Satyajit Chatterjee; 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-to-output 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: | Default (Finance) ; Debts, Public ; Bonds |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-2&r=dge |
| By: | Théophile T. Azomahou; Raouf Boucekkine; Phu Nguyen-Vanc |
| Abstract: | We develop a general equilibrium multi-sector vintage capital model with energy-saving technological progress and an explicit energy market to study the impact of investment subsidies on investment and output. Energy and capital are assumed to be complementary in the production process. New machines are less energy consuming and scrapping is endogenous. The intermediate inputs sector is modelled à la Dixit-Stiglitz (1977). Two polar market structures are considered for the energy market, free entry and natural monopoly. The impact of imperfect competition on the outcomes of the decentralized equilibria are deeply characterized. We identify an original paradox: adoption subsidies may induce a larger investment into cleaner technologies either under free entry or natural monopoly. However, larger diffusion rates do not necessarily mean lower energy consumption at equilibrium, which may explain certain empirical puzzles. |
| Keywords: | Energy-saving technological progress; vintage capital; market imperfections; natural monopoly; investment subsidies |
| JEL: | O40 E22 Q40 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_06&r=dge |
| By: | Mário A. P. M. Silva (Faculdade de Economia, Universidade do Porto) |
| Abstract: | The present model is essentially Romer’s (1990) model of endogenous growth with intertemporal knowledge externalities, augmented with contemporaneous knowledge externalities to give a richer explanation of the growth process. Both types of knowledge spillovers seem essential to capturing the features of knowledge in a model of growth. Introducing synchronic complementarities and knowledge externalities across inventive firms immediately creates the possibility of multiple equilibria and threshold effects in the present model. Another advantage of this theoretical formulation is that it allows for an analysis of the effects on steady-state growth of a variety of technology policies relying on changing knowledge complementarities parameters. |
| Keywords: | Endogenous growth, innovation, knowledge complementarities, knowledge externalities, general equilibrium |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:315&r=dge |
| By: | Enrique Martinez-Garcia; Jens Sondergaard |
| Abstract: | This paper develops a tractable two-country DSGE model with sticky prices à la Calvo (1983) and local-currency pricing. We analyze the capital investment decision in the presence of adjustment costs of two types, the capital adjustment cost (CAC) specification and the investment adjustment cost (IAC) specification. We compare the investment and trade patterns with adjustment costs against those of a model without adjustment costs and with (quasi-) flexible prices. We show that having adjustment costs results into more volatile consumption and net exports, and less volatile investment. We document three important facts on U.S. trade: a) the S-shaped cross-correlation function between real GDP and the real net exports share, b) the J-curve between terms of trade and net exports, and c) the weak and S-shaped cross-correlation between real GDP and terms of trade. We find that adding adjustment costs tends to reduce the model's ability to match these stylized facts. Nominal rigidities cannot account for these features either. |
| Keywords: | Macroeconomics - Econometric models ; Capital investments ; International trade ; Foreign exchange |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:28&r=dge |