|
on Dynamic General Equilibrium |
| By: | Martin Menner (Universidad de Alicante) |
| Abstract: | A search-theoretic monetary DSGE model with capital and in¬ventory investment is estimated, and its implications on output and inflation dynamics are contrasted with those of standard flexible price monetary models: a cash-in-advance and a portfolio adjustment cost model. Model estimation and comparison is conducted in a Bayesian way in order to account for possible model misspecification. The search model can track inflation and output data better. It dominates the other models in the ability to predict the autocorrela¬tions of inflation, the contemporaneous correlation between output growth and inflation, and in the persistent (dis-)inflation process after a (technol¬ogy) monetary shock. It generates a hump-shaped but delayed output response to a monetary shock that matches the data better than the other models. |
| Keywords: | Inflation and Output Dynamics, Business Cycle, Search-Theory of Money, Bayesian Estimation, Model Comparison. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2009-06&r=dge |
| By: | Frank Schorfheide; Keith Sill; Maxym Kryshko |
| Abstract: | This paper develops and illustrates a simple method to generate a DSGE model-based forecast for variables that do not explicitly appear in the model (non-core variables). We use auxiliary regressions that resemble measurement equations in a dynamic factor model to link the non-core variables to the state variables of the DSGE model. Predictions for the non-core variables are obtained by applying their measurement equations to DSGE model-generated forecasts of the state variables. Using a medium-scale New Keynesian DSGE model, we apply our approach to generate and evaluate recursive forecasts for PCE inflation, core PCE inflation, the unemployment rate, and housing starts along with predictions for the seven variables that have been used to estimate the DSGE model. |
| JEL: | C11 C32 C53 E27 E47 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14872&r=dge |
| By: | Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Pablo Guerron-Quintana (Department of Economics, North Carolina State University); Juan F. Rubio-Ramírez (Department of Economics, Duke University); Martin Uribe (Department of Economics, Columbia University) |
| Abstract: | This paper shows how changes in the volatility of the real interest rate at which small open emerging economies borrow have a quantitatively important effect on real variables like output, consumption, investment, and hours worked. To motivate our investigation, we document the strong evidence of time-varying volatility in the real interest rates faced by a sample of four emerging small open economies: Argentina, Ecuador, Venezuela, and Brazil. We postulate a stochastic volatility process for real interest rates using T-bill rates and country spreads and estimate it with the help of the Particle filter and Bayesian methods. Then, we feed the estimated stochastic volatility process for real interest rates in an otherwise standard small open economy business cycle model. We calibrate eight versions of our model to match basic aggregate observations, two versions for each of the four countries in our sample. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, and hours worked, and a notable change in the current account of the economy. |
| Keywords: | Small Open Economy, DSGE Models, Stochastic Volatility |
| JEL: | C32 C63 F32 F41 |
| Date: | 2009–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:09-013&r=dge |
| By: | Benedetto Molinari (Universidad Pablo de Olavide); Francesco Turino (Universidad de Alicante) |
| Abstract: | This paper provides new empirical evidence for quarterly U.S. aggregate advertisingexpenditures, showing that advertising has a well defined pattern over the BusinessCycle. To understand this pattern we develop a general equilibrium model wheretargeted advertising increases the marginal utility of the advertised good. Advertisingintensity is endogenously determined by profit maximizing firms. We embed thisassumption into an otherwise standard model of the business cycle withmonopolistic competition. We find that advertising affects the aggregate dynamics ina relevant way, and it exacerbates the welfare costs of fluctuations for the consumer.Finally, we provide estimates of our setup using Bayesian techniques. |
| Keywords: | Advertising, DSGE model, Business Cycle fluctuations, Bayesian |
| JEL: | D11 E32 J22 M37 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2009-09&r=dge |
| By: | Albrecht, James (Georgetown University); Navarro, Lucas (Universidad Alberto Hurtado); Vroman, Susan (Georgetown University) |
| 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, efficiency, participation, Hosios rule |
| JEL: | D8 J6 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4097&r=dge |
| By: | De Walque, Gregory (National Bank of Belgium); Pierrard, Olivier (Catholic University of Louvain); Sneessens, Henri (Catholic University of Louvain); Wouters, Raf (National Bank of 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. |
| Keywords: | DSGE, search and matching, nominal wage rigidity, monetary policy |
| JEL: | E31 E32 E52 J64 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4059&r=dge |
| By: | Christopher M. Gunn; Alok Johri |
| Abstract: | We explore the ability of a model with knowledge capital to generate expectations-driven business cycles. Knowledge capital is an input in production which is endogenously produced through a learning-by-doing process. We show that a standard real business cycle model augmented with only a learning-by-doing technology can exhibit an expectations-driven business cycle in response to news about a future change in total factor productivity. News about future productivity immediately increases the value of knowledge. This induces agents to accumulate knowledge now by working harder. The ensuing expansion of output is sufficient that both current consumption and investment can increase above steady state levels despite the absence of any contemporaneous productivity shock. Moreover, if knowledge capital is accumulated by firms the boom in real variables is accompanied by an appreciation in the price of equity shares, a feature that has empirical support. |
| Keywords: | Expectations-driven business cycle; Pigou cycle: News shock; Learning-by-doing; Asset pricing |
| JEL: | E3 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2009-02&r=dge |
| By: | Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University) |
| Abstract: | This paper examines an environment where money is essential and agents exchange in perfectly-competitive, Walrasian markets. Agents consume and produce a homogeneous good, but hold money to purchase consumption in the event of a relatively low productivity shock. A Walrasian market delivers a non-degenerate distribution of money holdings across agents and avoids some of the computational difficulties associated with the market and pricing assumptions of bilateral matching and bargaining common to search-theoretic environments. The model is calibrated to long-run US velocity, and the welfare costs of inflation are assessed for variable buyer-seller ratios and persistent states of buying and selling. |
| Keywords: | Monetary Policy, Inflation, Welfare, Walrasian Markets |
| JEL: | E40 E50 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:2&r=dge |
| By: | Vladimir Borgy; Xavier Chojnicki; Gilles Le Garrec; Cyrille Schwellnus |
| Abstract: | In this paper, we analyze the demographic and economic consequences of endogenous migrations flows over the coming decades in a multi-regions overlapping generations general equilibrium model (INGENUE 2) in which the world is divided in ten regions. Our analysis offers a global perspective on the consequences of international migration flows. The value-added of the INGENUE 2 model is that it enables us to analyze the effects of international migration on both the destination and the origin regions. A further innovation of our analysis is that international migration is treated as endogenous. In a first step, we estimate the determinants of migration in an econometric model. We show, in particular, that the income differential is one of the key variables explaining migration flows. In a second step, we endogenize migration flows in the INGENUE 2 model. In order to do so, we use the econometrically estimated relationships between demographic and income developments in the INGENUE model, which enables us to project long-run migration flows and to improve on projections of purely demographic models. |
| Keywords: | CGEM; migration; international capital flows |
| JEL: | F21 C68 J61 H55 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2009-06&r=dge |
| By: | Peter Haan; Victoria Prowse |
| Abstract: | We estimate a dynamic structural life-cycle model of employment, non-employment and retirement that includes endogenous accumulation of human capital and intertemporal non- separabilities in preferences. Additionally, the model accounts for the effect of the tax and transfer system on work incentives. The structural parameter estimates are used to evaluate the effects of a tax reform targeted at low income individuals on employment behavior and retirement decisions. |
| Keywords: | Life-cycle labor supply, income taxation |
| JEL: | C23 C25 J22 J64 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp877&r=dge |
| By: | Theodore Palivos (Department of Economics, University of Macedonia); Dimitrios Varvarigos (Department of Economics, University of Leicester) |
| Abstract: | We construct a simple model of education and growth in which young adults (children) spend a fraction of their time and old adults (parents) spend a fraction of their income on education. Both a strategic complementarity and an intergener- ational externality in the creation of human capital are present. The interactions between each pair of consecutive generations lead to rich dynamics. We show that multiple growth equilibria arise, some of them periodic and some aperiodic. We also ?nd a negative correlation between volatility and growth, without a one-way causal relationship between the two being, necessarily, present. Rather this negative correlation is driven by the structural characteristics of the economy. |
| Keywords: | Education, Human Capital, Economic Growth. |
| JEL: | E32 O41 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2009_08&r=dge |
| By: | Haan, Peter (DIW Berlin); Prowse, Victoria L. (University of Oxford) |
| Abstract: | We estimate a dynamic structural life-cycle model of employment, non-employment and retirement that includes endogenous accumulation of human capital and intertemporal non-separabilities in preferences. Additionally, the model accounts for the effect of the tax and transfer system on work incentives. The structural parameter estimates are used to evaluate the effects of a tax reform targeted at low income individuals on employment behavior and retirement decisions. |
| Keywords: | life-cycle labor supply, income taxation |
| JEL: | C23 C25 J22 J64 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4102&r=dge |
| By: | Jim Malley; Ulrich Woitek |
| Abstract: | This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of technology shocks in explaining aggregate fluctuations. To this end we estimate the model’s posterior density using Markov-Chain Monte-Carlo (MCMC) methods. Within this framework we extend Ireland’s (2001, 2004) hybrid estimation approach to allow for a vector autoregressive moving average (VARMA) process to describe the movements and co-movements of the model’s errors not explained by the basic RBC model. The results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model’s fit relative to the VAR and AR alternatives. Moreover, despite setting the RBC model a more difficult task under the VARMA specification, our analysis, based on forecast error and spectral decompositions, suggests that the RBC model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post-war U.S. economy. |
| Keywords: | Real Business Cycle, Bayesian estimation, VARMA errors |
| JEL: | C11 C52 E32 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:408&r=dge |
| By: | Oleksiy Kryvtsov |
| Abstract: | Models with imperfect information that generate persistent monetary nonneutrality predominantly rely on assumptions leading to substantial heterogeneity of information across price-setters. This paper develops a quantitative general equilibrium model in which the degree of heterogeneity of information is determined endogenously. In the model, firms use two technologies to acquire information: costly updating to full information and costless learning from publicly observed market signals. Price changes of firms that update information infrequently are synchronized with market signals. This leads to an externality whereby less frequent updating increases the information conveyed by prices and quantities. When the model is calibrated to moments from a panel of BLS commodity sectors, it is found that the private value of costly updating to full information is close to zero, market signals are informative, and the real effects of monetary shocks are small. |
| Keywords: | Business fluctuations and cycles; Inflation and prices; Transmission of monetary policy |
| JEL: | D83 E31 E32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-11&r=dge |
| By: | Pieter A. Gautier (VU University Amsterdam) |
| Abstract: | In this note I argue that the desirability of fiscal policy in response to the current crisis depends on whether one views the current crisis as a temporary deviation from a unique equilibrium or as a bad equilibrium out of multiple equilibria. The paper presents a simple Diamond (1982) type of model where firms must find an (investment) bank to finance their projects and the investment banks sell risky assets to get capital from investors. Due to coordination frictions, the economy can get stuck in an inefficient low-trade equilibrium. Finally, I briefly discuss some of the policies that have recently been put forward to stimulate the economy in the context of this model. |
| Keywords: | financial crisis; coordination frictions; macroeconomic complementarities; search frictions |
| JEL: | E44 E62 J64 |
| Date: | 2009–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090028&r=dge |
| By: | Michael Reiter (Institute for Advanced Studies, Vienna); Tommy Sveen (Norges Bank (Central Bank of Norway)); Lutz Weinke (Duke University and Institute for Advanced Studies, Vienna) |
| Abstract: | The lumpy nature of plant-level investment is generally not taken into account in the context of monetary theory (see, e.g., Christiano et al. 2005 and Woodford 2005). We formulate a generalized (S,s) pricing and investment model which is empirically more plausible along that dimension. Surprisingly, our main result shows that the presence of lumpy investment casts doubt on the ability of sticky prices to imply a quantitatively relevant monetary transmission mechanism. |
| Keywords: | Lumpy Investment, Sticky Prices |
| JEL: | E22 E31 E32 |
| Date: | 2009–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_05&r=dge |
| By: | Yuriy Gorodnichenko; Enrique G. Mendoza; Linda L. Tesar |
| Abstract: | During the period 1991-93, Finland experienced the deepest economic downturn in an industrialized country since the 1930s. We argue that the culprit behind this Great Depression was the collapse of Finnish trade with the Soviet Union, because it induced a costly restructuring of the manufacturing sector and a sudden, large increase in the cost of energy. We develop and calibrate a multi-sector dynamic general equilibrium model with labor market frictions, and show that the collapse of Soviet-Finnish trade can explain key features of Finland’s Great Depression. We also show that Finland’s Great Depression mirrors the macroeconomic dynamics of the transition economies of Eastern Europe. These economies experienced a similar trade collapse. However, as a western democracy with developed capital markets and institutions, Finland faced none of the large institutional adjustments that other transition economies experienced. Thus, by studying the Finnish experience we isolate the adjustment costs due solely to the collapse of Soviet trade. |
| JEL: | E32 F41 P2 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14874&r=dge |
| By: | Loic Batte; Agnes Benassy-Quere; Benjamin Carton; Gilles Dufrenot |
| Abstract: | We propose a two-country DSGE model of the Dutch disease in a monetary union, calibrated on Nigeria and WAEMU. Three monetary regimes are successively studied at the union level: a flexible exchange rate with constant money supply, a flexible exchange rate with an accommodating monetary policy, and a fixed exchange rate regime. We find that, in the face of oil shocks, the most stabilizing regime for Nigeria is a fixed money supply whereas it is a fixed exchange rate for WAEMU. However, the introduction of an oil stabilization fund can reduce the disagreement on the common policy rule. Furthermore, the two zones may agree on a fixed money-supply rule in the face of both oil and agricultural price shocks. |
| Keywords: | Dutch disease; DSGE; monetary union; optimal monetary policy |
| JEL: | E52 F41 Q33 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2009-07&r=dge |
| By: | Ferroni, Filippo |
| Abstract: | DSGE models are currently estimated with a two step approach: data is first filtered and then DSGE structural parameters are estimated. Two step procedures have problems, ranging from trend misspecification to wrong assumption about the correlation between trend and cycles. In this paper, I present a one step method, where DSGE structural parameters are jointly estimated with filtering parameters. I show that different data transformations imply different structural estimates; the two step approach lacks a statistical-based criterion to select among them. The one step approach allows to test hypothesis about the most likely trend specification for individual series and/or use the resulting information to construct robust estimates by Bayesian averaging. The role of investment shock as source of GDP volatility is reconsidered. |
| Keywords: | DSGE models; Filters; Structural estimation; Business Cycles |
| JEL: | C32 E32 C11 |
| Date: | 2009–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14550&r=dge |
| By: | Sergio Cesaratto |
| Abstract: | Endogenous growth literature emerged from dissatisfaction with one result of the neoclassical growth model: the independence of the growth rate from the saving ratio, which is seen as a variable subject to policy influence. There are at least three generations of EGT models: the old one of the sixties; the new one of the late eighties; and the most recent one, from the second half of the nineties. EGT models of any vintage fall into one of two fields: neo-Solowian (or semi-endogenous models) or fully endogenous models. Models from the sixties would generally fall into the first class and for good reasons. Indeed, most of the early generation of fully endogenous models from the late eighties fell under the ‘Jones critique’ (Jones 1995b), which pointed out some of the difficulties of these models. The most recent models have found various ways to avoid those problems. It is shown that these stratagems were anticipated by Marvin Frankel in the sixties and by Lucas in the eighties. One suspects that these devices arose in order to fix the theory rather than from, say, some ex-ante empirical observation (which is often provided ex post). More importantly, this paper indicates some problems common to all vintages of EGT models, beginning with the Cambridge capital theory critique, and suggests some alternative routes for growth analysis outside neoclassical theory. |
| JEL: | O3 O4 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:559&r=dge |
| By: | Rao, B. Bhaskara; Hassan, Gazi |
| Abstract: | This paper develops a framework to analyse the determinants of the long term growth rate of Bangladesh. It is based on the Solow (1956) growth model and its extension by Mankiw, Romer and Weil (1992) and follows Senhadji’s (2000) growth accounting procedure to estimate total factor productivity (TFP). Our growth accounting exercise showed that growth rate in Bangladesh, until 1990, was due to factor accumulation. Since then, however, TFP made a small positive contribution to growth. An analysis of the determinants of TFP showed that remittances by emigrant workers have negative effects which seem to be due to the loss of skilled labour force. Using these results policy options, to double per capita income of Bangladesh in about 15 years, are discussed. |
| Keywords: | Solow Growth Model; Endogenous Growth; Total Factor Productivity; Growth Accounting; Remittances; Bangladesh |
| JEL: | O11 O30 A10 |
| Date: | 2009–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14470&r=dge |
| By: | Hairault, Jean-Olivier (University of Paris 1); Langot, François (University of Le Mans); Ménard, Sébastien (GAINS, Université du Maine); Sopraseuth, Thepthida (GAINS, Université du Maine) |
| Abstract: | This paper shows that optimal unemployment insurance contracts are age-dependent. Older workers have only a few years left on the labor market prior to retirement. This short horizon implies a more digressive replacement ratio. However, there is a sufficiently short distance to retirement for which flat unemployment benefits can be the optimal contract as the nearly retired unemployed workers rationally expect never to suffer from the punishment. This is why imposing a tax on the future job is particularly efficient in the context of older workers because the agency can now reward the job search by present employment subsidies. Moreover, we propose adopting a global approach to unemployment insurance by determining an optimal contract that integrates unemployment insurance and retirement pension systems. |
| Keywords: | unemployment insurance, retirement, recursive contracts, moral hazard |
| JEL: | C61 J64 J65 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4071&r=dge |