nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒04‒18
seventeen papers chosen by
Christian Zimmermann
University of Connecticut

  1. New Evidence, Old Puzzles: Technology Shocks and Labor Market Dynamics By Almut Balleer
  2. The optimal tax treatment of housing capital in the neoclassical growth model By Essi Eerola; Määttänen; Niku
  3. Wage Risk and Employment Risk over the Life Cycle By Hamish Low; Costas Meghir; Luigi Pistaferri
  4. Wage Rigidity and Job Creation By Christian Haefke; Marcus Sonntag; Thijs van Rens
  5. What Can a New Keynesian Labor Matching Model Match? By Christopher Reicher
  6. Information, heterogeneity and market incompleteness By Liam Graham; Stephen Wright
  7. Disinflation in a DSGE Perspective: Sacrifice Ratio or Welfare Gain Ratio? By Guido Ascari; Tiziano Ropele
  8. Housing over time and over the life cycle: a structural estimation By Wenli Li; Haiyong Liu; Rui Yao
  9. The Finnish Great Depression: From Russia with Love By Gorodnichenko, Yuriy; Mendoza, Enrique G.; Tesar, Linda L.
  10. General Purpose Technologies and their Implications for International Trade By Petsas, Iordanis
  11. Time-Varying Employment Risks and Consumption: A Quantitative General Equilibrium Study By Nirei, Makoto; Sarker, Sanjib
  12. Notes on collateral constraints in a simple model of housing By Andreas Hornstein
  13. Markup variation and endogenous fluctuations in the price of investment goods By Max Floetotto; Nir Jaimovich; Seth Pruitt
  14. Sophisticated Monetary Policies By Andrew Atkeson; V. V. Chari; Patrick Kehoe
  15. Income Risk, Consumption Inequality, and Macroeconomy in Japan By Tomoaki Yamada
  16. Credit and self-employment By Kartik Athreya; Ahmet Akyol
  17. Business Cycle Dependent Unemployment Insurance By Torben M. Andersen; Michael Svarer

  1. By: Almut Balleer
    Abstract: Can the standard search-and-matching labor market model replicate the business cycle fluctuations of the job finding rate and the unemployment rate? In the model, fluctuations are prominently driven by productivity shocks which are commonly interpreted as technology shocks. I estimate different types of technology shocks from structural VARs and reassess the empirical performance of the standard model based on second moments that are conditional on technology shocks. Most prominently, the model replicates the conditional volatility of job finding and unemployment, so that the Shimer critique does not apply. Instead the model lacks non-technological disturbances to replicate the overall sample volatility. In addition, positive technology shocks lead to a fall in job finding and an increase in unemployment thereby opposing the dynamics in the standard model similar to the “hours puzzle” in Galí (1999)
    Keywords: labor market dynamics, technology shocks, structural VAR, search and matching, business cycle
    JEL: E24 E32 O33
    Date: 2009–03
  2. By: Essi Eerola; Määttänen; Niku
    Abstract: In a dynamic setting, housing capital is both an asset and a consumption good. But should it be taxed like other forms of consumption or like other forms of capital? We analyze this question by considering the taxation of housing capital in a version of the neoclassical growth model. We derive the optimal tax treatment of housing capital vis-à-vis the tax treatment of both business capital and other forms of consumption allowing for relatively general preferences. We show that for a class of utility functions that includes the standard Cobb-Douglas function, the second-best optimum can be achieved with a simple tax structure where housing construction is taxed at the same rate as non-housing consumption and the tax rate on the imputed rent equals the tax rate on the return to business capital in every period. We also show how the optimal tax structure depends on the elasticities of substitution between housing, non-housing consumption, and leisure. Our numerical analysis shows that the optimal tax burden on housing capital is indeed very sensitive to household preferences.
    Keywords: Optimal taxation, dynamic Ramsey taxation, housing taxation
    JEL: E21 H21
    Date: 2009–03–30
  3. By: Hamish Low; Costas Meghir; Luigi Pistaferri
    Abstract: We specify a structural life-cycle model of consumption, labour supply and job mobility in an economy with search frictions that allows us to distinguish between different sources of risk and to estimate their effects. The sources of risk are shocks to productivity, job destruction, the process of job arrival when employed and unemployed and match level heterogeneity. In contrast to simpler models that attribute all income fluctuations to shocks, our framework disentangles variability due to shocks from variability due to the responses to these shocks. Estimates of productivity risk, once we control for employment risk and for individual labour supply choices, are substantially lower than estimates that attribute all wage variation to productivity risk. Increases in productivity risk impose a considerable welfare loss on individuals and induce substantial precautionary saving. Increases in employment risk have large effects on output and, primarily through this channel, affect welfare. The welfare value of government p rogram s such as food stamps which partially insure productivity risk is greater than the value of unemployment insurance which provides (partial) insurance against employment risk and no insurance against persistent shocks.
    JEL: D91 E21 H31 J64
    Date: 2009–04
  4. By: Christian Haefke; Marcus Sonntag; Thijs van Rens
    Abstract: Standard macroeconomic models underpredict the volatility of unemployment fluctuations. A common solution is to assume wages are rigid. We explore whether this explanation is consistent with the data. We show that the wage of newly hired workers, unlike the aggregate wage, is volatile and responds one-to-one to changes in labor productivity. In order to replicate these findings in a search model, it must be that wages are rigid in ongoing jobs but flexible at the start of new jobs. This form of wage rigidity does not affect job creation and thus cannot explain the unemployment volatility puzzle
    Keywords: Wage Rigidity, Search and Matching Model, Business Cycle
    JEL: E24 E32 J31 J41 J64
    Date: 2009–03
  5. By: Christopher Reicher
    Abstract: A labor matching model with nominal rigidities can match short-run movements in labor’s share with some success. However, it cannot explain much of the behavior of employment, vacancies, and job flows in postwar US data without resorting to additional shocks beyond monetary policy and productivity shocks. In particular, the model suggests that monetary policy shocks can account for only a small portion of postwar fluctuations, except for the Volcker and late-1940s episodes. Productivity shocks can account for some of the pattern in labor’s share and in employment between the late 1960s and the early 1980s. Based on the timing of observed fluctuations in interest rates, inflation, and productivity, it appears that the vast majority of observed fluctuations in the real economy remain unexplained by standard real and nominal shocks
    Keywords: Unemployment, labor market search, job flows, labor share, inflation, productivity shocks, monetary shocks
    JEL: E24 E32 E52 J64
    Date: 2009–02
  6. By: Liam Graham; Stephen Wright
    Abstract: We provide a microfounded account of imperfect information in a dynamic general equilibrium model by describing heterogeneous households that acquire information only through their participation in markets. Thus incomplete markets will imply incomplete information. We solve the model taking full account of the infinite regress of expectations, and show that the properties of the model change dramatically. Under virtually all calibrations the impact response of consumption to a positive aggregate technology shock is negative. If households observe a noisy public signal in addition to the information they obtain from markets, consumption responds to shocks sluggishly
    Keywords: imperfect information, higher order expectations, Kalman Filter, dynamic general equilibrium
    JEL: D52 D84 E32
    Date: 2009–03
  7. By: Guido Ascari; Tiziano Ropele
    Abstract: When taken to examine disinflation monetary policies, the current workhorse DSGE model of business cycle fluctuations successfully accounts for the main stylized facts in terms of recessionary effects and sacrifice ratio. We complement the transitional analysis of the short-run costs with a rigorous welfare evaluation and show that, despite the long-lasting economic downturn, disinflation entails non-zero overall welfare gains
    Keywords: Disinflation, Sacrifice ratio, Non-linearities
    JEL: E31 E5
    Date: 2009–03
  8. By: Wenli Li; Haiyong Liu; Rui Yao
    Abstract: We estimate a structural model of optimal life-cycle housing and consumption in the presence of realistic labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consumption, and explicitly incorporates a house adjustment cost. Our estimation fits the cross-sectional and time-series household wealth and housing profiles from the Panel Study of Income Dynamics quite well, and suggests an intra-temporal elasticity of substitution between housing and nonhousing consumption of 0.33 and a housing adjustment cost that amounts to about 15 percent of house value. Policy experiments with estimated preference parameters imply that households respond nonlinearly to house price changes with large house price declines leading to sizable decreases in both the aggregate homeownership rate and aggregate non-housing consumption. The average marginal propensity to consume out of housing wealth changes ranges from 0.4 percent to 6 percent. When lending conditions are tightened in the form of a higher down payment requirement, interestingly, large house price declines result in more severe drops in the aggregate homeownership rate but milder decreases in nonhousing consumption.
    Date: 2009
  9. By: Gorodnichenko, Yuriy (University of California, Berkeley); Mendoza, Enrique G. (University of Maryland); Tesar, Linda L. (University of Michigan)
    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.
    Keywords: business cycles, depression, trade, Soviet, reallocation, multi-sector model
    JEL: E32 F41 P2
    Date: 2009–04
  10. By: Petsas, Iordanis
    Abstract: General purpose technologies (GPTs) are drastic innovations, such as electrification, the transistor, and the Internet, that are characterized by the pervasiveness in use, innovational complementarities, and technological dynamism. The model develops a two-country (Home and Foreign) dynamic general equilibrium framework and incorporates general purpose technology diffusion within Home that exhibits endogenous Schumpeterian growth. The model studies the effects of the diffusion of the general purpose technology on the pattern of trade and Home’s relative wage. Based on specific assumptions, the adoption of a GPT by a particular industry generates an increase in the productivity of manufacturing workers at Home. By assumption, the diffusion of a GPT across industries is governed by S-curve dynamics, and the diffusion of the GPT within an industry at Home is considered exogenous. The model analyzes the long-run and transitional dynamic effects of a new GPT on the pattern of trade and relative wage between the two countries.
    Keywords: General purpose technologies; Schumpeterian growth; comparative advantage; scale effects; R&D races.
    JEL: L2 F10 O3 O4 L1
    Date: 2009–03–15
  11. By: Nirei, Makoto; Sarker, Sanjib
    Keywords: Time-varying idiosyncratic risk, employment risk, precautionary savings, regime-switching fiscal policy
    JEL: E21 E62
    Date: 2008–09
  12. By: Andreas Hornstein
    Abstract: These notes provide the derivations of results stated without proof in Hornstein (2009). For a simple model of the demand for housing, it is shown that on a balanced growth path, the rate at which the relative price of housing changes over time is determined by the relative productivity growth rates of the housing sector and the rest of the economy. The model is then modified to include a collateral constrained consumer. We show that collateral constraints may affect the level of the housing price path, but they do not affect the growth rate of housing prices.
    Date: 2009
  13. By: Max Floetotto; Nir Jaimovich; Seth Pruitt
    Abstract: The two sector model presented in this note suggests a simple structural decomposition of movements in the price of investment goods into exogenous and endogenous sources. The endogenous fluctuations arise in the presence of countercyclical markups which vary differently across the consumption and investment sectors. In turn, the movements in the markups are due to endogenous procyclical net business formation. The model, while being consistent with the countercyclicality of the price of investment goods, suggests that about a quarter of the movement in the price series can be attributed to this endogenous mechanism.
    Date: 2009
  14. By: Andrew Atkeson; V. V. Chari; Patrick Kehoe
    Abstract: In standard approaches to monetary policy, interest rate rules often lead to indeterminacy. Sophisticated policies, which depend on the history of private actions and can differ on and off the equilibrium path, can eliminate indeterminacy and uniquely implement any desired competitive equilibrium. Two types of sophisticated policies illustrate our approach. Both use interest rates as the policy instrument along the equilibrium path. But when agents deviate from that path, the regime switches, in one example to money; in the other, to a hybrid rule. Both lead to unique implementation, while pure interest rate rules do not. We argue that adherence to the Taylor principle is neither necessary nor sufficient for unique implementation with pure interest rate rules but is sufficient with hybrid rules. Our results are robust to imperfect information and may provide a rationale for empirical work on monetary policy rules and determinacy.
    JEL: E5 E52 E58 E6 E61
    Date: 2009–04
  15. By: Tomoaki Yamada
    Abstract: In this paper, using an OLG model with heterogeneous households, we investigate economic inequality in the recent decades in Japan. We decompose the causes of economic inequality into macroeconomic factors and a demographic factor, and demonstrate that the earning inequality in the model replicates the actual evolution of inequality in Japan. Based on a counterfactual simulation, we demonstrate that time-varying macroeconomic factors play an important role in the evolution of economic inequality. In particular, we show that the low growth rate of total factor productivity in the 1990s in Japan limited the dispersion of economic inequality.
    Keywords: Income risk, Consumption inequality, Population aging
    JEL: E21 D11 D31 D91
    Date: 2009–03
  16. By: Kartik Athreya; Ahmet Akyol
    Abstract: Limited personal liability for debts has long been justified as a tool to promote entrepreneurial risk taking by providing insurance to the borrower in the event of low returns. Nonetheless, such limits erode repayment incentives, and so may increase unsecured borrowing costs. Our paper is the first to evaluate the tradeoff between credit costs and insurance against failure. We build a life-cycle model with risky, and repeated, occupational choice in the presence of defaultable debt contracts. We find that limits to liability can encourage self-employment, and alter the timing, size, and financing of self-employment projects. We also find that the positive relationship between wealth and self-employment rates may not be evidence for credit constraints: We show that such a relationship is present even when limited liability is eliminated.
    Date: 2009
  17. By: Torben M. Andersen; Michael Svarer
    Abstract: The consequences of cylical contingencies in unemployment insurance systems are considered in a search-matching model allowing for shifts between “good” and “bad” states of nature. An argument for state contingencies is that insurance arguments are stronger and incentive effects weaker in "bad" than in "good" states of nature. We con.rm this and show that cyclically dependent benefit levels not only provide better insurance but may have structural effects implying that the structural (average) unemployment rate decreases, although the variability of unemployment may increase
    Date: 2009–03

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