nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒05‒02
twelve papers chosen by
Christian Zimmermann
University of Connecticut

  1. The taxation of capital returns in overlapping generations economies without financial assets. By Julio Davila
  2. Accounting for Output Drops in Latin America By Ruy Lama
  3. A New Keynesian Model of the Armenian Economy By Ara Stepanyan; Ashot Mkrtchyan; Era Dabla-Norris
  4. The real exchange rate in sticky-price models: does investment matter? By Martinez-Garcia, Enrique; Sondergaard, Jens
  5. Environmental Tax and the Distribution of Income with Heterogeneous Workers. By Mireille Chiroleu-Assouline; Mouez Fodha
  6. An Incentive Theory of Matching By Brown, Alessio J G; Merkl, Christian; Snower, Dennis J.
  7. Endogenous technological progress and the cross section of stock returns By Lin, Xiaoji
  9. Monetary and Fiscal Policy Options for Dealing with External Shocks: Insights from the GIMF for Colombia By Daniel Leigh; Enrique Flores; Benedict J. Clements
  10. Industrial structure, appropriate technology and economic growth in less developed countries By Lin, Justin Yifu; Zhang, Pengfei
  11. One or Two Monies? By Janet Hua, Jiang; Mei, Dong
  12. Financial Market Participation and the Developing Country Business Cycle By Huseyin Murat Ozbilgin

  1. By: Julio Davila (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: I show in this paper that in an overlapping generations economy with production à la Diamond (1970) in which the agents can only save in terms of capital (i.e. with not asset bubbles à la Tirole (1985) or public debt as in Diamond (1965)), there is a period-by-period balanced fiscal policy supporting a steady state allocation that Pareto-improves upon the laissez-faire competitive equilibrium steady state (whithout having to resort to intergenerational transfers) if there is no first generation or the economy starts there. A transition from the competitive equilibrium steady state to this other allocation is also Pareto-improving if the former is dynamically inefficient, but even in the dynamically efficient case if the elasticity of output to capital is high enough. This intervention allows every subsequent generation to attain, as a competitive equilibrium outcome, the highest utility attainable at a steady state through the existing markets for the consumption good and the production factors. The active fiscal policy consists of taxing (or subsidizing, in the dynamically efficient case) linearly the returns to capital, while balancing the budget period by period through a lump-sum transfer (or tax, respectively) on second period income. This policy does not finance any public spending, since there is none in the model. The only purpose of the intervention is to decentralize as a competitive equilibrium the steady state allocation that maximizes the utility of the representative agent among all steady state allocations attainable through the existing markets.
    Keywords: Taxation of capital, overlapping generations.
    JEL: E62 E21 E22 H21
    Date: 2008–11
  2. By: Ruy Lama
    Abstract: This paper evaluates what type of models can account for the recent episodes of output drops in Latin America. I develop an open economy version of the business cycle accounting methodology (Chari, Kehoe, and McGrattan, 2007) in which output fluctuations are decomposed into four sources: total factor productivity (TFP), a labor wedge, a capital wedge, and a bond wedge. The paper shows that the most promising models are the ones that induce fluctuations of TFP and the labor wedge. On the other hand, models of fnancial frictions that translate into a bond or capital wedge are not successful in explaining output drops in Latin America. The paper also discusses the implications of these results for policy analysis using alternative DSGE models.
    Keywords: Accounting , Latin America , Emerging markets , Business cycles , Labor productivity , Economic models , Cross country analysis ,
    Date: 2009–03–27
  3. By: Ara Stepanyan; Ashot Mkrtchyan; Era Dabla-Norris
    Abstract: This paper develops a small open economy dynamic stochastic general equilibrium (DSGE) model of the Armenian economy. The structure of the model is largely motivated by recent developments in DSGE modeling, with key extensions to incorporate specific structural characteristics of the Armenian economy. The resultant model can be used to simulate monetary policy paths and help analyze the robustness of policy conclusions. The paper tests the model’s properties on Armenian data, demonstrating that the main stylized features relevant for monetary policy making are well captured by the model.
    Keywords: Monetary policy , Armenia , Inflation targeting , Business cycles , Inward remittances , Transfers of foreigners income , Exchange rate appreciation , Economic models ,
    Date: 2009–03–30
  4. By: Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas); Sondergaard, Jens (Bank of England)
    Abstract: This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing to market to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model's ability to generate volatile real exchange rates. Our analysis, therefore, caveats earlier work that has shown how real shocks in a sticky-price model without capital can replicate the observed real exchange rate dynamics. Finally, we find that so-called persistence anomaly remains robust to several alternative capital specifications including set-ups with variable capital utilisation and investment adjustment costs. In summary, the PPP puzzle is still very much alive and well.
    Keywords: Real exchange rates; capital accumulation; Taylor rules.
    JEL: F11 F42 F43
    Date: 2009–04–27
  5. By: Mireille Chiroleu-Assouline (Paris School of Economics - Centre d'Economie de la Sorbonne); Mouez Fodha (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: This paper analyzes the environmental tax policy issues within an overlapping generations models framework. The objective is to analyze whether an environmental tax policy can respect the two equity principles simultaneously, the vertical as well the horizontal one. We characterize the necessary conditions for the obtaining of a Pareto improving shift when the revenue of the pollution tax is recycled by a change in the labor tax rate or by a change in the distributive properties of the labor tax. We show that, depending on the production function elasticities and on the heterogeneity characteristics of labor supply, an appropriate policy mix could be designed in order to leave each workers' class unharmed by the environmental tax reform. It will consist in an increase of the progressivity of the labor tax together with a decrease of the minimal wage tax rate.
    Keywords: Environmental tax, overlapping generations model,double dividend, tax progressivity.
    JEL: D60 D62 E62 H23
    Date: 2008–12
  6. By: Brown, Alessio J G; Merkl, Christian; Snower, Dennis J.
    Abstract: This paper presents a theory explaining the labor market matching process through microeconomic incentives. There are heterogeneous variations in the characteristics of workers and jobs, and firms face adjustment costs in responding to these variations. Matches and separations are described through firms' job offer and firing decisions and workers' job acceptance and quit decisions. This approach obviates the need for a matching function. On this theoretical basis, we argue that the matching function is vulnerable to the Lucas critique. Our calibrated model for the U.S. economy can account for important empirical regularities that the conventional matching model cannot.
    Keywords: Adjustment costs; employment; Firing; Incentives; Job acceptance; Job offers; Matching; quits; unemployment
    JEL: E24 E32 J63 J64
    Date: 2009–04
  7. By: Lin, Xiaoji
    Abstract: I study the cross sectional variation of stock returns and technological progress using a dynamic equilibrium model with production. In the model, technological progress is endogenously driven by R&D investment and is composed of two parts. One part is product innovation devoted to creating new products; the other part is dedicated to increasing the productivity of physical investment and is embodied in new tangible capital (e.g., structures and equipment). The model breaks the symmetry assumed in standard models between intangible capital and tangible capital, in which the accumulation processes of tangible capital stock and intangible capital stock do not affect each other. The model explains qualitatively and in many cases quantitatively well-documented empirical regularities: (i) the positive relation between R&D investment and the average stock returns; (ii) the negative relation between physical investment and the average stock returns; and (iii) the positive relation between book-to-market ratio and the average stock returns.
    Keywords: Technological Progress; R&D Investment; Physical Investment; Stock Return
    JEL: E6
    Date: 2009–01–15
  8. By: Andrés González Gómez; Lavan Mahadeva; Diego Rodríguez; Luis Eduardo Rojas
    Abstract: If theory-consistent models can ever hope to forecast well and to be useful for policy, they have to relate to data which though rich in information is uncertain, unbalanced and sometimes forecasts from external sources about the future path of other variables. One example from many is financial market data, which can help but only after smoothing out irrelevant short-term volatility. In this paper we propose combining different types of useful but awkward data set with a linearised forward-looking DSGE model through a Kalman Filter fixed-interval smoother to improve the utility of these models as policy tools. We apply this scheme to a model for Colombia.
    Date: 2009–04–21
  9. By: Daniel Leigh; Enrique Flores; Benedict J. Clements
    Abstract: This paper utilizes an open-economy New Keynesian overlapping generations model, the Global Integrated Monetary and Fiscal Model (GIMF), to assess the macroeconomic effects of external shocks and the impact of various monetary and fiscal policy responses. The simulations assess the effect of shocks to trade, world income, and risk premia for public debt. The results suggest that under Colombia’s inflation targeting regime, which incorporates exchange rate flexibility and a highly responsive monetary policy, the economy is well poised to adjust to different external shocks. They also suggest that the potential role of fiscal policy in responding to shocks depends critically on financing conditions.
    Keywords: Monetary policy , Fiscal policy , External shocks , Colombia , Inflation targeting , Flexible exchange rates , Economic models ,
    Date: 2009–03–19
  10. By: Lin, Justin Yifu; Zhang, Pengfei
    Abstract: The authors develop an endogenous growth model that combines structural change with repeated product improvement. That is, the technologies in one sector of the model become not only increasingly capital-intensive, but also progressively productive over time. Application of the basic model to less developed economies shows that the (optimal) industrial structure and the (most) appropriate technologies in less developed economies are endogenously determined by their factor endowments. A firm in a less developed country that enters a capital-intensive, advanced industry in a developed country would be nonviable owing to the relative scarcity of capital in the factor endowments of less developed countries.
    Keywords: Economic Theory&Research,Political Economy,Technology Industry,Economic Growth,Inequality
    Date: 2009–04–01
  11. By: Janet Hua, Jiang; Mei, Dong
    Abstract: We investigate whether money constitutes a perfect substitute for the missing record-keeping technology in a quasi-linear environment, where private information and limited commitment are present. We adopt the mechanism design approach and solve a social planners problem subject to the resource constraint, the incentive constraints imposed by the existing frictions, and the available memory technologies. The result is that when money is divisible, concealable and in variable supply, a single money may or may not be su¢ cient to replace the record-keeping technology. We further show that two monies serve as a perfect substitute for the record-keeping technology so that there is no need for a third money.
    Keywords: Record-keeping; Money; Private Information; Limited Commit- ment; Mechanism Design
    JEL: F30 D82 E40
    Date: 2008–09–21
  12. By: Huseyin Murat Ozbilgin
    Date: 2009

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