New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒05‒09
eight papers chosen by



  1. Does Lumy Investment Matter for Business Cycles? By Miao, Jianjun; Wang, Pengfei
  2. Do Targeted Hiring Subsidies and Profiling Techniques Reduce Unemployment? By Jahn, Elke J.; Wagner, Thomas
  3. Downward wage rigidity and optimal steady-state inflation By Gabriel Fagan; Julián Messina
  4. Inflation and welfare in long-run equilibrium with firm dynamics By Alexandre Janiak; Paulo Santos Monteiro
  5. Dynamic Monetary-Fiscal Interactions and the Role of Monetary Conservatism By Stefan Niemann
  6. Surprising comparative properties of monetary models: Results from a new data base By Taylor, John B.; Wieland, Volker
  7. The Evolution of Markets and the Revolution of Industry: A Quantitative Model of England's Development, 1300-2000 By Desmet, Klaus; Parente, Stephen
  8. Stability under Learning: the Neo-Classical Growth Problem By Orlando Gomes

  1. By: Miao, Jianjun; Wang, Pengfei
    Abstract: We present an analytically tractable general equilibrium business cycle model that features micro-level investment lumpiness. We prove an exact irrelevance proposition which provides sufficient conditions on preferences, technology, and the fixed cost distribution such that any positive upper support of the fixed cost distribution yields identical equilibrium dynamics of the aggregate quantities normalized by their deterministic steady state values. We also give two conditions for the fixed cost distribution, under which lumpy investment can be important to a first-order approximation: (i) The steady-state elasticity of the adjustment rate is large so that the extensive margin effect is large. (ii) More mass is on low fixed costs so that the general equilibrium price feedback effect is small. Our theoretical results may reconcile some debate and some numerical findings in the literature.
    Keywords: generalized (S;s) rule; lumpy investment; general equilibrium; business cycles; marginal Q; exact irrelevance proposition
    JEL: E32 E22
    Date: 2009–04–30
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:14977&r=dge
  2. By: Jahn, Elke J. (Department of Economics, Aarhus School of Business); Wagner, Thomas (University of Applied Sciences Nuremberg)
    Abstract: To reduce unemployment targeted hiring subsidies for long-term unemployed are often recommended. To explore their effect on employment and wages, we devise a model with two types of unemployed and two methods of search, a public employment service (PES) and random search. The eligibility of a new match depends on the applicant’s unemployment duration and on the method of search. The hiring subsidy raises job destruction and extends contrary to Mortensen-Pissarides (1999, 2003) the duration of a job search, so that equilibrium unemployment increases. Like the subsidy, organizational reforms, which advance the search effectiveness of the PES, crowd out the active jobseekers and reduce overall employment as well as social welfare. Nevertheless, reforms are a visible success for the PES and its target group, as they significantly increase the service’s placement rate and lower the duration of a job search via the PES
    Keywords: Matching model; hiring subsidy; endogenous separation rate; active labour market policy; PES; random search
    JEL: J41 J63 J64 J68
    Date: 2008–10–10
    URL: http://d.repec.org/n?u=RePEc:hhs:aareco:2008_019&r=dge
  3. By: Gabriel Fagan (Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Julián Messina (Universitat de Girona, Plaça Sant Domènec, 3, IT-17071 Girona, Italy; IZA and FEDEA.)
    Abstract: This paper examines the impact of downward wage rigidity (nominal and real) on optimal steady-state inflation. For this purpose, we extend the workhorse model of Erceg, Henderson and Levin (2000) by introducing asymmetric menu costs for wage setting. We estimate the key parameters by simulated method of moments, matching key features of the cross-sectional distribution of individual wage changes observed in the data. We look at five countries (the US, Germany, Portugal, Belgium and Finland). The calibrated heterogeneous agent models are then solved for different steady state rates of inflation to derive welfare implications. We find that, across the European countries considered, the optimal steady-state rate of inflation varies between zero and 2%. For the US, the results depend on the dataset used, with estimates of optimal inflation varying between 2% and 5%. JEL Classification: E31, E52, J4.
    Keywords: Downward wage rigidity, DSGE models, optimal inflation.
    Date: 2009–04
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901048&r=dge
  4. By: Alexandre Janiak; Paulo Santos Monteiro
    Abstract: We analyze the welfare cost of inflation in a model with cash-in-advance constraints and an endogenous distribution of establishments' productivities. Inflation distorts aggregate productivity through firm entry dynamics. The model is calibrated to the United States economy and the long-run equilibrium properties are compared at low and high inflation. We find that increasing the annual inflation rate by 10 percentage points above the average rate in the U.S. would result in a fall in average productivity of roughly 1.3 percent. This decrease in productivity is not innocuous: it is responsible for about one half of the welfare cost of inflation.
    Date: 2009
    URL: http://d.repec.org/n?u=RePEc:edj:ceauch:261&r=dge
  5. By: Stefan Niemann
    Abstract: The present paper reassesses the role of monetary conservatism in a setting with nominal government debt and endogenous fiscal policy. We assume that macroeconomic policies are chosen by monetary and fiscal policy makers who interact repeatedly but cannot commit to future actions. The real level of public liabilities is an endogenous state variable, and policies are chosen in a non-cooperative fashion. We focus on Markovperfect equilibria and investigate the role of fiscal impatience and monetary conservatism as determinants of the economy’s steady state and the associated welfare implications. Fiscal impatience creates a tendency of accumulating debt, and monetary conservatism actually exacerbates such excessive debt accumulation. Increased conservatism implies that any given level of real liabilities can be sustained at a lower rate of inflation. However, since this is internalized by the fiscal authority, the Markov-perfect equilibrium generates a steady state with higher indebtedness. As a result, increased monetary conservatism has adverse welfare implications.
    Date: 2009–04–30
    URL: http://d.repec.org/n?u=RePEc:esx:essedp:667&r=dge
  6. By: Taylor, John B.; Wieland, Volker
    Abstract: In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy. We make use of a new data base of models designed for such investigations. We focus on three representative models: the Christiano, Eichenbaum, Evans (2005) model, the Smets and Wouters (2007) model, and the Taylor (1993a) model. Although the three models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, the optimal monetary policy responses to other sources of economic fluctuations are widely different in the different models. We show that simple optimal policy rules that respond to the growth rate of output and smooth the interest rate are not robust. In contrast, policy rules with no interest rate smoothing and no response to the growth rate, as distinct from the level, of output are more robust. Robustness can be improved further by optimizing rules with respect to the average loss across the three models.
    Keywords: Macroeconomic models; Model comparison; Monetary policy rules; Monetary policy shocks; Optimal policy; Robustness and model uncertainty
    JEL: C52 E30 E52
    Date: 2009–05
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:7294&r=dge
  7. By: Desmet, Klaus; Parente, Stephen
    Abstract: This paper argues that an economy's transition from Malthusian stagnation to modern growth requires markets to reach a critical size, and competition to reach a critical level of intensity. By allowing an economy to produce a greater variety of goods, a larger market makes goods more substitutable, raising the price elasticity of demand, and lowering mark-ups. Firms must then become larger to break even, which facilitates amortizing the fixed costs of innovation. We demonstrate our theory in a dynamic general equilibrium model calibrated to England's long-run development and explore how various factors affect the timing of takeoff.
    Keywords: Competition; Industrial Revolution; Innovation; Market Revolution; Unified Growth Theory
    JEL: N33 O14 O33 O41
    Date: 2009–05
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:7290&r=dge
  8. By: Orlando Gomes (Instituto Politécnico de Lisboa - Escola Superior de Comunicação Social and UNIDE-ERC)
    Abstract: A local stability condition for the standard neo-classical Ramsey growth model is derived. The proposed setting is deterministic, defined in discrete time and expectations are formed through adaptive learning.
    Keywords: Neo-classical Growth, Adaptive Learning, Stability Analysis, Monetary Policy.
    JEL: O41 C62 D83
    Date: 2008–05
    URL: http://d.repec.org/n?u=RePEc:isc:wpaper:ercwp1108&r=dge

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