nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒05‒16
ten papers chosen by
Christian Zimmermann
University of Connecticut

  1. MEDEA: A DSGE Model for the Spanish Economy By Pablo Burriel; Jesus Fernandez-Villaverde; Juan F. Rubio-Ramirez
  2. Overborrowing and Systemic Externalities in the Business Cycle By Bianchi, Javier
  3. Dynamic effects of government expenditure in a finance constrained economy: A Note By Chen, Yan; Zhang, Yan
  4. An Incentive Theory of Matching By Brown, Alessio J. G.; Merkl, Christian; Snower, Dennis J.
  5. Credit Mismatch and Breakdown By Zsolt Becsi; Victor E. Li; Ping Wang
  6. ENVY AND INEQUALITY By Francisco Alvarez-Cuadrado; Ngo Van Long
  7. Immigration Policy, Remittances, and Growth in the Migrant-Sending Country By Sylvain Dessy; Tiana Rambeloma
  8. Offshoring and Unemployment: The Role of Search Frictions and Labor Mobility By Mitra, Devashish; Ranjan, Priya
  9. The Reservation Wage under CARA and Limited Borrowing By Bauer, Christian
  10. Decentralized Exchange and Factor Payments: A Multiple-Matching Approach By Derek Laing; Victor E. Li; Ping Wang

  1. By: Pablo Burriel (Monetary and Financial Studies Department, Bank of Spain); Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Juan F. Rubio-Ramirez (Department of Economics, Duke University)
    Abstract: In this paper, we provide a brief introduction to a new macroeconometric model of the Spanish economy named MEDEA (Modelo de Equilibrio Dinámico de la Economía EspañolA). MEDEA is a dynamic stochastic general equilibrium (DSGE) model that aims to describe the main features of the Spanish economy for policy analysis, counterfactual exercises, and forecasting. MEDEA is built in the tradition of New Keynesian models with real and nominal rigidities, but it also incorporates aspects such as a small open economy framework, an outside monetary authority such as the ECB, and population growth, factors that are important in accounting for aggregate fluctuations in Spain. The model is estimated with Bayesian techniques and data from the last two decades. Beyond describing the properties of the model, we perform different exercises to illustrate the potential of MEDEA, including historical decompositions, long-run and short-run simulations, and counterfactual experiments.
    Keywords: DSGE Models, Likelihood Estimation, Bayesian Methods
    JEL: C11 C13 E30
    Date: 2009–05–04
  2. By: Bianchi, Javier
    Abstract: Credit constraints that link a private agent's debt to market-determined prices embody a systemic credit externality that drives a wedge between competitive and (constrained) socially optimal equilibria, which induces private agents to ``overborrow". We quantify the effects of this externality in a two-sector DSGE model of a small open economy calibrated to emerging markets. Debt is denominated in units of tradable goods, and is constrained not to exceed a fraction of income, including nontradables income valued at the relative price of nontradables. The externality arises because agents fail to internalize the price effects of their individual borrowing, and hence the adverse debt-deflation amplification effects of negative income shocks that trigger a binding credit constraint. Quantitatively, the credit externality causes a modest increase in average debt, of about 2 percentage points of GDP, but it triples the probability of financial crises and doubles the average current account and consumption reversals caused by these crises.
    Keywords: Financial Crises, Business Cycles, Amplification Effects, Sudden Stops, Systemic Externalities
    JEL: D62 F20 E32 F32 F30 F41
    Date: 2009–04–28
  3. By: Chen, Yan; Zhang, Yan
    Abstract: Gokan [Dynamic effects of government expenditure in a finance constrained economy, J. Econ. Theory 127 (2006) 323-333] introduces constant government expenditure (financed by labor income taxes) in Woodford's model with capital-labor substitution and investigates how local dynamics near two steady states depend upon the elasticity of substitution between capital and labor. In this paper, we show that the local dynamics will change dramatically if the government transfers its revenue to the households (workers) in a lump sum way. In particular, we question the result that the rate of money growth has no impact on the model dynamics. In a numerical example, we illustrate that the result previously obtained is not robust to the alternative assumption.
    Keywords: a lump sum transfer; indeterminacy.
    JEL: E32 C62
    Date: 2009–05–09
  4. By: Brown, Alessio J. G. (Kiel Institute for the World Economy); Merkl, Christian (Kiel Institute for the World Economy); Snower, Dennis J. (Kiel Institute for the World Economy)
    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: matching, incentives, adjustment costs, unemployment, employment, quits, firing, job offers, job acceptance
    JEL: E24 E32 J63 J64
    Date: 2009–04
  5. By: Zsolt Becsi (Department of Economics, Southern Illinois University Carbondale); Victor E. Li (Department of Economics and Statistics, Villanova School of Business, Villanova University); Ping Wang (Department of Economics, Washington University in St. Louis)
    Abstract: This paper studies the phenomenon of mismatch in a decentralized credit market where borrowers and lenders must engage in costly search to establish credit relationships. Our dynamic general equilibrium framework integrates incentive based informational frictions with a matching process highlighted by (i) borrowers’ endogenous market entry and exit decision (entry frictions) and (ii) time and resource costs necessary to locate credit opportunities (search frictions). A key feature of the incentive compatible loan contract negotiated between borrowers and lenders is the interaction of informational frictions (in the form of moral hazard) with entry and search frictions. We find that the removal of entry barriers can eliminate information-based equilibrium credit rationing. More generally, entry and incentive frictions are important in understanding the extent of credit rationing, while entry and search frictions are important for understanding credit market breakdown.
    Keywords: Entry, Moral Hazard, Credit Rationing, Credit Mismatch, Credit-Market Breakdown
    JEL: C78 D82 D83 E44
    Date: 2009–04
  6. By: Francisco Alvarez-Cuadrado; Ngo Van Long
    Abstract: We present an overlapping generations economy populated by heterogeneous agents who care about their consumption relative to others and the bequest they leave to their offspring. In the presence of positional concerns individual saving and bequest rates vary across the income distribution. This dispersion in the rates of asset accumulation is the main channel for envy to impact the degree of intra-generational wealth inequality and its inter-generational transmission. Our results suggest that concerns for relative consumption might be an important explanatory factor for the surprisingly low levels of assets held by low-income households and the high concentration of bequests in the upper tail of the wealth distribution.
    JEL: D62 E21 H21
    Date: 2009–05
  7. By: Sylvain Dessy; Tiana Rambeloma
    Abstract: As evidence accumulates to expose the ineffectiveness of foreign aid, there are increasing calls for rich countries to open up their immigration policies so as to enable migrants' remittances to substitute for foreign aid as a growth-stimulant in poor, migrant-sending countries. In this paper, we use an endogenous growth model to argue that the growth effects of transnational migration and remittances are entirely mediated by the human capital profile of emigrants, as determined by immigration policy at the destination country. Quantitatively, we find that when immigration policy at the destination country provokes a "brain drain", growth is negatively impacted in the sending country despite remittances. The reverse is true when immigration policy targets workers with low levels of human capital.
    Keywords: Remittances, migration, growth, education, general equilibrium, child labor
    JEL: J13 J61 O11 O15 O40
    Date: 2009
  8. By: Mitra, Devashish (Syracuse University); Ranjan, Priya (University of California, Irvine)
    Abstract: In a two-sector, general-equilibrium model with labor-market search frictions, we find that wage increases and sectoral unemployment decreases upon offshoring in the presence of perfect intersectoral labor mobility. If, as a result, labor moves to the sector with the lower (or equal) vacancy costs, there is an unambiguous decrease in economywide unemployment. With imperfect intersectoral labor mobility, unemployment in the offshoring sector can rise, with an unambiguous unemployment reduction in the non-offshoring sector. Imperfect labor mobility can result in a mixed equilibrium in which only some firms in the industry offshore, with unemployment in this sector rising.
    Keywords: trade, offshoring, search, unemployment
    JEL: F11 F16 J64
    Date: 2009–04
  9. By: Bauer, Christian
    Abstract: A continuous-time sequential job search model with savings and CARA preferences is solved analytically without resorting to unlimited borrowing and real-valued consumption. I isolate the effects of limited borrowing and nonnegative consumption as well as risk-aversion on the reservation wage by using a system of ordinary differential equations.
    Keywords: labor income risk; wealth-dependent reservation wage; borrowing limit
    JEL: C61 E21 D91 J64
    Date: 2009–03–15
  10. By: Derek Laing (Department of Economics, Syracuse University); Victor E. Li (Department of Economics and Statistics, Villanova School of Business, Villanova University); Ping Wang (Department of Economics, Washington University in St. Louis)
    Abstract: The emergence of fiat money is studied in an environment in which exchange is organized around trading posts where many producers and shoppers are matched in a dynamic monopolistically competitive framework. Each household consumes a bundle of commodities and has a preference for consumption variety. Within this multiple matching structure we determine the endogenous organization of exchange between firms and shoppers and the means of factor payment (remuneration) as well as the price at which these trades occur. Although each household contacts many sellers, the specialization of tastes implies that the variety of the consumption basket under barter mediated exchange is sparser than that obtained under monetary exchange. We verify that the endogenous linkage of factor payments with the medium of exchange can lead to a monetary equilibrium outcome where only fiat money trades for goods, an ex-ante feature of cash-in-advance models. We also examine the long-run effects of money growth on the equilibrium pattern of exchange. A primary finding, consistent with documented hyperinflationary episodes, is that a sufficiently rapid expansion of money supply and inflation leads to the gradual emergence of barter. Under these circumstances sellers will accept both goods and cash payments whereas workers receive part of their remuneration in goods.
    Keywords: Variety Preference, Search, Trading Post, Monetary vs. Barter Equilibrium
    JEL: D83 D9 E0 E4
    Date: 2009–04

This nep-dge issue is ©2009 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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