nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒05‒30
twelve papers chosen by
Christian Zimmermann
University of Connecticut

  1. A Structural Approach to Estimating the Effect of Taxation on the Labor Market Dynamics of Older Workers By Peter Haan; Victoria Prowse
  2. Fiscal Policy Can Reduce Unemployment: But There is a Less Costly and More Effective Alternative By Roger E. A. Farmer
  3. The Cross-Section of Output and Inflation in a Dynamic Stochastic General Equilibrium Model with Sticky Prices By Jörg Döpke; Michael Funke; Sean Holly; Sebastian Weber
  4. Environmental health and education : Towards sustainable growth By Natacha Raffin
  5. Liquidity Shocks and Order Book Dynamics By Bruno Biais; Pierre-Olivier Weill
  6. Technology Innovation and Diffusion as Sources of Output and Asset Price Fluctuations By Diego Comin; Mark Gertler; Ana Maria Santacreu
  7. Child Benefit and Fiscal Burden with Endogenous Fertility By Oguro, Kazumasa; Takahata, Junichiro
  8. The Impact of Immigration on the Japanese Economy: A multi-country simulation model By SHIMASAWA Manabu; OGURO Kazumasa
  9. Joint-Search Theory: New Opportunities and New Frictions By Bulent Guler; Fatih Guvenen; Giovanni L. Violante
  10. Maintenance and investment: complements or substitutes? A reappraisal By Raouf Boucekkine; Giorgio Fabbri; Fausto Gozzi
  11. On the distributional consequences of epidemics By Raouf Boucekkine; Jean-Pierre Laffargue
  12. On the Relation Between the Endogenous Growth Rate of the Economy and the Dynamics of Renewable Resources By José Belbute; Paulo Brito

  1. 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
  2. By: Roger E. A. Farmer
    Abstract: This paper uses a model with a continuum of equilibrium unemployment rates to explore the effectiveness of fiscal policy. The existence of multiple steady state unemployment rates is explained by the absence of markets for the inputs to a search technology for matching unemployed workers with vacant jobs. I explain the current financial crisis as a shift to a high unemployment equilibrium, induced by the self-fulfilling beliefs of market participants about asset prices. Using this model, I ask two questions. 1) Can fiscal policy help us out of the crisis? 2) Is there an alternative to fiscal policy that is less costly and more effective? The answer to both questions is yes.
    JEL: E2 E24
    Date: 2009–05
  3. By: Jörg Döpke; Michael Funke; Sean Holly; Sebastian Weber
    Abstract: In a standard dynamic stochastic general equilibrium framework, with sticky prices, the cross sectional distribution of output and inflation across a population of firms is studied. The only form of heterogeneity is confined to the probability that the ith changes its prices in response to a shock. In this Calvo setup the moments of the cross sectional distribution of output and inflation depend crucially on the proportion of firms that are allowed to change their prices. We test this model empirically using German balance sheet data on a very large population of firms. We find a significant counter-cyclical correlation between the skewness of inflation and aggregates, but the relation with output is less sure. Our results can be interpreted as indirect evidence of the importance of price stickiness in macroeconomic adjustments.
    Keywords: New-Keynesian macroeconomics, DSGE, cross-sectional distribution, firm growth
    JEL: D12 E52 E43
    Date: 2009
  4. By: Natacha Raffin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This article aims at investigating the interplay between environmental quality, health and development. We consider an OLG model, where human capital dynamics depend on the current environment, through its impact on children's school attendance. In turn, environmental quality dynamics depend on human capital, through maintenance and pollution. This two-way causality generates a co-evolution of human capital and environmental quality and may induce the emergence of an environmental poverty trap characterized by a low level of human capital and deteriorated environmental quality. Our results are consistent with empirical observation about the existence of Environmental Kuznets Curve. Finally, the model allows for the assessment of an environmental policy that would allow to escape the trap.
    Keywords: Education, environmental quality, growth, health.
    Date: 2009–04
  5. By: Bruno Biais; Pierre-Olivier Weill
    Abstract: We propose a dynamic competitive equilibrium model of limit order trading, based on the premise that investors cannot monitor markets continuously. We study how limit order markets absorb transient liquidity shocks, which occur when a significant fraction of investors lose their willingness and ability to hold assets. We characterize the equilibrium dynamics of market prices, bid-ask spreads, order submissions and cancelations, as well as the volume and limit order book depth they generate.
    JEL: G12
    Date: 2009–05
  6. By: Diego Comin (Harvard Business School, Business, Government and the International Economy Unit); Mark Gertler (New York University, Department of Economics); Ana Maria Santacreu (New York University, Department of Economics)
    Abstract: We develop a model in which innovations in an economy's growth potential are an important driving force of the business cycle. The framework shares the emphasis of the recent "new shock" literature on revisions of beliefs about the future as a source of fluctuations, but differs by tieing these beliefs to fundamentals of the evolution of the technology frontier. An important feature of the model is that the process of moving to the frontier involves costly technology adoption. In this way, news of improved growth potential has a positive effect on current hours. As we show, the model also has reasonable implications for stock prices. We estimate our model for data post-1984 and show that the innovations shock accounts for nearly a third of the variation in output at business cycle frequencies. The estimated model also accounts reasonably well for the large gyration in stock prices over this period. Finally, the endogenous adoption mechanism plays a significant role in amplifying other shocks.
    Keywords: Business Cycles, Endogenous Technology Adoption, News Shocks, Stock Market.
    JEL: E3 O3
    Date: 2009–06
  7. By: Oguro, Kazumasa; Takahata, Junichiro
    Abstract: This paper studies a possibility of efficiency improvement by child benefit programs in an overlapping generations economy with endogenous fertility and government debt. We derive conditions for improving an efficiency by child benefit using Representative-Consumer efficiency (RC-efficiency), an efficiency criterion for an endogenous fertility setting developed by Michel and Wigniolle (2007). It is shown that the result crucially depends on the relative amount of accumulated government debt in the economy. It is likely to hold in an economy of developed countries with a low fertility rate. We provide an implication of the results in the real economy.
    Keywords: Endogenous fertility; Pareto-efficiency; child benefit; fiscal burden
    JEL: D6 J1 H6
    Date: 2009–04
  8. By: SHIMASAWA Manabu; OGURO Kazumasa
    Abstract: To quantify the impacts of immigration on the Japanese economy, we present a large-scale numerical dynamic equilibrium model with OLG and a total of 16 countries and regions, both those that are industrialized including Japan, the U.S. and EU, and developing countries China, Brazil, the Philippines and Peru. Our simulation results show that immigration will improve the Japanese economy. Specifically, annual immigrant flows of 150,000 will dramatically improve the welfare of current and future generations. On the other hand, we canft expect a significant long-run improvement in welfare solely by implementing a policy increasing the consumption tax. The results indicate that substantially increased inflows of working-age immigrants would alleviate the need for future fiscal reform and also help to dramatically reduce the public pension burden on the working generations.
    Date: 2009–05
  9. By: Bulent Guler; Fatih Guvenen; Giovanni L. Violante
    Abstract: Search theory routinely assumes that decisions about the acceptance/rejection of job offers (and, hence, about labor market movements between jobs or across employment states) are made by individuals acting in isolation. In reality, the vast majority of workers are somewhat tied to their partners--in couples and families--and decisions are made jointly. This paper studies, from a theoretical viewpoint, the joint job-search and location problem of a household formed by a couple (e.g., husband and wife) who perfectly pools income. The objective of the exercise, very much in the spirit of standard search theory, is to characterize the reservation wage behavior of the couple and compare it to the single-agent search model in order to understand the ramifications of partnerships for individual labor market outcomes and wage dynamics. We focus on two main cases. First, when couples are risk averse and pool income, joint search yields new opportunities--similar to on-the-job search--relative to the single-agent search. Second, when the two spouses in a couple face job offers from multiple locations and a cost of living apart, joint-search features new frictions and can lead to significantly worse outcomes than single-agent search.
    JEL: E24 J61 J64
    Date: 2009–05
  10. By: Raouf Boucekkine; Giorgio Fabbri; Fausto Gozzi
    Abstract: A benchmark AK optimal growth model with maintenance expenditures and endogenous utilization of capital is considered within an explicit vin- tage capital framework. Scrapping is endogenous, and the model allows for a clean distinction between age and usage dependent capital deprecia- tion and obsolescence. It is also shown that in this set-up past investment profile completely determines the size of current maintenance expendi- tures. Among other findings, a closed-form solution to optimal dynam- ics is provided taking advantage of very recent development in optimal control of infinite dimensional systems. More importantly, and in con- trast to the pre-existing literature, we study investment and maintenance co-movements without any postulated ad-hoc depreciation function. In particular, we find that optimal investment and maintenance do move to- gether in the short-run in response to neutral technological shocks, which seems to be more consistent with the data.
    Keywords: Maintenance, investment, optimal control, dynamic program- ming, infinite dimensional problem
    JEL: E22 E32 O40
    Date: 2009–04
  11. By: Raouf Boucekkine; Jean-Pierre Laffargue
    Abstract: We develop a tractable general theory for the study of the economic and demographic impact of epidemics, and notably its distributional consequences. To this end, we develop a three-period overlapping generations model where altruistic parents choose optimal health expenditures for their children and themselves. The survival probability of (junior) adults and children depends on such investments. Agents can be skilled or unskilled. The model emphasizes the role of orphans. Orphans are not only penalized in the face of death, they are also penalized in the access to education. Epidemics are modeled as one period exogenous shocks to the survival rates. We specifically study the consequence of a negative shock on adult survival rates in the first period. We prove that while the epidemic has no permanent effect on income distribution, it can perfectly alter it in the short and medium run. In particular, the epidemic may imply a worsening in the short and medium run of both economic performance and income distribution. Two opposite mechanisms are isolated: first, the survival rate of children at the end of the first period decreases relatively more in poor than in wealthy families. This decreases the proportion of junior adults with a low endowment of human capital in period 2. Secondly, the number of orphans in period 1 increases in both families. This decreases the proportion of junior adults with a low endowment of human capital in period 2. Therefore, the proportion of the unskilled will necessarily increase in the medium run if orphans are too penalized in the access to a high level of education.
    Keywords: Epidemics, orphans, income distribution, endogenous survival, medium-term dynamics
    JEL: O1 D9 I1 I2
    Date: 2009–05
  12. By: José Belbute (Department of Economics, University of Évora; CEFAGE-UE); Paulo Brito (Department of Economics, Technical University of Lisbon; UECE)
    Abstract: In this paper we study a simple endogenous growth model in which the two engines of growth are the exogenous technical progress in dematerialization and the accumulation of a renewable natural resource. The model is also labeled as been "endogenous" as the rate of growth of natural capital is endogenously determined and should lie between zero and the rate of technical progress. In this context, it is possible to combine permanent economic growth with permanent growth of the environmental asset. the endogenous rate of growth of the stock of natural resources is a positive function of the physical rate of regeneration (which will occur if consumption would be zero) and of the rate of technical progress. However, in order to assure sustainability, the former growth rate should be larger than zero but smaller than the later. Second, the output growth rate (which in our model is equal to the rate of consumption) should lie between the rate of technical progress and the sum of the rate of technical progress and the natural rate of regeneration. Therefore, even in the case in which the physical rate of renewal is mall, this will allow for unbounded growth. Third, in our simple model, there is no transitional dynamics.
    Keywords: Endogenous growth, environmental preservation, habit-formation
    JEL: C61 Q56 O39 O40
    Date: 2009

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