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on Dynamic General Equilibrium |
| By: | Gonzalo Fernández-de-Córdoba (Universidad de Salamanca); José L. Torres (Universidad de Málaga) |
| Abstract: | During the past ten years Dynamic Stochastic General Equilibrium (DSGE) models have become an important tool in quantitative macroeconomics. However, DSGE models was not considered as a forecasting tool until very recently. The objective of this paper is twofold. First, we compare the forecasting ability of a canonical DSGE model for the Spanish economy with other standard econometric techniques. More precisely, we compare out-of-sample forecasts coming from different estimation methods of the DSGE model to the forecasts produced by a VAR and a Bayesian VAR. Second, we propose a new method for combining DSGE and VAR models (Augmented VAR-DSGE) through the expansion of the variable space where the VAR operates with artificial series obtained from a DSGE model. The results indicate that the out-of-sample forecasting performance of the proposed method outperforms all the considered alternatives. |
| Keywords: | DSGE models, forecasting, VAR, BVAR |
| JEL: | C53 E32 E37 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:mal:wpaper:2009-1&r=dge |
| By: | Nirei, Makoto |
| Abstract: | This paper presents a model of endogenous fluctuations of investment and output at the business cycles frequencies. Aggregate investments fluctuate endogenously due to the strategic complementarity of micro-level lumpy investments. The investment fluctuations are transmitted to the output via variable utilization of capital. Simulations show that there is a range of parameter values under with the model economy exhibits a large magnitude of fluctuations and comovements in investment and output. |
| Keywords: | business cycles, lumpy investment, variable capacity utilization, nonlinear dynamics |
| JEL: | E32 E22 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:hit:iirwps:09-01&r=dge |
| By: | Nicolas L. Dromel (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: | We analyze how investment subsidies can affect aggregate volatility and growth in economies subject to capital market imperfections. Within a model featuring both frictions on the credit market and unequal access to investment opportunities among individuals, we provide specific fiscal parameters able to reduce the probability of recessions, fuel the economy long-run growth rate and place it on a permanent-boom dynamic path. We analyze how conditions on the stabilizing fiscal parameters are modified when frictions in the economy evolve. Eventually, we show how this tax and transfer system can moderate persistence in the economy's response to temporary and permanent productivity shocks. |
| Keywords: | Endogenous business cycles, capital market imperfections, access to productive investment, fiscal policy, macroeconomic stabilization. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00389690_v1&r=dge |
| By: | Jang-Ting Guo (Department of Economics, University of California Riverside); Kevin J. Lansing (Federal Reserve Bank of San Francisco) |
| Abstract: | This paper examines the quantitative relationship between the elasticity of capital-labor substitution and the conditions needed for equilibrium indeterminacy (and belief-driven áuctuations) in a one-sector growth model. Our analysis employs a ìnormalizedîversion of the CES production function so that all steady-state allocations and factor income shares are held constant as the elasticity of substitution is varied. We demonstrate numerically that higher elasticities cause the threshold degree of increasing returns for indeterminacy to decline monotonically, albeit very gradually. When the elasticity of substitution is unity (the Cobb-Douglas case), our model requires increasing returns to scale of around 1.08 for indeterminacy. When the elasticity of substitution is raised to 5, which far exceeds any empirical estimate, the threshold degree of increasing returns reduces to around 1.05. We also demonstrate analytically that laborÃs share of income becomes pro-cyclical as the elasticity of substitution increases above unity, whereas laborÃs share in postwar U.S. data is countercyclical. This observation, together with other empirical evidence, indicates that the elasticity of capital-labor substitution in the U.S. economy is actually below unity. |
| Keywords: | Capital-Labor Substitution, Equilibrium Indeterminacy, Capital Utilization, Real Business Cycles, Labor Income |
| JEL: | E30 E32 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:200804&r=dge |
| By: | Nicolas L. Dromel (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: | Firms devote significant resources to maintain and repair thei existing capital. Within a real business cycle model featuring arguably small aggregate increasing returns, this paper assesses the stabilizing effects of fiscal policies with a maintenance expenditure allowance. In this setup, firms are authorized to deduct their maintenance expenditures from revenues in calculating pre-tax profits, as in many prevailing tax codes. While flat-rate taxation does not prove useful to insulate the economy from self-fulfilling beliefs, a progressive tax can render the equilibrium unique. However, we show that the required progressivity to protect the economy against sunspot-driven fluctuations is increasing in the maintenance-to-GDP ratio. Taking into account the maintenance and repair activity of firms, and the tax deductibility of the related expenditures, would then weaken the expected stabilizing properties of progressive fiscal schedules. |
| Keywords: | Business cycles, maintenance and repair allowances, capital utilization, progressive income taxes, local indeterminacy and sunspots. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00389691_v1&r=dge |
| By: | Galeazzo Impicciatore; Luca Panaccione; Francesco Ruscitti |
| Abstract: | In this paper we analyze the intertemporal competitive equilibrium of a walrasian model of capital accumulation. We prove the existence of equilibria by generalizing a result of Todd (1979). We overcome the indeterminacy in savings allocation to multiple types of capital goods by introducing a decreasing-return-to-scale storage technology. We finally verify that, for stored capital goods, equality of rates of returns is satisfied in equilibrium. |
| Keywords: | Walras, Capital Goods, Activity Analysis, General Equilibrium |
| JEL: | B21 C60 C62 D51 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:sap:wpaper:121&r=dge |
| By: | Francesco Giuli; Massimiliano Tancioni |
| Abstract: | The theoretical literature on business cycles predicts a positive investment response to productivity improvements. In this work we question this prediction from theoretical and empirical standpoints. We first show that a negative short-term response of investment to a positive technology shock is consistent with a plausibly parameterized new Keynesian DSGE model in which capital is firm-specific and monetary policy is not fully accommodative. Employing Bayesian techniques, we then provide evidence that permanent productivity improvements have short-term contractionary effects on investment. Even if this result emerges in both the firm-specific and rental capital specifications, only with the former the estimated average price duration is in line with microeconometric evidence. In the firm-specific capital model, strategic complementarity in price setting leads to a degree of price inertia which is higher than that implied by the frequency at which firms change their prices. |
| Keywords: | firm-specific capital, NK-DSGE model, technology shocks, investment dynamics, Bayesian inference. |
| JEL: | E32 E22 C11 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:sap:wpaper:120&r=dge |
| By: | Felix KUBLER (University of Zurich and Swiss Finance Institute); Karl SCHMEDDERS (University of Zurich and Swiss Finance Institute) |
| Abstract: | In this paper we examine non-parametric restrictions on counterfactual analysis in a dynamic stochastic general equilibrium model. Under the assumption of time-separable expected utility and complete markets all equilibria in this model are stationary. The Arrow-Debreu prices uniquely reveal the probabilities and discount factor. The equilibrium correspondence, de¯ned as the map from endowments to stationary (probability-free) state prices, is identical to the equilibrium correspondence in a standard Arrow-Debreu exchange economy with additively separable utility. We examine possible restriction on this correspondence and give necessary as well as sufficient conditions on profiles of individual endowments that ensure that associated equilibrium prices cannot be arbitrary. Although restrictions on possible price changes often exist, we show that results from a representative-agent economy usually do not carry over to a setting with heterogeneous agents. |
| Keywords: | Dynamic general equilibrium, non-parametric analysis, observable restrictions |
| JEL: | D50 G10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0905&r=dge |
| By: | Rupert, Peter (University of California, Santa Barbara); Wasmer, Etienne (Sciences Po, Paris) |
| Abstract: | The Mortensen-Pissarides model with unemployment benefits and taxes has been able to account for the variation in unemployment rates across countries but does not explain why geographical mobility is very low in some countries (on average, three times lower in Europe than in the U.S.). We build a model in which both unemployment and mobility rates are endogenous. Our findings indicate that an increase in unemployment benefits and in taxes does not generate a strong decline in mobility and accounts for only half to two-thirds of the difference in unemployment from the US to Europe. We find that with higher commuting costs the effect of housing frictions plays a large role and can generate a substantial decline in mobility. We show that such frictions can account for the differences in unemployment and mobility between the US and Europe. |
| Keywords: | labor search frictions, unemployment, housing market imperfections, commuting costs |
| JEL: | J30 J60 R20 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4172&r=dge |
| By: | Walentin, Karl (Research Department, Central Bank of Sweden) |
| Abstract: | We explore the implications of shocks to expected future productivity in a setting with limited enforcement of financial contracts. As in Lorenzoni andWalentin (2007) optimal financial contracts under limited enforcement imply that to obtain external finance firms have to post collateral in terms of liquidation value of the firm. In contrast to earlier real one-sector models, we show that a model with this type of “collateral constraint” generates an increase in stock prices in response to positive news about future productivity, as well as the other properties of an expectation driven business cycle, that is, an increase in consumption, investment and hours. The positive stock price response is in line with Beaudry and Portier’s (2006) empirical results and the emerging standard view of expectation driven booms. |
| Keywords: | business cycles; news shocks; limited enforcement; stock prices |
| JEL: | E22 E32 E44 E51 |
| Date: | 2009–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0229&r=dge |
| By: | L'Haridon, Olivier; Malherbe, Franck |
| Abstract: | The design of employment protection legislation (EPL) is of particular importance in the European debate on the contours of labor market reform. In this article we appeal to an equilibrium unemployment model to investigate the virtues of EPL reform which reduces the red tape and legal costs associated with layos and introduces a U.S.-style experiencerating system, which we model as a combination of a layo tax and a payroll subsidy. The reform considered shows that it is possible to improve the eciency of employment protection policies without aecting the extent of worker protection on the labor market. These results are consistent with the conventional wisdom that experience rating is desirable, not only as an integral component of unemployment-compensation nance, as most studies acknowledge, but also as part and parcel of a virtuous EPL system. |
| Keywords: | Search and Matching Models; Employment Protection; State-Contingent Layo Tax; Experience-Rating |
| JEL: | J41 J48 J60 |
| Date: | 2008–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0910&r=dge |
| By: | Ratbek Dzhumashev; Emin Gahramanov |
| Abstract: | In this paper we develop a stochastic endogenous growth model augmented with income tax evasion. Our model avoids some existing discrepancies between empirical evidence and theoretical predictions of traditional tax evasion models. Further, we show that: i) productive government expenditures play an important role in affecting economy's tax evasion rate; ii) the average marginal income tax rate in Australia come close to the optimal; and iii) the phenomenon of tax evasion is not an excuse for a productive government to advocate an excessive income taxation. |
| Keywords: | Tax evasion; Economic growth; Public services |
| JEL: | H26 D91 O41 |
| Date: | 2009–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:dkn:econwp:eco_2009_5&r=dge |
| By: | Fabio Canova |
| Abstract: | I discuss the identifiability of a structural New Keynesian Phillips curve when it is embedded in a small scale dynamic stochastic general equilibrium model. Identification problems emerge because not all the structural parameters are recoverable from the semi-structural ones and because the objective functions I consider are poorly behaved. The solution and the moment mappings are responsible for the problems. |
| Keywords: | Identification, DSGE models, New Keynesian Phillips curve, Identification robust estimation methods |
| JEL: | C10 C52 E32 E50 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1159&r=dge |
| By: | Nicolas L. Dromel (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); Elie Kolakez (ERMES - TEPP - Université Paris II Panthéon-Assas); Etienne Lehmann (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, IZA - Institute for the Study of Labor) |
| Abstract: | In this paper, we argue that credit market imperfections impact not only the level of unemployment, but also its persistence. For this purpose, we first develop a theoretical model based on the equilibrium matching framework of Mortensen and Pissarides (1999) and Pissarides (2000) where we introduce credit constraints. We show these credit constraints not only increase steady-state unemployment, but also slow down the transitional dynamics. We then provide an empirical illustration based on a country panel dataset of 19 OECD countries. Our results suggest that credit market imperfections would significantly increase the persistence of unemployment. |
| Keywords: | Credit markets, labor markets, unemployment, credit constraints, search frictions. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00389762_v1&r=dge |
| By: | Kaas, Leo (University of Konstanz); Lu, Jun (University of Konstanz) |
| Abstract: | We consider a search model of the labor market with two types of equally productive workers and two types of firms, discriminators and non-discriminators. Without policy intervention, there is wage dispersion between and within the two worker groups, but all wage differences become negligible when the taste for discrimination is small. We analyze the effect of an equal-pay policy, both in combination with affirmative action and without. When equal opportunity of hiring cannot be enforced, wage dispersion increases and wages for minority workers fall substantially relative to laissez faire. Sometimes also the wage gap between worker groups widens in response to the policy. |
| Keywords: | search model, wage dispersion, discrimination, equal pay policy |
| JEL: | J41 J71 J78 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4173&r=dge |
| By: | Michael Mania; Revaz Tevzadze |
| Abstract: | We study utility maximization problem for general utility functions using dynamic programming approach. We consider an incomplete financial market model, where the dynamics of asset prices are described by an Rd-valued continuous semimartingale. Under some regularity assumptions we derive backward stochastic partial differential equation (BSPDE) related directly to the primal problem and show that the strategy is optimal if and only if the corresponding wealth process satisfies a certain forward-SDE. As examples the cases of power, exponential and logarithmic utilities are considered |
| Keywords: | Backward stochastic partial dierential equation, utility maximization problem, semimartingale, incomplete markets |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpmath:07-2008&r=dge |
| By: | Richard M. H. Suen (Department of Economics, University of California Riverside) |
| Abstract: | The constant-relative-risk-aversion (CRRA) utility function is now predominantly used in quantitative macroeconomic studies. This function, however, is not bounded and thus creates problems when applying the standard tools of dynamic programming. This paper devises a method for "bounding" the CRRA utility functions. The proposed method is based on a set of conditions that can establish boundedness among a broad class of utility functions. These results are then used to construct a bounded utility function that is identical to a CRRA utility function except when consumption is very small or very large. It is shown that the constructed utility function also satisfies the Inada condition and is consistent with balanced growth. |
| Keywords: | Utility Function; Elasticity of Marginal Utility; Boundedness |
| JEL: | C61 O41 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:200902&r=dge |
| By: | Carneiro, Anabela (University of Porto); Guimaraes, Paulo (University of South Carolina); Portugal, Pedro (Universidade Nova de Lisboa) |
| Abstract: | Using a longitudinal matched employer-employee data set for Portugal over the 1986-2005 period, this study analyzes the heterogeneity in wages responses to aggregate labor market conditions for newly hired workers and existing workers. Accounting for both worker and firm heterogeneity, the data support the hypothesis that entry wages are much more procyclical than current wages. A one-point increase in the unemployment rate decreases wages of newly hired male workers by around 2.8% and by just 1.4% for workers in continuing jobs. Since we estimate the fixed effects, we were able to show that unobserved heterogeneity plays a non-trivial role in the cyclicality of wages. In particular, worker fixed effects of new hires and separating workers behave countercyclically, whereas firm fixed effects exhibit a procyclical pattern. Finally, the results reveal, for all workers, a wage-productivity elasticity of 1.2, slightly above the one-for-one response predicted by the Mortensen-Pissarides model. |
| Keywords: | wage cyclicality, hires, firm-specific effects, compositional effects, labor productivity |
| JEL: | J31 E24 E32 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4174&r=dge |