nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒06‒17
thirty-two papers chosen by
Christian Zimmermann
University of Connecticut

  1. Labor Market Frictions and the International Propagation Mechanism By Lise Patureau
  2. Conspicuous Consumption and Overlapping Generations By Wendner, Ronald
  3. Firm Heterogeneity and the Long-run Effects of Dividend Tax Reform By Francois Gourio; Jianjun Miao
  4. Productivity shocks and aggregate cycles in an estimated endogenous growth model By Jim Malley; Ulrich Woitek
  5. On the Macroeconomic and Welfare Effects of Illegal Immigration By Liu, Xiangbo
  6. When does heterogeneity matter? By Yi Wen
  7. Debt, Deficits and Finite Horizons: The Stochastic Case By Roger Farmer; Carine Nourry; Alain Venditti
  8. Overborrowing and Systemic Externalities in the Business Cycle By Bianchi, Javier
  9. Fiscal Policy, Maintenance Allowances and Expectation-Driven Business Cycles. By Nicolas L. Dromel
  10. Wage Dispersion in the Search and Matching Model with Intra-Firm Bargaining By Dale T. Mortensen
  11. Precautionary Demand for Money in a Monetary Business Cycle Model By Telyukova, Irina A.; Visschers, Ludo
  12. Computing DSGE Models with Recursive Preferences By Dario Caldara; Jesus Fernandez-Villaverde; Juan F. Rubio-Ramirez; Wen Yao
  13. Inflation dynamics with labour market matching: assessing alternative specifications. By Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
  15. Parameter identification, population and economic growth in an extended Lucas and Uzawa-type two sector model By Alberto BUCCI; Herb E. KUNZE; Davide LA TORRE
  16. Transitional dynamics in the Solow-Swan growth model with AK technology and logistic population change By Alberto BUCCI; Luca GUERRINI
  17. A closed form solution to the transitional dynamics of a modified Ramsey model By FERRARA, Massimiliano; GUERRINI, Luca
  18. Credit constraints and persistence of unemployment. By Nicolas L. Dromel; Elie Kolakez; Etienne Lehmann
  19. On human capital and economic growth with random technology shocks By Alberto BUCCI; Cinzia COLAPINTO; Martin FORSTER; Davide LA TORRE
  20. On the Societal Benefits of Illiquid Bonds By David Andolfatto; ;
  21. Inefficient Worker Turnover By Nicolas L. Jacquet
  22. Scale effects, saving and factor shares in a human capital-based growth model with physical capital accumulation By Alberto BUCCI
  23. The Unemployment Volatility Puzzle: The Role of Matching Costs Revisited By Silva , José Ignacio; Toledo, Manuel
  24. Population and economic growth with human and physical capital investments By Alberto BUCCI; Davide LA TORRE
  25. Capital Flows and Asset Prices By Kosuke Aoki; Gianluca Benigno; Nobuhiro Kiyotaki
  26. A Life-Cycle Analysis of Social Security with Housing By Chen, Kaiji
  27. Vertical Production and Macroeconomic Persistence: The Case of an Emerging Market Economy By Mai Farid; ;
  28. Hot and Cold Seasons in the Housing Market By L. Rachel Ngai; Silvana Tenreyro
  29. Entry, Exit and Investment-Specific Technical Change, Second Version By Roberto M. Samaniego
  30. Population in factor accumulation-based growth By Alberto BUCCI
  31. Mapping prices into productivity in multisector growth models By Ngai, Liwa Rachel; Samaniego, Roberto
  32. A Model of a Systemic Bank Run By Harald Uhlig

  1. By: Lise Patureau (Université de Cergy-Pontoise, THEMA, F-95000 Cergy-Pontoise)
    Abstract: The paper investigates the determinants of international business cycle comovement in a two-country Dynamic Stochastic General Equilibrium (DSGE) model featured by monopolistic competition and nominal price rigidity, following so the New Open Economy Macroeconomy (NOEM) literature. Within this framework, we assess the role of labor market search and matching frictions in the international propagation of supply and monetary shocks. Our results show that labor market frictions improve the ability of the New Open Economy Macroeconomy framework to account for international business cycles comovement. In particular, the NOEM model with labor market search is consistent with the international propagation mechanism of monetary shocks identified in the data. Through their impact on labor market dynamics, labor market institutions affect the magnitude of international comovement. Business cycle synchronization is thus found to increase with the generosity of the unemployment benefits system, whereas it decreases with the strictness of employment protection.
    Keywords: International business cycles, Search, Labor market institutions, Wage bargaining, International transmission of shocks
    JEL: E24 E32 F41
    Date: 2009
  2. By: Wendner, Ronald
    Abstract: This paper investigates household decisions, and optimal taxation in an overlapping generations model in which individual utility depends on a weighted average of consumption of ones peers --- a ``keeping up with the Joneses'' consumption externality. In contrast to representative agent economies, the consumption externality \emph{generally} affects steady state savings and growth rates. The nature of the externality's impact, however, critically depends on the rate at which labor productivity declines with age. For a (strongly enough) declining labor productivity (or when people gradually retire), the consumption externality \emph{lowers} the steady state propensity to consume out of total wealth. The opposite holds for a constant labor productivity. The market economy can be decentralized by a (reverse) unfunded social security system if the rate of labor productivity decline is high (low). In contrast to previous results, the \emph{optimal} steady state capital income tax is zero, in spite of the consumption externality.
    Keywords: Consumption externality; labor productivity; gradual retirement; overlapping generations; keeping up with the Joneses; optimal taxation; capital taxation
    JEL: D90 E21 O40
    Date: 2009–06–02
  3. By: Francois Gourio; Jianjun Miao
    Abstract: To study the long-run effect of dividend taxation on aggregate capital accumulation, we build a dynamic general equilibrium model in which there is a continuum of firms subject to idiosyncratic productivity shocks. We find that a dividend tax cut raises aggregate productivity by reducing the frictions in the reallocation of capital across firms. Our baseline model simulations show that when both dividend and capital gains tax rates are cut from 25 and 20 percent, respectively, to the same 15 percent level permanently, the aggregate long-run capital stock increases by about 4 percent.
    JEL: E22 E62 G31 G35 H32
    Date: 2009–06
  4. By: Jim Malley; Ulrich Woitek
    Abstract: Using a two-sector endogenous growth model, this paper explores how productivity shocks in the goods and human capital producing sectors contribute to explaining aggregate cycles in output, consumption, investment and hours. To contextualize our findings, we also assess whether the human capital model or the standard real business cycle (RBC) model better explains the observed variation in these aggregates. We find that while neither of the workhorse growth models uniformly dominates the other across all variables and forecast horizons, the two-sector model provides a far better fit to the data. Some other key results are first, that Hicks-neutral shocks explain a greater share of output and consumption variation at shorter-forecast horizons whereas human capital productivity innovations dominate at longer ones. Second, the combined explanatory power of the two technology shocks in the human capital model is greater than the Hicks-neutral shock in the RBC model in the medium- and long-term for output and consumption. Finally, the RBC model outperforms the two-sector model with respect to explaining the observed variation in investment and hours.
    Keywords: Endogenous growth, human capital, real business cycles, Bayesian estimation, VAR errors
    JEL: C11 C52 E32
    Date: 2009–06
  5. By: Liu, Xiangbo
    Abstract: This paper investigates the macroeconomic and welfare effects of illegal immigration on the native born within a dynamic general equilibrium framework with labor market frictions. A key feature of the model is that job competition is allowed for between domestic workers and illegal immigrants. We calibrate the model to match some key statistics of the postwar U.S. economy. The model predicts that in the long run illegal immigration is a boon, but the employment opportunities of domestic workers are strongly negatively affected. The model also predicts that the level of domestic consumption has a U-shaped relationship with the share of illegal immigrants.
    Keywords: Economic Growth; Immigration; Welfare; Search; Unemployment
    JEL: F22 O41 J64
    Date: 2009–05–28
  6. By: Yi Wen
    Abstract: How do movements in the distribution of income affect the macroeconomy? Krusell and Smith (1998) analyzed this question in a neoclassical growth model, and their results show that the representative-agent assumption provides a good approximation for aggregate behaviors of heterogeneous agents. This paper extends their analysis to a cash-in-advance model with heterogeneous money demand. It is shown that movements in the distribution of monetary income can have significant impact on the macroeconomy. For example, the dynamic responses of aggregate output to monetary shocks behave very differently from those of a representative agent; the welfare costs of moderate inflation are much higher than previously thought, up to 20% of consumption when the inequality of cash distribution is sufficiently large. This is in sharp contrast to the findings of Cooley and Hansen (1989) and Lucas (2000) based on representative-agent models.
    Keywords: Liquidity (Economics) ; Money theory
    Date: 2009
  7. By: Roger Farmer; Carine Nourry; Alain Venditti
    Abstract: We introduce a solution technique for the study of discrete time stochastic models populated by long-lived agents. We introduce aggregate uncertainty and complete markets into a 'perpetual-youth' model of a kind first studied by Olivier Blanchard and we show that the pure-trade version of the model behaves much like the two-period overlapping generations model. Our methods are easily generalized to economies with production and they should prove useful to researchers who seek a tractable stochastic model in which fiscal policy has real effects on aggregate allocations.
    JEL: C10 E0 E6
    Date: 2009–06
  8. 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
  9. By: Nicolas L. Dromel (Centre d'Economie de la Sorbonne - Paris School of Economics)
    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.
    JEL: D33 D58 E30 E32 E62 H20 H30
    Date: 2009–05
  10. By: Dale T. Mortensen
    Abstract: Matched employer-employee data exhibits both wage and productivity dispersion across firms and suggest that a linear relationship holds between the average wage paid and a firm productivity. The purpose of this paper is to demonstrate that these facts can be explained by a search and matching model when firms are heterogenous with respect to productivity, are composed of many workers, and face diminishing returns to labor given the wage paid to identical workers is the solution to the Stole-Zwiebel bilateral bargaining problem. Helpman and Iskhoki (2008) show that a unique single wage (degenerate) equilibrium solution to the model exists in this environment. In this paper, I demonstrate that another equilibrium exists that can be characterized by a non-degenerate distribution of wages in which more productive firms pay more if employed workers are able to search. Generically this dispersed wage equilibrium is unique and exists if and only if firms are heterogenous with respect to factor productivity. Finally, employment is lower in the dispersed wage equilibrium than in the single wage equilibrium but this fact does not imply that welfare is higher in the single wage equilibrium.
    JEL: E24 J3 J64
    Date: 2009–06
  11. By: Telyukova, Irina A.; Visschers, Ludo
    Abstract: We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models, the only uncertainty affecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and find that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables.
    Keywords: Precautionary Demand for Money; Business Cycles
    JEL: E32 E40 E41
    Date: 2009–06–08
  12. By: Dario Caldara (Institute of International Economic Studies, Stockholm University); Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Juan F. Rubio-Ramirez (Department of Economics, Duke University); Wen Yao (Department of Economics, University of Pennsylvania)
    Abstract: This paper compares different solution methods for computing the equilibrium of dynamic stochastic general equilibrium (DSGE) models with recursive preferences such as those in Epstein and Zin (1989 and 1991). Models with these preferences have recently become popular, but we know little about the best ways to implement them numerically. To fill this gap, we solve the stochastic neoclassical growth model with recursive preferences using four different approaches: second and third-order perturbation, Chebyshev polynomials, and value function iteration. We document the performance of the methods in terms of computing time, implementation complexity, and accuracy. Our main finding is that a third-order perturbation is competitive in terms of accuracy with Chebyshev polynomials and value function iteration, while being an order of magnitude faster to run. Therefore, we conclude that perturbation methods are an attractive approach for computing this class of problems.
    Keywords: DSGE Models, Recursive Preferences, Perturbation
    JEL: C63 C68 E37
    Date: 2009–05–25
  13. By: Kai Christoffel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); James Costain (Banco de España, Alcalá 50, E-28014 Madrid, Spain.); Gregory de Walque (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Keith Kuester (Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106-1574, USA.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stephen Millard (Bank of England, Threadneedle Street, London EC2R 8AH, UK.); Olivier Pierrard (Banque Centrale du Luxembourg, 2 boulevard Royal, L-2983 Luxembourg, Luxembourg.)
    Abstract: This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behaviour. In a search and matching environment, we consider the following modeling setups - right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates. JEL Classification: E31, E32, E24, J64.
    Keywords: Inflation Dynamics, Labour Market, Business Cycle, Real Rigidities.
    Date: 2009–05
  14. By: Rochelle M. Edge; Michael T. Kiley; Jean-Philippe Laforte
    Abstract: This paper considers the “real-time” forecast performance of the Federal Reserve staff, time-series models, and an estimated dynamic stochastic general equilibrium (DSGE) model – the Federal Reserve Board’s new Estimated, Dynamic, Optimization-based (Edo) model. We evaluate forecast performance using out-of-sample predictions from 1996 through 2005 – thereby examining over 70 forecasts presented to the Federal Open Market Committee (FOMC). Our analysis builds on previous real-time forecasting ex- ercises along two dimensions. First, we consider time-series models, a structural DSGE model that has been employed to answer policy questions quite different from forecast- ing, and the forecasts produced by the staff at the Federal Reserve Board. In addition, we examine forecasting performance of our DSGE model at a relatively detailed level by separately considering the forecasts for various components of consumer expenditures and private investment. The results provide significant support to the notion that richly specified DSGE models belong in the forecasting toolbox of a central bank.
    Date: 2008–12
  15. By: Alberto BUCCI; Herb E. KUNZE; Davide LA TORRE
    Abstract: The aim of this paper is twofold. First of all we re-examine the long-run relationship between population and economic growth. To do this we extend the Lucas-Uzawa model along two different directions: we introduce the growth of the physical capital stock into the human capital supply equation and include in the intertemporal maximization problem of the representative household a preference parameter controlling for the degree of agents’ altruism towards future generations. These two extensions allow us to capture eventual complementarity/substitutability links between physical and human capital in the production of new human capital and to study how such links, along with agents’ altruism, may impact on the interplay between economic and demographic growth along the balanced growth path equilibrium. In the second part of this paper we develop the inverse problem for this extended Lucas-Uzawa model. The method we are going to use is based on fractals and has been developed by two of the authors in recent papers. Through the solution of the inverse problem one can get the estimation of some key-parameters such as the total factor productivity, the productivity of human capital in the production of new skills, the physical capital share in total income, the inverse of the intertemporal elasticity of substitution in consumption, the depreciation rate of (physical and human) capital and the parameter controlling for the degree of altruism towards future generations.
    Keywords: Population Growth, Two-Sector Endogenous Growth Models, Human Capital Investment, Physical Capital Accumulation, Fractal-based Methods, Inverse Problems, Collage Theorem
    JEL: O41 J24 J10
    Date: 2008–10–22
  16. By: Alberto BUCCI; Luca GUERRINI
    Abstract: This paper offers an alternative way, based on the logistic population growth hypothesis, to yield transitional dynamics in the standard AK model with exogenous savings rate. Within this framework, we show that the dynamics of the capital stock per person and its growth rate can be non-monotonic over time. Moreover, even in the presence of negative growth, the capital stock per-capita can converge to a strictly positive level (different from the initial level) when time goes to infinity. In general, the analysis allows us to conclude that the dynamics of the Solow-Swan model with linear technology and logistic population growth is richer than the one with exponential population growth.
    Keywords: Transitional dynamics, AK model, Economic growth, Population dynamics, Physical capital investment
    JEL: O16 O41 J10 C61
    Date: 2008–12–19
  17. By: FERRARA, Massimiliano (Universitatea Spiru Haret, Facultatea de Finante si Banci); GUERRINI, Luca (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: In this paper we derive a closed form solution for the Ramsey model with a bounded population growth rate and a Benthamite felicity function, for the case where capital's share is equal to the reciprocal of the intertemporal elasticity of substitution.
    Keywords: Ramsey; closed form solution; bounded population growth rate
    JEL: O41
    Date: 2009–06–01
  18. By: Nicolas L. Dromel (Centre d'Economie de la Sorbonne - Paris School of Economics); Elie Kolakez (ERMES - TEPP, Université Paris 2 Panthéon-Assas); Etienne Lehmann (CREST-INSEE et IZA)
    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.
    JEL: E24 E44 J08 J64
    Date: 2009–05
  19. By: Alberto BUCCI; Cinzia COLAPINTO; Martin FORSTER; Davide LA TORRE
    Abstract: We embed the Uzawa-Lucas human capital accumulation technology into the Mankiw-Romer-Weil exogenous growth model. The paper is divided into two parts. In the first part we assume that the rate of technological progress is exogenous and deterministic and study the local dynamics of the model around its steady-state equilibrium. The first order conditions lead to a system of four nonlinear differential equations. By reducing the dimension of the system to three, we find that the equilibrium is a saddle point. If the equations system is attacked in its original dimension, and by making use of an arbitrage condition, we prove that the equilibrium is unstable. In the second part of the paper technology is assumed to be subject to random shocks driven by a geometric Brownian motion. Using the Hamilton-Jacobi-Bellman equation, and through numerical simulations, we discuss the effects of technology shocks on the optimal policies of consumption and the allocation of human capital across sectors.
    Keywords: Economic Growth, Physical and Human Capital Accumulation, Technology Shocks
    JEL: C61 C63 J24 O41 O33
    Date: 2008–11–05
  20. By: David Andolfatto (Federal Reserve Bank of St. Louis, Simon Fraser University, and the Rimini Centre for Economic Analysis); ;
    Abstract: Kocherlakota (2003) presents an example of a monetary economy where efficiency is enhanced with the introduction of a nominally risk-free bond that is specifically designed to be illiquid. In his environment, an asset market involving swaps of money for bonds effects a socially desirable redistribution of purchasing power that might otherwise be replicated by a policy of type-contingent money transfers. In this paper, I recast Kocherlakota’s model in a fully dynamic quasilinear model and characterize optimal interventions when type-contingent transfers are feasible and when they are not. When they are not, an illiquid bond is essential. However, I also find that an illiquid bond may remain essential even when type-contingent transfers are feasible.
    Date: 2009–01
  21. By: Nicolas L. Jacquet (School of Economics, Singapore Management University)
    Abstract: This paper considers the efficiency properties of risk-neutral workers’ mobility decisions in an equilibrium model with search frictions, but no search externalities, when the rent accruing to a match is split through bargaining. Matches are ex ante homogeneous and their true productivity is learnt after the match is formed. It is shown that the efficiency of worker turnover depends on contract enforceability, and that in the absence of complete enforceability the equilibrium fails to be efficient. This is because without complete enforceability firms cannot credibly offer workers contracts that will guarantee them the entire future of all potential future matches.
    Keywords: On-the-Job Search; Learning; Bargaining; Contracts; Enforceability
    JEL: J30 J6
    Date: 2007–09
  22. By: Alberto BUCCI
    Abstract: Using a balanced-growth model with physical and human capital accumulation, this article analyzes quantitatively the long run effects of changes in the saving rate and in income distribution (i.e., the shares of physical and human capital in income) on investment in human capital, growth of income, and the ratio of human to physical capital. In the long run the ratio of physical to human capital is constant, so that these two production factors can grow at the same rate. This rate is a function of the economy’s exogenous technological and preference parameters and depends positively on the share of skills invested in human capital formation. We also find that population growth is neither necessary nor conducive to economic growth and that the level of real income depends linearly on the level of human capital and is independent of population size.
    Keywords: Economic Growth, Human and Physical Capital Investment, Scale Effects
    JEL: O41 J22 J24
    Date: 2008–07–26
  23. By: Silva , José Ignacio; Toledo, Manuel
    Abstract: Recently, Pissarides (2008) has argued that the standard search model with sunk fixed matching costs increases unemployment volatility without introducing an unrealistic wage response in new matches. We revise the role of matching costs and show that when these costs are not sunk and, therefore, can be partially passed on to new hired workers in the form of lower wages, the amplication mechanism of fixed matching costs is considerably reduced and wages in new hired positions become more sensitive to productivity shocks.
    Keywords: unemployment volatility puzzle; search and matching; matching costs
    JEL: E32 J32 J64
    Date: 2009–05–25
  24. By: Alberto BUCCI; Davide LA TORRE
    Abstract: We present a two-sector endogenous growth model with human and physical capital accumulation in order to analyze the long run relationship between population growth and real per capita income growth. Learning is assumed to affect agents’ decision of how much to invest in formal education. Along the balanced growth path equilibrium population change may have a positive, negative, or neutral effect on economic growth depending on whether physical and human capital are complementary/substitutes for each other in the production of new human capital and on their degree of complementarity.
    Keywords: Economic Growth, Population Chang, Learning by using, Human Capital Investment, Physical Capital Accumulation
    JEL: O41 J24 J10
    Date: 2007–12–03
  25. By: Kosuke Aoki; Gianluca Benigno; Nobuhiro Kiyotaki
    Abstract: After liberalizing international transactions of financial assets, many countries experiencelarge swings in asset prices, capital flows, and aggregate production. This paper studies howthe adjustment to capital account liberalization depends upon the degree of development of adomestic financial system, and why the economy with an underdeveloped financial systemmay be vulnerable to shocks to the domestic and foreign finance. We construct a model of asmall open economy in which it is difficult to enforce debtors to repay their debts unless thedebts are secured by collateral, and assets usable as collateral for international borrowing aremore restricted than domestic borrowing.
    Keywords: capital flows, asset prices, domestic and international borrowing constraints
    JEL: F32 F37 F41
    Date: 2009–04
  26. By: Chen, Kaiji
    Abstract: This paper incorporates two features of housing in a life-cycle analysis of social security: housing as a durable good and housing market frictions. We find that with housing as a durable good unfunded social security substantially crowds out housing consumption throughout the life cycle. By contrast, aggregate non-durable consumption is higher when social security is present, although it is postponed until late in life. Moreover, in the presence of housing market frictions, social security lowers the aggregate home ownership rate and reduces the average size of owner-occupied housing. The effects of social security on housing position, furthermore, exhibit substantial heterogeneity across households of different income levels.
    Keywords: Durable Goods; Housing Market Frictions; Housing Tenure Choice; Social Security
    JEL: E62 H55 E21
    Date: 2009–05
  27. By: Mai Farid; ;
    Abstract: Empirical studies reveal persistence of macroeconomic variables to nominal shocks. However, theoretical models fail to match the data. This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model with vertical input-output production, imperfect competition and staggered prices at each stage of production to reconcile theoretical models with empirical observations. We find that output response to stage-specific technological change and demand shock is more persistent the greater the number of production stages and the larger the share of intermediate goods in final good production. Depending on the source of technological change, we may either have contractionary or expansionary impact on macroeconomic variables.
    Keywords: Vertical production chain; Staggered price contracts; Persistence; Technological change.
    JEL: E31 O33
  28. By: L. Rachel Ngai; Silvana Tenreyro
    Abstract: Every year during the second and thirdquarters (the "hot season") housing markets in the UKand the US experience systematic above-trend increases in both prices and transactions.During the fourth and first quarters (the "cold season"), house prices and transactions fallbelow trend. We propose a search-and-matching framework that sheds new light on themechanisms governing housing market fluctuations. The model has a "thick-market" effectthat can generate substantial differences in the volume of transactions and prices acrossseasons, with the extent of seasonality in prices depending crucially on the bargaining powerof sellers. The model can quantitatively mimic the seasonal fluctuations in transactions andprices observed in the UK and the US.
    Keywords: housing market, thick-market effects, search-and-matching, seasonality, house price fluctuations
    JEL: E0
    Date: 2009–04
  29. By: Roberto M. Samaniego (Department of Economics, George Washington University)
    Abstract: Using European data, this paper finds that (1) industry entry and exit rates are positively related to industry rates of investment-specific technical change (ISTC); (2) the sensitivity of industry entry and exit rates to cross-country differences in entry costs depends on industry rates of ISTC. The paper constructs a general equilibrium model in which the rate of ISTC varies across industries and new investment-specific technologies can be introduced by entrants or by incumbents. In the calibrated model, equilibrium behavior is consistent with stylized facts (1) and (2), provided the cost of technology adoption is increasing in the rate of ISTC.
    Keywords: Entry, exit, turnover, investment-specific technical change, entry costs, vintage capital, embodied technical change, lumpy investment
    JEL: D92 L26 O33 O41
    Date: 2008–04–02
  30. By: Alberto BUCCI
    Abstract: This paper analyzes the conditions under which, within a two-sector endogenous growth model with human and physical capital accumulation but without R&D-driven disembodied technological progress, it is possible to observe an ambiguous effect of population growth on economic growth, as empirical evidence suggests. We present three models. In each of them the engine of long-run growth is human capital accumulation. Population growth exerts ambiguous effects on economic growth only when human and physical capital are complementary for each other in the production of new human capital. This result is explained in terms of the interplay between the “dilution” and “accumulation” effects. In accordance with the growth literature exhibiting endogenous human capital accumulation and R&D activity, we also find that income growth can be positive even with stable population, that both the growth rate and the level of per-capita income are independent of population size, and finally that the level of per-capita income is proportional to per-capita human capital. We conclude that it is possible to reach the same results even without explicitly assuming endogenous and purposeful investment in research by firms
    Keywords: Population Size and Growth, Scale Effects, Per-Capita Income; Economic Growth, Human Capital Investment, Physical Capital Accumulation
    JEL: O41 J24 J10
    Date: 2008–06–09
  31. By: Ngai, Liwa Rachel; Samaniego, Roberto
    Abstract: Two issues related to mapping a multi-sector model into a reduced-form value-added model are often neglected: the composition of intermediate goods, and the distinction between the productivity indices for value added and for gross output. We illustrate their significance for growth accounting using the well known model of Greenwood, Hercowitz and Krusell (1997), who find that about 60% of economic growth can be attributed to investment-specific technical change (ISTC). When we recalibrate their model to account for the composition of intermediates, we find that ISTC accounts for an even greater share of post-war US growth.
    Keywords: growth accounting; Intermediate goods; investment-specific technical change; multisector growth models; value added
    JEL: E13 O30 O41 O47
    Date: 2009–06
  32. By: Harald Uhlig
    Abstract: The 2008 financial crisis is reminiscent of a bank run, but not quite. In particular, it is financial institutions withdrawing deposits from some core financial institutions, rather than depositors running on their local bank. These core financial institutions have invested the funds in asset-backed securities rather than committed to long-term projects. These securities can potentially be sold to a large pool of outside investors. The question arises, why these investors require steep discounts to do so. I therefore set out to provide a model of a systemic bank run delivering six stylized key features of this crisis. I consider two different motives for outside investors and their interaction with banks trading asset-backed securities: uncertainty aversion versus adverse selection. I shall argue that the version with uncertainty averse investors is more consistent with the stylized facts than the adverse selection perspective: in the former, the crisis deepens, the larger the market share of distressed core banks, while a run becomes less likely instead as a result in the adverse selection version. I conclude from that that the variant with uncertainty averse investors is more suitable to analyze policy implications. This paper therefore provides a model, in which the outright purchase of troubled assets by the government at prices above current market prices may both alleviate the financial crises as well as provide tax payers with returns above those for safe securities.
    JEL: E44 G21 G28
    Date: 2009–06

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