nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒07‒03
24 papers chosen by
Christian Zimmermann
University of Connecticut

  1. Conspicuous Consumption and Overlapping Generations? By Ronald Wendner
  2. "Business Cycle Implications of Internal Consumption Habit for New Keynesian Models" By Takashi Kano; James M. Nason
  3. Equity Returns and Business Cycles in Small Open Economies By Jahan-Parvar, Mohammad R.; Liu, Xuan; Rothman, Philip
  4. Offshoring and Unemployment: The Role of Search Frictions and Labor Minority By Devashish Mitra
  5. Labor Market Policy Evaluation in Equilibrium: Some Lessons of the Job Search and Matching Model By Pierre Cahuc; Thomas Le Barbanchon
  6. Social Security Reform in a Dynastic Life-Cycle Model with Endogenous Fertility By Radim Bohacek; Volha Belush
  7. Financial (in)stability, supervision and liquidity injections : a dynamic general equilibrium approach By Gregory, DE WALQUE; Olivier, PIERRARD; Abdelaziz, ROUABAH
  8. Search, Nash Bargaining and Rule of Thumb Consumers By José Emilio Boscá; Javier Ferri; Rafa Doménech
  9. Equilibria in a model with a search labour market and a matching marriage market By Bonilla, Roberto
  10. Temptation and Social Security in a Dynastic Framework By Cagri Seda Kumru; Chung Tran
  11. Maintenance and investment : Complements or Substitutes ? A Reappraisal By Raouf, BOUCEKKINE; Giorgio, FABBRI; Fausto, GOZZI
  12. Money and Endogenous Growth in a Cash-in-Advance Model with Social Status By Hung-Ju Chen; Jang-Ting Guo
  13. Inflation and welfare in long-run equilibrium with firm dynamics By Janiak, Alexandre; Monteiro, Paulo Santos
  14. Endogenous Labor Force Participation and Firing Costs By Moon, Weh-Sol
  15. Business Cycle Dependent Unemployment Insurance By Andersen, Torben M; Svarer, Michael
  16. Investments and the Holdup Problem in a Matching Market By Bester, Helmut
  17. Continuous-Time Overlapping Generations Models By Hippolyte d'ALBIS; Emmanuelle AUGERAUD-VÉRON
  18. Measuring Unemployment Insurance Generosity By Stéphane Pallage; Lyle Scruggs; Christian Zimmermann
  19. Capital misallocation and aggregate factor productivity By Azariadis, Costas; Kaas, Leo
  20. Human Capital Accumulation and Labour Market Equilibrium By Burdett, Ken; Carrillo-Tudela, Carlos; Coles, Melvyn
  21. Fertility Decisions and the Sustainability of Defined Benefit Pay-as-You-Go Pension Systems By Miriam Steurer
  22. Brain Drain in Globalization: A General Equilibrium Analysis from the Sending Countries' Perspective By Marchiori, Luca; Shen, I-Ling; Docquier, Frédéric
  23. Patience Cycles By Barnett, Richard C; Bhattacharya, Joydeep; Puhakka, Mikko
  24. They are even larger! More (on) puzzling labor market volatilities By Gartner, Hermann; Merkl, Christian; Rothe, Thomas

  1. By: Ronald Wendner
    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 generally a?ects 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 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 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: D91 E21 O40
    Date: 2009–05–05
  2. By: Takashi Kano (Faculty of Economics, University of Tokyo); James M. Nason (Research Department, Federal Reserve Bank of Atlanta)
    Abstract: This paper studies the implications of internal consumption habit for propagation and monetary transmission in new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian methods are employed to evaluate the role of internal consumption habit in NKDSGE model propagation and monetary transmission. Simulation experiments show that internal consumption habit often improves NKDSGE model fit to output and consumption growth spectra by dampening business cycle periodicity. Nonetheless, habit NKDSGE model fit is vulnerable to the nominal rigidity, to the choice of monetary policy rule, to the frequencies used for evaluation, and to spectra identified by permanent productivity shocks.
    Date: 2009–06
  3. By: Jahan-Parvar, Mohammad R.; Liu, Xuan; Rothman, Philip
    Abstract: This is the first paper in the literature to match key business cycle moments and long-run equity returns in a small open economy with production. These results are achieved by introducing three modications to a standard real business cycle model: (1) borrowing and lending costs are imposed to increase the volatility of the intertemporal marginal rate of substitution; (2) investment adjustment costs are assumed to make equity returns more volatile; and (3) GHH preferences are employed to smooth consumption. We also decompose the contributions of productivity, the world interest rate, and government expenditure shocks to the equity premium. Our results are based on data from Argentina, Brazil, and Chile.
    Keywords: Asset Pricing; Equity Returns; Dynamic Stochastic General Equilibrium Model; Real Business Cycle; Small Open Economy.
    JEL: G12 E32 G15 E44 F41
    Date: 2009–06–25
  4. By: Devashish Mitra
    Abstract: In this paper, in order to study the impact of offshoring on sectoral and economy wide rates of unemployment, we construct a two sector general equilibrium model in which unemployment is caused by search frictions. The model shows 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 economy wide 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. [IZA DP no. 4136]
    Keywords: trade; unemployment; offshoring; search frictions; labor minority
    Date: 2009
  5. By: Pierre Cahuc (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Center for Economic Research - CEPR, IZA - Institute for the Study of Labor); Thomas Le Barbanchon (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Unité de gestion de la direction de l'action régionale et des relations avec l'enseignement supérieur (DARES) - INRA)
    Abstract: We analyze the consequences of counseling provided to job seekers in a standard job search and matching model. It turns out that neglecting equilibrium effects induced by counseling can lead to wrong conclusions. In particular, counseling can increase steady state unemployment although counseled job seekers exit unemployment at a higher rate than the noncounseled. Dynamic analysis shows that permanent and transitory policies can have effects of opposite sign on unemployment.
    Keywords: evaluation, equilibrium effect, labor market policy
    Date: 2009–06–17
  6. By: Radim Bohacek; Volha Belush
    Abstract: This paper studies the effects of a fully funded social security reform with endogenous fertility in a detailed, general equilibrium life-cycle model with dynasties whose members differ in skills and life uncertainty. We find that as high skill households tend to save relatively more in assets than in children, models with exogenous fertility underestimate the aggregate capital stock in the PAYG steady state. These models also predict that the capital stock increases after the fully funded reform. However, because the high skill households respond to the reform by having more children and investing less in assets and intergenerational transfers, the average fertility increases and the aggregate capital stock falls. The welfare gains from the elimination of social security seem to more than compensate the agents for the lost insurance against life-span and earnings risks.
    Keywords: Fertility, Social Security, Fiscal Policy, Public Expenditures, Taxation.
    JEL: J13 H55 E62
    Date: 2009–01
  7. By: Gregory, DE WALQUE; Olivier, PIERRARD; Abdelaziz, ROUABAH
    Abstract: We develop a dynamic stochastic general equilibrium model with an heterogeneous banking sector. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbank market. Our aim is to understand the interactions between the banking sector and the rest of the economy, as well as the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real US data and used for simulations. We show that Based regulation reduces the steady state but improves the resilience of the economy to shocks, and that moving from Basel I to Basel II is procyclical. We also show that liquidity injections relieve financial instability but have ambiguous effects on output fluctuations
    Keywords: DGSE; Banking sector; Default risk; Supervision; Central Bank
    JEL: E13 E20 G21 G28
    Date: 2009–02–05
  8. By: José Emilio Boscá (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain); Rafa Doménech (BBVA Economic Research Department, Spain)
    Abstract: This paper analyses the effects of introducing typical Keynesian features, namely rule-of-thumb consumers and consumption habits, into a standard labour market search model. It is a well-known fact that labour market matching with Nash-wage bargaining improves the ability of the standard real business cycle model to replicate some of the cyclical properties featuring the labour market. However, when habits and rule-of-thumb consumers are taken into account, the labour market search model gains extra power to reproduce some of the stylised facts characterising the US labour market, as well as other business cycle facts concerning aggregate consumption and investment behaviour.
    Keywords: general equilibrium, labour market search, habits, rule-of-tumb consumers
    JEL: E24 E32 E62
    Date: 2009–06
  9. By: Bonilla, Roberto
    Abstract: I analyse an economy where a search labour market and a matching marriage market interact. The economy is populated by homogeneous workers, firms and marriage partners (MPs). Workers simultaneously search for firms in order to work and for MPs in order to marry. Firms post wages to attract workers. MPs look for workers in order to marry. I assume that married workers receive a pre-determined flow utility, and married MPs derive flow utility equal to the worker's earnings. This provides the link between the markets. Noisy search in the labour market generates a distribution of wages. I show that the so called married wage premium can be the consequence of frictions in both markets, without having to resort to the typical explanations. In one equilibrium, MPs marry all workers, regardless of their employment status. In a more interesting equilibrium, MPs marry only high earners, while workers accept wages that render them "unmarriageable". The workers' reservation wage must compensate them for the loss of marriageability in addition to the option of continued search for better wages. This affects the distributions of wages offered and earned, which are crucial in the MPs decision to marry/reject low earners.
    Keywords: Search; Married wage premium; matching markets
    JEL: J01
    Date: 2009–02–12
  10. By: Cagri Seda Kumru (School of Economics, University of New South Wales); Chung Tran (School of Economics, University of New South Wales)
    Abstract: We investigate welfare and aggregate implications of a pay as you go (PAYG) social security system in a dynastic framework in which agents have self-control problems. The presence of these two additional factors at the same time affects individuals’ intertemporal decision problems in two opposite directions. That is, on the one hand individuals prefer to save more because of their altruistic concerns, on the other hand, they prefer to save less because of their urge for temptation towards current consumption. Individuals’ efforts to balance between the long-term commitment (consumption smoothing and altruism) and the short-term urge for temptation result in self-control costs. In this environment the existence of social security system provides not only consumption smoothing and risk sharing mechanisms but also a channel that reduces the severity of temptation. We find that the adverse welfare effects of a PAYG system are further mitigated relative to the environments that incorporates altruism and self control issues separately.
    Keywords: Temptation; Self-control preferences; Altruism; Social security; Dynamic general equilibrium; Overlapping generations; Welfare
    JEL: E21 E62 H55
    Date: 2009–06
  11. By: Raouf, BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Giorgio, FABBRI; Fausto, GOZZI
    Abstract: A benchmark AK optimal growth model with maintenance expenditures and endogeneous utilization of capital is considered within an explicit vintage capital framework. Scrapping is endogenous, and the model allows for a clean distinction between age and usage dependent capital depreciation and obsolescence. It is also shown that in this set-up past investment profile completely determines the size of current maintenance expenditures. Among other findings, a closed-form solution to optimal dynamics is provided taking advantage of very recent development in optimal control of infinite dimensional systems. More importantly, and in contrast 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 together 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 programming; infinite dimensional problem
    JEL: E22 E32 O40
    Date: 2009–04–18
  12. By: Hung-Ju Chen (Department of Economics, National Taiwan University); Jang-Ting Guo (Department of Economics, University of California Riverside)
    Abstract: Motivated by the substantial increase of nominal money supply in the U.S. economy since late 2008, this paper examines the equilibrium growth effect of money/inflation within a standard one-sector AK model of endogenous growth with wealth-enhanced preferences for social status and the most generalized cash-in-advance constraint. We show that the sign for the correlation between money and output growth depends crucially on (i) the liquidity-constrained ratio of consumption to investment, and (ii) how the shadow price of physical capital responds to a change in the monetary growth rate. This money-growth correlation, as well as the growth effect of social status, turns out to be closely related to the local stability properties of the economy's balanced growth path(s).
    Keywords: Money, Endogenous Growth, Cash-in-Advance Constraint, Social Status, In- determinacy
    JEL: E52 O42
    Date: 2009–06
  13. By: Janiak, Alexandre (University of Chile and IZA); Monteiro, Paulo Santos (University of Warwick)
    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 infiation 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
  14. By: Moon, Weh-Sol
    Abstract: I construct a matching model to explain the labor market transition between employment, unemployment and nonparticipation, and evaluate the quantitative effects of firing costs. The model has several features that are distinguished from previous studies: endogenous labor force participation, different job-search decisions and imperfect insurance markets. I find that the model is able to account for the U.S. labor market, especially the gross labor-force transition rates. I also find that firing costs as a type of firing tax have a negative effect on the layoff rate, the job-finding probability and the participation rate. In particular, the effect of a decrease in the job-finding probability is greater than the effect of a decrease in the layoff rate, and this results in an increase in the unemployment-to-population ratio. Finally, firing costs make individuals' job tenures longer and skew the asset distribution to the right.
    Keywords: Search and Matching; Labor Force Participation; Firing Costs
    JEL: E24 J21 J65 J64
    Date: 2009–05–21
  15. By: Andersen, Torben M; Svarer, Michael
    Abstract: The consequences of business cycle contingencies in unemployment insurance systems are considered in a search-matching model allowing for shifts between "good" and "bad" states of nature. We show that not only is there an insurance argument for such contingencies, but also an incentive argument. If benefits are less distortionary in a recession than a boom, it follows that countercyclical benefits reduce average distortions compared to state independent benefits. We show that optimal benefits are state contingent and tend to reduce the structural (average) unemployment rate, although the variability of unemployment may increase.
    Keywords: business cycle; incentives; insurance; unemployment benefits,
    JEL: H4 J6
    Date: 2009–06
  16. By: Bester, Helmut
    Abstract: This paper studies investment incentives in the steady state of a dynamic bilateral matching market. Because of search frictions, both parties in a match are partially locked-in when they bargain over the joint surplus from their sunk investments. The associated holdup problem depends on market conditions and is more important for the long side of the market. In the case of investments in homogenous capital only the agents on the short side acquire ownership of capital. There is always underinvestment on both sides of the market. But when market frictions become negligible, the equilibrium investment levels tend towards the first-best.
    Keywords: Holdup Problem; Investments; Matching Market
    JEL: C78 D23 D92
    Date: 2009–06
  17. By: Hippolyte d'ALBIS; Emmanuelle AUGERAUD-VÉRON
    Date: 2009–06
  18. By: Stéphane Pallage; Lyle Scruggs; Christian Zimmermann
    Abstract: Unemployment insurance policies are multidimensional objects. They are typically defined by waiting periods, eligibility duration, benefit levels and asset tests when eligible, which make intertemporal or international comparisons difficult. To make things worse, labor market conditions, such as the likelihood and duration of unemployment matter when assessing the generosity of different policies. In this paper, we develop a methodology to measure the generosity of unemployment insurance programs with a single metric. We build a first model with such complex characteristics. Our model features heterogeneous agents that are liquidity constrained but can self-insure. We then build a second model that is similar, except that the unemployment insurance is simpler: it is deprived of waiting periods and agents are eligible forever with constant benefits. We then determine which level of benefits in this second model makes agents indifferent between both unemployment insurance policies. We apply this strategy to the unemployment insurance program of the United Kingdom and study how its generosity evolved over time.
    Keywords: Social policy, generosity, unemployment insurance, measurement
    JEL: E24 J65
    Date: 2009
  19. By: Azariadis, Costas; Kaas, Leo
    Abstract: We propose a sectoral-shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, a constant production possibilities frontier, and finitely many sectors producing the same good. Both the growth rate and total factor productivity in these economies respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to persistent and reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in the form of secured collateral loans, as in Kiyotaki-Moore (1997), and also as unsecured reputational loans suggested in Bulow-Rogoff (1989). Endogenous debt limits slow down capital reallocation, preventing the equalization of risk-adjusted equity yields across sectors. Economy-wide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP and sectoral growth rates. If sector productivities follow a symmetric two-state Markov process, many of our economies converge to a limit cycle alternating between mild expansions and abrupt contractions. We also find highly periodic and volatile limit cycles in economies with small amounts of collateral.
    Keywords: TFP; misallocation; sectoral shocks; collateral; reputation
    JEL: E32 O47 D90
    Date: 2009–06–15
  20. By: Burdett, Ken (University of Pennsylvania); Carrillo-Tudela, Carlos (University of Leicester); Coles, Melvyn (University of Essex)
    Abstract: We analyse an equilibrium labour market with on-the-job search and experience effects (where workers learn-by-doing). The analysis yields a standard Mincer wage equation with worker fixed effects and endogenously determined firm fixed effects. It shows that learning-by-doing increases equilibrium wage dispersion consistent with the data. Equilibrium sorting - where over time more experienced workers also tend to find and quit to better paid employment - has a significant impact on wage inequality. As the model yields a cross section distribution of wages paid with the 'right' structure (the density of wages paid is single peaked with a 'fat' Pareto right tail) and yields the 'right' time profile of worker wage outcomes (the initial 10 years of a worker's career are characterised by several job changes and rapid wage growth) it yields a new, coherent statistical structure for future applied work.
    Keywords: search, wage dispersion, human capital accumulation
    JEL: J24 J42 J64
    Date: 2009–06
  21. By: Miriam Steurer (School of Economics, The University of New South Wales)
    Abstract: The sustainability of a defined benefit pay-as-you-go (DBPAYG) pension system is investigated in the context of an overlapping-generations model of endogenous fertility with heterogeneous agents. The model places particular emphasis on the time costs of child rearing. It illustrates the mechanism by which such a pension system can increase the opportunity cost of having children and hence sow the seeds of its own destruction. The model is then extended to allow for fertility-based payments. Such a system is more likely to be sustainable. The model highlights a number of issues that are of relevance to a number of OECD countries that have generous DBPAYG pension systems and falling fertility rates.
    Keywords: Pay-as-you-go pension; Defined benefit; Overlapping generations; Endogenous fertility; Labor participation Rate; Heterogeneous agents
    JEL: H55 J13 J14
    Date: 2009–04
  22. By: Marchiori, Luca (Catholic University of Louvain); Shen, I-Ling (University of Geneva); Docquier, Frédéric (Catholic University of Louvain)
    Abstract: The paper assesses the global effects of brain drain on developing economies and quantifies the relative sizes of various static and dynamic impacts. By constructing a unified generic framework characterized by overlapping-generations dynamics and calibrated to real data, this study incorporates many direct impacts of brain drain whose interactions, along with other indirect effects, are endogenously and dynamically generated. Our findings suggest that the short-run impact of brain drain on resident human capital is extremely crucial, as it does not only determine the number of skilled workers available to domestic production, but it also affects the sending economy's capacity to innovate or to adopt modern technologies. The latter impact plays an important role particularly in a globalized economy where capital investments are made in places with higher production efficiencies ceteris paribus. Hence, in spite of several empirically documented positive feedback effects, those countries with high skilled emigration rates are the most candid victims to brain drain since they are least likely to benefit from the "brain gain" effect, and thus suffering from declines of their resident human capital.
    Keywords: brain drain, capital flow, development, human capital, remittances
    JEL: F22 J24 O15
    Date: 2009–06
  23. By: Barnett, Richard C; Bhattacharya, Joydeep; Puhakka, Mikko
    Abstract: There is a large body of evidence supporting the notion that a) those who grow up to be patient (forward-looking) do better in life compared to those who do not, and b) parents can inculcate the virtue of delayed gratification in their children by taking the right sort of actions. We study a dynamic model in which parents, for selfish reasons, invest resources to raise patient children. Patience raises the marginal return to human capital accumulation. The patient young do better in school, and hence, get more education but scrimp on investing in their own progeny's patience. This dynamic can generate intergenerational patience cycles. Generations coming of age with little patience will invest more in the productive capacity of their children, while those with greater patience invest more in their own productive capacity.
    Keywords: patience, delayed gratification, human capital
    JEL: E0
    Date: 2009–06–15
  24. By: Gartner, Hermann (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Merkl, Christian; Rothe, Thomas (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "This paper shows that the German labor market is more volatile than the US labor market at the business cycle frequency. Specifically, the volatility of the cyclical component of several labor market variables (e.g., the job-finding rate, the labor market tightness and vacancies) divided by the volatility of labor productivity is roughly twice as large as in the United States. We derive and simulate a simple model to explain this seemingly puzzling result. This new model provides explanations for this phenomenon, in particular the longer job tenure in Germany." (author's abstract, IAB-Doku) ((en))
    Keywords: Arbeitsmarktindikatoren - internationaler Vergleich, Beschäftigungsschwankung, offene Stellen, Arbeitsproduktivität, Konjunkturabhängigkeit, Betriebszugehörigkeit, Beschäftigungsdauer, Arbeitslosenquote, labour turnover, Kündigung - Quote, Lohnhöhe, institutionelle Faktoren, Lohnfindung, matching - Quote, Produktivitätsentwicklung, USA, Bundesrepublik Deutschland
    JEL: J6 E24 E32
    Date: 2009–06–05

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