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on Dynamic General Equilibrium |
| 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, consump- tion, 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 mod- els 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 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_23&r=dge |
| By: | Hiroaki Miyamoto; Yuya Takahashi |
| Abstract: | This paper studies the impact of long-run productivity growth on job finding and separation rates, and thus the unemployment rate, using a search and matching model. We incorporate disembodied technological progress and on-the-job search into the endogenous job separation model of Mortensen and Pissarides (1994). The incorporation of on-the-job search allows faster growth to reduce unemployment by decreasing the separation rate and inducing job creation. We demonstrate that introducing on-the-job search substantially improves the ability of the Mortensen and Pissarides model to explain the impact of growth on unemployment. Our quantitative analysis shows that our model increases the magnitude of the negative impact of growth on unemployment compared to the standard matching model with disembodied technological progress. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0734&r=dge |
| By: | Hiroshi Aiura (Faculty of Economics, Oita University (Japan)); Yasuhiro Sato (Graduate School of Economics, Osaka University (Japan)) |
| Abstract: | This paper develops an overlapping generations model that involves endogenous determination of fertility and explicit city structure. We provide conditions under which there exists a unique steady state, which can replicate spatial features of demography observed in Japanese cities. We also provide comparative steady state analysis by calibration. |
| Keywords: | city structure, land rent, fertility, demography |
| JEL: | J11 R11 R23 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0918&r=dge |
| By: | Hammad Qureshi (Department of Economics, Ohio State University) |
| Abstract: | The idea that expectations about future economic fundamentals can drive business cycles dates back to the early twentieth century. However, the standard real business cycle (RBC) model fails to generate positive comovement in output, consumption, labor-hours and investment in response to news shocks. This paper proposes a simple and intuitive solution to this puzzling feature of the RBC model, based on a mechanism that has strong empirical support: learning-by-doing (LBD). First, we show that the one-sector RBC model augmented by LBD can generate aggregate comovement in response to news shock about technology. Second, we show that in the two-sector RBC model, LBD along with an intratemporal adjustment cost can generate sectoral comovement in response to news about three types of shocks: i) neutral technology shock, ii) consumption technology shock, and iii) investment technology shock. We show that these results hold for contemporaneous technology shocks and for different specifications of LBD. |
| Keywords: | News Shocks, Learning-by-Doing, Pigou Cycles |
| JEL: | E3 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:osu:osuewp:09-06&r=dge |
| By: | Katsuhiko Hori; Katsunori Yamada |
| Abstract: | This paper combines three prototype endogenous growth models, themodels with human capital accumulation introduced by Uzawa [1965] andLucas [1988], variety expansion by Romer [1990], and quality improvementsby Aghion and Howitt [1992], in order to investigate how these threeengines of growth interact. We show that a subsidy to human capital accumulation has a positive impact on R&D effort, as well as on human capital accumulation. On the other hand, a subsidy to R&D sectors does not affect human capital accumulation in our model. Moreover, we show that equilibrium dynamics is locally saddle-path stable around the steady growth path. It suggests that Schumpeterian growth models a la Howitt [1999] should share the locally saddle-path stable property. Finally, since in our model the percapita output growth rate is endogenously determined by both technology improvements and human capital accumulation, it bridges the gap between the literature on Schumpeterian growth models and that on growth empirics. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0731&r=dge |
| By: | Bulent Guler; Faith 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. |
| Keywords: | Search theory ; Unemployment ; Wages |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:426&r=dge |
| By: | Federico Ravenna; Carl E. Walsh |
| Abstract: | We explore the distortions in business cycle models arising from inefficiencies in price setting and in the search process matching firms to unemployed workers, and the implications of these distortions for monetary policy. To this end, we characterize the tax instruments that would implement the first best equilibrium allocations and then examine the trade-offs faced by monetary policy when these tax instruments are unavailable. Our findings are that the welfare cost of search inefficiency can be large, but the incentive for policy to deviate from the inefficient flexible-price allocation is in general small. Sizable welfare gains are available if the steady state of the economy is inefficient, and these gains do not depend on the existence of an inefficient dispersion of wages. Finally, the gains from deviating from price stability are larger in economies with more volatile labor flows, as in the U.S. |
| Keywords: | Labor market |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2009-12&r=dge |
| By: | Kilponen , Juha (Bank of Finland Research); Vanhala, Juuso (Bank of Finland Research) |
| Abstract: | This paper focuses on productivity dynamics of a firm-worker match as a potential explanation for the ‘unemployment volatility puzzle’. We let new matches and continuing jobs differ in terms of productivity level and sensitivity to aggregate productivity shocks. As a result, new matches have a higher destruction rate and lower, but more volatile, wages than old matches, as new hires receive technology associated with the latest vintage. In our model, an aggregate productivity shock generates a persistent productivity difference between the two types of matches, creating an incentive to open new productive vacancies and to destroy old matches that are temporarily less productive. The model produces a well behaved Beveridge curve, despite endogenous job destruction and more volatile vacancies and unemployment, without needing to rely on differing wage setting mechanisms for new and continuing jobs. |
| Keywords: | matching; productivity shocks; new hires; continuing jobs; job flows; Beveridge curve; vintage structure |
| JEL: | E24 E32 J64 |
| Date: | 2009–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_015&r=dge |
| By: | Ljungwall, Christer (China Economic Research Center); Gao, Xu (World Bank, China Group, Beijing Office) |
| Abstract: | This paper investigates the sources of business cycle fluctuations in China and India since 1978/81. Under the framework of a standard neoclassical open economy model with time-varying frictions (wedges), we study the relative importance of efficiency, labor, investment and government consumption wedges on the business cycle phenomenon. This enables us to contrast and compare the two countries’ experience in a way remarkably different from previous studies. The results for both China and India show that efficiency wedge is the main source of economic fluctuations, while the investment wedge and government consumption wedge played minor roles in generating business cycles. |
| Keywords: | Business cycle fluctuations; Business cycle accounting; China; India |
| JEL: | E32 E37 O47 O53 |
| Date: | 2009–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hacerc:2009-007&r=dge |
| By: | Martin M. Andreasen (Bank of England and CREATES) |
| Abstract: | This paper argues that a specification of stochastic volatility commonly used to analyze the Great Moderation in DSGE models may not be appropriate, because the level of a process with this specification does not have conditional or unconditional moments. This is unfortunate because agents may as a result expect productivity and hence consumption to be inifinite in all future periods. This observation is followed by three ways to overcome the problem. |
| Keywords: | Great Moderation, Productivity shocks, and Time-varying coe¢ cients |
| JEL: | E10 E30 |
| Date: | 2009–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-29&r=dge |
| By: | Faith Guvenen; Burhanettin Kuruscu |
| Abstract: | In this paper, we construct a parsimonious overlapping-generations model of human capital accumulation and study its quantitative implications for the evolution of the U.S. wage distribution from 1970 to 2000. A key feature of the model is that individuals differ in their ability to accumulate human capital, which is the main source of wage inequality in this model. We examine the response of this model to skill-biased technical change (SBTC), which is modeled as an increase in the trend growth rate of the price of human capital starting in the early 1970s. The model displays behavior that is consistent with several important trends observed in the US data, including the rise in overall wage inequality; the fall and subsequent rise in the college premium, as well as the fact that this behavior was most pronounced for younger workers; the rise in within-group inequality; the stagnation in median wage growth; and the small rise in consumption inequality despite the large rise in wage inequality. We consider different scenarios regarding how individuals? expectations evolve during SBTC. Specifically, we study the case where individuals immediately realize the advent of SBTC (perfect foresight), and the case where they initially underestimate the future growth of the price of human capital (pessimistic priors), but learn the truth in a Bayesian fashion over time. Lack of perfect foresight appears to have little effect on the main results of the paper. Overall, the model shows promise for explaining a diverse set of wage distribution trends observed since the 1970s in a unifying human capital framework. |
| Keywords: | Wages ; Human capital ; Productivity ; Consumption (Economics) |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:427&r=dge |
| By: | Ivan Vidangos |
| Abstract: | This paper assesses the quantitative importance of a number of sources of income risk for household welfare and precautionary saving. To that end I construct a lifecycle consumption model in which household income is subject to shocks associated with disability, health, unemployment, job changes, wages, work hours, and a residual component of household income. I use PSID data to estimate the key processes that drive and affect household income, and then use the consumption model to: (i) quantify the welfare value to consumers of providing full, actuarially fair insurance against each source of risk and (ii) measure the contribution of each type of shock to the accumulation of precautionary savings. I find that the value of fully insuring disability, health, and unemployment shocks is extremely small (well below 1/10 of 1 percent of lifetime consumption in the baseline model). The gains from insuring shocks to the wage and to the residual component of household income are significantly larger (above 1% and 2% of lifetime consumption, respectively). These two shocks account for more than 60% of precautionary wealth. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-14&r=dge |
| By: | Espen Henriksen; Finn E. Kydland; Roman Sustek |
| Abstract: | We document that, at business cycle frequencies, fluctuations in nominal variables, such as aggregate price levels and nominal interest rates, are substantially more synchronized across countries than fluctuations in real output. To the extent that domestic nominal variables are determined by domestic monetary policy, and central banks generally attempt to keep the domestic nominal environment stable, this might seem surprising. We ask if a parsimonious international business cycle model can account for this aspect of cross-country aggregate fluctuations. It can. Due to spillovers of technology shocks across countries, expected future responses of national central banks to fluctuations in domestic output and inflation generate movements in current prices and interest rates that are synchronized across countries even when output is not. Even modest spillovers produce cross-country correlations such as those in the data. |
| JEL: | E31 E32 E43 F42 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15123&r=dge |
| By: | Thomas Hintermaier (Institute for Advanced Studies (IHS), Vienna); Winfried Koeniger (Queen Mary, University of London, and IZA) |
| Abstract: | We provide a model with endogenous portfolios of secured and unsecured household debt. Secured debt is collateralized by durables whereas unsecured debt can be discharged in bankruptcy procedures. We show that the model matches the main quantitative characteristics of observed wealth and debt portfolios in the US and some of the observed changes over time. Furthermore, we establish two quantitative results. Firstly, modest levels of risk aversion are necessary to match observed debt portfolios. Secondly, durables do not improve consumers' access to unsecured credit, and plausible variations of durable exemptions in bankruptcy procedures have very small effects on the equilibrium. |
| Keywords: | Household debt portfolios, Durables, Collateral, Income risk, Bankruptcy |
| JEL: | E21 D91 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp646&r=dge |
| By: | Kilponen, Juha (Bank of Finland Research) |
| Abstract: | This paper derives and estimates an aggregate Euler consumption equation which allows one to compare the importance of collateral constraints and non-separability of consumption and leisure as alternative sources of excess sensitivity of consumption to current income. Estimation results suggest that during a severe financial distress both non-separability and collateral constraints are needed to capture excess sensitivity of consumption to current economic conditions. During more tranquil times, evidence on collateral effects is more limited and non-separability is sufficient to make the Euler consumption equation agree well with the data. |
| Keywords: | housing; financial distress; excess sensitivity of consumption |
| JEL: | E21 E32 E44 |
| Date: | 2009–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_009&r=dge |
| By: | Yi Wen |
| Abstract: | The profession has been longing for closed-form solutions to consumption functions under uncertainty and borrowing constraints. This paper proposes an analytical approach to solving buffer-stock saving models with both idiosyncratic and aggregate uncertainties. It is shown analytically that an individual’s optimal consumption plan under uncertainty follows the rule of thumb: Consumption is proportional to a target wealth with the marginal propensity to consume depending on the state of the macroeconomy. The method is applied to addressing two long- standing puzzles: the "excess smoothness" and "excess sensitivity" of consumption with respect to income changes. Some of my findings sharply contradict the conventional wisdom. |
| Keywords: | Saving and investment ; Income |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-26&r=dge |
| By: | Xavier Freixas; Antoine Martin; David Skeie |
| Abstract: | A major lesson of the recent financial crisis is that the ability of banks to withstand liquidity shocks and to provide lending to one another is crucial for financial stability. This paper studies the functioning of the interbank lending market and the optimal policy of a central bank in response to both idiosyncratic and aggregate shocks. In particular, we consider how the interbank market affects a bank's choice between holding liquid assets ex ante and acquiring such assets in the market ex post. We show that a central bank should use different tools to manage different types of shocks. Specifically, it should respond to idiosyncratic shocks by lowering the interest rate in the interbank market and address aggregate shocks by injecting liquid assets into the banking system. We also show that failure to adopt the optimal policy can lead to financial fragility. |
| Keywords: | Interbank market ; Banks and banking, Central ; Bank liquidity ; Interest rates |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:371&r=dge |