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on Dynamic General Equilibrium |
| By: | Federico Ravenna; Carl E. Walsh |
| Abstract: | In this paper, we derive a linear-quadratic model for monetary policy analysis that is consistent with sticky prices and search and matching frictions in the labor market. We show that the second-order approximation to the welfare of the representative agent depends on inflation and "gaps" that involve current and lagged unemployment. Our approximation makes explicit how the costs of fluctuations are generated by the presence of search frictions. These costs are distinct from the costs associated with relative price dispersion and fluctuations in consumption that appear in standard new Keynesian models. We use the model to analyze optimal monetary policy under commitment and discretion and to show that the structural characteristics of the labor market have important implications for optimal policy. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2009-15&r=dge |
| By: | Kazumasa, Oguro; Junichiro , Takahata; Manabu, Shimasawa |
| Abstract: | In this paper, we present an OLG simulation model with endogenous fertility in order to analyze the relationship between child benefit and fiscal burden in Japan. Our simulation results show that expansion of the child benefit will improve the welfare of current and future generations. On the other hand, our findings show that we cannot expect a significant long-term improvement in welfare solely from implementing a policy of increasing the consumption tax. If both the sustainability of the fiscal budget and the improvement of the welfare of current and future generations are requirements, we will need to promote a strategy consisting of such components as a policy-mix that includes both child benefit expansion and additional fiscal reform, i.e. increasing the consumption tax. Implementation of such a policy-mix could be expected to yield a higher economic level in the welfare of current and future generations than could be expected solely from consumption tax reform. |
| Keywords: | Computable general equilibrium (CGE) model; overlapping generations (OLG); child benefit; endogenous fertility |
| JEL: | E62 J13 H55 E17 D61 J11 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16132&r=dge |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:iei:wpaper:0901&r=dge |
| By: | INABA Masaru; NUTAHARA Kengo |
| Abstract: | Many researches that apply business cycle accounting (hereafter, BCA) to actual data conclude that models with investment frictions or investment wedges are not promising for modeling business cycle dynamics. In this paper, we apply BCA to artificial data generated by a variant model of Carlstrom and Fuerst (1997, American Economic Review), which is one of the representative models with investment frictions. Based on our findings, BCA leads us to conclude that models with investment wedges are not promising according to the criteria of BCA, even though the true model contains investment frictions. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:09027&r=dge |
| By: | Regis Barnichon |
| Abstract: | This paper presents a search model of unemployment with a new mechanism of job separation based on firms' demand constraints. The model is consistent with the cyclical behavior of labor market variables and can account for three stylized facts about unemployment that the Mortensen-Pissarides (1994) model has difficulties explaining jointly: (i) the unemployment-vacancy correlation is negative, (ii) the contribution of the job separation rate to unemployment fluctuations is small but non-trivial, (iii) movements in the job separation rate are sharp and short-lived while movements in the job finding rate are persistent. In addition, the model can rationalize two hitherto unexplained findings: why unemployment inflows were less important in the last two decades, and why the asymmetric behavior of unemployment weakened after 1985. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-24&r=dge |
| By: | Costas Azariadis; Leo Kaas |
| 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: | Industrial productivity |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-28&r=dge |
| By: | David Lagakos |
| 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: | Retail trade ; Technology ; Productivity |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:428&r=dge |
| By: | Adjemian, S.; Cahn, C.; Devulder, A.; Maggiar, N. |
| Abstract: | In this paper, we try to illustrate the interest of the Bayesian approach for the evaluation of economic policies, often realised by analysing the response of the economy to a standard shock. We present a Stochastic Dynamic General Equilibrium model for the euro area. The Bayesian estimation gives a measure of the uncertainty on the parameters, from which we can derive the uncertainty of the responses to standard shocks. As an illustration, we simulate the effects of a fiscal shock (announced VAT increase). |
| Keywords: | DSGE, Euro zone, Nominal rigidities, Bayesian estimation. |
| JEL: | E4 E5 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:236&r=dge |
| By: | Pengfei Wang; Yi Wen |
| Abstract: | Why are asset prices so much more volatile and so often detached from their fundamentals? Why does the burst of financial bubbles depress the real economy? This paper addresses these questions by constructing an infinite-horizon heterogeneous-agent general-equilibrium model with speculative bubbles. We show that agents are willing to invest in asset bubbles even though they have positive probability to burst. We prove that any storable goods, regardless of their intrinsic values, may give birth to bubbles with market prices far exceeding their fundamental values. We also show that perceived changes in the bubbles probability to bust can generate boom-bust cycles and produce asset price movements that are many times more volatile than the economy's fundamentals, as in the data. |
| Keywords: | Financial crises ; Speculation ; Asset pricing |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-29&r=dge |
| By: | Sharon Harrison (Barnard College, Columbia University); Mark Weder (University of Adelaide) |
| Abstract: | Annualized output growth in the United States was highest during the 1920s, as compared to any other of Fields (2003, 2009) growth cycles. This motivates us to address the causes of the Roaring Twenties in the United States. In particular, we use a version of the real business cycle model to test the hypothesis that an extraordinary pace of productivity growth was the driving factor. Our motivation comes from the abundance of evidence of signi cant technological progress during this period, fed by innovations in manufacturing and the widespread introduction of electricity. Our estimated total factor productivity series generate arti cial model output that shows high conformity with the data: the model economy successfully replicates the boom years from 1922-1929. |
| Keywords: | Real Business Cycles, Roaring Twenties. |
| JEL: | E32 N12 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:brn:wpaper:0902&r=dge |
| By: | Olayeni, Olaolu Richard |
| Abstract: | Motivated by the way a small open economy should react to business cycles, we have estimated a small open economy (SOE) model for Nigeria. This is with a view to understanding how the Nigerian economy should be managed in the face of a cycle such as the current global meltdown. Our SOE model is used to generate dummy observation priors for the VAR in line with the BVAR-DSGE technique. We consider four monetary policy rules and estimate each of the resulting models using DYNARE 4.0.2. We find that the Central Bank of Nigeria (CBN) places little weight on the exchange rate behaviour in reacting to the cycles, resulting in overshooting and persistence in the exchange rate but strongly reacts to the behaviour of inflation and, to a lesser degree, of output, output gap or its growth following the shocks. We conclude that it will be important for the CBN to pursue a guided exchange rate policy by actively responding to the exchange rate movement to avoid overshooting and persistence, that the terms of trade must be endogenize and that there is scope for the CBN to learn from past policy outcome by building a much stronger feedback. |
| Keywords: | BVAR-DSGE; SOE; Nigeria |
| JEL: | D58 C11 C01 |
| Date: | 2009–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16180&r=dge |
| By: | Daniel Mulino |
| Abstract: | In a two-period OLG framework, there is only one rate of population growth at which the competitive equilbrium outcome is also the golden rule outcome. I show that this is the welfare minimizing outcome for agents. Moreover, I show that as population growth increases beyond the welfare minimizing level, agents are better off even as the economy becomes more dynamically inef_cient. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2005-19&r=dge |
| By: | Corseuil, Carlos H. L. |
| Abstract: | In this paper we build an integrated framework of the labor market in which worker replacement, job creation and job destruction are decided simultaneously at the firm level, providing a rigorous instrument for the analysis of worker flows. The main features of the model are uncertainty related to worker X firm match quality and search frictions. Worker flow components are decided as firms learn about the quality of their matches. A negative cor- relation between replacement and job creation arises from this mechanism. The model also provides several implications for firm dynamics, which are all confirmed by related empirical papers. |
| Keywords: | worker flows; firm dynamics |
| JEL: | J63 J64 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16157&r=dge |
| By: | Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stéphane Moyen (Deutsche Bundesbank, Taunusanlage 5, D-60329 Frankfurt am Main, Germany.) |
| Abstract: | This paper quantifies the deterioration of achievable stabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale DSGE model, we introduce through a simple signal extraction problem, an imperfect knowledge configuration where price and wage setters wrongly doubt about the determination of the central bank to leave unchanged its long-term inflation objective in the face of inflationary shocks. The magnitude of private sector learning has been calibrated to match the volatility of US inflation expectations at long horizons. Given such illustrative calibrations, we find that the costs of maintaining a given inflation volatility under weak credibility could amount to 0.25 pp of output gap standard deviation. JEL Classification: E4, E5, F4. |
| Keywords: | Monetary policy; Imperfect credibility; Signal extraction. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901065&r=dge |
| By: | Kopecky, Karen A.; Koreshkova, Tatyana |
| Abstract: | We consider a life-cycle model with idiosyncratic risk in labor earnings, out-of-pocket medical and nursing home expenses, and survival. Partial insurance is available through welfare, Medicaid, and social security. Calibrating the model to the U.S., we find that nursing home expenses play an important role in the savings of the wealthy. In our policy analysis, we find that elimination of out-of-pocket expenses through public health care would reduce the capital stock by 12 percent, Medicaid and old-age welfare programs crowd out 44 percent of savings and greatly increase wealth inequality, and social security effects are influenced by out-of-pocket health expenses. |
| Keywords: | social insurance; medical expenses; nursing home expenses; wealth inequality; savings |
| JEL: | I18 E21 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16197&r=dge |
| By: | Strulik, Holger; Trimborn, Timo |
| Abstract: | Can a large-scale defcit spending program speed up recovery after recession? To answer that question we calibrate a standard neoclassical growth model with US data and assume that an exogenous shock has driven aggregate output far below steady-state level. We calibrate the model such that a permanent increase of government expenditure is effective in raising output. We then show that "fiscal stimulus", i.e. a temporary increase of government expenditure is not only ineffective but detrimental. Even before the spending program expires, aggregate output is lower than it could be without fiscal stimulus. We show the generality of this result w.r.t. size and persistence of the shock, size of the government spending multiplier, and the scale and duration of the stimulus program. Using a phase diagram we provide the economic intuition for our unpleasant finding and explain why, generally, private capital stock reaches its lowest level when a deficit spending program expires. We also show how an accompanying temporary cut of capital income taxes helps to prevent the negative repercussion of deficit spending on economic recovery. |
| Keywords: | deficit spending, government spending multiplier, economic recovery, economic growth |
| JEL: | E60 H30 H50 O40 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-421&r=dge |