nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒08‒16
seventeen papers chosen by
Christian Zimmermann
University of Connecticut

  1. A Three State Model of Worker Flows in General Equilibrium By Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
  2. Aggregate Labor Market Outcomes: The Role of Choice and Chance By Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
  3. Search, Nash Bargaining and Rule of Thumb Consumers By J.E. Boscá; R. Doménech; J. Ferri
  4. Trending Current Accounts By Horag Choi; Nelson C. Mark
  5. Habit Formation, Interest-Rate Control and Equilibrium Determinacy By Seiya Fujisaki
  6. Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy By Hernandez-Verme, Paula; Wang, Wen-Yao
  7. Long-Run Impacts of Inflation Tax with Endogenous Capital Depreciation By Fujisaki, Seiya; Mino, Kazuo
  8. Transitional Dynamics in a Growth Model with Government Spending, Technological Progress and Population Change By Alberto Bucci; Massimo Florio; Davide La Torre
  9. A Parsimonious Macroeconomic Model for Asset Pricing By Fatih Guvenen
  10. Learning, Knowledge Diffusion and the Gains from Globalization By Kunal Dasgupta
  11. A Dynamic Model of Economic Growth in a Small Tourism Driven Economy By Schubert, Stefan Franz; Brida, Juan Gabriel
  12. Consumption and Labor Supply with Partial Insurance: An Analytical Framework By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  13. Coping with Externalities in Tourism - A Dynamic Optimal Taxation Approach By Schubert, Stefan Franz
  14. Dynamic Effects of Oil Price Shocks and their Impact on the Current Account By Schubert, Stefan Franz
  15. Financial Frictions and Monetary Transmission By Uluc Aysun; Ryan Brady; Adam Honig
  16. A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds By Christopher D. Carroll; Olivier Jeanne
  17. Costly Portfolio Adjustment By Yosef Bonaparte; Russell Cooper

  1. By: Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
    Abstract: We develop a simple model featuring search frictions and a nondegenerate labor supply decision along the extensive margin. The model is a standard version of the neoclassical growth model with indivisible labor with idiosyncratic shocks and frictions characterized by employment loss and employment opportunity arrival shocks. We argue that it is able to account for the key features of observed labor market flows for reasonable parameter values. Persistent idiosyncratic productivity shocks play a key role in allowing the model to match the persistence of the employment and out of the labor force states found in individual labor market histories.
    JEL: E24 J22 J64
    Date: 2009–08
  2. By: Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
    Abstract: Commonly used frictional models of the labor market imply that changes in frictions have large effects on steady state employment and unemployment. We use a model that features both frictions and an operative labor supply margin to examine the robustness of this feature to the inclusion of a empirically reasonable labor supply channel. The response of unemployment to changes in frictions is similar in both models. But the labor supply response present in our model greatly attenuates the effects of frictions on steady state employment relative to the simplest matching model, and two common extensions. We also find that the presence of empirically plausible frictions has virtually no impact on the response of aggregate employment to taxes.
    JEL: E24 J22 J64
    Date: 2009–08
  3. By: J.E. Boscá; R. Doménech; J. Ferri
    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-thumb consumers
    JEL: E24 E32 E62
    Date: 2009–06
  4. By: Horag Choi; Nelson C. Mark
    Abstract: Trending current accounts pose a challenge for intertemporal open-economy macro models. This paper shows that a two-country representative-agent business cycle model is able to explain the historical time-paths of the US and Japanese current accounts, both of which display trends but in opposite directions. Households have a state-dependent subjective discount factor such that they become relatively impatient (patient) when societal consumption is abnormally high (low). We present agents in the model with historical observations on the exogenous state variables, run the economy, and compare the current account implied by the model with the data. We find that the model generates national saving behavior that matches the current account's trend. Investment dynamics are important for explaining current account fluctuations around the trend, but not for the trend itself. The model also accounts for the timing of cyclical current account fluctuations around the trend.
    JEL: F3 F41
    Date: 2009–08
  5. By: Seiya Fujisaki (Graduate School of Economics, Osaka University)
    Abstract: We examine macroeconomic stability of a monetary economy with habit formation in consumption. We assume that monetary authority controls the rate of nominal interest in response to inflation and output gap. We show that in the presence of habit persistence not only active but also passive monetary policy can generate equilibrium determinacy under empirically plausible values of the elasticity of intertemporal substitution in felicity.
    Keywords: equilibrium determinacy, habit formation, Taylor rule, endogenous labor.
    JEL: E21 E52 O42
    Date: 2009–08
  6. By: Hernandez-Verme, Paula; Wang, Wen-Yao
    Abstract: We model a typical Asian-crisis-economy using dynamic general equilibrium tech-niques. Exchange rates obtain from nontrivial fiat-currencies demands. Sudden stops/bank-panics are possible, and key for evaluating the merits of alternative ex-change rate regimes. Strategic complementarities contribute to the severe indetermi-nacy of the continuum of equilibria. The scope for existence and indeterminacy of equilibria and dynamic properties are associated with the underlying policy regime. Binding multiple reserve requirements promote stability under floating but increase the scope for panic equilibria under both regimes. Backing the money supply acts as a stabilizer only in fixed regimes, but reduces financial fragility under both regimes.
    Keywords: Sudden stops; Bank runs; Exchange rate regimes; Multiple reserve requirements; Dynamic Stochastic General Equilibrium; Open Economy Macroeconomics; International Financial crises.
    JEL: G14 E43 F34 E31 O53 E44 G33 F33 O11 F32 E58 E42 O16 E52 E65 F41 F31 G21
    Date: 2009–03–05
  7. By: Fujisaki, Seiya; Mino, Kazuo
    Abstract: This paper examines the long-run impact of inflation tax in the context of a generalized Ak growth model in which the rate of capital depreciation is endogenously determined. It is assumed that the rate of capital depreciation positively depends on capital utilization rate and negatively depends on maintenance spending. Money is introduced via a cash in advance constraint that may apply to the maintenance expenditure as well as to consumption and investment spending. We find that the long-run effects of inflation tax are more complex than those obtained in the monetary Ak growth model with a fixed capital depreciation rate. In particular, the relation between inflation and growth is highly sensitive to the specifications of the capital depreciation technology as well as to the forms of cash-in-advance constraint.
    Keywords: cash-in-advance constraint; AK growth model; endogenous capital depreciation; maintenance expenditures
    JEL: E22
    Date: 2009–07–13
  8. By: Alberto Bucci (University of Milan); Massimo Florio (University of Milan); Davide La Torre (University of Milan)
    Abstract: Abstract This paper extends public spending-based growth theory along three directions: we assume that exogenous and constant technological progress does exist and that both population change and the ratio of government expenditure to income follow a logistic trajectory. By focusing on the choices of a benevolent social planner we find that, if the inverse of the intertemporal elasticity of substitution in consumption is sufficiently high, the ratio of consumption to private physical capital converges towards zero when time goes to infinity. Through two examples we see that, depending on the form of the underlying aggregate production function and on whether, for given production function, technological progress equals zero or a positive constant, our model may or may not yield an asymptotic balanced growth path (ABGP) equilibrium. When there is no exogenous technological progress, an equilibrium where population size, the ratio of government spending to total income and the ratio of consumption to private physical capital are all constant does exist and the equilibrium is a saddle point. In case of positive technological progress numerical simulations show that the model still exhibits an ABGP equilibrium.
    Date: 2009–02–24
  9. By: Fatih Guvenen
    Abstract: In this paper, I study asset prices in a two-agent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices that have been documented in the literature, such as a high equity premium; relatively smooth interest rates; procyclical variation in stock prices; and countercyclical variation in the equity premium, in its volatility, and in the Sharpe ratio. While the model also reproduces the long-horizon predictability of the equity premium, the extent of predictability is smaller than in the data. In this model, the risk-free asset market plays a central role by allowing the non-stockholders (who have low EIS) to smooth the fluctuations in their labor income. This process concentrates nonstockholders’ aggregate labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non-stockholders in the US data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model’s ability to generate a countercyclical equity premium. Finally, when it comes to business cycle performance the model’s progress has been more limited: consumption is still too volatile compared to the US data, whereas investment is still too smooth. These are important areas for potential improvement in this framework.
    JEL: E21 E32 E44 G12
    Date: 2009–08
  10. By: Kunal Dasgupta
    Abstract: We develop a dynamic, general equilibrium model to understand how multinationals affect host countries through knowledge diffusion. Workers learn from their managers and knowledge diffusion takes place through worker mobility. We identify two forces that determine wages : the labour demand effect and the learning effect. The former tends to raise wages while the latter tends to reduce it. We show that in a model without learning, an integrated steady-state equilibrium in which incumbent host country managers operate alongside multinationals, can never be a Pareto improvement for the host country. In contrast, we present a novel mechanism through which a Pareto improvement occurs in the presence of learning dynamics. We study how integration affects the life time earnings of agents and the degree of inequality in the host country, as well as, analyze the pattern of multinational activity. In the quantitative section of the paper, we calibrate our model to fit key moments from the U.S. wage distribution and quantify gains from integration. Our estimates suggest that learning produces welfare gains that range from 2% for middle-income countries to 43% for the low-income countries.
    Keywords: Multinationals, knowledge di¤usion, learning, welfare gains, worker mobility
    JEL: F23
    Date: 2009–07–30
  11. By: Schubert, Stefan Franz; Brida, Juan Gabriel
    Abstract: The paper studies the dynamics of economic growth caused by an increase in the growth rate of tourism demand. We develop a simple dynamic model of a small open economy, which is completely specialized in the production of tourism services (island economy model), populated by a large number of intertemporally optimizing agents, deriving utility from consuming an imported good. Tourism services are produced by means of a simple AK technology by using imported capital, its accumulation associated with adjustment costs. Moreover, the economy can lend or borrow at the international financial markets at the given world interest rate. Adjustments in the relative price of tourism services ensure market clearance for tourism services. The long-run growth rate of the economy is tied to the growth rate in tourism demand. An increase in the latter increases thus the economy’s long-run balanced growth rate. In contrast to the standard one-good small open economy endogenous growth model, where the economy is always on its balanced growth path, we show that there are transitional dynamics after an increase in the growth rate of tourism demand. In particular, the short-run growth rate of output rises gradually towards its higher long-run level, and the market price of tourism increases during transition. Thus, an increase in the growth of tourism demand, say, caused by higher economic growth abroad, leads to a boom in the small open economy and increasing terms of trade. Adjustments of the relative price of tourism services (i. e. the real exchange rate) can therefore not protect the economy from demand disturbances.
    Keywords: tourism demand; growth; economic dynamics
    JEL: O41 F41 R11
    Date: 2009–03
  12. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: This paper studies consumption and labor supply in a model where agents have partial insurance and face risk and initial heterogeneity in wages and preferences. Equilibrium allocations and variances and covariances of wages, hours and consumption are solved for analytically. We prove that all parameters of the structural model are identified given panel data on wages and hours, and cross-sectional data on consumption. The model is estimated on US data. Second moments involving hours and consumption show that the rise in wage dispersion in the 1970s was effectively insured by households, while the rise in the 1980s was not.
    JEL: E21 J22 J31
    Date: 2009–08
  13. By: Schubert, Stefan Franz
    Abstract: The paper studies optimal taxation (subvention) when tourism is associated with „multiple externalities“, using a simple dynamic model of a small open economy, which is completely specialized in the production of tourism services and populated by a large number of intertemporally optimizing agents. Depending on the volume of tourism production, the externality can be either positive or negative. We show that the first best optimum, achieved by a central planner, recognizing the externality, can be replicated in a decentralized economy by using a time-varying tax rate. This ensures that (i) the steady state of the first best optimum is reached and that (ii) the speed of convergence to steady state is socially optimal.
    Keywords: tourism demand; externalities; dynamic optimal taxation
    JEL: H21 R13 F21 H23
    Date: 2009–07
  14. By: Schubert, Stefan Franz
    Abstract: Our objective is to study the dynamic effects of an oil price shock on economic key variables and on the current account of a small open economy. To do this, we introduce time non-separable preferences in a standard model of a small open economy, where labor supply is endogenous and imported oil is used both as an intermediate input in production and as a consumption good. Using a plausible calibration of the model, we show that the changes in output and employment are quite small, and that the current account exhibits the J-curve property, both being in line with recent empirical evidence. After an oil price increase, the current account first deteriorates, and after some time it turns into surplus. We explain this non-monotonic behavior with agents' reluctance to change their consumption expenditures, resulting in an initial trade balance deficit which causes the current account to deteriorate. Over time, with gradually falling expenditures, the trade balance improves sufficiently to turn the current account into surplus. The model thus provides a plausible explanation of recent empirical findings.
    Keywords: oil price shocks; time non-separable preferences; current account dynamics
    JEL: F32 F41 Q43
    Date: 2009–02
  15. By: Uluc Aysun (University of Connecticut); Ryan Brady (Unites States Naval Academy); Adam Honig (Amherst College)
    Abstract: This paper examines the effect of financial frictions on the strength of the credit channel of monetary policy. First, we use a DSGE model characterized by financial frictions as in Bernanke, Gertler, and Gilchrist (1999), and calibrate it using parameter values for countries with different levels of financial frictions. We find that the credit channel is stronger in countries with high levels of financial frictions. The intuition is that in these countries, external finance premiums are more sensitive to firms' financial leverage. By affecting asset prices, therefore, monetary policy has greater impact on external finance premiums and output. Second, we provide empirical evidence for this relationship. We use cross-country data in SVAR models to generate indicators for credit channel strength. We then show that there is a positive relationship between financial frictions, captured by bankruptcy recovery rates, and credit channel strength, confirming the predictions of the model.
    Keywords: credit channel, financial frictions, bankruptcy costs
    JEL: E44 F31 F41
    Date: 2009–08
  16. By: Christopher D. Carroll; Olivier Jeanne
    Abstract: We model the motives for residents of a country to hold foreign assets, including the precautionary motive that has been omitted from much previous literature as intractable. Our model captures many of the principal insights from the existing specialized literature on the precautionary motive, deriving a convenient formula for the economy's target value of assets. The target is the level of assets that balances impatience, prudence, risk, intertemporal substitution, and the rate of return. We use the model to shed light on two topical questions: The "upstream'' flows of capital from developing countries to advanced countries, and the long-run impact of resorbing global financial imbalances.
    JEL: C61
    Date: 2009–08
  17. By: Yosef Bonaparte; Russell Cooper
    Abstract: This paper studies the dynamic optimization problem of a household when portfolio adjustment is costly. The analysis is motivated by the observation that on a monthly basis, less than 10% of stockholders typically adjust their portfolio of common stocks. We use this, and related observations, to estimate the parameters of household preferences and portfolio adjustment costs. We find significant adjustment costs, beyond the direct costs of buying and selling assets. These adjustment costs imply that inferences drawn about household risk aversion and the elasticity of intertemporal substitution are biased: household risk aversion is lower compared to other estimates and it is not equal to the inverse of the elasticity of intertemporal substitution.
    JEL: E21 E44 G11
    Date: 2009–08

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