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on Dynamic General Equilibrium |
| By: | Per Krusell; Toshihiko Mukoyama; Aysegul Sahin |
| Abstract: | We analyze a Bewley-Huggett-Aiyagari incomplete-markets model with labor-market frictions. Consumers are subject to idiosyncratic employment shocks against which they cannot insure directly. The labor market has a Diamond-Mortensen-Pissarides structure: firms enter by posting vacancies and match with workers bilaterally, with match probabilities given by an aggregate matching function. Wages are determined through Nash bargaining. We also consider aggregate productivity shocks, and a complete set of contingent claims conditional on this risk. We use the model to evaluate a tax-financed unemployment insurance scheme. Higher insurance is beneficial for consumption smoothing, but because it raises workers' outside option value, it discourages firm entry. We find that the latter effect is more potent for welfare outcomes; we tabulate the effects quantitatively for different kinds of consumers. We also demonstrate that productivity changes in the model---in steady state as well as stochastic ones---generate rather limited unemployment effects, unless workers are close to indifferent between working and not working; thus, recent findings are corroborated in our more general setting. |
| JEL: | D31 D52 E32 J63 J64 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15282&r=dge |
| By: | Chen, Yan; Zhang, Yan |
| Abstract: | This paper introduces endogenous capital income tax rates as in Schmitt-Grohe and Uribe (1997), into the overlapping generations model with endogenous labor and consumption in both periods of life (e.g., Cazzavillan and Pintus, 2004). In contrast with the previous result that the existence of endogenous labor income taxes raises the possibility of local indeterminacy (Chen and Zhang 2009), it shows that increasing the size of capital income taxes can make shrink the range of values of the consumption--to--wage ratio associated with local indeterminacy, because of two conflicting effects on savings that operate through wage and interest rate. |
| Keywords: | Indeterminacy; Endogenous capital income tax rate. |
| JEL: | E32 C62 |
| Date: | 2009–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16824&r=dge |
| By: | Aleksander Berentsen; Christopher J. Waller |
| Abstract: | We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a price-level target, it can control inflation expectations and improve welfare by stabilizing short-run shocks to the economy. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-33&r=dge |
| By: | Christopher J. Waller |
| Abstract: | The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In middle age, agents receive preference shocks and trade amongst themselves in an anonymous manner. Since preference shocks are private information, in a record-keeping economy, the planner's constrained allocation trades off efficient risk sharing against production efficiency in the search market. In the absence of record-keeping, the government uses flat money as a substitute for dynamic contracts to induce truthful revelation of preferences. Inflation affects agents' incentive constraints and so distortionary taxation of money may be needed as part of the optimal policy even if lump-sum taxes are available. |
| Keywords: | Money ; Taxation |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-35&r=dge |
| By: | Aleksander Berentsen; Christopher J. Waller |
| Abstract: | We study optimal monetary stabilization policy in a dynamic stochastic general equilibrium model where money is essential for trade and firm entry is endogenous. We do so when all prices are flexible and also when some are sticky. Due to an externality affecting firm entry, the central bank deviates from the Friedman rule. Calibration exercises suggest that the nominal interest rate should have been substantially smoother than the data if preference shocks were the main disturbance and much more volatile if productivity was the driving shock. This result is a direct consequence of policy actions to control entry. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-32&r=dge |
| By: | Christopher J. Waller |
| Abstract: | I use the monetary version of the neoclassical growth model developed by Aruoba, Waller and Wright (2008) to study the properties of the model when there is exogenous growth. I first consider the planner's problem, then the equilibrium outcome in a monetary economy. I do so by first using proportional bargaining to determine the terms of trade and then consider competitive price taking. I obtain closed form solutions for the balanced growth path of all variables in all cases. I then derive closed form solutions for the transition paths under the assumption of full depreciation and, in the monetary economy, a non-stationary interest rate policy. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-34&r=dge |
| By: | Martins, Pedro S. (Queen Mary, University of London); Snell, Andy (University of Edinburgh); Thomas, Jonathan P. (University of Edinburgh) |
| Abstract: | Following insights by Bewley (1999a), this paper analyses a model with downward rigidities in which firms cannot pay discriminate based on a year of entry to a firm, and develops an equilibrium model of wages and unemployment. We solve for the dynamics of wages and unemployment under conditions of downward wage rigidity, where forward looking firms take into account these constraints. Using simulated productivity data based on the post-war US economy, we analyse the ability of the model to match certain stylised labour market facts. |
| Keywords: | labour contracts, business cycle, unemployment, equal treatment, downward rigidity, cross-contract restrictions |
| JEL: | E32 J41 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4346&r=dge |
| By: | S. Boragan Aruoba; Christopher J. Waller; Randall Wright |
| Abstract: | We study the effects of money (anticipated inflation) on capital formation. Previous papers on this topic adopt reduced-form approaches, putting money in the utility function or imposing cash in advance, but use otherwise frictionless models. We follow a literature that is more explicit about the frictions making money essential. This introduces several new elements, including a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining. We show how these elements matter qualitatively and quantitatively. Our numerical results differ from findings in the reduced-form literature. The analysis reduces the previously large gap between mainstream macro and monetary theory. |
| Keywords: | Money ; Monetary theory ; Capital ; Search theory |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-31&r=dge |
| By: | Evelyn Ribi |
| Abstract: | This paper derives the welfare optimal size and intensity of job search assistance programs in a general equilibrium model where the labor market is affected by search frictions. Both instruments have a priori ambiguous fiscal implications: their direct employment stimulating effects broaden the base of the labor income tax and increase revenues, while also incurring direct costs. At optimal levels, the policy instruments trade off the positive effects on the participants against a marginal increase in taxes, which distorts employment decisions and potentially labor market tightness. We find that the higher unemployment insurance benefits, the lower is the optimal program intensity. Further, the introduction of a job search assistance program is more likely to raise welfare if it is highly effective at improving participants' job search skills, direct program costs are low and if the general level of taxation in the economy and thus the labor market participation tax are high. |
| Keywords: | Job search assistance, optimal size, optimal intensity, unemployment insurance |
| JEL: | J64 J68 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2009:2009-19&r=dge |
| By: | Costain, James (Banco de Espana); Jansen, Marcel (Universidad Carlos III de Madrid) |
| Abstract: | This paper studies the cyclical dynamics of Mortensen and Pissarides' (1994) model of job creation and destruction when workers' effort is not perfectly observable, as in Shapiro and Stiglitz (1984). An occasionally-binding no-shirking constraint truncates the real wage distribution from below, making firms' share of surplus weakly procyclical, and may thus amplify fluctuations in hiring. It may also cause a burst of inefficient firing at the onset of a recession, separating matches that no longer have sufficient surplus for incentive compatibility. On the other hand, since marginal workers in booms know firms cannot commit to keep them in recessions, they place little value on their jobs and are expensive to motivate. For a realistic calibration, this last effect is by far the strongest; even a moderate degree of moral hazard can eliminate all fluctuation in the separation rate. This casts doubt on Ramey and Watson's (1997) "contractual fragility" mechanism, and means worker moral hazard only makes the "unemployment volatility puzzle" worse. However, moral hazard has potential to explain other labor market facts, because it is consistent with small but clearly countercyclical fluctuations in separation rates, and a robust Beveridge curve. |
| Keywords: | job matching, shirking, efficiency wages, endogenous separation, contractual fragility |
| JEL: | C78 E24 E32 J64 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4344&r=dge |
| By: | Fernando Álvarez-Parra; Juan M. Sanchez |
| Abstract: | This paper considers the problem of optimal unemployment insurance (UI) in a repeated moral hazard framework. Unlike existing literature, unemployed individuals can secretly participate in a hidden labor market. This extension modifies the standard problem in three dimensions. First, it imposes an endogenous lower bound for the lifetime utility that a contract can deliver. Second, it breaks the identity between unemployment payments and consumption. And third, it hardens the encouragement of search effort. The optimal unemployment insurance system in an economy with a hidden labor market is simple, with an initial phase in which payments are relatively flat during unemployment and with no payments for long-term unemployed individuals. This scheme differs substantially from the one prescribed without a hidden labor market and resembles unemployment protection programs in many countries. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:09-09&r=dge |
| By: | Christopher D. Carroll; Patrick Toche |
| Abstract: | We present a tractable model of the effects of nonfinancial risk on intertemporal choice. Our purpose is to provide a simple framework that can be adopted in fields like representative-agent macroeconomics, corporate finance, or political economy, where most modelers have chosen not to incorporate serious nonfinancial risk because available methods were too complex to yield transparent insights. Our model produces an intuitive analytical formula for target assets, and we show how to analyze transition dynamics using a familiar Ramsey-style phase diagram. Despite its starkness, our model captures most of the key implications of nonfinancial risk for intertemporal choice. |
| JEL: | C61 D11 E24 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15265&r=dge |
| By: | Chau, Nancy (Cornell University) |
| Abstract: | This paper presents a capability-augmented model of on the job search, in which sweatshop conditions stifle the capability of the working poor to search for a job while on the job. The augmented setting unveils a sweatshop equilibrium in an otherwise archetypal Burdett-Mortensen economy, and reconciles a number of oft noted yet perplexing features of sweatshop economies. We demonstrate existence of multiple rational expectation equilibria, graduation pathways out of sweatshops in complete absence of enforcement, and country-specific efficiency and distributional responses to competitive forces and social safety nets depending precisely on whether graduation criteria are met. |
| Keywords: | sweatshop equilibrium, on the job search, capability deficits |
| JEL: | J64 J88 O15 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4363&r=dge |
| By: | Strulik, Holger |
| Abstract: | This paper introduces wealth-dependent time preference into a simple model of endogenous growth. The model generates adjustment dynamics in line with the historical facts on savings and economic growth in Europe from the High Middle Ages to today. Along a virtuous cycle of development more wealth leads to more patience, which leads to more savings and even higher wealth. Savings rates and income growth rates are thus jointly increasing during the process of development until they converge towards constants along a balanced growth path. During the transition to modern growth an economy in which the association of wealth and patience is stronger overtakes an otherwise identical economy and generates temporarily diverging growth rates. It is shown how wealth-dependent time preference can explain the existence of a locally stable poverty trap as well as the phenomenon of simultaneously falling interest rates and rising growth rates. |
| Keywords: | economic growth, savings, time preference, poverty trap, moral consequences of economic growth. |
| JEL: | O11 O41 D90 P48 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-426&r=dge |
| By: | Nirei, Makoto |
| Abstract: | This paper analytically demonstrates that the tails of income and wealth distributions converge to a Pareto distribution in a variation of the Solow or Ramsey growth model where households bear idiosyncratic investment shocks. The Pareto exponent is shown to be decreasing in the shock variance, increasing in the growth rate, and increased by redistribution policies by income or bequest tax. Simulations show that even in the short run the exponent is affected by those fundamentals. We argue that the Pareto exponent is determined by the balance between the savings from labor income and the asset income contributed by risk-taking behavior. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:hit:iirwps:09-05&r=dge |
| By: | Chu, Angus C. |
| Abstract: | Can a transfer of wealth from the US to least developed countries be Pareto improving? We analyze this question in an open-economy innovation-driven growth model, in which the high-income (low-income) country produces innovative (homogenous) goods. We find that wealth redistribution to the low-income country simultaneously reduces global inequality and stimulates innovation through an increase in labor supply in the high-income country. Given that the market equilibrium of R&D-growth models is usually inefficient due to R&D externalities, the wealth redistribution may lead to a Pareto improvement, which occurs if the discount rate is sufficiently low or R&D productivity is sufficiently high. |
| Keywords: | innovation-driven growth; wealth redistribution; Pareto improvement |
| JEL: | O41 O31 F43 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16809&r=dge |
| By: | Pablo Guerron-Quintana; Atsushi Inoue; Lutz Kilian |
| Abstract: | The authors show that in weakly identified models (1) the posterior mode will not be a consistent estimator of the true parameter vector, (2) the posterior distribution will not be Gaussian even asymptotically, and (3) Bayesian credible sets and frequentist confidence sets will not coincide asymptotically. This means that Bayesian DSGE estimation should not be interpreted merely as a convenient device for obtaining asymptotically valid point estimates and confidence sets from the posterior distribution. As an alternative, the authors develop a new class of frequentist confidence sets for structural DSGE model parameters that remains asymptotically valid regardless of the strength of the identification. The proposed set correctly reflects the uncertainty about the structural parameters even when the likelihood is flat, it protects the researcher from spurious inference, and it is asymptotically invariant to the prior in the case of weak identification. |
| Keywords: | Stochastic analysis ; Macroeconomics - Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-13&r=dge |
| By: | Parantap Basu; Christoph Thoenissen |
| Abstract: | Is the relative price of investment goods a good proxy for investment frictions? We model this relative price in a flexible price international economy with two fundamental shocks, namely the total factor productivity (TFP) shock and the investment specific technology (IST) shock. The paper argues that the one-to-one correspondence between investment friction and the relative price of investment goods breaks down in an international economy because of the short run correlation between the terms of trade and the relative price of investment goods. The data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions (rise in IST) as suggested by many studies. A calibration experiment with the US data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of TFP on the terms of trade for a broad range of econ mies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment. A regression experiment with major OECD countries provided empirical support of the fact that terms of trade effect on the relative price of investment is important |
| Keywords: | Investment frictions, investment specific technological progress, total factor productivity, relative price of investment goods terms of trade |
| JEL: | E22 E32 F41 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0905&r=dge |
| By: | Iyigun, Murat (University of Colorado, Boulder) |
| Abstract: | This paper combines partner matching with an intra-household allocation model where couples decide if they want to marry or cohabitate. Marriage encourages but does not ensure a higher level of spousal commitment, which in turn can generate a larger marital surplus. Individuals’ marital preferences and commitment costs vary, and sorting equilibria are based on individuals’ marital preferences and propensity to commit. In all equilibria, some married couples are able to cooperate and operate efficiently, but some married and all cohabiting couples act with limited commitment and non-cooperatively. When spousal marital commitment costs are gender symmetric, there is a pure-sorting equilibrium in which all partners who prefer to act with commitment in marriage are matched with someone who has the same preference. In such an equilibrium, the benefits of marital commitment accrue to both partners. When commitment costs are not gender neutral, there can also be mixed-matching equilibria in which a partner who is willing to act with commitment in marriage is matched with someone who is not. In all such equilibria, the benefits of marital commitment accrue only to those men or women who are in short supply. Consequently, a shortage of men (women) who can maritally commit makes all women (men) worse off and materially indifferent between marriage or cohabitation. An excess supply of men who prefer marriage not only reduces the marriage incentives of men and raises those of women, but also the marital commitment incentives of men. As a corollary, if the gains from marriage fall, not only will more individuals choose to cohabitate but more married couples will act non-cooperatively. |
| Keywords: | collective model, intra-household bargaining, modes of partnership choice |
| JEL: | C78 D61 D70 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4341&r=dge |