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on Dynamic General Equilibrium |
| By: | Juha Kilponen (Bank of Finland, Monetary Policy and Research Department, P.O. Box 160, FI-00101 Helsinki, Finland); Juuso Vanhala (Bank of Finland, Monetary Policy and Research Department, P.O. Box 160, FI-00101 Helsinki, Finland) |
| Abstract: | This paper focuses on tenure driven productivity dynamics of a firm-worker match as a potential explanation of "unemployment volatility puzzle". We let new matches and continuing jobs differ by their productivity levels and by their 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. Our contribution is to produce model driven stickiness of old jobs’ wages which does not rely on ad hoc assumptions on wage rigidity. 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 behaving Beveridge curve, despite endogenous job destruction, and more volatile vacancies and unemployment, without a need to rely on differing wage setting mechanisms of new and continuing jobs. Price rigidities do not alter the basic mechanism and the transmission of monetary policy shock is very similar to the standard New Keynesian model with search frictions. JEL Classification: E24, E32, J64. |
| Keywords: | Matching, productivity shocks, job flows, Beveridge curve, vintage structure, nominal rigidities, monetary policy shock, tenure. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091080&r=dge |
| By: | Masako Ikefuji (Institute of School and Economic Research, Osaka University); Kazuo Mino (Institute of Economic Research, Kyoto University) |
| Abstract: | This paper explores the roles of internal and external habit formation in a simple model of endogenous growth with overlapping generations. Unlike the representative agent settings in which the distinction between internal and external habits may not yield significant qualitative differences in working of the model economy, we show that the internal and external habit persistence in overlapping generations economies may have qualitatively different effects on the steady-state characterization as well as on the dynamic behavior of the economy. We also confirm that in an overlapping generations framework, whether the habits in the utility function takes subtractive or multiplicative forms may be critical both for long-run growth and for transitional dynamics. |
| Keywords: | internal habits formation, external habit formation, overlapping generations economy, long-run growth |
| JEL: | E32 J24 O40 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:676&r=dge |
| By: | ERIC M. LEEPER, MICHAEL PLANTE, NORA TRAUM (Indiana University Bloomington, Indiana University and Ball State University, Indiana University Office) |
| Abstract: | Dynamic stochastic general equilibrium models that include policy rules for government spending, lump-sum transfers, and distortionary taxation on labor and capital income and on consumption expenditures are fit to U.S. data under a variety of specifica- tions of fiscal policy rules. We obtain several results. First, the best fitting model allows a rich set of fiscal instruments to respond to stabilize debt. Second, responses of aggregate variables to fiscal policy shocks under rich fiscal rules can vary considerably from responses that allow only non-distortionary fiscal instruments to finance debt. Third, based on esti- mated policy rules, transfers, capital tax rates, and government spending have historically responded strongly to government debt, while labor taxes have responded more weakly. Fourth, all components of the intertemporal condition linking debt to expected discounted surpluses—transfers, spending, tax revenues, and discount factors—display instances where their expected movements are important in establishing equilibrium. Fifth, debt-financed fiscal shocks trigger long lasting dynamics so that short-run multipliers can differ markedly from long-run multipliers, even in their signs. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2009-012&r=dge |
| By: | Seiya Fujisaki (Graduate School of Economics, Osaka University); Kazuo Mino (Institute of Economic Research, Kyoto University) |
| 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. We assume that the rate of capital depreciation positively depends on capital utilization rate and negatively depends on maintenance expenditures. Money is introduced via a cash-in-advance constraint that may apply to the maintenance expenditures as well as to consumption and investment spendings. 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 specification of the capital depreciation technology as well as to the forms of cash-in-advance constraints. |
| Keywords: | maintenance expenditures, endogenous growth, inflation tax, cash-in-advance constraints |
| JEL: | E31 E52 O42 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:677&r=dge |
| By: | Gui Pedro de Mendonça |
| Abstract: | We discuss the implications of informality on growth and fiscal policy by considering an informal sector based on low tech firms, in an open economy model of endogenous growth, where labour supply is elastic and increasing returns arise from public spending. We allow for both labour and capital to allocate between sectors and examine the dynamic and policy issues that arise in an economy, where long run outcomes are still dominated by formal activities, but long macroeconomic transitions arise as a result of informal microeconomic activities, which take advantage of both government taxation and limited fiscalization. |
| Keywords: | Endogenous Growth Theory; Optimal Fiscal Policy; Informal Sector; Public Capital. |
| JEL: | C61 E62 F43 O17 O41 |
| Date: | 2009–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2009_16&r=dge |
| By: | Chu, Angus C. |
| Abstract: | This paper develops an R&D-growth model and calibrates the model to aggregate data of the US economy to quantify a structural relationship between patent length, R&D and consumption. Under parameter values that match the empirical flow-profit depreciation rate of patents and other key features of the US economy, extending the patent length beyond 20 years leads to a negligible increase in R&D despite equilibrium R&D underinvestment. In contrast, shortening the patent length leads to a significant reduction in R&D and consumption. Finally, this paper also analytically derives and quantifies a dynamic distortionary effect of patent length on capital investment. |
| Keywords: | innovation-driven growth; intellectual property rights; patent length; R&D |
| JEL: | O34 O31 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16918&r=dge |
| By: | Daron Acemoglu; Mikhail Golosov; Aleh Tsyvinski |
| Abstract: | We study the dynamic taxation of capital and labor in the Ramsey model under the assumption that taxes and public good provision are decided by a self-interested politician who cannot commit to policies. We show that, as long as the discount factor of the politician is equal to or greater than that of the citizens, the Chamley-Judd result of zero long-run taxes holds. In contrast, if the politician is less patient than the citizens, the best (subgame perfect) equilibrium from the viewpoint of the citizens involves long-run capital taxation. |
| JEL: | E6 E62 H21 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15302&r=dge |
| By: | Costa, Carlos Eugênio da; Issler, João Victor; Matos, Paulo F. |
| Abstract: | We build a pricing kernel using only US domestic assets data and checkwhether it accounts for foreign markets stylized facts that escape consumptionbased models. By interpreting our stochastic discount factor as the projection ofa pricing kernel from a fully specified model in the space of returns, our results indicatethat a model that accounts for the behavior of domestic assets goes a longway toward accounting for the behavior of foreign assets. We address predictabilityissues associated with the forward premium puzzle by: i) using instrumentsthat are known to forecast excess returns in the moments restrictions associatedwith Euler equations, and; ii) by pricing Lustig and Verdelhan (2007)'s foreigncurrency portfolios. Our results indicate that the relevant state variables that explainforeign-currency market asset prices are also the driving forces behind U.S.domestic assets behavior. |
| Date: | 2009–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:697&r=dge |
| By: | Evers, Michael; Niemann, Stefan; Schiffbauer, Marc (ESRI) |
| Abstract: | This paper demonstrates a negative relation between inflation and long-run productivity growth. Inflation generates long-run real effects due to a link from the short-run nominal and financial frictions to a firm's qualitative investment portfolio. We develop an endogenous growth model whose key ingredients are (i) a nominal short-run portfolio choice for households, (ii) an agency problem which gives rise to financial market incompleteness, (iii) a firm-level technology choice between a return-dominated but secure and a more productive but risky project. In this framework, inflation increases the costs of corporate insurance against productive but risky projects and hence a firm's choice of technology. It follows that each level of inflation is associated with a different long-run balanced growth path for the economy as long as financial markets are incomplete. Finally, we apply U.S. industry and firm level data to examine the relevance of our specific microeconomic mechanism. We find that (i) firms insure systematically against risky R&D investments by means of corporate liquidity holdings, (ii) periods of higher inflation restrain firm-level R&D investments by reducing corporate liquidity holdings. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:dynreg48&r=dge |
| By: | Vasco Cúrdia; Michael Woodford |
| Abstract: | We consider the desirability of modifying a standard Taylor rule for a central bank's interest-rate policy to incorporate either an adjustment for changes in interest-rate spreads (as proposed by Taylor [2008] and by McCulley and Toloui [2008]) or a response to variations in the aggregate volume of credit (as proposed by Christiano et al. [2007]). We consider the consequences of such adjustments for the way in which policy would respond to a variety of types of possible economic disturbances, including (but not limited to) disturbances originating in the financial sector that increase equilibrium spreads and contract the supply of credit. We conduct our analysis using the simple DSGE model with credit frictions developed in Curdia and Woodford (2009), and compare the equilibrium responses to a variety of disturbances under the modified Taylor rules to those under a policy that would maximize average expected utility. According to our model, a spread adjustment can improve upon the standard Taylor rule, but the optimal size is unlikely to be as large as the one proposed, and the same type of adjustment is not desirable regardless of the source of the variation in credit spreads. A response to credit is less likely to be helpful, and the desirable size (and even the right sign) of the response to credit is less robust to alternative assumptions about the nature and persistence of disturbances. |
| JEL: | E44 E52 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15289&r=dge |
| By: | Olaf Posch (School of Economics and Management, University of Aarhus, Denmark); Klaus Wälde (University of Mainz) |
| Abstract: | A model highlighting the endogeneity of both volatility and growth is presented. Volatility and growth are therefore correlated but there is no causal link from volatility to growth. This joint endogeneity is illustrated by working out the effects through which economies with different tax levels dier both in their volatility and growth. Using a continuous-time DSGE model with plausible parametric restrictions, we obtain closedform measures of macro volatility based on cyclical components and output growth rates. Given our results, empirical volatility-growth analysis should include controls in the conditional variance equation. Otherwise an omitted variable bias is likely. |
| Keywords: | Tax effects, Volatility measures, Poisson uncertainty, Endogenous cycles and growth, Continuous-time DSGE models |
| JEL: | E32 E62 H3 C65 |
| Date: | 2009–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2009-10&r=dge |
| By: | Gabriel Felbermayr; Mario Larch; Wolfgang Lechthaler |
| Abstract: | We introduce search and matching unemployment into a model of trade with differentiated goods and heterogeneous firms. Countries may differ with respect to size, geographical location, and labor market institutions. Contrary to the literature, our single-sector perspective pays special attention to the role of income effects and shows that bad institutions in one country worsen labor market outcomes not only in that country but also in its trading partners. This spill-over effect is conditioned by trade costs and country size: smaller and/or more centrally located nations suffer less from inefficient policies at home and are more heavily affected from spill-overs abroad than larger and/or peripheral ones. We offer empirical evidence for a panel of 20 rich OECD countries. Carefully controlling for institutional features and for business cycle comovements between countries, we confirm our qualitative theoretical predictions. However, the magnitude of spill-over effects is larger in the data than in the theoretical model. We show that introducing real wage rigidity can remedy this problem |
| Keywords: | Spill-over effects of labor market institutions; unemployment; international trade; search frictions; heterogeneous firms |
| JEL: | F11 F12 F16 J64 L11 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1540&r=dge |
| By: | Ida Wolden Bache (Norges Bank (Central Bank of Norway)); James Mitchell (National Institute of Economic and Social Research); Francesco Ravazzolo (Norges Bank (Central Bank of Norway)); Shaun P. Vahey (Melbourne Business School) |
| Abstract: | We argue that the next generation of macro modellers at Inflation Targeting central banks should adapt a methodology from the weather forecasting literature known as `ensemble modelling'. In this approach, uncertainty about model specifications (e.g., initial conditions, parameters, and boundary conditions) is explicitly accounted for by constructing ensemble predictive densities from a large number of component models. The components allow the modeller to explore a wide range of uncertainties; and the resulting ensemble `integrates out' these uncertainties using time-varying weights on the components. We provide two examples of this modelling strategy: (i) forecasting inflation with a disaggregate ensemble; and (ii) forecasting inflation with an ensemble DSGE. |
| Keywords: | Ensemble modelling, Forecasting, DSGE models, Density combination |
| JEL: | C11 C32 C53 E37 E52 |
| Date: | 2009–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_15&r=dge |
| By: | Kenneth Judd; Lilia Maliar; Serguei Maliar |
| Abstract: | We develop numerically stable stochastic simulation approaches for solving dynamic economic models. We rely on standard simulation procedures to simultaneously compute an ergodic distribution of state variables, its support and the associated decision rules. We differ from existing methods, however, in how we use simulation data to approximate decision rules. Instead of the usual least-squares approximation methods, we examine a variety of alternatives, including the least-squares method using SVD, Tikhonov regularization, least-absolute deviation methods, principal components regression method, all of which are numerically stable and can handle ill-conditioned problems. These new methods enable us to compute high-order polynomial approximations without encountering numerical problems. Our approaches are especially well suitable for high-dimensional applications in which other methods are infeasible. |
| JEL: | C63 C68 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15296&r=dge |