nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒09‒05
ten papers chosen by
Christian Zimmermann
University of Connecticut

  1. Inflation dynamics with labour market matching: assessing alternative specifications By Christoffel, Kai; Costain, James; de Walque, Gregory; Kuester, Keith; Linzert, Tobias; Millard, Stephen; Pierrard, Olivier
  2. Long-Run Impacts of Inflation Tax in the Presence of Multiple Capital Goods By Fujisaki , Seiya; Mino, Kazuo
  3. Wage, inflation and employment dynamics with labour market matching By Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
  4. Capital Income Taxation Revisited: The Role of Information Asymmetry in the Credit Market By Ho , Wai-Hong; Wang, Yong
  5. Aging and the Financing of Social Security in Switzerland By Christian Keuschnigg; Mirela Keuschnigg; Christian Jaag
  6. A Newton Collocation Method for Solving Dynamic Bargaining Games By John Duggan; Tasos Kalandrakis
  7. Ex-ante methods to assess the impact of social insurance policies on labor supply with an application to Brazil By Robalino, David A.; Zylberstajn, Helio
  8. InfSOCSol2 An updated MATLAB Package for Approximating the Solution to a Continuous-Time Infinite Horizon Stochastic Optimal Control Problem with Control and State Constraints By Azzato, Jeffrey D.; Krawczyk, Jacek B.
  9. Job Search with Bidder Memories By Carlos Carrillo-Tudela; Guido Menzio; Eric Smith
  10. Trade Agreements, Bargaining and Economic Growth By Maoz, Yishay; Peled, Dan; Sarid, Assaf

  1. By: Christoffel, Kai (European Central Bank); Costain, James (Banco de Espana); de Walque, Gregory (National Bank of Belgium); Kuester, Keith (Federal Reserve Bank of Philadelphia); Linzert, Tobias (European Central Bank); Millard, Stephen (Bank of England); Pierrard, Olivier (Banque Centrale du Luxembourg)
    Abstract: This paper reviews recent approaches to modelling the labour market, and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behaviour. In a search and matching environment, we consider the following modelling set-ups: right-to-manage bargaining versus efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity relative to the data and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining, or with firm-specific labour emerge as the most promising candidates.
    Keywords: Inflation dynamics; labour market; business cycle; real rigidities
    JEL: E24 E31 E32 J64
    Date: 2009–08–24
  2. 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 production technology uses two types of capital stocks under a constant-returns-to-scale technology. We find hat unless investment expenditure for each type of capital is subject to the same degree of cash-in-advance constraint, a change in the money growth rate affects the steady-state level of factor intensity. It is shown that if the balanced-growth path is uniquely given, we still have a negative long-run relationship between money growth and the growth rate of real income. However, due to the endogenous determination of the factor intensity, the negative relation between the velocity of money and the rate of inflation may not be established.
    Keywords: maintenance expenditures; endogenous Growth; cash-in-advance constraint; inflation tax
    JEL: O42 E31 E52
    Date: 2009–06
  3. By: Kai Christoffel (European Central Bank); James Costain (Banco de España); Gregory de Walque (Banque Nationale de Belgique); Keith Kuester (Federal Reserve Bank of Philadelphia); Tobias Linzert (European Central Bank); Stephen Millard (Bank of England); Olivier Pierrard (Banque Centrale du Luxembourg)
    Abstract: In a search and matching environment, this paper assesses a range of modeling setups against macro evidence for the monetary transmission mechanism in the euro area. In particular, we assess right-to-manage vs. efficient bargaining, flexible vs. sticky wages, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour imply a sufficient degree of real rigidity, and so can reproduce inflation dynamics well. However, they imply too small a response on the employment margin. The other model variants fit employment dynamics better, but then imply too little real rigidity and, so, too volatile inflation, owing to strong responses of marginal wages and hours per employee. Further sources of real rigidities - possibly from outside of the labour market - seem to be needed to simultaneously explain the responses of wages, inflation and employment.
    Keywords: Inflation Dynamics, Labour Market, Business Cycle, Real Rigidities
    JEL: E31 E32 E24 J64
    Date: 2009–08
  4. By: Ho , Wai-Hong; Wang, Yong
    Abstract: This paper reexamines the issue of optimal capital income taxation in an endogenous growth model with overlapping generations. By assuming costly state verification for capital producing projects, we show that the presence of the information asymmetry creates inefficiency in the credit market by driving a wedge between the rate of interest and the rate of transformation. In this context, we further show that capital income taxation worsens the credit market distortions and, subsequently, induces greater adverse effects on growth and welfare. Taken together, our analysis suggests that the presence of informational frictions in the credit market introduces a rationale for more conservative taxation on capital income from both growth and welfare perspectives.
    Keywords: Capital income taxation; Asymmetric information; Economic growth
    JEL: H21 O41 D82
    Date: 2009–09–01
  5. By: Christian Keuschnigg; Mirela Keuschnigg; Christian Jaag
    Abstract: This paper studies the quantitative impact of aging on the financing of social security and the public sector in Switzerland. Demographic projections forecast a doubling of the dependency ratio until 2050 as well as an increase of 10% in total population due to longer life expectancy. We use a computational growth model with overlapping generations, including labor market adjustment on five different behavioural margins: labor market participation, hours worked, job search, retirement, and on-the-job training. Starting with a passive fiscal strategy, our simulations show that a doubling of the old age dependency ratio might reduce per capita income by more than 20 percent and necessitate a long-run increase of wage taxes and social security contributions by 21 percentage points. A comprehensive reform package, including an increase in the effective retirement age to 68 years and several other measures, may limit the increase of the tax burden to 4 percentage points of the value added tax and reduce the decline of per capita income to 6% in the long-run. firms typically have a high growth potential, need external funds to finance investment, and rely on the key effort and know-how of inside entrepreneurs. Given the limited amount of tangible assets and the non-contractible nature of entrepreneurial effort, these firms are often financially constrained. Access to external funds becomes an important factor in the expansion of innovative industries. This paper models a two sector economy of innovative and standard industries and shows how the pattern of comparative advantage is shaped by factor endowments and variables relating to corporate finance. In particular, a larger equity ratio of young entrepreneurial firms and tough corporate governance standards relax the financing constraints and create a comparative advantage in innovative industries.
    Keywords: Aging, social security, retirement, human capital, unemployment
    JEL: D58 D91 H55 J26 J64
    Date: 2009–09
  6. By: John Duggan (W. Allen Wallis Institute of Political Economy, 107 Harkness Hall, University of Rochester, Rochester, NY 14627-0158); Tasos Kalandrakis (W. Allen Wallis Institute of Political Economy, 107 Harkness Hall, University of Rochester, Rochester, NY 14627-0158)
    Abstract: We develop and implement a collocation method to solve for an equilibrium in the dynamic legislative bargaining game of Duggan and Kalandrakis (2008). We formulate the collocation equations in a quasi-discrete version of the model, and we show that the collocation equations are locally Lipchitz continuous and directionally differentiable. In numerical experiments, we successfully implement a globally convergent variant of Broyden's method on a preconditioned version of the collocation equations, and the method economizes on computation cost by more than 50% compared to the value iteration method. We rely on a continuity property of the equilibrium set to obtain increasingly precise approximations of solutions to the continuum model. We showcase these techniques with an illustration of the dynamic core convergence theorem of Duggan and Kalandrakis (2008) in a nine-player, two-dimensional model with negative quadratic preferences.
    Date: 2009–08
  7. By: Robalino, David A.; Zylberstajn, Helio
    Abstract: This paper solves and estimates a stochastic model of optimal inter-temporal behavior to assess how changes in the design of the unemployment benefits and pension systems in Brazil could affect savings rates, the share of time that individuals spend outside of the formal sector, and retirement decisions. Dynamics depend on five main parameters: preferences regarding consumption and leisure, preferences regarding formal Vs. informal work, attitudes towards risks, the rate of time preference, and the distribution of an exogenous shock that affects movements in and out of the social security system (given individual decisions). The yearly household survey is used to create a pseudo panel by age-cohorts and estimate the joint distribution of model parameters based on a generalized version of the Gibbs sampler. The model does a good job in replicating the distribution of the members of a given cohort across states (in or out of the social security / active or retired). Because the parameters are related to individual preferences or exogenous shocks, the joint distribution is unlikely to change when the social insurance system changes. Thus, the model is used to explore how alternative policy interventions could affect behaviors and through this channel benefit levels and fiscal costs. The results from various simulations provide three main insights: (i) the Brazilian SI system today might generate distortions (lower savings rates and less formal employment) that increase the costs of the system and might generate regressive redistribution; (ii) there are important interactions between the unemployment benefits and pension systems, which calls for joint policy analysis when considering reforms; and (iii) current distortions could be reduced by creating an actuarial link between contributions and benefits and then combining matching contributions and anti-poverty targeted transfers to cover individuals with limited or no savings capacity.
    Keywords: ,Labor Markets,Labor Policies,Pensions&Retirement Systems,Emerging Markets
    Date: 2009–08–01
  8. By: Azzato, Jeffrey D.; Krawczyk, Jacek B.
    Abstract: This paper is a successor of [AK08]. Both papers describe the same suite of MATLAB R° routines devised to provide an approximately optimal solution to an infinite horizon stochastic optimal control problem. The difference is that this paper explains how to allow for state and control constraints. The suite routines implement a policy improvement algorithm to optimise a Markov decision chain approximating the original control problem, as described in [Kra01c] and [Kra01b].
    Keywords: Computational economics; Financial engineering; Approximating Markov decision chains
    JEL: C63 C88 G23
    Date: 2009–08–31
  9. By: Carlos Carrillo-Tudela (Department of Economics, University of Leicester and IZA); Guido Menzio (Department of Economics, University of Pennsylvania and NBER); Eric Smith (Department of Economics, University of Essex and FRB Atlanta)
    Abstract: This paper revisits the no-recall assumption in job search models with take-it-or-leave-it offers. Workers who can recall previously encountered potential employers, in order to engage them in Bertrand bidding, have a distinct advantage over workers without such attachments. Firms account for this difference when hiring a worker. When a worker first meets a firm, the firm offers the worker a sufficient share of the match rents to avoid a bidding war in the future. The pair share the gains to trade. In this case, the Diamond paradox no longer holds.
    Keywords: Job search, recall, wage determination, Diamond paradox
    JEL: J24 J42 J64
    Date: 2009–07–01
  10. By: Maoz, Yishay; Peled, Dan; Sarid, Assaf
    Abstract: Rebelo's two-sector endogenous growth model is embedded within a two-country international trade framework. The two countries bargain over a trade agreement that specifies: (i) the size of the foreign aid that the richer country gives to the poorer one; (ii) the terms of the international trade that takes place after the aid is given. The aid is given not because of generosity, but because it improves the capital allocation across the world and thus raises total world production. This world production surplus enables the rich country to raise its equilibrium consumption and welfare beyond their no-aid levels. To ensure it, the rich country uses a trade agreement to condition the aid on favorable terms of trade.
    Keywords: International trade; Aid; Balanced Growth; Trade Agreement
    JEL: O41 P45 F43
    Date: 2009–08–30

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