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on Dynamic General Equilibrium |
| By: | Fatih Guvenen |
| Abstract: | I study asset prices in a two-agent macroeconomic model with two key features: limited stock market participation and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices, such as a high equity premium; relatively smooth interest rates; procyclical stock prices; and countercyclical variation in the equity premium, its volatility, and in the Sharpe ratio. In this model, the risk-free asset market plays a central role by allowing non-stockholders (with low EIS) to smooth the fluctuations in their labor income. This process concentrates non-stockholders' 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. When it comes to business cycle performance the model's progress has been more limited: consumption is still too volatile compared to the data, whereas investment is still too smooth. These are important areas for potential improvement in this framework. |
| Keywords: | Wealth ; Stock market |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:434&r=dge |
| By: | Olivier Pierrard; Henri R. Sneessens |
| Abstract: | We build on the DSGE literature to propose an overlapping generation model for Luxembourg.By way of illustration, the model is then used to study the consequences of the ageing of the population and the potential effects of alternative macroeconomic policies. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:cahier_etudes_36&r=dge |
| By: | KOBAYASHI Keiichiro |
| Abstract: | We construct a search-theoretic model à la Lagos and Wright (2005), that has multiple steady-state equilibria, one of which may be interpreted as a state of financial crisis. The key ingredient is the collateral-secured loan in the decentralized matching market, in which the borrowers must put up their own land as collateral. They borrow debt for intertemporal smoothing of the consumption stream and also for factor payment in production. In the crisis state, the land price is low and the debt for factor payment, i.e., liquidity, dries up. Facing a liquidity shortage, all sellers choose not to participate in the matching market and the market is shut down due to the search externality. This market disruption lowers the aggregate productivity, while the low productivity justifies the low asset price in turn. We may be able to derive a policy implication that collective debt reduction by government intervention may solve the coordination failure and bring the economy out of the crisis equilibrium. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:09045&r=dge |
| By: | Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard |
| Abstract: | This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behavior. In a search and matching environment, we consider the following modeling setups: right-to-manage bargaining vs. 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 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. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:cahier_etudes_38&r=dge |
| By: | José-Víctor Ríos-Rull; Frank Schorfheide; Cristina Fuentes-Albero; Raul Santaeulalia-Llopis; Maxym Kryshko |
| Abstract: | In this paper, we employ both calibration and modern (Bayesian) estimation methods to assess the role of neutral and investment-specific technology shocks in generating fluctuations in hours. Using a neoclassical stochastic growth model, we show how answers are shaped by the identification strategies and not by the statistical approaches. The crucial parameter is the labor supply elasticity. Both a calibration procedure that uses modern assessments of the Frisch elasticity and the estimation procedures result in technology shocks accounting for 2% to 9% of the variation in hours worked in the data. We infer that we should be talking more about identification and less about the choice of particular quantitative approaches. |
| Keywords: | Business cycles ; Technology - Economic aspects |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:433&r=dge |
| By: | Atanas Hristov |
| Abstract: | We outline the case for credit frictions and a demand side aspect to labor market fluctuations. To illustrate the above proposition, we present a simple framework to analyze the joint dependence between a labor search problem in the labor market and a costly state verification problem in the credit market in the presence of price rigidities. Credit market imperfections amplify volatility of labor market variables to both supply and demand shocks, but to a much higher extent to demand shocks under rigid prices. The reason is that demand disturbances provide for a strong incentive to demand-constrained firms to adjust production and thereby labor factor. |
| Keywords: | Credit and search frictions, unemployment, monetary policy |
| JEL: | J64 G24 E51 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwfin:diwfin07030&r=dge |
| By: | Bambi, Mauro; Fabbri, Giorgio; Gozzi, Fausto |
| Abstract: | In this paper the dynamic programming approach is exploited in order to identify the closed loop policy function, and the consumption smoothing mechanisms in an endogenous growth model with time to build, linear technology and irreversibility constraint in investment. Moreover the link among the time to build parameter, the maximum capital reproduction rate, and the magnitude of the smoothing effect is deeply investigated and compared with what happens in a vintage capital model characterized by the same technology and utility function. Finally we have analyzed the effect of time to build on the speed of convergence of the main aggregate variables. |
| Keywords: | Time-to-build; AK model; Dynamic programming; optimal strategies; closed loop policy. |
| JEL: | E32 E22 O40 |
| Date: | 2009–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17128&r=dge |
| 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. |
| Keywords: | Wages ; Consumption (Economics) |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:432&r=dge |
| By: | Galenianos, Manolis; Kircher, Philipp; Virag, Gabor |
| Abstract: | We build a theoretical model to study the welfare effects and resulting policy implications of firms’ market power in a frictional labor market. Our environment has two main characteristics: wages play a role in allocating labor across firms and there is a finite number of agents. We find that the decentralized equilibrium is inefficient and that the firms’ market power results in the misallocation of workers from the high to the low-productivity firms. A minimum wage forces the low-productivity firms to increase their wage, leading them to hire even more often thereby exacerbating the inefficiencies. Moderate unemployment benefits can increase welfare because they limit firms’ market power by improving the workers’ outside option. |
| Keywords: | directed search; heterogeneity; inefficient allocation; market power |
| JEL: | J08 D43 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17093&r=dge |
| By: | Michele Boldrin; Adrian Peralta-Alva |
| Abstract: | The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that, in the long run, the market reverts to well understood fundamentals. Our work suggests this belief should be questioned as well. First, we show actual dividends cannot account for the secular trends of stock market values. We then consider a more comprehensive measure of capital income. This measure displays large secular fluctuations that roughly coincide with changes in stock market trends. Under perfect foresight, however, this measure fails to account for stock market movements as well. We thus abandon the perfect foresight assumption. Assuming instead that forecasts of future capital income are performed using a distributed lag equation and information available up to the forecasting period only, we find that standard asset pricing theory can be reconciled with the secular trends in the stock market. Nevertheless, our studyleaves open an important puzzle for asset pricing theory: the market value of U.S. corporations was much lower than the replacement cost of corporate tangible assets from the mid 1970s to the mid 1980s. |
| Keywords: | Stock market ; Asset pricing |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-42&r=dge |
| By: | Adrian Peralta-Alva; Manuel S. Santos |
| Abstract: | Our work has been concerned with the numerical simulation of dynamic economies with heterogeneous agents and economic distortions. Recent research has drawn attention to inherent difficulties in the computation of competitive equilibria for these economies: A continuous Markovian solution may fail to exist, and some commonly used numerical algorithms may not deliver accurate approximations. We consider a reliable algorithm set forth in Feng et al. (2009), and discuss problems related to the existence and computation of Markovian equilibria, as well as convergence and accuracy properties. We offer new insights into numerical simulation. |
| Keywords: | Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-36&r=dge |
| By: | Marie Hoerova; Cyril Monnet; Ted Temzelides |
| Abstract: | The authors study credible information transmission by a benevolent central bank. They consider two possibilities: direct revelation through an announcement, versus indirect information transmission through monetary policy. These two ways of transmitting information have very different consequences. Since the objectives of the central bank and those of individual investors are not always aligned, private investors might rationally ignore announcements by the central bank. In contrast, information transmission through changes in the interest rate creates a distortion, thus lending an amount of credibility. This induces the private investors to rationally take into account information revealed through monetary policy. |
| Keywords: | Banks and banking, Central ; Information theory |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-18&r=dge |