nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒09‒19
twenty papers chosen by
Christian Zimmermann
University of Connecticut

  1. The cross-section of firms over the business cycle: new facts and a DSGE exploration By Bachmann, Ruediger; Bayer, Christian
  2. Evaluating a monetary business cycle model with unemployment for the euro area By Nicolas Groshenny
  3. Firm-specific productivity risk over the business cycle: facts and aggregate implications By Bachmann, Ruediger; Bayer, Christian
  4. Efficient likelihood evaluation of state-space representations By DeJong, David N.; Dharmarajan, Hariharan; Liesenfeld, Roman; Moura, Guilherme V.; Richard , Jean-François
  5. On Robust Asymmetric Equilibria in Asymmetric R&D-Driven Growth Economies By Giordani, Paolo E.; Zamparelli, Luca
  6. Resurrecting the Role of Real Money Balance Effects By José Dorich
  7. The debt brake: business cycle and welfare consequences of Germany's new fiscal policy rule By Mayer, Eric; Stähler, Nikolai
  8. Industrialization Jobs Creation and Wages Incentives By Faria, Joao; Jellal, Mohamed
  9. Macroeconomic Effects of Financial Shocks By Urban Jermann; Vincenzo Quadrini
  10. PAYG Pensions and Human Capital Accumulation: Some Unpleasant Arithmetic By Giam Pietro Cipriani; Miltiadis Makris
  11. Unemployment in an interdependent world By Felbermayr, Gabriel; Larch, Mario; Lechthaler, Wolfgang
  12. Technological Growth and Asset Pricing By Nicolae B. Gârleanu; Stavros Panageas; Jianfeng Yu
  13. Optimal savings and heallth spending over the life cycle By Tamara Fioroni
  14. Asymptotic age structures and intergenerational trade By Grégory Ponthière
  15. Dynamic of Employment and Wages Incentives By Faria, Joao; Jellal, Mohamed
  16. Decreasing Fertility, Economic Growth and the Intergenerational Wage Gap By Klaus Prettner; Alexia Prskawetz
  17. Inequality, Mobility and Redistributive Taxation in a Finance-constrained Economy By Ryo Arawatari; Tetsuo Ono
  18. More or less aggressive?: robust monetary policy in a New Keynesian model with financial distress By Gerke, Rafael; Hammermann, Felix; Lewis, Vivien
  19. On the (de)stabilizing effects of news shocks By Winkler, Roland C.; Wohltmann, Hans-Werner
  20. Growth Accounting By Charles R. Hulten

  1. By: Bachmann, Ruediger; Bayer, Christian
    Abstract: Using a unique German firm-level data set, this paper is the first to jointly study the cyclical properties of the cross-sections of firm-level real value added and Solow residual innovations, as well as capital and employment adjustment. We find two new business cycle facts: 1) The cross-sectional standard deviation of firm-level innovations in the Solow residual, value added and employment is robustly and significantly countercyclical. 2) The cross-sectional standard deviation of firm-level investment is procyclical. We show that a heterogeneousfirm RBC model with quantitatively realistic countercyclical innovations in the firm-level Solow residual and non-convex adjustment costs calibrated to the non-Gaussian features of the steady state investment rate distribution, produces investment dispersion that positively comoves with the cycle, with a correlation coefficient of 0.65, compared to 0.61 in the data. We argue more generally that the cross-sectional business cycle dynamics impose tight empirical restrictions on structural parameters and stochastic properties of driving forces in heterogeneousfirmmodels, and are therefore paramount in the calibration of these models.
    Keywords: Ss model,RBC model,cross-sectional firm dynamics,lumpy investment,countercyclical risk,aggregate shocks,idiosyncratic shocks,heterogeneous firms.
    JEL: E20 E22 E30 E32
    Date: 2009
  2. By: Nicolas Groshenny (Reserve Bank of New Zealand)
    Abstract: This paper estimates a medium-scale DSGE model with search unemployment by matching model and data spectra. Price markup shocks emerge as the main source of business-cycle fluctuations in the euro area. Key for the propagation of these disturbances are a high degree of inflation ndexation and a persistent response of monetary policy to deviations of inflation from the target.
    JEL: E32 C51 C52
    Date: 2009–09
  3. By: Bachmann, Ruediger; Bayer, Christian
    Abstract: Is time-varying firm-level uncertainty a major cause or amplifier of the business cycle? This paper investigates this question in the context of a heterogeneousfirm RBC model with persistent firm-level productivity shocks and lumpy capital adjustment, where cyclical changes in uncertainty correspond naturally to cyclical changes in the cross-sectional dispersion of firm-specific Solow residual innovations. We use a unique German firm-level data set to investigate the extent to which firm-level uncertainty varies over the cycle. This allows us to put empirical discipline on our numerical simulations. We find that, while firm-level uncertainty is indeed countercyclical, it does not fluctuate enough to significantly alter the dynamics of an RBC model with only first moment shocks. The mild changes we do find are mainly caused by a bad news effect: higher uncertainty today predicts lower aggregate Solow residuals tomorrow. This effect dominates the real option value effect of time-varying uncertainty, highlighted in the literature.
    Keywords: Ss model,RBC model,lumpy investment,countercyclical risk,aggregate shocks,idiosyncratic shocks,heterogeneous firms,news shocks,uncertainty shocks.
    JEL: E20 E22 E30 E32
    Date: 2009
  4. By: DeJong, David N.; Dharmarajan, Hariharan; Liesenfeld, Roman; Moura, Guilherme V.; Richard , Jean-François
    Abstract: We develop a numerical procedure that facilitates efficient likelihood evaluation in applications involving non-linear and non-Gaussian state-space models. The procedure approximates necessary integrals using continuous approximations of target densities. Construction is achieved via efficient importance sampling, and approximating densities are adapted to fully incorporate current information. We illustrate our procedure in applications to dynamic stochastic general equilibrium models.
    Keywords: particle filter,adaption,efficient importance sampling,kernel density approximation,dynamic stochastic general equilibrium model
    Date: 2009
  5. By: Giordani, Paolo E.; Zamparelli, Luca
    Abstract: In an R&D-driven growth model with asymmetric fundamentals the steady state equilibrium R&D investments are industry-specific and they are such that R&D returns are equalized across industries. Return equalization, however, makes investors indifferent as to where to target research and, hence, the problem of allocation of R&D investments across industries is indeterminate. Agents' indifference creates an ambiguous investment scenario. We assume that agents hold "ambiguous" beliefs on the per-industry profitability of their R&D investments. Investors' aversion towards ambiguity (in the sense of Gilboa-Schmeidler, 1989) eliminates the indeterminacy of the R&D investment problem. In particular, we prove that the asymmetric return-equalizing equilibrium is robust against a however small degree of investors' aversion to ambiguity.
    Keywords: R&D driven growth models; symmetry/asymmetry; ambiguity
    JEL: D81 O41 O32
    Date: 2009–09
  6. By: José Dorich
    Abstract: I present a structural econometric analysis supporting the hypothesis that money is still relevant for shaping inflation and output dynamics in the United States. In particular, I find that real money balance effects are quantitatively important, although smaller than they used to be in the early postwar period. Moreover, I show three additional implications of the econometric estimates for monetary policy analysis. First, by including real money balance effects into the standard sticky price model, two stylized facts can be explained: the modestly procyclical real wage response to a monetary policy shock and the supply side effects of monetary policy. Second, the existence of real money balance effects causes higher volatility of output and lower volatility of interest rates under the optimal monetary policy. Third, the reduction in the size of real money balance effects can account for a significant decline in macroeconomic volatility.
    Keywords: Business fluctutations and cycles, Monetary aggregates, Transmission of monetary policy
    JEL: E31 E32 E52
    Date: 2009
  7. By: Mayer, Eric; Stähler, Nikolai
    Abstract: In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors.
    Keywords: Fiscal policy,debt brake,welfare,dsge
    JEL: E32 E62
    Date: 2009
  8. By: Faria, Joao; Jellal, Mohamed
    Abstract: An optimizing representative firm pays efficiency wages to skilled workers to produce technological innovations, which are assumed to be of labor saving type, affecting negatively the hiring rate of unskilled workers. The results are: i) The efficiency wage of skilled workers is determined by the Solow condition; ii) There is underemployment of unskilled workers whenever the added value of innovations is greater than the opportunity cost of skilled workers’ wages; iii) The optimal level of technology is independent of technological parameters; iv) The employment of skilled workers increases with the level of technology and decreases with the efficiency wage; v) The employment of unskilled workers is not necessarily negatively affected by technological innovations in the steady state.
    Keywords: Unemployment; Dynamic Efficiency Wage Model; Technological Change
    JEL: J41 O33 D92
    Date: 2009–09–01
  9. By: Urban Jermann; Vincenzo Quadrini
    Abstract: In this paper we document the cyclical properties of U.S. firms' financial flows. Equity payouts are procyclical and debt payouts are countercyclical. We develop a model with explicit roles for debt and equity financing and explore how the observed dynamics of real and financial variables are affected by `financial shocks', that is, shocks that affect the firms' capacity to borrow. Standard productivity shocks can only partially explain the movements in real and financial variables. The addition of financial shocks brings the model much closer to the data. The recent events in the financial sector show up clearly in our model as a tightening of firms' financing conditions causing the GDP decline in 2008-09. Our analysis also suggests that the downturns in 1990-91 and 2001 were strongly influenced by changes in credit conditions.
    JEL: E32 G10
    Date: 2009–09
  10. By: Giam Pietro Cipriani; Miltiadis Makris
    Abstract: A large literature has studied the effects of PAYG systems on fertility, human capital and growth. We argue that the social security system may also interact with longevity when the latter is endogenously determined. We show that in such an environment, in a dynamically efficient economy PAYG pensions must be sufficiently low in order to ensure positive economic growth. Moreover, a transition to a funded social security system will promote growth, and can thereby take place by fully compensating the losers.
    Keywords: Pensions, Human Capital, Growth, Endogenous Longevity
    JEL: H55 J10 O10
    Date: 2009–07
  11. By: Felbermayr, Gabriel; Larch, Mario; Lechthaler, Wolfgang
    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
  12. By: Nicolae B. Gârleanu; Stavros Panageas; Jianfeng Yu
    Abstract: In this paper we study the implications of general-purpose technological growth for asset prices. The model features two types of shocks: "small", frequent, and disembodied shocks to productivity and "large" technological innovations, which are embodied into new vintages of the capital stock. While the former affect the economy on impact, the latter affect the economy with lags, since firms need to first adopt the new technologies through investment. The process of adoption leads to cycles in asset valuations and risk premia as firms convert the growth options associated with the new technologies into assets in place. This process can help provide a unified, investment-based view of some well documented phenomena such as the asset-valuation patterns around major technological innovations, the countercyclical behavior of returns, the lead-lag relationship between the stock market and output, and the increasing patterns of consumption-return correlations over longer horizons.
    JEL: E22 G12
    Date: 2009–09
  13. By: Tamara Fioroni
    Abstract: This paper investigates the relationship between saving and health spending in a two-period overlapping generations economy. Individuals work in the first period of life and live in retirement in old age. Health spending is an activity that increases the quality of life and longevity. Empirical evidence shows that both health spending and saving behave as luxury goods but their behavior differs markedly according to the level of per capita GDP. The share of saving on GDP has a concave shape with respect to per capita GDP, whereas the share of health spending on GDP increases more than proportionally with respect to per capita GDP. Their ratio is nonlinear with respect to income, i.e. first increasing and then decreasing. This ratio, in the proposed model, is equal to the ratio between the elasticity of the utility function with respect to saving and the elasticity of the utility function with respect to health.
    Keywords: Intertemporal Choice, Health Spending, Adult Mortality, Saving
    JEL: D91 I12 E21
    Date: 2009–02
  14. By: Grégory Ponthière
    Abstract: While demographers Lotka (1939) and Lopez (1961) proposed conditions on (exogenous) fertility and mortality laws under which populations with distinct initial age structures exhibit the same asymptotic age structure, this paper re-examines the issues of age structure stabilization and convergence, by considering a population whose fertility and mortality are endogenously determined in the economy. For that purpose, we develop a three-period OLG model where human capital accumulation and intergenerational trade affect fertility and longevity. It is shown that the age structure must converge asymptotically towards a stable structure, whose form depends on the structural parameters of the economy. Moreover, populations with distinct initial age structures will end up with the same long-run age structure when fertility and mortality laws are converging, which requires converging terms of trade between coexisting generations in the different populations under study.
    Date: 2009
  15. By: Faria, Joao; Jellal, Mohamed
    Abstract: This paper studies a dynamic model with efficiency wages and adjustment costs associated with hiring and firing decisions. With linear adjustment costs, the optimal efficiency wage and employment are affected by the real interest rate and adjustment costs. When lumpy costs or convex adjustment costs (symmetric or asymmetric) are taken into account, the interest rate and the adjustment costs do not play any role in determining the equilibrium efficiency wage and level of employment.
    Keywords: Wage determination; Jobs creation
    JEL: J41 J23
    Date: 2009–09–08
  16. By: Klaus Prettner; Alexia Prskawetz
    Abstract: Persistent low fertility rates lead to lower population growth rates and eventually also to decreasing population sizes in most industrialized countries. There are fears that this demographic development is associated with declines in per capita GDP and possibly also increasing inequality of the wage distribution. We investigate whether this is true in the context of neoclassical growth models, augmented with endogenous fertility decisions and endogenous educational decisions. Furthermore we allow for imperfect substitutability across workers of different age in the production process and learning by doing effects as well as human capital depreciation. In particular, we assess the intergenerational wage redistribution effects which follow after a demographic change to persistent low fertility rates.
    Keywords: Population decline, economic growth, intergenerational wage gap.
    Date: 2009–08
  17. By: Ryo Arawatari (Faculty of Economics, Shinshu University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper presents a simple model that displays a joint determination of income inequality and intergenerational mobility affected by redistributive taxation. The model shows that a larger redistribution improves equality and utility and enhances mobility when the poor are financially constrained, however it creates a trade-off between the rich and the poor in terms of utility when the poor are financially unconstrained. The model also shows that the size of the redistribution as well as wage inequality play key roles in explaining the cross-country differences in inequality and mobility among OECD countries.
    Keywords: inequality; Gini coefficient; intergenerational mobility; redistributive taxation; financial constraints.
    JEL: D31 H23 O23
    Date: 2009–09
  18. By: Gerke, Rafael; Hammermann, Felix; Lewis, Vivien
    Abstract: This paper investigates the optimal monetary policy response to a shock to collateral when policymakers act under discretion and face model uncertainty. The analysis is based on a New Keynesian model where banks supply loans to transaction constrained consumers. Our results confirm the literature on model uncertainty with respect to a cost-push shock. Insuring against model misspecification leads to a more aggressive policy response. The same is true for a shock to collateral. A preference for robustness leads to a more aggressive policy. Increasing the weight attached to interest rate smoothing raises the degree of aggressiveness. Our results indicate that a preference for robustness crucially depends on the way different types of disturbances affect the economy: in the case of a shock to collateral the policymaker does not need to be as much worried about model misspecification as in the case of a conventional cost-push shock.
    Keywords: Optimal monetary policy,discretion,model uncertainty,banking,collateral
    JEL: E44 E58 E32
    Date: 2009
  19. By: Winkler, Roland C.; Wohltmann, Hans-Werner
    Abstract: This paper analyzes the impacts of news shocks on macroeconomic volatility. Whereas in any purely forward-looking model, such as the baseline New Keynesian model, anticipation amplifies volatility, we obtain ambiguous results when including a backward-looking component. In addition to these theoretical findings, we use the estimated model of Smets and Wouters (2003) to provide numerical evidence that news shocks increase the volatility of key macroeconomic variables in the euro area when compared to unanticipated shocks.
    Keywords: Anticipated shocks,business cycles,volatility
    JEL: E32
    Date: 2009
  20. By: Charles R. Hulten
    Abstract: Incomes per capita have grown dramatically over the past two centuries, but the increase has been unevenly spread across time and across the world. Growth accounting is the principal quantitative tool for understanding this phenomenon, and for assessing the prospects for further increases in living standards. This paper sets out the general growth accounting model, with its methods and assumptions, and traces its evolution from a simple index-number technique that decomposes economic growth into capital-deepening and productivity components, to a more complex account of the growth process. In the more complex account, capital and productivity interact, both are endogenous, and quality change in inputs and output matters. New developments in micro-level productivity analysis are also reviewed, and the long-standing question of net versus gross output as the appropriate indicator of economic growth is addressed.
    JEL: E01 O47
    Date: 2009–09

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