nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒10‒24
fifteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Intangible Capital, Corporate Earnings and the Business Cycle By Keqiang Hou; Alok Johri
  2. Endogenous lifetime in an overlapping generations small open economy By Luciano Fanti and Luca Gori
  3. Medium Term Business Cycles in Developing Countries By Diego A. Comin; Norman Loayza; Farooq Pasha; Luis Serven
  4. Existence and stability of overconsumption equilibria By Grégory Ponthière
  5. Social VAT: Good or bad idea? By Fève, P.; Matheron, J.; Sahuc, J-G.
  6. Steady state Laffer curve with the underground economy By Francesco Busato; Bruno Chiarini
  7. Retirement in a Life Cycle Model of Labor Supply with Home Production By Richard Rogerson; Johanna Wallenius
  8. Child policy ineffectiveness in an OLG small open economy with human capital accumulation and public education By Luciano Fanti and Luca Gori
  9. Endogenous fertility, endogenous lifetime and economic growth: the role of health and child policies By Luciano Fanti and Luca Gori
  10. Information Criteria for Impulse Response Function Matching Estimation of DSGE Models By Alastair R. Hall; Atsushi Inoue; James M Nason; Barbara Rossi
  11. On the fiscal treatment of life expectancy related choices. By Julio Davila; Marie-Louise Leroux
  12. Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts By Jingjing Chai; Wolfram Horneff; Raimond Maurer; Olivia S. Mitchell
  13. Economists, Incentives, Judgment, and the European CVAR Approach to Macroeconometrics By David Colander
  14. Public and private sector wages interactions in a general equilibrium model By Gonzalo Fernández-de-Córdoba; Javier J. Pérez; José L. Torres
  15. Two Perspectives on Preferences and Structural Transformation By Berthold Herrendorf; Richard Rogerson; Ãkos Valentinyi

  1. By: Keqiang Hou; Alok Johri
    Abstract: Aggregate corporate profits are highly volatile and procyclical. Most dynamic general equilibrium models of the business cycle cannot deliver these basic features of the data. We develop a model of the U.S. economy in which firms expend resources to create intangible capital (IC), which is an additional input in their production technology. In keeping with the data, the model delivers profits that are many times more volatile than output. An estimated version of the model implies that IC investments are large and pro-cyclical. IC acts as a propaga- tion mechanism, generating inertial responses to shocks. Overall, the model fits the aggregate data much better than a model without IC.
    Keywords: Business Cycles; Profits; Bayesian Estimation; Intangible Capital
    JEL: E3
    Date: 2009–10
  2. By: Luciano Fanti and Luca Gori
    Abstract: Using a simple overlapping generations small open economy, we show that endogenous longevity – through public health expenditure – may reduce both the saving rate and per capita domestic income, while increasing the per capita foreign debt in a country. Moreover, despite funding public health capital is always beneficial for life expectancy, it may or may not represent a Pareto improvement with respect to the laissez-faire solution depending on whether the world interest rate is high or low enough, respectively.
    Keywords: Health; Life expectancy; OLG model; Small open economy.
    JEL: I18 O41
    Date: 2009–10–15
  3. By: Diego A. Comin; Norman Loayza; Farooq Pasha; Luis Serven
    Abstract: We build a two country asymmetric DSGE model with two features: (i) a product cycle structure determines the range of intermediate goods used to produce new capital in each country and (ii) there are investment flow adjustment costs in the developing economy. We calibrate the model to match the Mexico-US trade and FDI flows. The model is able to explain (i) why US shocks have a larger effect on Mexico than in the US and hence why the Mexican economy is more volatile than the US; (ii) why US business cycles lead over medium term fluctuations in Mexico and (iii) why Mexican consumption is not less volatile than output.
    JEL: E3 F1 F2 F4 O3
    Date: 2009–10
  4. By: Grégory Ponthière
    Abstract: Growth models with endogenous mortality assume generally that life expectancy is increasing with output per capita, and, thus, with individual consumption, whatever the consumption level is. However, empirical evidence on the effect of overconsumption and obesity on mortality tends to question that postulate. This paper develops a two-period OLG model where life expectancy is a non-monotonic function of consumption. The existence, uniqueness and stability of steady-state equilibria are studied. It is shown that overconsumption equilibria - i.e. equilibria at which consumption exceeds the level maximizing life expectancy - exist in highly productive economies with a low impatience. Stability analysis highlights conditions under which there exist non-converging cycles in output and longevity around overconsumption equilibria.
    Date: 2009
  5. By: Fève, P.; Matheron, J.; Sahuc, J-G.
    Abstract: The quantitative and dynamic consequence of a social VAT reform, i.e. a fiscal reform consisting in substituting VAT for social contributions, is assessed using two general equilibrium models. The first one is a Walrasian model with no other frictions than distortionary taxation of labor and capital incomes and consumption. The second one introduces in addition matching frictions in the labor market. Two alternative financing schemes are considered for the practical details of implementing the social VAT. In all cases, the fiscal reform turns out to generate a small, positive long--run effect on aggregate variables and yields a modest welfare gain. In the no--friction model, this welfare gain is substantially reduced when the reform is pre--announced six quarters prior to implementation. The effect of such a pre-announced reform are smaller when labor market frictions are taken into account.
    Keywords: social VAT, DGE, pre-announced fiscal reform.
    JEL: E10 E20 G12
    Date: 2009
  6. By: Francesco Busato; Bruno Chiarini (-; -)
    Abstract: This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. In particular, we show that a dynamic general equilibrium with tax evasion may give a rational justification for a variant of the Laffer curve for a plausible parameterization. In this respect, the paper also identifies the different parameterization of the model formulation with tax evasion under which a Laffer curve exist. From a revenue maximizing perspective, the key policy messages are that bringing tax payers to compliance would be better than announcing to punish them if convicted, and that an economy without problems of compliance is much more sensitive to myopic behavior.
    Keywords: Two-sector Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and Underground Activities.
    JEL: E32 E13 H20 E26
    Date: 2009–10–06
  7. By: Richard Rogerson (Arizona State University); Johanna Wallenius (Arizona State University)
    Abstract: We analyze the forces that can generate retirement in different versions of standard life cycle models of labor supply. While nonconvexities in production can generate retirement, we show that the size of nonconvexities needed increases sharply as the intertemporal elasticity of substitution for labor decreases. In a model with home production, we show that these models imply a large increase in time devoted to home production at retirement. This is contrary to what is found in the ATUS data. We suggest that nonconvexities in the enjoyment of leisure time may be a promising alternative feature to generate retirement.
    Date: 2009–09
  8. By: Luciano Fanti and Luca Gori
    Abstract: Motivated by the recent decrease in the number of children experienced in many developed countries, in this paper we consider an OLG small open economy with endogenous fertility and human capital formation through public education and look at the role the government can play in affecting fertility rates through the widely used child allowance policy. Contrary to the conventional wisdom, we show that child allowances do not affect fertility. The policy implication is that the public provision of child allowances is not effective as a pro-natalist policy, while also reducing human capital accumulation. In contrast, enhancing the public provision of education is beneficial for both fertility and human capital.
    Keywords: Child allowance; Fertility; Public education; Small open economy.
    JEL: I28 J13
    Date: 2009–10–15
  9. By: Luciano Fanti and Luca Gori
    Abstract: In this paper we link endogenous fertility, endogenous longevity, economic growth and public policies – represented by public health investments and child policies – in a basic overlapping generations model. We found that there even exist four equilibria, and thus low and high development regimes, which may be, however, determined by government policies, and concluded that when fertility is endogenous, increasing public health is always beneficial allowing economies to escape from poverty and, hence, to prosper. The same conclusion holds for the child tax policy. In particular, the latter result may be in accord with, for instance, the tremendous development experienced by China where a restrictive one child per family policy forced by the government planned and restricted the size of Chinese families, probably allowing some geographic areas within China to escape from poverty.
    Keywords: Child policy; Endogenous fertility; Health; Life expectancy; OLG model.
    JEL: I1 J13 O4
    Date: 2009–10–15
  10. By: Alastair R. Hall; Atsushi Inoue; James M Nason; Barbara Rossi
    Abstract: We propose new information criteria for impulse response function matching estimators (IRFMEs). These estimators yield sampling distributions of the structural parameters of dynamic sto- chastic general equilibrium (DSGE) models by minimizing the distance between sample and theoretical impulse responses. First, we propose an information criterion to select only the responses that produce consistent estimates of the true but unknown structural parameters: the Valid Impulse Response Selection Criterion (VIRSC). The criterion is especially useful for mis-speci?ed models. Second, we propose a criterion to select the impulse responses that are most informative about DSGE model parameters: the Relevant Impulse Response Selection Criterion (RIRSC). These criteria can be used in combination to select the subset of valid impulse response functions with minimal dimension that yields asymptotically efficient estimators. The criteria are general enough to apply to impulse responses estimated by VARs, local projections, and simulation methods. We show that the use of our criteria signi?cantly a¤ects estimates and inference about key parameters of two well-known new Keynesian DSGE models. Monte Carlo evidence indicates that the criteria yield gains in terms of ?nite sample bias as well as o¤ering tests statistics whose behavior is better approximated by ?rst order asymptotic theory. Thus, our criteria improve on existing methods used to implement IRFMEs.
    Date: 2009
  11. By: Julio Davila (Centre d'Economie de la Sorbonne - Paris School of Economics and CORE); Marie-Louise Leroux (CORE - Université Catholique de Louvain)
    Abstract: In an overlapping generations economy setup we show that, if individuals can improve their life expectancy by exerting some effort, costly in terms of either resources or utility, the competitive equilibrium steady state differs from the first best steady state. This is due to the fact that under perfect competition individuals fail to anticipate the impact of their longevity-enhancing effort on the return of their annuitized savings. We indentify the policy instruments required to implement the first-best into a competitive equilibrium and show that they are specific to the form, whether utility or resources, that the effort takes.
    Keywords: Life expectancy, health expenditures, taxation.
    JEL: H21 D91
    Date: 2009–09
  12. By: Jingjing Chai (Goethe University); Wolfram Horneff (Goethe University); Raimond Maurer (Goethe University); Olivia S. Mitchell (The Wharton School)
    Abstract: This paper derives optimal life cycle portfolio asset allocations as well as annuity purchases trajectories for a consumer who can select her hours of work and also her retirement age. Using a realistically-calibrated model with stochastic mortality and uncertain labor income, we extend the investment universe to include not only stocks and bonds, but also survival-contingent payout annuities. We show that making labor supply endogenous raises older peoples’ equity share; substantially increases work effort by the young; and markedly enhances lifetime welfare. Also, introducing annuities leads to earlier retirement and higher participation by the elderly in financial markets. Finally, when we allow for an age-dependent leisure preference parameter, this fits well with observed evidence in that it generates lower work hours and smaller equity holdings at older ages as well as sensible retirement age patterns.
    Date: 2009–08
  13. By: David Colander
    Abstract: This paper argues that the DSGE approach to macroeconometrics is the dominant approach because it meets the institutional needs of the replicator dynamics of the profession, not because it is necessarily the best way to do macroeconometrics. It further argues that this “DSGE-theory first” approach is inconsistent with the historical approach that economists have advocated in the past and that the alternative European CVAR approach is much more consistent with economist’s historically used methodology, correctly understood. However, because the European CVAR approach requires explicit researcher judgment, it does not do well in the replicator dynamics of the profession. The paper concludes with the suggestion that there should be an increase in dialog between the two approaches.
    Keywords: methodology, macroeconometrics, general to specific, DSGE, VAR, judgment, incentives
    JEL: C10 A1
    Date: 2009–12
  14. By: Gonzalo Fernández-de-Córdoba (Universidad de Salamanca); Javier J. Pérez (Banco de España); José L. Torres (Universidad de Málaga)
    Abstract: This paper develops a dynamic general equilibrium model in which the public and the private sector interact in the labor market. Previous studies that analyze the labor market effects of public sector employment and wages have mostly assumed exogenous rules for public wage and public employment. We show that theories that equalize wages with marginal products in the private sector can rationalize the interaction of public and private sector wages when extended to accommodate a non-trivial government sector/public sector union that endogenously determines public employment and wages. Our model suggests a positive correlation between public and private sector wages. Any increase in tax revenues, coupled with the existence of a positive public-private sector wage gap, makes working in the public sector an attractive option. Thus, a positive neutral productivity shock increases public and private sector wages. More interestingly, even a private-sector specific productivity shock spills-over to the public sector, increasing public wages. These facts lend some support to the wage leading role of the private sector. Nevertheless, at the same time, a positive shock to public sector wages would lead to an increase in private sector wages, via the flow of workers from the private to the public sector.
    Keywords: Public wages, public employment, labor market, trade unions
    JEL: C32 J30 J51 J52 E62 E63 H50
    Date: 2009–10
  15. By: Berthold Herrendorf; Richard Rogerson; Ãkos Valentinyi
    Abstract: We ask what specification of preferences can account for the changes in the expenditure shares of broad sectors that are associated with the process of structural transformation in the U.S. since 1947. Following the tradition of the expenditure systems literature, we first calibrate utility function parameters using NIPA data on final consumption expenditure. We find that a Stone-Geary specification fits the data well. While useful, this exercise does not tell the researcher what utility function to use in a model that posits sectoral production functions in value added form. We therefore develop a method to calculate the value added components of consumption categories that are consistent with value added production functions, and use these data to calibrate a utility function over sectoral consumption value added. We find that a Leontief specification fits the data well. Interestingly, the two specifications display very different properties: for final consumption expenditure income effects are the dominant force behind changes in expenditure shares whereas for consumption value added relative price effects are dominant.
    JEL: E20 O14
    Date: 2009–10

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