|
on Dynamic General Equilibrium |
| By: | Hashmat Khan (Department of Economics, Carleton University); John Tsoukalas (Department of Economics, University of Nottingham) |
| Abstract: | Recent work based on sticky price-wage estimated dynamic stochastic general equilibrium (DSGE) models suggests investment shocks are the most important drivers of post-World War II US business cycles. Consumption, however, typically falls after an investment shock. This finding sits oddly with the observed business cycle comovement where consumption, along with hours-worked and investment, moves with economic activity. We show that this comovement problem is resolved in an estimated DSGE model when the cost of capital utilization is specified in terms of increased depreciation of capital, as originally proposed by Greenwood et al. (1988) in a neoclassical setting. Traditionally, the cost of utilization is specified in terms of forgone consumption following Christiano et al. (2005), who studied the effects of monetary policy shocks. The alternative specication we consider has two additional implications relative to the traditional one: (i) it has a substantially better fit with the data and (ii) the contribution of investment shocks to the variance of consumption is over three times larger. The contributions to output, investment, and hours, are also relatively higher, suggesting that these shocks may be quantitatively even more important than previous estimates based on the traditional specification. |
| Keywords: | Investment shocks, comovement, estimated DSGE models |
| JEL: | E2 E3 |
| Date: | 2009–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:09-09&r=dge |
| By: | Björn van Roye; Dennis Wesselbaum |
| Abstract: | We implement capital in an endogenous separations New Keynesian matching model. In contrast to the vintage capital theory, we suggest a more general approach, such that workers have unrestricted access to a proportional share of the capital stock. We find that the introduction of capital generates an important channel for the transmission of aggregate productivity shocks, using capital-labor trade-off. The model generates higher volatilities of key variables and therefore enhances the performance of the matching model to generate stylized facts in response to an aggregate productivity shock. However, there is almost no difference for monetary policy shocks |
| Keywords: | Capital, Endogenous Separations, Search and Matching |
| JEL: | E22 E32 J64 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1561&r=dge |
| By: | Matteo Iacoviello (Boston College); Marina Pavan (The Geary Institute, University College Dublin) |
| Abstract: | We present an equilibrium life-cycle model of housing where nonconvex adjustment costs lead households to adjust their housing choice infrequently and by large amounts when they do so. In the cross-sectional dimension, the model matches the wealth distribution, the age profiles of consumption, homeownership, and mortgage debt, and data on the frequency of housing adjustment. In the time-series dimension, the model accounts for the procyclicality and volatility of housing investment, and for the procyclical behavior of household debt. We use a calibrated version of our model to ask the following question: what are the consequences for aggregate volatility of an increase in household income risk and a decrease in downpayment requirements? We distinguish between an early period, the 1950s through the 1970s, when household income risk was relatively small and loan-to-value ratios were low, and a late period, the 1980s through today, with high household income risk and high loan-to-value ratios. In the early period, precautionary saving is small, wealth-poor people are close to their maximum borrowing limit, and housing investment, homeownership and household debt closely track aggregate productivity. In the late period, precautionary saving is larger, wealth-poor people borrow less than the maximum and become more cautious in response to aggregate shocks. As a consequence, the correlation between debt and economic activity on the one hand, and the sensitivity of housing investment to aggregate shocks on the other, are lower, as is found the data. Quantitatively, our model can explain: (one) 45 percent of the reduction in the volatility of household investment; (two) the decline in the correlation between household debt and economic activity; (three) about 10 percent of the reduction in the volatility of GDP. |
| Keywords: | Housing, Housing Investment, Household Debt, Life-cycle Models, Income Risk, Homeownership, Dynamic Stochastic General Equilibrium Models. |
| JEL: | E22 E32 E44 E51 D92 R21 |
| Date: | 2009–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:723&r=dge |
| By: | Antoci, Angelo; Naimzada, Ahmad; Sodini, Mauro |
| Abstract: | We analyze an overlapping generations model where individuals’ welfare depends on the stock of a free access environmental good E and on the consumption C of a private good. We assume that the production process of the private good depletes the natural resource but that specific investments alleviate these damages. In such context, we show that strategic behaviour and heterogeneity in preferences may be a source of complex dynamics. |
| Keywords: | Heterogeneous agents; environmental externalities; overlapping generations models. |
| JEL: | C61 Q20 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:18221&r=dge |
| By: | Kwamie Dunbar (University of Connecticut and Sacred Heart University) |
| Abstract: | The recent global economic downturn in a number of economies was preceded by rising credit market risk brought on by a massive financial market failure. This paper develops a small open economy model that analyzes the interaction of business cycle volatilities with capital accumulation and the subsequent impacts on economic growth. We use a stochastic dynamic programming model to test the central hypothesis that rising volatility shocks is an inhibitor to capital accumulation and subsequently economic growth. The model illustrates that traditional capital-based growth models which assume a constant capital stock are not consistent with the business cycle variation in capital accumulation. Furthermore, it appears that an increase in precautionary savings arising from a stochastic shock does not completely translate into productive capital investment need for growth, since risk-averse households will seek out risk-free government or foreign assets. We find this conclusion consistent with the empirical findings of Ramey et al (1995) and Badinger (2009) who both argued that, business cycle volatility is important to the growth discussion because of its robust net negative effect on output growth. |
| Keywords: | Economic Growth; Capital Accumulation; Business Cycle Volatilities; Stochastic Optimal Control; Economic Contraction; Credit Default Swaps; Credit Crisis; Credit Markets |
| JEL: | C61 D81 E13 E32 E44 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2009-36&r=dge |
| By: | Halliday, Timothy (University of Hawaii at Manoa); He, Hui (University of Hawaii at Manoa); Zhang, Hao (University of Hawaii at Manoa) |
| Abstract: | We study the evolution of health investment over the life-cycle by calibrating a model of endogenous health accumulation. The model is able to produce the decline in labor supply with age as well as the hump-shaped consumption profile. In both cases, health and health investment play a crucial role as the former encroaches upon healthy time and the latter crowds out non-medical expenditures as people age. Finally, we quantify the value of health as both an investment and a consumption good. We show that the investment motive is about three times higher than the consumption motive during the early 20s, but decreases over the life-cycle until it disappears at retirement. In contrast, the consumption motive increases with age and surpasses the investment motive during the mid 40s. |
| Keywords: | health investment, structural model, medical expenditures |
| JEL: | I12 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4482&r=dge |
| By: | Le, Vo Phuong Mai (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael |
| Abstract: | We review the methods used in many papers to evaluate DSGE models by comparing their simulated moments with data moments. We compare these with the method of Indirect Inference to which they are closely related. We illustrate the comparison with contrasting assessments of a two-country model in two recent papers. We conclude that Indirect Inference is the proper end point of the puzzles methodology. |
| Keywords: | Bootstrap; US-EU model; DSGE; VAR; indirect inference; Wald statistic; anomaly; puzzle |
| JEL: | C12 C32 C52 E1 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2009/22&r=dge |
| By: | Kazuo Mino (Institute of Economic Research, Kyoto University); Yasuhiro Nakamoto (DFaculty of Economics, Kyushu Sangyo University) |
| Abstract: | This paper explores the distributional effect of consumption externalities in a neoclassical growth model with heterogeneous agents. The economy consists of two types of agents each of which perceives different degrees of intergroup as well as intragroup consumption external effects. It is shown that the stationary distribution and transitional dynamics are highly sensitive to the specification of preference structures of each type of agents. |
| JEL: | D31 E13 E21 O40 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:683&r=dge |
| By: | Fabio Ghironi (Boston College); Jaewoo Lee (International Monetary Fund); Alessandro Rebucci (Inter-American Development Bank) |
| Abstract: | International financial integration has greatly increased the scope for changes in a country's net foreign asset position through the "valuation channel" of external adjustment, namely capital gains and losses on the country's external assets and liabilities. We examine this valuation channel theoretically in a dynamic equilibrium portfolio model with international trade in equity that encompasses complete and incomplete asset market scenarios. By separating asset prices and quantities in the definition of net foreign assets, we can characterize the first-order dynamics of both valuation effects and net foreign equity holdings. First-order excess returns are unanticipated and i.i.d. in our model, but capital gains and losses on equity positions feature persistent, anticipated dynamics in response to productivity shocks. The separation of prices and quantities in net foreign assets also enables us to characterize fully the role of capital gains and losses versus the current account in the dynamics of macroeconomic aggregates. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete, showing how these different channels contribute to dampening (or amplifying) the impact response of the cross-country consumption differential to shocks and to keeping it constant in subsequent periods. |
| Keywords: | Current account; Equity; Net foreign assets; Risk sharing; Valuation |
| JEL: | F32 F41 G11 G15 |
| Date: | 2009–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:722&r=dge |
| By: | Klaus Prettner |
| Abstract: | This article investigates the consequences of population ageing for longrun economic growth perspectives. We introduce population ageing into a generalized model of endogenous technological change incorporating the model of Romer (1990) and Jones (1995) as special cases. We find that increases in longevity have positive effects on steady state per capita output growth in endogenous as well as in semiendogenous growth models. In the latter case, the positive dependence can also be shown for the equilibrium growth rate during transition to the steady state. |
| Keywords: | population ageing, endogenous technological change, long-run economic growth. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:vid:wpaper:0908&r=dge |
| By: | Zhang, Yan; Chen , Yan |
| Abstract: | Zhang (2009) shows that endogenous tariffs and endogenous labor income taxes (Schmitt-Grohe and Uribe, 1997) are equivalent in generating local indeterminacy. Using the method developed by Stockman (2009), we extend Zhang's analysis to prove that they are also equivalent in generating global indeterminacy (chaotic equilibria) under a balanced-budget rule. We show that the existence of Euler equation branching in an arbitrarily small neighborhood of a steady state can imply topological chaos in the sense of Devaney. In addition, the Euler equation branching occurs regardless of the local uniqueness of the equilibrium around the steady state(s). |
| Keywords: | Endogenous Tariff Rate; Regime Switching; Chaos. |
| JEL: | E62 E32 |
| Date: | 2009–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:18296&r=dge |
| By: | Michal Andrle; Tibor Hledik; Ondra Kamenik; Jan Vlcek |
| Abstract: | The purpose of the paper is to introduce the new “g3†structural model of the Czech National Bank and illustrate how it is used for forecasting and policy analysis. As from January 2007 the model was regularly used for shadowing official forecasts, and in July 2008 it became the core model of the CNB. In the paper we highlight the most important and unusual features of the model and discuss tools and procedures that help us in forecasting and assessing the economy with the model. The paper is not meant to provide a full derivation of the model or the complete characteristics of its behavior and should not be regarded as model documentation. Rather, the paper demonstrates how the model is used and how it contributes to policy analysis. |
| Keywords: | DSGE, filtering, forecasting, general equilibrium, monetary policy. |
| JEL: | D58 E32 E58 E47 C53 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2009/2&r=dge |
| By: | Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); José Luis Torres Chacón (Departamento de Teoría e Historia Económica de la Universidad de Málaga) |
| Abstract: | We use a dynamic general equilibrium growth model to quantify the contribution to productivity growth from different technological sources in the three leading economies of the world: Japan, Germany and the U.S. The sources of technology are classified into neutral progress and investment-specific progress. The latter can be split into two different types of equipment: Information and Communication Technologies (ICT) and non-ICT equipment. This decomposition analysis is done for both long term and short term growth. In the long run, neutral technological change is the main source of productivity growth in Japan and Germany. For the U.S., the main source of productivity growth arises from investment-specific technological change, mainly associated with ICT. Finally, impulse-response analysis reveals that deviations from the balanced growth path in the short run are mainly due to neutral shocks in the three countries. |
| Keywords: | Productivity growth; Investment-specific progress; Neutral progress; Information and communication technology. |
| JEL: | O3 O4 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:09.09&r=dge |
| By: | Evangelia Vourvachaki |
| Abstract: | This paper investigates the growth impact of Information and Communication Technologies (ICT) in an economy consisting of three sectors, ICT-producing, ICT-using and non-ICTusing. The ICT progress causes falling prices of the consumption and intermediates produced by the ICT-using sector, providing incentives for investment in the sectors using them. Therefore, the non-ICT-using sector benefits indirectly from ICT, while households' utility increases. The magnitude of the growth transmission mechanism relies on the ICT-using sector production shares. Aggregate economy is on a constant growth path, where growth rates differ across sectors. The model predictions are broadly consistent with the U.S. growth experience. |
| Keywords: | Multi-sector Economy, Endogenous Growth, Constant Growth Path, Information and Communication Technologies. |
| JEL: | O40 O41 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp386&r=dge |
| By: | Iho, Antti; Laukkanen, Marita |
| Abstract: | This paper puts forward a model of the role of phosphorus in crop production, soil phosphorus dynamics and phosphorus loading that integrates the salient economic and ecological features of agricultural phosphorus management. The model accounts for the links between phosphorus fertilization, crop yield, accumulation of soil phosphorus reserves, and phosphorus loading. It can be used to guide precision phosphorus management and erosion control as means to mitigate agricultural loading. Using a parameterization for cereal production in southern Finland, the model is solved numerically to analyze the intertemporally optimal combination of fertilization and erosion control and the associated soil phosphorus development. The optimal fertilizer application rate changes markedly over time in response to changes in the soil phosphorus level. When, for instance, soil phosphorus is initially above the socially optimal steady state level, annually matching phosphorus application to the prevailing soil phosphorus stock produces significantly higher social welfare than using a fixed fertilizer application rate. Erosion control was found to increase welfare only on land that is highly susceptible to erosion. |
| Keywords: | precision nutrient management, agricultural phosphorus loading, cereal production, soil phosphorus reserves, agricultural water pollution, dynamic programming, Agricultural and Food Policy, Crop Production/Industries, Environmental Economics and Policy, |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:ags:mttfdp:54285&r=dge |
| By: | Jan Babecky; Kamil Dybczak |
| Abstract: | The Czech Republic is facing a population ageing phenomenon. In addition, its demographic structure is expected to change dramatically over the next 50 years. We apply a stylised overlapping generation model in order to analyse the potential effects of the expected demographic changes on aggregate economic performance taking into account alternative fiscal policy set-ups. We provide a rough estimate of the amendments necessary on the revenue and expenditure sides in order to keep the current system financially balanced. We also discuss the implications for the development of other economic variables. In particular, we separately simulate future developments in the cases of adjustment in either the contribution rate or the value of public benefit. In addition, we demonstrate that parametric changes, such as an increase in the statutory retirement age, cannot eliminate the impact of the deterioration in the demographic structure on the course of the economy. |
| Keywords: | Population ageing, public pension systems, social security. |
| JEL: | E27 J11 H55 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2009/1&r=dge |
| By: | Maroula Khraiche |
| Abstract: | Throughout economic history there have been episodes in which the liberalization of trade has been accompanied by a positive flow of migrants. Such phenomena are notable because they contradict the basic Heckscher-Ohlin conclusion that trade and labor mobility are substitutes. Also notable is the fact that migrants to the U.S. have been largely skilled rather than unskilled. This paper links these two phenomena by pointing out the simple fact that increased trade can involve different types of firm structures and different types of goods being traded, which in turn have different effects on skilled and unskilled labor. The interaction between different frictions that impact labor movements, specifically the interaction between capital adjustment costs and trade costs, has a significant effect on the gap between the returns to labor in the South and North. Although the decrease in trade costs and increase in trade dampens labor movements, the existence of asymmetric capital adjustment costs in the North and South increases it. To show these results formally, this paper calibrates and solves a two-country, two-sector model of trade and migration, in which countries differ in skill endowments and capital adjustment costs and sectors differ in structures and capital intensities. Empirical analysis is then provided, with results supporting the main qualitative implications of the model. |
| Keywords: | International migration, multinational firms, capital adjustment cost. |
| JEL: | F16 F22 F23 E2 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2009-35&r=dge |