nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒11‒14
twenty papers chosen by
Christian Zimmermann
University of Connecticut

  1. Labor supply heterogeneity and macroeconomic comovement By Stefano Eusepi; Bruce Preston
  2. Risk aversion, the labor margin, and asset pricing in DSGE models By Eric T. Swanson
  3. Credit Constraints and the Persistence of Unemployment By Dromel, Nicolas; Kolakez, Elie; Lehmann, Etienne
  4. Marital Risk, Family Insurance, and Public Policy By Hans Fehr; Manuel Kallweit; Fabian Kindermann
  5. The ‘Puzzles’ Methodology: En Route to Indirect Inference? By Vo Phuong Mai Le; Patrick Minford; Michael Wickens
  6. External imbalances and collateral constraints in a two-country world. By Eleni Iliopulos
  7. The cyclicality of the user cost of labor with search and matching By Marianna Kudlyak
  8. A model of urban demography By Hiroshi Aiura; Yasuhiro Sato
  9. Pension funding and individual accounts in economies with life-cyclers and myopes By Hans Fehr; Fabian Kindermann
  10. Inflation, Human Capital and Tobin's q By Parantap Basu; Max Gillman; Joseph Pearlman
  11. Equilibria in a model with a search labour market and a matching marriage market By Roberto Bonilla
  12. Inequality, Mobility and Redistributive Politics By Ryo Arawatari; Tetsuo Ono
  13. The role of capital service-life in a model with heterogenous labor and vintage capital By Milton H. Marquis; Wuttipan Tantivongy; Bharat Trehan
  14. The Suspension of the Gold Standard as Sustainable Monetary Policy By Elisa Newby
  15. A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks By Ignazio Angeloni; Ester Faia
  16. Bargaining Frictions, Labor Income Taxation, and Economic Performance By Stéphane Auray; Samuel Danthine
  17. Outside versus inside bonds: a Modigliani-Miller type result for liquidity constrained economies By Aleksander Berentsen; Christopher J. Waller
  18. Tax and Transfer Programs in an Incomplete Markets Model By Alonso Ortiz, Jorge; Rogerson, Richard
  19. “On the ‘Hot Potato Effect’ of Inflation: Intensive versus Extensive Margins” By Lucy Qian Liu; Liang Wang; Randall Wright
  20. Commuting, Wages and Bargaining Power By Rupert, Peter; Stancanelli, Elena; Wasmer, Etienne

  1. By: Stefano Eusepi; Bruce Preston
    Abstract: Standard real business cycle models must rely on total factor productivity (TFP) shocks to explain the observed comovement of consumption, investment, and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption can generate comovement in the absence of TFP shocks. Intertemporal substitution of goods and leisure induces comovement over the business cycle through heterogeneity in the consumption behavior of employed and unemployed workers. This result owes to two model features introduced to capture important characteristics of U.S. labor market data. First, individual consumption is affected by the number of hours worked: Employed agents consume more on average than the unemployed do. Second, changes in the employment rate, a central factor explaining variation in total hours, affect aggregate consumption. Demand shocks--such as shifts in the marginal efficiency of investment, as well as government spending shocks and news shocks--are shown to generate economic fluctuations consistent with observed business cycles.
    Keywords: Labor market ; Consumption (Economics) ; Productivity ; Business cycles ; Employment
    Date: 2009
  2. By: Eric T. Swanson
    Abstract: In dynamic stochastic general equilibrium (DSGE) models, the househol's labor margin as well as consumption margin affects Arrow-Pratt risk aversion. This paper derives simple, closed-form expressions for risk aversion that take into account the household's labor margin. Ignoring the labor margin can lead to wildly inaccurate measures of the household's true attitudes toward risk. We show that risk premia on assets computed using the stochastic discount factor are proportional to Arrow-Pratt risk aversion, so that measuring risk aversion correctly is crucial for understanding asset prices. Closed-form expressions for risk aversion in DSGE models with generalized recursive preferences and internal and external habits are also derived.> In dynamic stochastic general equilibrium (DSGE) models, the househol's labor margin as well as consumption margin affects Arrow-Pratt risk aversion. This paper derives simple, closed-form expressions for risk aversion that take into account the household's labor margin. Ignoring the labor margin can lead to wildly inaccurate measures of the household's true attitudes toward risk. We show that risk premia on assets computed using the stochastic discount factor are proportional to Arrow-Pratt risk aversion, so that measuring risk aversion correctly is crucial for understanding asset prices. Closed-form expressions for risk aversion in DSGE models with generalized recursive preferences and internal and external habits are also derived.
    Keywords: Financial risk management ; Asset pricing
    Date: 2009
  3. By: Dromel, Nicolas (University of Paris 1); Kolakez, Elie (University of Paris 2 - ERMES); Lehmann, Etienne (CREST-INSEE)
    Abstract: In this paper, we argue that credit market imperfections impact not only the level of unemployment, but also its persistence. For this purpose, we first develop a theoretical model based on the equilibrium matching framework of Mortensen and Pissarides (1999) and Pissarides (2000) where we introduce credit constraints. We show these credit constraints not only increase steady-state unemployment, but also slow down the transitional dynamics. We then provide an empirical illustration based on a country panel dataset of 20 OECD countries. Our results suggest that credit market imperfections significantly increase the persistence of unemployment.
    Keywords: credit markets, labor markets, unemployment, credit constraints, search frictions
    JEL: E24 E44 J08 J64
    Date: 2009–10
  4. By: Hans Fehr; Manuel Kallweit; Fabian Kindermann
    Abstract: The present paper aims to quantify the growth and welfare consequences of changing family structures in western societies. For this reason we develop a dynamic general equilibrium model with both genders which takes into account changes of the marital status as a stochastic process. Individuals respond to these shocks by adjusting savings and labor supply. Our quantitative results indicate that the declining number of marriages coupled with increasing divorce rates had a profound effect on macroeconomic variables and long-run welfare. We find a significant increase in aggregate capital accumulation and a rising labor market participation of women. In addition, our simulations indicate that the change in the marital structure had significant negative welfare consequences for women who lost between 0.4 and 2.2 percent of aggregate resources. The impact on men’s welfare, however, could be positive or negative depending on the specific calibration.
    Keywords: family formation, stochastic general equilibrium, life cycle model
    JEL: J12 J22
    Date: 2009
  5. By: Vo Phuong Mai Le; Patrick Minford; Michael Wickens
    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: 2009–09
  6. By: Eleni Iliopulos (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: In this article, we focus on current account dynamics in large open economies characterized by debt-constrained heterogeneous agents and endogenous monetary policies. We incorporate three key features that have bulked large in the New Open Macroeconomics literature : i) home bias in trade, ii) price rigidities, and iii) durable goods (real properties). In order to limit agents' willingness to consume and to (partially) insure creditors against the risk of default, we incorporate collateral constraints. We show that the impatience of collateral-constrained agents can be at the roots of permanent external imbalances. Indeed our model has a unique and dynamically determinate steady state, which is characterized by a positive level of debt. Our framework allows us to analyze the linkage between exchange rates, real assets and international capital flows. We focus on this mechanism so as to track the (international) transmission of shocks and the implications for the monetary policy. We show how developments hitting the house market can affect current account and exchange rate dynamics.
    Keywords: Open economy, durable goods, collateral constraints, sticky prices, simple monetary rules.
    JEL: E52 F32 F37 F41
    Date: 2009–10
  7. By: Marianna Kudlyak
    Abstract: The user cost of labor captures the hiring wage and the expected effect of the economic conditions at the time of hiring on future wages. In search and matching models, I show that it is the user cost and not the wage that is weighted against the worker's marginal product at the time of hiring; so, the user cost is the allocational variable. I construct its measure in the data and estimate that it is more procyclical than average wages or wages of newly hired workers. I show that the textbook search and matching model cannot simultaneously generate the empirical elasticities of the vacancy-unemployment ratio and of the user cost of labor, irrespectively of the surplus division rule.
    Keywords: Business cycles ; Labor market
    Date: 2009
  8. By: Hiroshi Aiura (Faculty of Economics, Oita University (Japan)); Yasuhiro Sato (Graduate School of Economics, Osaka University (Japan))
    Abstract: This paper develops an overlapping generations model that involves the endogenous determination of fertility and an explicit city structure in order to analyze fully the social and natural changes in city populations. We provide conditions under which the model exhibits the spatial features of demography observed in large Japanese cities. We also show by calibration that the low cost of obtaining human capital in Tokyo metropolitan area played a significant role in establishing its urban primacy in Japan.
    Keywords: urbanization, demography, migration, monocentric city
    JEL: J11 R11 R14 R23
    Date: 2009–06
  9. By: Hans Fehr (University of Würzburg); Fabian Kindermann (University of Würzburg)
    Abstract: The present paper Studies the growth and efficiency consequences of pension funding with individual retirement accounts in a general equilibrium overlapping generations model with idiosyncratic lifespan and labor income uncertainty. We distinguish between economies with rational and hyperbolic consumers and compare the consequences of voluntary and mandatory retirement plans. Three major findings are derived in our study: First, we quantify the commitment effect of social security for myopic individuals by roughly 1 percent of aggregate resources. It is possible to recapture this commitment technology in IRAs, if those are annuitized. Second, despite the fact that our consumers have an operative bequest motive, the welfare gain from the (implicit) longevity insurance of the pension system is significant and amounts to roughly 0.5 percent of aggregate resources. However, mandatory annuitization reduces unintended bequests so that future generations are significantly hurt. Finally, our results highlight the importance of liquidity effects for social security analysis. These efficiency gains are only attainable if accounts are voluntary and not mandatory.
    Keywords: individual retirement accounts, annuities, stochastic general equilibrium, hyperbolic consumers
    JEL: H55 J26
    Date: 2009
  10. By: Parantap Basu; Max Gillman; Joseph Pearlman
    Abstract: A pervasive empirical finding for the US economy is that inflation is negatively correlated with the normalized market price of capital (Tobin's q) and growth. A dynamic stochastic general equilibrium model of endogenous growth is developed to explain these stylized facts. In this model, human capital is the principal driver of self-sustained growth. Long run comparative statics analysis suggests that inflation diverts scarce time resource to leisure which lowers human capital utilization. This impacts growth adversely and modulates cap¬ital adjustment cost downward resulting in a decline in Tobin's q. For the short run, a Tobin effect of inflation on growth weakens the negative association between inflation and q.
    Date: 2009–05
  11. By: Roberto Bonilla
    Abstract: I analyse an economy where a search labour market with an endogenous wage distribution and a matching marriage market interact. The economy is populated by homogeneous workers, firms and marriage partners (MPs). Workers simultaneously search for firms in order to work and for MPs in order to marry. Firms post wages to attract workers. MPs look for workers in order to marry. Married workers receive a pre-determined flow utility, and married MPs derive flow utility equal to the worker’s earnings. This provides the link between the markets. By interpreting workers and MPs as men and women respectively, I show that the so called married wage premium can arise purely from frictions in both markets. Also, the paper may explain the simultaneous occurrence of three stylised facts: In the model, an increase in the value of women’s option outside marriage leads to a decrease in marriage rates and an increase in the spread of the male wage distribution.
    Keywords: Search, Married wage premium, matching markets.
    JEL: J01
    Date: 2009–03–11
  12. By: Ryo Arawatari (Faculty of Economics, Shinshu University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper develops a model where income inequality and intergenerational mobility are jointly determined via redistributive politics. The model includes two key factors: accessibility of tertiary education for poor-born agents and multiple, selffulfilling expectations of agents. Given these factors, the model provides predictions of cross-country differences in inequality and mobility consistent with empirical observations. The model also demonstrates the dynamic motion of inequality and mobility as influenced by changes in the expectations of agents.
    Keywords: Inequality; Intergenerational mobility; Redistribution; Markov perfect political equilibrium; Overlapping generations
    JEL: D70 H55 I38
    Date: 2009–04
  13. By: Milton H. Marquis; Wuttipan Tantivongy; Bharat Trehan
    Abstract: We examine how the economy responds to both disembodied and embodied technology shocks in a model with vintage capital. We focus on what happens when there is a change in the number of vintages of capital that are in use at any one time and on what happens when there is a change in the persistence of the shocks hitting the economy. The data suggest that these kinds of changes took place in the U.S. economy in the 1990s, when the pace of embodied technical progress appears to have accelerated. We find that embodied technology shocks lead to greater variability (of output, investment and labor allocations) than disembodied shocks of the same size. On the other hand, a decrease in the number of vintages in use at any time (such as is likely to occur when the pace of technical progress accelerates) tends to reduce the volatility of output and also to differentiate the initial response of the economy to the two shocks.
    Keywords: Technology ; Technological innovations ; Labor productivity
    Date: 2009
  14. By: Elisa Newby
    Abstract: This paper models the gold standard as a state contingent commitment technology that is only feasible during peace. Monetary policy during war, when the gold convertibility rule suspended, can still be credible, if the policy maker’s plan is to resume the gold standard in the future. The DGE model developed in this paper suggests that the resumption of the gold standard was a sustainable plan, which replaced the gold standard as a commitment technology and made monetary policy time consistent. Trigger strategies support the equilibrium: private agents retaliate if a policy maker defaults its plan to resume the gold standard.
    Keywords: Time Consistency, Monetary Policy, Monetary Regimes.
    JEL: C61 E31 E4 E5 N13
    Date: 2009–06
  15. By: Ignazio Angeloni; Ester Faia
    Abstract: We introduce banks, modeled as in Diamond and Rajan (JoF 2000 or JPE 2001), into a standard DSGE model and use this framework to study the role of banks in the transmission of shocks, the effects of monetary policy when banks are exposed to runs, and the interplay between monetary policy and Basel-like capital ratios. In equilibrium, bank leverage depends positively on the uncertainty of projects and on the bank’s "relationship lender" skills, and negatively on short term interest rates. A monetary restriction reduces leverage, while a productivity or asset price boom increases it. Procyclical capital ratios are destabilising; monetary policy can only partly offset this effect. The best policy combination includes mildly anticyclical capital ratios and a response of monetary policy to asset prices or leverage
    Keywords: capital requirements, leverage, bank runs, combination policy, market liquidity
    Date: 2009–10
  16. By: Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Samuel Danthine (Universite du Quebec a Montreal, Universidad de Malaga and CIRPEE)
    Abstract: This paper is an attempt to explain differences in economic performance between a subset of OECD countries. We classify countries in terms of their degree of rigidity in the labor market, and use a matching model with labor/leisure choice, bargaining frictions, and labor income taxation to capture these rigidity differences. Added flexibility improves economic performance in different ways depending on whether income taxation is high or low. Feeding income taxation rates estimated from the countries at hand, we find that the model is able to replicate the observed rigidity levels. The model is also shown to reproduce well cross-country differences in non-employment population ratios and the share of part-time jobs.
    Keywords: models of search and matching, bargaining frictions, economic performance, labor market institutions, part-time jobs, labor market rigidities
    JEL: E24 J22 J30 J41 J50 J64
    Date: 2009–09–01
  17. By: Aleksander Berentsen; Christopher J. Waller
    Abstract: When agents are liquidity constrained, two options exist - sell assets or borrow. We compare the allocations arising in two economies: in one, agents can sell government bonds (outside bonds) and in the other they can borrow (issue inside bonds). All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds but that the converse is not true. However, the optimal policy in each economy makes the allocations equivalent.
    Keywords: Financial markets ; Bond market ; Liquidity (Economics)
    Date: 2009
  18. By: Alonso Ortiz, Jorge; Rogerson, Richard
    Abstract: We assess the consequences of increases in the scale of tax and transfer programs in the context of a model with idiosyncratic productivity shocks and incomplete markets. We contrast the outcomes for both hours worked and welfare relative to the results obtained in a stand-in household model, featuring no idiosyncratic shocks and complete markets. Our main finding is that the impact on hours remains very large, but the welfare consequences are very different. The analysis also suggests that tax and transfer policies may have large effects on average labor productivity via selection effects on employment.
    Keywords: Heterogeneous agents; idiosyncratic labor income risk; employment
    JEL: E62 E24 E21
    Date: 2009–06
  19. By: Lucy Qian Liu (International Monetary Fund, Wash D.C.); Liang Wang (Department of Economics, University of Pennsylvania); Randall Wright (Department of Economics, University of Wisconsin-Madison)
    Abstract: Conventional wisdom is that inflation makes people spend money faster, trying to get rid of it like a “hot potato,” and this is a channel through which inflation affects velocity and welfare. Monetary theory with endoge- nous search intensity seems ideal for studying this. However, in standard models, inflation is a tax that lowers the surplus from monetary exchange and hence reduces search effort. We replace search intensity with a free entry (participation) decision for buyers - i.e., we focus on the extensive rather than intensive margin - and prove buyers always spend their money faster when inflation increases. We also discuss welfare.
    Keywords: Search, Money, Inflation, Velocity, Free Entry
    JEL: E40 E50 E31
    Date: 2009–11–04
  20. By: Rupert, Peter (University of California, Santa Barbara); Stancanelli, Elena (CNRS, Nice); Wasmer, Etienne (Sciences Po, Paris)
    Abstract: A search model of the labor market is augmented to include commuting time to work. The theory posits that wages are positively related to commute distance, by a factor itself depending negatively on the bargaining power of workers. Since not all combinations of distance and wages are accepted, there is non-random selection of accepted job offers. We build on these ingredients to explore in the data the relationship between wages and commute time. We find that neglecting to account for this selection will bias downward the wage impact of commuting, and marginally affect the coefficients on education, age and gender. The correlation between the residuals of the selectivity equation and the distance equation is -0.70, showing the large impact of commute time on job acceptance decisions. We also use the theory to calculate the bargaining power of workers which largely varies depending on demographic groups: it appears to be much larger for men than that for women and that the bargaining power of women with young children is essentially zero.
    Keywords: simultaneous equations, search model, commuting
    JEL: J3 J6 R2
    Date: 2009–10

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