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on Dynamic General Equilibrium |
| By: | Carine Nourry (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | We consider a two-sector two-periods overlapping generations model with inelastic labor, consumption in both periods of life and homothetic CES preferences. Assuming gross substitutability and a capital intensive consumption good, we prove that when dynamic eciency holds, local indeterminacy and sunspot fluctuations occur with low enough values for the sectoral elasticities of capital-labor substitution and we illustrate this finding within a standard example. This result shows that some scale policy rules can prevent the existence of business-cycle fluctuations in the economy by driving it to the optimal steady state as soon as it is announced, and thus shows that Reichlin's [9] influential conclusion is a robust property in a two-sector OLG economy. |
| Keywords: | Two-sector OLG model, dynamic efficiency, gross substitutability in consumption, local indeterminacy, stabilization policy |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00439240_v1&r=dge |
| By: | Jean-Pierre Drugeon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Carine Nourry (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | We consider a two-sector overlapping generations model with homothetic preferences. Under standard conditions on technologies, upon large enough values for the share of first period consumption over the wage income, we prove that dynamic efficiency and local uniqueness of the competitive equilibrium hold. On the contrary, for lower values of the share of first period consumption over the wage income which imply dynamic inefficiency of the steady state, local indeterminacy arises without requiring strong restrictions on the sectoral elasticities of capital-labor substitution. |
| Keywords: | Two-sector OLG model, efficiency, local uniqueness |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00439241_v1&r=dge |
| By: | Roger E.A. Farmer (UCLA Economics - University of California, Los Angeles); Carine Nourry (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | We introduce aggregate uncertainty and complete markets into Blanchard's (1985) perpetual youth model. We show how to construct a simple formula for the pricing kernel in terms of observable aggregate variables. We study a pure trade version of our model and we show it behaves much like the two-period overlapping generations model. Our methods are easily generalized to economies with production and they should prove useful to researchers who seek a tractable stochastic model in which fiscal policy has real effects on aggregate allocations. |
| Keywords: | Overlapping generations ; indeterminacy ; sunspot equilibria ; aggregate uncertainty |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00439336_v1&r=dge |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | Standard real-business-cycle models must rely on total factor productivity (TFP) shocks to explain the observed co-movement between consumption, investment and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption, can generate co-movement in absence of TFP shocks. Intertemporal substitution of goods and leisure induces co-movement over the business cycle through heterogeneity in consumption behavior of employed and unemployed workers. The result is due to two model features that are introduced to capture important characteristics of US labor market data. First, individual consumption is affected by the number of hours worked with employed consuming more on average than unemployed. Second, changes in the employment rate, a central explanator of total hours variation, then affects aggregate consumption. Demand shocks --- such as shifts in the marginal efficiency of investment, government spending shocks and news shocks --- are shown to generate economic fluctuations consistent with observed business cycles. |
| JEL: | E13 E24 E32 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15561&r=dge |
| By: | Szilard Benk (Hungarian Central Bank); Max Gillman (Institute of Economics - Hungarian Academy of Sciences); Michal Kejak (The Center for Economic Research and Graduate Education of Charles University (CERGE EI)) |
| Abstract: | The paper shows that US GDP velocity of M1 money has exhibited long cycles around a 1.25% per year upward trend, during the 1919-2004 period. It explains the velocity cycles through shocks constructed from a DSGE model and annual time series data (Ingram et al., 1994). Model velocity is stable along the balanced growth path, which features endogenous growth and decentralized banking that produces exchange credit. Positive shocks to credit productivity and money supply increase velocity, as money demand falls, while a positive goods productivity shock raises temporary output and velocity. The paper explains such velocity volatility at both business cycle and long run frequencies. With filtered velocity turning negative, starting during the 1930s and the 1987 crashes, and again around 2003, results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times. |
| Keywords: | business cycle, credit shocks, velocity and volatility |
| JEL: | E13 E32 E44 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:0923&r=dge |
| By: | Patrick-Antoine Pintus (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | Kiyotaki and Moore (1997) have stressed that an amplification-persistence trade-off arises when collateral constraints on borrowing interact with lumpy investment. In this paper, I confirm by way of example that collateral constraints are not by themselves responsible for such a deceptive trade-off. More precisely, I show in a standard general-equilibrium two-agent model that the amplification and persistence of the impact of temporary shocks go hand in hand. Unlike Kiyotaki-Moore's, the economy features concave utility and production functions, an endogenous interest rate and neo-classical input accumulation |
| Keywords: | collateral constraints; amplification and persistence of aggregate shocks |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00439243_v1&r=dge |
| By: | Patrick-Antoine Pintus (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Yi Weng (Federal Reserve Bank of St. Louis - Federal Reserve Bank of St. Louis, Tsinghua University - Tsinghua University) |
| Abstract: | It has long been argued in the history of economic thought that over investment through highly leveraged borrowing under elastic credit supply may generate large boom-bust business cycles. This paper rationalizes this idea in a dynamic general equilibrium model with infinitely lived rational agents. It shows that dynamic interactions between strong asset-accumulation motives (based on habit formation on the borrower side) and elastic credit supply (based on collateralized lending on the lender side) generate a multiplier-accelerator mechanism that can transform a one-time technological innovation into large and long-lasting boom-bust cycles. Such cycles share many features in common to investment bubbles observed in the history (such as the IT bubble in the 1990s and the 2000s housing bubble). |
| Keywords: | Over-Investment; Borrowing Constraints; Multiplier-Accelerator; Elastic Credit Supply |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00439245_v1&r=dge |
| By: | Greg Kaplan; Giovanni L. Violante |
| Abstract: | We assess the degree of consumption smoothing implicit in a calibrated life-cycle version of the standard incomplete-markets model, and we compare it to the empirical estimates of Blundell et al. (2008) (BPP hereafter). We find that households in the model have access to less consumption-smoothing against permanent earnings shocks than what is measured in the data. BPP estimate that 36% of permanent shocks are insurable (i.e., do not translate into consumption growth), whereas the model’s counterpart of the BPP estimator varies between 7% and 22%, depending on the tightness of debt limits. In the model, the age profile of the insurance coefficient is sharply increasing, whereas BPP find no clear age slope in their estimate. Allowing for a plausible degree of “advance information” about future earnings does not reconcile the model-data gap. If earnings shocks display mean reversion, even with very high autocorrelation, then the average degree of consumption smoothing in the model agrees with the BPP empirical estimate, but its age profile remains steep. Finally, we show that the BPP estimator of the true insurance coefficient has, in general, a downward bias that grows as borrowing limits become tighter. |
| JEL: | D31 D91 E21 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15553&r=dge |
| By: | Francis Bloch (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Nicolas Houy (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | This paper analyzes the assignment of durable objects to successive generations of agents who live for two periods. The optimal assignment rule is stationary, favors old agents and is determined by a selectivity function which satisfies an iterative functional differential equation. More patient social planners are more selective, as are social planners facing distributions of types with higher probabilities for higher types. The paper also characterizes optimal assignment rules when monetary transfers are allowed and agents face a recovery cost, when agents' types are private information and when agents can invest to improve their types. |
| Keywords: | Dynamic Assignment ; Durable Objects ; Revenue Management ; Dynamic Mechanism Design ; Overlapping Generations ; Promotions and Intertemporal Assignments |
| Date: | 2009–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00435385_v1&r=dge |
| By: | Viktors Ajevskis; Kristine Vitola |
| Abstract: | In this paper we estimate a small open economy DSGE model for Latvia following Lubik and Schorfheide (2007) using Bayesian methods. The estimates of the structural parameters fall within plausible ranges. Simulation results suggest that under inflation targeting inflation turns out to be more volatile than under the peg in the case of Latvia. Additional concern for output stabilisation accounts for lower inflation variability while it is still higher than under existing exchange rate regime with ±1% fluctuation bands. The model results therefore support the existing exchange rate policy. |
| Keywords: | DSGE, small open economy, exchange rate policy, Bayesian estimation |
| JEL: | C11 C3 C51 D58 E58 F41 |
| Date: | 2009–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:200904&r=dge |
| By: | Luca PENSIEROSO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and FNRS) |
| Abstract: | This paper presents and assesses the recent application of models in the Real Business Cycle (RBC) tradition to the analysis of the Great Depression of the 1930s. The main conclusion is that the breaking of the depression taboo has been a desirable completion of the cliometric revolution: no historic event should be exempt from a dispassionate quantitative analysis. On the other hand, the substantive contribution of RBC models is not yet sucient to establish a new historiography of the Great Depression. |
| Keywords: | Great Depression, Real Business Cycle, Dynamic Stochastic General Equilibrium, Cliometrics |
| JEL: | N10 E13 N01 |
| Date: | 2009–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2009034&r=dge |
| By: | Javier Andrés Domingo (University of Valencia, Spain); José Emilio Boscá (University of Valencia, Spain); Rafael Domenech Vilariño (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain) |
| Abstract: | The benefits implied by changing the growth model are at the heart of the heated political and economic debate in Spain. Increases in productivity and the reallocation of employment towards more innovative sectors are defended as the panacea for most of the ills afflicting the Spanish economy. In this paper we use a DSGE model with price rigidities, and labour market search frictions a la Mortensen-Pissarides, to assess the effects of the change in the growth model on unemployment. In so doing, we assume that the vigorous demand shock which has been mostly responsible for recent economic growth in Spain will be successfully substituted by a productivity shock as the main driver of Spain‘s economic growth in the future. So we assume that we actually succeed in the so called "change in the growth model". We show that whatever the benefits that this change might bring to the Spanish economy, the time span needed to bring the unemployment rate down to the European average actually increases. We then analyze the impact of several reforms in the labour market and evaluate their interaction with the new growth model. We conclude that changes in the economic structure do not make labour reforms any less necessary, but rather the opposite if we want to shorten employment recovery significantly. |
| Keywords: | artistic creation, superstars, private copy, piracy, levies |
| JEL: | L10 L82 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:iei:wpaper:0903&r=dge |
| By: | Jean-Francois FAGNART (CEREC, Facultes universitaires Saint-Louis, Brussels and Department of Economics, Universite catholique de Louvain, Louvain- la-Neuve.); Marc GERMAIN (EQUIPPE, Universite de Lille 3 and Department of Economics, Universite catholique de Louvain, Louvain-la-Neuve) |
| Abstract: | We propose an endogenous growth model of a decentralized economy subject to environmental constraints. In a basic version, we consider an economy where final production requires some material input and where research activities allow simultaneously productive firms to reduce the dependency of their production process on this input and to improve the quality of their output. We adopt a material balance approach and, in spite of the optimistic assumption that the material input is perfectly recyclable (and thus never exhausted), we show that material output growth is always a transitory phenomenon. When it exists, a balanced growth path is necessarily characterized by constant values of the material variables, long term economic growth taking exclusively the form of perpetual improvements in the quality of consumption goods. The material esource constraint is not solely a long term issue since it is also shown to affect the whole transitory dynamics of the (material) growth process. Renewable energy is introduced in an extension of our basic model. This extension does not affect qualitatively the features of a feasible balanced growth path but make its conditions of existence more restrictive. |
| Keywords: | material balance, endogenous growth, recycling |
| JEL: | E1 Q0 Q56 |
| Date: | 2009–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2009037&r=dge |
| By: | Fabian Eser (Nuffield College, Oxford University, Oxford.) |
| Abstract: | This paper examines under what conditions fiscal policy in the form of government spending should contribute to macroeconomic stabilisation. To this end optimal fiscal targeting rules minimising the microfounded social loss are examined in the following settings. Firstly, for the benchmark New Keynesian model, where monetary policy is unconstrained, a neutrality result for fiscal obtains: fiscal policy should not respond to any shocks. Secondly, if monetary policy is constrained to follow a Taylor rule, a stabilisation role for fiscal policy emerges. Fiscal policy should 'lean against' inflation and be countercyclical relative to output. Crucially, the Taylor principle is shown to remain the key requirement on policy to guarantee equilibrium determinacy. Thirdly, the fiscal targeting rule obtained under a Taylor rule is shown to be optimal, too, when policy is optimal but subject to monetary frictions. Thus, there is a stabilisation role for government spending under monetary frictions, changing the role of monetary and fiscal policy fundamentally. |
| Keywords: | Monetary Policy, Fiscal Policy, Macroeconomic Stabilisation, Discretion, Dynamic General Equilibrium, Sticky Prices, Monetary Frictions, Equilibrium Determinacy |
| JEL: | E5 E6 C62 |
| Date: | 2009–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0914&r=dge |
| By: | Jean-Marc Bonnisseau (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Alexandrine Jamin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | In an economy with a non-convex production sector, we provide an assumption on each individual producer, which implies that the survival assumption holds true at the aggregate level for general pricing rules. For the marginal pricing rule, we derive this assumption from the bounded marginal productivity of inputs. We apply this approach to intertemporal economies and we show how our assumption fits well with the time structure leading to a tractable existence result of equilibria, which could be apply to discrete dynamical growth models. |
| Keywords: | General equilibrium theory ; increasing returns ; survival assumption ; marginal pricing ; general pricing rules |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00435256_v1&r=dge |
| By: | Bernard Cornet (Department of Economics, The University of Kansas and Universite Paris 1 Pantheon-Sorbonne); Lionel De Boisdeffre (INSEE, Paris and Universite de Paris 1) |
| Abstract: | In a financial economy with asymmetric information and incomplete markets, we study how agents, having no model of how equilibrium prices are determined, may still refine their information by eliminating sequentially "arbitrage state(s)", namely, the state(s) which would grant the agent an arbitrage, if realizable. |
| Keywords: | Arbitrage, Incomplete markets, Asymmetric information, Information revealed by prices |
| JEL: | D52 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:200912&r=dge |
| By: | Dirk Krueger; Fabrizio Perri; Luigi Pistaferri; Giovanni L. Violante |
| Abstract: | This paper provides an introduction to the special issue of the Review of Economic Dynamics on "Cross Sectional Facts for Macroeconomists''. The issue documents, for nine countries, the level and the evolution, over time and over the life cycle, of several dimensions of economic inequality, including wages, labor earnings, income, consumption, and wealth. After describing the motivation and the common methodology underlying this empirical project, we discuss selected results, with an emphasis on cross-country comparisons. Most, but not all, countries experienced substantial increases in wages and earnings inequality, over the last three decades. While the trend in the skill premium differed widely across countries, the experience premium rose and the gender premium fell virtually everywhere. At a higher frequency, earnings inequality appears to be strongly counter-cyclical. In all countries, government redistribution through taxes and transfers reduced the level, the trend and the cyclical fluctuations in income inequality. The rise in income inequality was stronger at the bottom of the distribution. Consumption inequality increased less than disposable income inequality, and tracked the latter much more closely at the top than at the bottom of the distribution. Measuring the age-profile of inequality is challenging because of the interplay of time and cohort effects. |
| JEL: | D31 D91 E21 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15554&r=dge |