nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2009‒12‒19
twenty-six papers chosen by
Christian Zimmermann
University of Connecticut

  1. Learning in an Estimated Medium-Scale DSGE Model By Sergey Slobodyan; Raf Wouters
  2. Impulse Response Identification in DSGE Models By Martin Fukac
  3. Health Care Financing over the Life Cycle, Universal Medical Vouchers and Welfare By Juergen Jung; Chung Tran
  4. Trends and Cycles : an Historical Review of the Euro Area. By Barthélemy, J.; Marx, M.; Poissonnier, A.
  5. The Political Economy of Social Security and Public Goods Provision in a Borrowing-constrained Economy By Ryo Arawatari; Tetsuo Ono
  6. Putting the New Keynesian DSGE model to the real-time forecasting test. By Marcin Kolasa; Michał Rubaszek; Paweł Skrzypczyński
  7. Produce or Speculate? Asset Bubbles, Occupational Choice and Efficiency By Cahuc, Pierre; Challe, Edouard
  8. Investment Shocks and the Relative Price of Investment By Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
  9. Effects of Patent Length on R&D: A Quantitative DGE Analysis By Angus C. Chu
  10. Combining VAR and DSGE forecast densities By Ida Wolden Bache; Anne Sofie Jore; James Mitchell; Shaun P. Vahey
  11. Demographic Changes and the Gains from Globalisation: An Overlapping Generations CGE Analysis By Marcel Mérette; Patrick Georges
  12. Forecasting the US Real House Price Index: Structural and Non-Structural Models with and without Fundamentals By Rangan Gupta; Alain Kabundi; Stephen M. Miller
  13. Fiscal Competition, Decentralization, Leviathan, and Growth By Ken Tabata
  14. Technology Shocks and Business Cycle: An Analysis Based on the Malmquist Index By Mark J. Lee
  15. Structural macro-wconometric modelling in a policy environment By Martin Fukac; Adrian Pagan
  16. Unemployment insurance and the business cycle: prolong benefit entitlements in bad times? By Moyen, Stéphane; Stähler, Nikolai
  17. Public versus Private Risk Sharing By Dirk Krueger; Fabrizio Perri
  18. An Equilibrium Theory of Learning, Search and Wages By Francisco M. Gonzalez; Shouyong Shi
  19. Optimal tax progressivity in unionised labour markets: what are the driving forces? By Boeters, Stefan
  20. Estimating a NKBC Model for the U.S. Economy with Multiple Filters By Efrem Castelnuovo
  21. Unfunded pensions and endogenous labor supply By Torben M. Andersen; Joydeep Bhattacharya
  22. Medium-term business cycles in developing countries By Comin, Diego; Loayza, Norman; Pasha, Farooq; Serven, Luis
  23. From Wage Rigidities to Labour Market Rigidities: A Turning-Point in Explaining Equilibrium Unemployment? By Marco Guerrazzi; Nicola Meccheri
  24. Sustainability, optimality, and viability in the Ramsey model By Noël Bonneuil; Raouf Boucekkine
  25. Endogenous Growth Models in Open Economies: A Possibility of Permanent Current Account Deficits By Harashima, Taiji
  26. The Macroeconomics of Model T By Reto Foellmi; Tobias Wuergler; Josef Zweimüller

  1. By: Sergey Slobodyan; Raf Wouters
    Abstract: In this paper we evaluate the empirical relevance of learning by private agents in an estimated medium–scale DSGE model. We replace the standard rational expectation assumption in the Smets and Wouters (2007) model by a constant gain learning mechanism. If agents know the correct structure of the model and only learn about the parameters, both expectation mechanisms result in a similar fit, and only the transition dynamics that are generated by specific initial beliefs are responsible for the differences between the two approaches. If, in addition, agents use only a reduced information set in forming the perceived law of motion, the implied model dynamics change and for some initial beliefs the marginal likelihood of the model is further improved. The learning models with the highest posterior probabilities add some additional persistence to the DSGE model that reduce the gap between the IRFs of the DSGE model and the more data-driven DSGE-VAR model. However, the additional dynamics that are introduced by the learning process do not systematically alter the estimated structural parameters related to the nominal and real frictions in the DSGE model.
    Keywords: Constant gain adaptive learning, medium–scale DSGE model, DSGE–VAR.
    JEL: C11 D84 E30 E52
    Date: 2009–11
  2. By: Martin Fukac (Reserve Bank of New Zealand)
    Abstract: DSGE models have become a widely used tool for policymakers. This paper takes the global identification theory used for structural vectorautoregressions, and applies it to dynamic stochastic general equilibrium (DSGE) models. We use this modified theory to check whether a DSGE model structure allows for unique estimates of structural shocks and their dynamic effects. The potential cost of a lack of identification for policy oriented models along that specific dimension is huge, as the same model can generate a number of contrasting yet theoretically and empirically justifiable recommendations. The problem and methodology are illustrated using a simple New Keynesian business cycle model.
    JEL: C30 C52
    Date: 2009–12
  3. By: Juergen Jung (Department of Economics, Towson University); Chung Tran (School of Economics, University of New South Wales)
    Abstract: In this paper we develop a general equilibrium overlapping generations (OLG) model with health shocks to analyze the life-cycle pattern of insurance choice and health care spending. We use data from the Medical Expenditure Panel Survey (MEPS) and show that our model is able to match the life-cycle trends of insurance take up ratios and average medical expenditures in the U.S. We then demonstrate how this model can be used to conduct health care policy analysis by evaluating the macroeconomic effects of a counter factual health care reform using a system of universal health insurance vouchers. Our results suggest that health insurance vouchers are able to extend insurance coverage to the entire population but they also increase aggregate spending on health. More importantly, we find that the positive insurance effect (efficient risk pooling) dominates the negative incentive effect (tax distortions and moral hazard) which results in significant welfare gains for all generations when a payroll tax is used to finance the voucher program. In addition, our results suggest that the choice of tax financing instrument and accounting for general equilibrium price adjustments are critical in determining the performance of the voucher program.
    Keywords: Public health insurance; private health insurance; vouchers; dynamic stochastic general equilibrium model; endogenous health production
    JEL: H51 I18 I38
    Date: 2009–11
  4. By: Barthélemy, J.; Marx, M.; Poissonnier, A.
    Abstract: We analyze the euro area business cycle in a medium scale DSGE model where we assume two stochastic trends: one on total factor productivity and one on the inflation target of the central bank. To justify our choice of integrated trends, we test alternative specifications for both of them. We do so, estimating trends together with the model's structural parameters, to prevent estimation biases. In our estimates, business cycle fluctuations are dominated by investment specific shocks and preference shocks of households. Our results cast doubts on the view that cost push shocks dominate economic fluctuations in DSGE models and show that productivity shocks drive fluctuations on a longer term. As a conclusion, we present our estimation's historical reading of the business cycle in the euro area. This estimation gives credible explanations of major economic events since 1985.
    Keywords: New Keynesian model, Business Cycle, Bayesian estimation.
    JEL: E32
    Date: 2009
  5. By: Ryo Arawatari (Faculty of Economics, Shinshu University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper introduces an overlapping generations model with earnings heterogeneity and borrowing constraints. The labor income tax and the allocation of tax revenue across social security and public goods provision are determined in a bidimensional majoritarian voting game played by successive generations. The political equilibrium is characterized by an ends-against-the-middle equilibrium where lowand high-income individuals form a coalition in favor of a low tax rate and less social security while middle-income individuals favor a high tax rate and greater social security. Government spending then shifts from social security to public goods provision if either: (i) higher wage inequality is associated with the borrowing constraint and a low intertemporal elasticity of substitution, or (ii) the population growth rate becomes lower.
    Keywords: Borrowing constraint; Social security; Public goods provision; Structureinduced equilibrium; Ends-against-the-middle equilibrium; Wage inequality; Population aging
    JEL: H41 H55 D72
    Date: 2009–11
  6. By: Marcin Kolasa (National Bank of Poland, ul. Swietokrzyska 11/21, PL-00-919 Warsaw, Poland.); Michał Rubaszek (National Bank of Poland, ul. Swietokrzyska 11/21, PL-00-919 Warsaw, Poland.); Paweł Skrzypczyński (National Bank of Poland, ul. Swietokrzyska 11/21, PL-00-919 Warsaw, Poland.)
    Abstract: Dynamic stochastic general equilibrium models have recently become standard tools for policy-oriented analyses. Nevertheless, their forecasting properties are still barely explored. We fill this gap by comparing the quality of real-time forecasts from a richly-specified DSGE model to those from the Survey of Professional Forecasters, Bayesian VARs and VARs using priors from a DSGE model. We show that the analyzed DSGE model is relatively successful in forecasting the US economy in the period of 1994-2008. Except for short-term forecasts of inflation and interest rates, it is as good as or clearly outperforms BVARs and DSGE-VARs. Compared to the SPF, the DSGE model generates better output forecasts at longer horizons, but less accurate short-term forecasts for interest rates. Conditional on experts' now casts, however, the forecasting power of the DSGE turns out to be similar or better than that of the SPF for all the variables and horizons. JEL Classification: C11, C32, C53, D58, E17.
    Keywords: Forecasting, DSGE, Bayesian VAR, SPF, Real-time data.
    Date: 2009–11
  7. By: Cahuc, Pierre; Challe, Edouard
    Abstract: We study the macroeconomic effects of rational asset bubbles in an overlapping-generations economy where asset trading requires specialized intermediaries and where agents freely choose between working in the production or in the financial sector. Frictions in the market for deposits create rents in the financial sector that affect workers' choice of occupation. When rents are large, the private gains associated with trading asset bubbles may lead too many workers to become speculators, thereby causing rational bubbles to lose their efficiency properties. Moreover, if speculation can be carried out by skilled labor only, then asset bubbles displace skilled workers away from the productive sector and raise income and consumption inequalities.
    Keywords: dynamic efficiency; occupational choice; Rational bubbles
    JEL: E22 E44 G21
    Date: 2009–12
  8. By: Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
    Abstract: We estimate a New-Neoclassical Synthesis business cycle model with two investment shocks. The first, an investment-specific technology shock, affects the transformation of consumption into investment goods and is identified with the relative price of investment. The second shock affects the production of installed capital from investment goods or, more broadly, the transformation of savings into the future capital input. We find that this shock is the most important driver of U.S. business cycle fluctuations in the post-war period and that it is likely to proxy for more fundamental disturbances to the functioning of the financial sector. To corroborate this interpretation, we show that it correlates strongly with interest rate spreads and that it played a particularly important role in the recession of 2008.
    Keywords: Business cycles; DSGE model; financial factors; investment-specific technology
    JEL: C11 E22 E30
    Date: 2009–12
  9. By: Angus C. Chu (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: This paper develops an R&D-growth model and calibrates the model to aggregate data of the US economy to quantify a structural relation ship between patent length, R&D and consumption. Under parameter values that match the empirical flow-profit depreciation rate of patents and other key features of the US economy, extending the patent length beyond 20 years leads to a negligible increase in R&D despite equilibrium R&D underinvestment. In contrast, shortening the patent length leads to a significant reduction in R&D and consumption. Finally, this paper also analytically derives and quantifies a dynamic distortionary effect of patent length on capital investment.
    Keywords: innovation-driven growth, intellectual property rights, patent length, R&D
    JEL: O31 O34
    Date: 2009–01
  10. By: Ida Wolden Bache (Norges Bank); Anne Sofie Jore (Norges Bank); James Mitchell (NIESR); Shaun P. Vahey (Melbourne Business School)
    Abstract: A popular macroeconomic forecasting strategy takes combinations across many models to hedge against instabilities of unknown timing; see (among others) Stock and Watson (2004), Clark and McCracken (2010), and Jore et al. (2010). Existing studies of this forecasting strategy exclude Dynamic Stochastic General Equilibrium (DSGE) models, despite the widespread use of these models by monetary policymakers. In this paper, we combine inflation forecast densities utilizing an ensemble system comprising many Vector Autoregressions (VARs), and a policymaking DSGE model. The DSGE receives substantial weight (for short horizons) provided the VAR components exclude structural breaks. In this case, the inflation forecast densities exhibit calibration failure. Allowing for structural breaks in the VARs reduces the weight on the DSGE considerably, and produces well-calibrated forecast densities for inflation.
    Keywords: Ensemble modeling, Forecast densities, Forecast evaluation, VAR models, DSGE models
    JEL: C32 C53 E37
    Date: 2009–11–05
  11. By: Marcel Mérette (Department of Economics, University of Ottawa); Patrick Georges (Graduate School of Public and International Affairs,University of Ottawa)
    Abstract: This paper develops a multi-country overlapping-generations general equilibrium model to gauge the economic impacts of demographic changes in the global economy and its transmission effects on different countries. Although severe demographic pressures contribute to significantly lower real GDP per capita across several regions in the world, globalisation through international trade generates an improvement in the terms of trade of older OECD countries, which sustains their real consumption per capita, while globalisation through capital flows stimulates capital deepening and therefore growth in younger countries such as India and various parts of the Rest of the World. The general equilibrium nature of the ageing process is crucial to understand the net foreign asset dynamics of countries during the demographic transition, and this is particularly relevant for a country like China that is caught, in the global economy, between relatively older and younger countries. On this regard China, unlike older countries, does not benefit from a terms of trade improvement which could otherwise sustain its consumption, nor does it benefit, unlike India, from capital deepening, which could otherwise sustain its GDP growth.
    Keywords: Inequality Demographic transition, ageing, globalisation, overlapping generations, computable general equilibrium modeling
    JEL: D58 F41 J11
    Date: 2009
  12. By: Rangan Gupta (Department of Economics, University of Pretoria); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg); Stephen M. Miller (College of Business, University of Las Vegas, Nevada)
    Abstract: We employ a 10-variable dynamic structural general equilibrium model to forecast the US real house price index as well as its turning point in 2006:Q2. We also examine various Bayesian and classical time-series models in our forecasting exercise to compare to the dynamic stochastic general equilibrium model, estimated using Bayesian methods. In addition to standard vector-autoregressive and Bayesian vector autoregressive models, we also include the information content of either 10 or 120 quarterly series in some models to capture the influence of fundamentals. We consider two approaches for including information from large data sets – extracting common factors (principle components) in a Factor-Augmented Vector Autoregressive or Factor-Augmented Bayesian Vector Autoregressive models or Bayesian shrinkage in a large-scale Bayesian Vector Autoregressive models. We compare the out-ofsample forecast performance of the alternative models, using the average root mean squared error for the forecasts. We find that the small-scale Bayesian-shrinkage model (10 variables) outperforms the other models, including the large-scale Bayesian-shrinkage model (120 variables). Finally, we use each model to forecast the turning point in 2006:Q2, using the estimated model through 2005:Q2. Only the dynamic stochastic general equilibrium model actually forecasts a turning point with any accuracy, suggesting that attention to developing forward-looking microfounded dynamic stochastic general equilibrium models of the housing market, over and above fundamentals, proves crucial in forecasting turning points.
    Keywords: US House prices, Forecasting, DSGE models, Factor Augmented Models, Large-Scale BVAR models
    JEL: C32 R31
    Date: 2009–12
  13. By: Ken Tabata (Kwansei Gakuin University)
    Abstract: This paper studies the implications of different fiscal regimes (i.e. centralized vs decentralized) for economic growth and welfare by incorporating Wilson (2005)-type fiscal competition model into a Barro (1990)-type endogenous growth model. We show that fiscal decentralization is more desirable than fiscal centralization for economic growth, when the degree of selfishness of central government bureaucrats is high, and the relative political power of the young to the old is low. We also show that the growth-maximizing fiscal regime is also welfare-maximizing.
    Keywords: Fiscal competition, Decentralization, Leviathan, Overlapping generations
    JEL: H71 H72 E62
    Date: 2009–11
  14. By: Mark J. Lee (Department of Economics, Towson University)
    Abstract: The goal of this study examines the quantitative implications of the Malmquist index in a standard Real Business Cycle (RBC) model as a measure of technology shock. To achieve this, the paper first investigates the empirical validity of the equivalence proposition on the two technology shock measures: a relatively new Malmquist Index and the predominant Solow residual. On the basis of permutation tests, this paper shows the observational equivalence of the two measures. Then, the role of technology shock measured by the Malmquist index in the RBC model is examined. The study uncovers that the RBC model with the Malmquist index successfully replicates the stylized U.S. business cycle features documented in the existing literature. Finally, this paper discusses potential benefits of the Malmquist index in the business cycle studies.
    Keywords: Malmquist Index, Observational Equivalence, Solow Residual, RBC Model, Aggregate Technology Shocks
    Date: 2009–12
  15. By: Martin Fukac; Adrian Pagan (Reserve Bank of New Zealand)
    Abstract: In this paper we review the evolution of macroeconomic modelling in a policy environment that took placeover the past sixty years. We identify and characterise four generations of macro models. Particular attention is paid to the fourth generation – dynamic stochastic general equilibrium models. We discuss some of the problems in how these models are implemented and quantified.
    JEL: B16 C50
    Date: 2009–12
  16. By: Moyen, Stéphane; Stähler, Nikolai
    Abstract: The aim of this paper is to study the optimal duration of unemployment benefit entitlement duration across the business cycle. We wonder if the entitlement duration should be prolonged in bad and shortened in good times. Because of consumption smoothing, such a countercyclical policy can be welfare-enhancing as long as it does not affect labor market adjustment too severely or even helps to reduce inefficiencies there. If, however, the labor market is quite inflexible already, procyclical behavior may be preferable. In a calibrated dynamic business cycle framework, we find that countercyclical benefit entitlement duration may be preferable in the US but not in Europe. --
    Keywords: Unemployment insurance,entitlement duration,business cycle
    JEL: E32 E62
    Date: 2009
  17. By: Dirk Krueger; Fabrizio Perri
    Abstract: Can public insurance through redistributive income taxation improve the allocation of risk in an economy in which private risk sharing is limited? The answer depends crucially on the fundamental friction that limits private risk sharing in the first place. If risk sharing is incomplete because some insurance markets are missing for model-exogenous reasons (as in Bewley, 1986 and Aiyagari, 1994) publicly provided risk sharing via a tax system generally improves on the allocation of risk. If instead private insurance markets exist but their use is limited by the absence of complete enforcement (as in Kehoe and Levine, 1993 and Kocherlakota, 1996) then the provision of public insurance can crowd out private insurance to such an extent that total consumption insurance is reduced. By reducing income risk the tax system increases the value of being excluded from private insurance markets and hence weakens the enforcement mechanism of these contracts. In this paper we theoretically characterize and numerically compute equilibria in an economy with limited enforcement and a continuum of agents facing realistic income risk and tax systems with various degrees of risk reduction (progressivity). We find that the crowding-out effect of public insurance on private insurance in the limited enforcement model can be quantitatively important, as is the positive insurance effect of taxation in the Bewley model.
    JEL: D52 E62 H31
    Date: 2009–12
  18. By: Francisco M. Gonzalez; Shouyong Shi
    Abstract: We examine the labor market effects of incomplete information about the workers' own job-finding process. Search outcomes convey valuable information, and learning from search generates endogenous heterogeneity in workers' beliefs about their job-finding probability. We characterize this process and analyze its interactions with job creation and wage determination. Our theory sheds new light on how unemployment can affect workers' labor market outcomes and wage determination, providing a rational explanation for discouragement as the consequence of negative search outcomes. In particular, longer unemployment durations are likely to be followed by lower re-employment wages because a worker's beliefs about his job-finding process deteriorate with unemployment duration. Moreover, our analysis provides a set of useful results on dynamic programming with optimal learning.
    Keywords: Learning; Wages; Unemployment; Directed search; Monotone comparative statics
    JEL: E24 D83 J64
    Date: 2009–12–08
  19. By: Boeters, Stefan
    Abstract: In labour markets with collective wage bargaining higher progressivity of the labour income tax creates a trade-off. On the one hand, wages are lowered and unemployment decreases, on the other hand, the individual labour supply decision is distorted at the hours-of-work margin. The optimal level of tax progressivity within this trade-off is determined using a numerical general equilibrium model with imperfect competition on the goods market, collective wage bargaining and a labour-supply module calibrated to empirically plausible elasticity values. The model is calibrated to macroeconomic and institutional parameters of both the OECD average and a number of individual OECD-countries. In most cases the optimal degree of tax progressivity is below the actual level. A decomposition approach shows that the optimal level is increased by high unemployment and by the general tax level. --
    Keywords: labour taxation,tax progressivity,optimal taxation,collective wage bargaining,unemployment
    JEL: H21 J22 J51 J64
    Date: 2009
  20. By: Efrem Castelnuovo (University of Padua)
    Abstract: This paper estimates a new-Keynesian DSGE model of the U.S. business cycle by employing a variety of business cycle proxies, either one-by-one or, following a recent proposal by Canova and Ferroni (2009), in a joint fashion. Objects such as posterior densities, impulse-response functions, and forecast error variance decompositions are shown to be remarkably sensitive to different filtering. This uncertainty notwithstanding, shocks to trend inflation are given robust support as the main inflation driver in the post-WWII era.
    JEL: C32 E32 E37
    Date: 2009–11
  21. By: Torben M. Andersen (School of Economics and Management, University of Aarhus, Denmark); Joydeep Bhattacharya (Iowa State University, USA)
    Abstract: Abstract. A classic result in dynamic public economics, dating back to Aaron (1966) and Samuelson (1975), states that there is no welfare rationale for PAYG pensions in a dynamically-efficient neoclassical economy with exogenous labor supply. This paper argues that this result, under the fairly-mild restriction that the old be no less risk-averse than the young, extends to a neoclassical economy with endogenous labor supply.
    Keywords: pay-as-you-go, social security, endogenous labor supply, dynamic efficiency
    JEL: E6 H3
    Date: 2009–12–08
  22. By: Comin, Diego; Loayza, Norman; Pasha, Farooq; Serven, Luis
    Abstract: Empirical evidence - including the current global crisis - suggests that shocks from advanced countries often have a disproportionate effect on developing economies. Can this account for the fact that aggregate fluctuations are larger and more persistent in the latter than in the former economies? And what are the mechanisms at play? This paper addresses these questions using a model of an industrial and a developing economy trading goods and assets, with (i) a product cycle shaping the range of intermediate goods used to produce new capital in each country, and (ii) investment adjustment costs in the developing economy. Innovation by the advanced economy results in new intermediate goods, at first produced at home, and eventually transferred to the developing economy through direct investment. The pace of innovation and technology transfer is driven by profitability. This process of technology diffusion creates a medium-term connection between both economies, over and above the short-term link through trade. Calibration of the model to match Mexico-United States trade and foreign direct investment flows shows that this mechanism can explain why shocks to the United States economy have a larger effect on Mexico than on the United States itself, and hence why Mexico shows higher volatility than the United States; why business cycles in the United States lead to medium-term fluctuations in Mexico; and why consumption is not less volatile than output in Mexico.
    Keywords: Economic Theory&Research,Political Economy,Emerging Markets,Debt Markets,Markets and Market Access
    Date: 2009–12–01
  23. By: Marco Guerrazzi; Nicola Meccheri
    Abstract: This paper offers a critical discussion of the concept of labour market rigidity relevant to explaining unemployment. Starting from Keynes’s own view, we discuss how the concept of labour market flexibility has changed over time, involving nominal or real wage flexibility, contract flexibility or labour market institution flexibility. We also provide a critical assessment of the factors that lead the search framework highlighting labour market rigidities (frictions) to challenge the more widespread explanation of equilibrium unemployment grounded on wage rigidity.
    Keywords: Labour Market Rigidities, Nominal and Real Wages, Unemployment, Search Theory.
    JEL: E12 E24
    Date: 2009–11–26
  24. By: Noël Bonneuil; Raouf Boucekkine
    Abstract: The Ramsey model of economic growth is revisited from the point of view of viability compared to optimality. A viable state is a state from which there exists at least one trajectory in capital, consumption, and reproduction that remains in the set of constraints of minimal consumption and positive wealth. There exists a largest set of viable states, including all others, called the viability kernel. This concept is an interesting addition to those of equilibria and optimal paths. Viability is first presented with a constraint of minimal consumption, then with an additional criterion of economic sustainability in the sense of the Brundtland commission, which amounts to requiring a non-decreasing social welfare. The comparison of viability kernels with or without sustainability shows how much consumption should be reduced and when. One strong mathematical result is that the viable-optimal solution in the sense of inter-temporal consumption is obtained on the viability boundary of an auxiliary system. Varying preference, technological, and demographic parameters randomly over simulated viability kernels with and without the Brundtland criterion help identify the determinants of the non-emptiness of the viability kernel and of its volume: technological progress works against population growth to favor the possibility for a given state of being viable or viable-sustainable.
    Keywords: Viability theory, Optimization, Sustainability, Ramsey model
    JEL: C61 C63 C65 O41
    Date: 2009–11
  25. By: Harashima, Taiji
    Abstract: The paper examines the impacts of heterogeneity in the degree of relative risk aversion on the balance on current account in the framework of endogenous growth, and concludes that, like heterogeneity in demographic changes, heterogeneity in the degree of relative risk aversion generates persisting current account imbalances. The imbalance continues permanently, but its ratio to outputs stabilizes. With evidence in many empirical studies that the degree of relative risk aversion in Japan is relatively higher than that in the U.S., the paper argues that the persisting bilateral trade deficit of the U.S. with Japan is partially generated by this mechanism.
    Keywords: Current account; Trade deficits; Capital flows; Endogenous growth; Risk aversion
    JEL: F21 F41 F43 E10 O40
    Date: 2009–12–16
  26. By: Reto Foellmi; Tobias Wuergler; Josef Zweimüller
    Abstract: We study a model of endogenous growth where firms invest both in product and process innovations. Product innovations (that open up completely new product lines) satisfy the advanced wants of the rich. Subsequent process innovations (that decrease costs per unit of quality) transform the luxurious products of the rich into conveniences of the poor. A prototypical example for such a product cycle is the automobile. Initially an exclusive product for the very rich, the automobile became affordable to the middle class after the introduction of Ford's Model T, the car that 'put America on wheels'. We show that an egalitarian society creates strong incentives for process innovations (such as the Model T) whereas an unequal society creates strong incentives for product innovations (new luxuries). We show that the inequality-growth relationship depends on which type of innovative activity drives technical progress, analyzing both the characteristics of and the transition to the balanced growth path.
    Keywords: Inequality, technical change, growth, mass production, product innovations, process innovations.
    JEL: O15 O30 D30 D40
    Date: 2009–12

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