nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒01‒16
24 papers chosen by
Christian Zimmermann
University of Connecticut

  1. The taxation of savings in overlapping generations economies with unbacked risky assets By Julio Davila
  2. A General Equilibrium Analysis of Parental Leave Policies By Andres Erosa; Luisa Fuster; Diego Restuccia
  3. Some problems in the testing of DSGE models By Le, Vo Phuong Mai; Minford, Patrick; Wickens, Michael
  4. Search Frictions and Asset Price Volatility By B. Ravikumar; Enchuan Shao
  5. A Structural Investigation into the Price and Wage Dynamics in Hong Kong By Michael Cheng; Wai-Yip Alex Ho
  6. Monetary policy and potential output uncertainty: a quantitative assessment. By Simona Delle Chiaie
  7. The Shimer puzzle and the identification of productivity shocks By Regis Barnichon
  8. The implications of inflation in an estimated new-Keynesian model By Pablo A. Guerron-Quintana
  9. Neoclassical Growth, Environment and Technological Change: The Environmental Kuznets Curve By S.J. Rubio; J.R. García; J.L. Hueso
  10. Time-separable Utility, Leisure and Human Capital Accumulation: What New Implications for the Environment-Growth Nexus? By Xavier Pautrel
  11. Quantifying the Distortionary Fiscal Cost of ‘The Bailout’ By Francisco Gomes; Alexander Michaelides; Valery Polkovnichenko
  12. Estimating DSGE-Model-Consistent Trends for Use in Forecasting By Jean-Philippe Cayen; Marc-André Gosselin; Sharon Kozicki
  13. On the Origin of the Family By Francesconi, Marco; Ghiglino, Christian; Perry, Motty
  14. The Valuation Channel of External Adjustment By Fabio Ghironi; Jaewoo Lee; Alessandro Rebucci
  15. Health-enhancing Activities and the Environment: How Competition for Resources Makes the Environmental Policy Beneficial By Xavier Pautrel
  16. Trade Structure and Equilibrium Indeterminacy in a Two-Country Model By Yunfang Hu; Kazuo Mino
  17. Job separations, heterogeneity, and earnings inequality By Pedro S. Amaral
  18. Real-time search in the laboratory and the market By Meta Brown; Christopher J. Flinn; Andrew Schotter
  19. A Small Open Economy with Heterogenous Agents Facing Interest Rate Ceilings on Loans By Arend, Mario
  20. Wealth effects and public debt in an endogenous growth model By Jerome Creel; Francesco Saraceno
  21. Demographic Change and Pension Reform in Spain: An Assessment in a Two-Earner, OLG Model By Alfonso R. Sánchez Martín; Virginia Sánchez Marcos
  22. Revisiting the role of home production in life-cycle labor supply By R. Jason Faberman
  23. Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes By Fischer, Carolyn; Springborn, Michael R.
  24. On the Rise of Health Spending and Longevity By Raquel Fonseca; Pierre-Carl Michaud; Titus Galama; Arie Kapteyn

  1. By: Julio Davila (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CORE - Université Catholique de Louvain)
    Abstract: This paper establishes, in the context of the Diamond (1965) overlapping generations economy with production, that the risk that savings in unbacked assets (like fiat money or public debt) become worthless implies that, not only the first-best steady state, but even the best steady state attainable with those saving instruments fails to be a competitive equilibrium outcome under laissez-faire. It is nonetheless shown as well that this best monetary steady state can be implemented as a competitive equilibrium with the adequate policy of taxes on returns to capital, subsidies to returns to monetary savings, and lump-sum transfers. Interestingly enough, this policy requires non redistribution of income among agents, unlike the implementation of the first-best steady state. The policy is balanced every period at the steady state and, since no public spending exists in the model, it serves the only purpose of implementing a steady state that provides all agents with a higher utility than the laissez-faire competitive equilibrium steady state. The results thus provide a rationale for an active fiscal policy that has nothing to do with redistributive goals or the need to fund any kind of public sending.
    Keywords: Taxation of savings, overlapping generations, asset bubble.
    Date: 2009–12
  2. By: Andres Erosa; Luisa Fuster; Diego Restuccia
    Abstract: Despite mandatory parental leave policies being a prevalent feature of labor markets in developed countries, their aggregate effects in the economy are not well understood. To assess their quantitative impact, we develop a general equilibrium model of fertility and labor market decisions that builds on the labor matching framework of Mortensen and Pissarides (1994). We find that females gain substantially with generous policies but this benefit occurs at the expense of a reduction in the welfare of males. Leave policies have important effects on fertility, leave taking decisions, and employment. These effects are mainly driven by how the policy affects bargaining -- young females anticipate future states with higher threat points induced by the policy. Because the realization of these states depend on the decisions of females to give birth and take a leave, leave policies effectively subsidize fertility and leave taking. We also find that generous paid parental leaves can be an effective tool to encourage mothers to spend time with their children after giving birth.
    Keywords: human capital; labor market equilibrium; parental leave policies; fertility; temporary separations
    JEL: E24 E60 J2 J3
    Date: 2009–12–30
  3. 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 and other features with data equivalents. We note that they select, scale and characterise the shocks without reference to the data; crucially they fail to use the joint distribution of the features under comparison. We illustrate this point by recomputing an assessment of a two-country model in a recent paper; we .nd that the paper.s conclusions are essentially reversed.
    Keywords: Boostrap; US-EU model; DSGE; VAR; indirect inference; Wald statistic; anomaly; puzzle
    JEL: C12 C32 C52 E1
    Date: 2009–12
  4. By: B. Ravikumar; Enchuan Shao
    Abstract: We examine the quantitative effect of search frictions in product markets on asset price volatility. We combine several features from Shi (1997) and Lagos and Wright (2002) in a model without money. Households prefer special goods and general goods. Special goods can be obtained only via a search in decentralized markets. General goods can be obtained via trade in centralized competitive markets and via ownership of an asset. There is only one asset in our model that yields general goods. The asset is also used as a medium of exchange in the decentralized market to obtain the special goods. The value of the asset in facilitating transactions in the decentralized market is determined endogenously. This transaction role makes the asset pricing implications of our model different from those in the standard asset pricing model. Our model not only delivers the observed average rate of return on equity and the volatility of the equity price, but also accounts for most of the spectral characteristics of the equity price.
    Keywords: Financial markets; Market structure and pricing
    JEL: E44 G12
    Date: 2010
  5. By: Michael Cheng (Research Department, Hong Kong Monetary Authority); Wai-Yip Alex Ho (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper estimates the degree of wage and price flexibility of the Hong Kong economy with the use of a stylised dynamic stochastic general equilibrium (DSGE) model developed for the Hong Kong economy. It also studies the factors contributing to deflation in Hong Kong following the Asian financial crisis (i.e. during the period from 1998 to 2003) and finds that declining import prices were the main culprit. Consistent with earlier studies on the subject and anecdotal evidence, wages and prices in Hong Kong are found to be (relatively) flexible.
    Keywords: DSGE, Bayesian Estimation, Nominal Rigidities
    JEL: F30 G15 G12
    Date: 2009–12
  6. By: Simona Delle Chiaie (Oesterreichische National Bank, Economic Studies Division, Otto-Wagner Platz 3, 1090 Wien, Austria.)
    Abstract: I estimate a dynamic stochastic general equilibrium model where the policymaker and the private sector have imperfect knowledge about potential output. The estimation of the structural parameters and of the monetary authorities’objectives is key to assess the quantitative relevance of the imperfect information problem and to evaluate the robustness of previous exercises based on calibration. The estimated model also allows me to revisit the Orphanides (2001, 2003) findings that the central bank can make large and persistent mistakes to estimate potential output in response to productivity and cost shocks. I find that when real unit labor cost is used as a monetary policy indicator, the potential output uncertainty has quantitatively negligible consequences on policy behaviour and inflation dynamics. JEL Classification: E4, E5.
    Keywords: Monetary policy, potential output uncertainty, indicator variables, real unit labor cost.
    Date: 2009–12
  7. By: Regis Barnichon
    Abstract: Shimer (2005) argues that the Mortensen-Pissarides (MP) model of unemployment lacks an amplification mechanism because it generates less than 10 percent of the observed business cycle fluctuations in unemployment given labor productivity shocks of plausible magnitude. This paper argues that part of the problem lies with the identification of productivity shocks. Because of the endogeneity of measured labor productivity, filtering out the trend component as in Shimer (2005) may not correctly identify the shocks driving unemployment. Using a New-Keynesian framework to control for the endogeneity of productivity, this paper estimates that the MP model can account for a third, and possibly as much as 60 percent, of fluctuations in labor market variables.
    Keywords: Labor market ; Unemployment ; Labor productivity
    Date: 2009
  8. By: Pablo A. Guerron-Quintana
    Abstract: This paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. It is found that 10 percentage points of inflation entails a steady state welfare cost as high as 13 percent of annual consumption. This large cost is mainly driven by staggered price contracts and price indexation. The transition from high to low inflation inflicts a welfare loss equivalent to 0.53 percent. The role of nominal/real frictions as well as that of parameter uncertainty is also addressed.
    Keywords: Inflation (Finance) ; Econometric models ; Keynesian economics
    Date: 2010
  9. By: S.J. Rubio (University of Valencia); J.R. García (University of Valencia); J.L. Hueso (University of Valencia)
    Abstract: The paper investigates socially optimal patterns of economic growth and environmental quality in a neoclassical growth model with endogenous technological progress. In the model, the environmental quality affects positively not only to utility but also to production. However, cleaner technologies can be used in the economy whether a part of the output is used in environmentally oriented R&D. In this framework, if the initial level of capital is low then the shadow price of a cleaner technology is low relative to the cost of developing it given by the marginal utility of consumption and it is not worth investing in R&D. Thus, there will be a first stage of growth based only on the accumulation of capital with a decreasing environmental quality until the moment that pollution is great enough to make profitable the investment in R&D. After this turning point, if the new technologies are efficient enough, the economy can evolve along a balanced growth path with an increasing environmental quality. The result is that the optimal investment pattern supports an environmental Kuznets curve.
    Keywords: Neoclassical Growth Model, Endogenous Technological Progress, External Effects, Environmental Kuznets Curve
    JEL: O33 O41 Q55 Q56
    Date: 2009–12
  10. By: Xavier Pautrel (Nantes Atlantique Université Laboratoire d’Économie et de Management de Nantes (LEMNA), Institut d’Économie et de Management de Nantes - IEA)
    Abstract: Using a time-separable utility function where leisure is introduced through the disutility of working time and is adjusted for quality, as measured by human capital to capture home production, we demonstrate that the environmental policy is harmful for growth. A tighter environmental tax reduces the incentives to educate by increasing leisure time and lowers the steady-state growth rate and lifetime welfare, whatever the source of pollution. We also demonstrate that the intertemporal elasticity of substitution in labor supply plays a crucial role in the marginal impact of the environmental tax on growth and welfare. When the positive influence of human capital is added into preferences (by explicitly modelling the home production sector), we find that the environmental policy promotes steady-state growth. This result challenges the finding by Hettich (1998) according to which, in the presence of leisure, the environmental tax does not affect human capital accumulation if the source of pollution is output.
    Keywords: Leisure, Human Capital, Environmental Tax
    JEL: C Q56
    Date: 2009–11
  11. By: Francisco Gomes (London Business School and CEPR); Alexander Michaelides (London School of Economics, Central Bank of Cyprus, CEPR and FMG); Valery Polkovnichenko (University of Texas at Dallas)
    Abstract: We utilize an overlapping generations model with endogenous production and incomplete markets to quantify the distortionary costs associated with financing the increase in government expenditures directed to investments in the private sector in 2008 and 2009 (also known as ‘the bailout’), and its differential impact on different groups of the population (in the USA). In our baseline calibration, this distortion corresponds to a loss of approximately $300 billion dollars in total household consumption. For plausible alternative assumptions regarding both the expected and actual duration of this increase in expenditures, or the willingness of foreign institutions and/or investors in absorbing additional government debt, this number can increase to $800 billion. We find that the cost falls more dramatically on those households which are either older and/or wealthier. Retirees face approximately 50% of the cost, as younger agents still expect to be alive when the economy has returned to its steady-state. Across wealth groups, the top 25% of the wealth distribution bears almost two thirds of the cost.
    Keywords: Fiscal Policy, tax distortions, bailout, incomplete markets
    JEL: E21 E62 G12
    Date: 2009–12
  12. By: Jean-Philippe Cayen; Marc-André Gosselin; Sharon Kozicki
    Abstract: The workhorse DSGE model used for monetary policy evaluation is designed to capture business cycle fluctuations in an optimization-based format. It is commonplace to loglinearize models and express them with variables in deviation-from-steady-state format. Structural parameters are either calibrated, or estimated using data pre-filtered to extract trends. Such procedures treat past and future trends as fully known by all economic agents or, at least, as independent of cyclical behaviour. With such a setup, in a forecasting environment it seems natural to add forecasts from DSGE models to trend forecasts. While this may be an intuitive starting point, efficiency can be improved in multiple dimensions. Ideally, behaviour of trends and cycles should be jointly modeled. However, for computational reasons it may not be feasible to do so, particularly with medium- or large-scale models. Nevertheless, marginal improvements on the standard framework can still be made. First, pre-filtering of data can be amended to incorporate structural links between the various trends that are implied by the economic theory on which the model is based, improving the efficiency of trend estimates. Second, forecast efficiency can be improved by building a forecast model for model-consistent trends. Third, decomposition of shocks into permanent and transitory components can be endogenized to also be model-consistent. This paper proposes a unified framework for introducing these improvements. Application of the methodology validates the existence of considerable deviations between trends used for detrending data prior to structural parameter estimation and model-consistent estimates of trends, implying the potential for efficiency gains in forecasting. Such deviations also provide information on aspects of the model that are least coherent with the data, possibly indicating model misspecification. Additionally, the framework provides a structure for examining cyclical responses to trend shocks, among other extensions.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods
    JEL: E3 D52 C32
    Date: 2009
  13. By: Francesconi, Marco (University of Essex); Ghiglino, Christian (University of Essex); Perry, Motty (Hebrew University, Jerusalem)
    Abstract: This paper presents an overlapping generations model to explain why humans live in families rather than in other pair groupings. Since most non-human species are not familial, something special must be behind the family. It is shown that the two necessary features that explain the origin of the family are given by uncertain paternity and overlapping cohorts of dependent children. With such two features built into our model, and under the assumption that individuals care only for the propagation of their own genes, our analysis indicates that fidelity families dominate promiscuous pair bonding, in the sense that they can achieve greater survivorship and enhanced genetic fitness. The explanation lies in the free riding behavior that characterizes the interactions between competing fathers in the same promiscuous pair grouping. Kin ties could also be related to the emergence of the family. When we consider a kinship system in which an adult male transfers resources not just to his offspring but also to his younger siblings, we find that kin ties never emerge as an equilibrium outcome in a promiscuous environment. In a fidelity family environment, instead, kinship can occur in equilibrium and, when it does, it is efficiency enhancing in terms of greater survivorship and fitness. The model can also be used to shed light on the issue as to why virtually all major world religions are centered around the importance of the family.
    Keywords: fatherhood uncertainty, free riding, kinship systems, religion, overlapping generations, divorce and blended families
    JEL: C72 D01 D10 J12 Z13
    Date: 2009–12
  14. By: Fabio Ghironi; Jaewoo Lee; Alessandro Rebucci
    Abstract: International financial integration has greatly increased the scope for changes in a country's net foreign asset position through the valuation channel, namely capital gains and losses on external assets and liabilities. We examine this valuation channel in a dynamic equilibrium portfolio model with international trade in equity. By separating asset prices and quantities, we can characterize the first-order dynamics of valuation effects and the current account in macroeconomic dynamics. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete.
    Date: 2009–12–17
  15. By: Xavier Pautrel (Institut d’Economie et de Management de Nantes-IAE, Université de Nantes)
    Abstract: In a two-period overlapping generations model, this paper demonstrates that the relationship between the environmental taxation and the economic activity (level- and growth-output) becomes inverted-U shaped, when the detrimental impact of pollution on health and the private decision of each working-age agent to improve her health are taken into account. Especially, a tighter environmental tax is more likely to promote (rather than to harm) output-level and –growth when health is very sensitive to pollution, the weight of health in preferences is high, the polluting capacity of the production technology is high and the rate of natural purification of pollutants is low. The inverted-U shaped relationship between the environmental tax and the economic activity is due to a positive effect arising from the competition for resources between the final output sector and the health-enhancing activities that offsets the conventional detrimental “drag-down effect” for low values of the environmental tax. We also demonstrate that the link between the environmental tax and the lifetime welfare is inverted-U shaped as well. Finally, we investigate the social optimum and the determinants of the optimal environmental tax.
    Keywords: Growth, Environment, Health, Overlapping Generations
    JEL: Q5
    Date: 2009–12
  16. By: Yunfang Hu (Graduate School of International Cultural Studies, Tohoku University); Kazuo Mino (Institute of Economic Research, Kyoto University)
    Abstract: This paper explores a dynamic two-country model with production externalities in which capital goods are not traded and international lending and borrowing are allowed. Unlike the integrated world economy model based on the Heckscher-Ohlin setting, our model yields indeterminacy of equilibrium under a wider set of parameter values than in the corresponding closed economy model. Our finding demonstrates that the assumption on trade structure would be a relevant determinant in considering the relation between globalization and economic volatility.
    Keywords: two-country model, non-traded goods, equilibrium indeterminacy, social constant returns
    JEL: F43 O41
    Date: 2009–12
  17. By: Pedro S. Amaral
    Abstract: Changes in the fraction of workers experiencing job separations can account for> most of the increase in earnings dispersion that occurred both between, as well as> within educational groups in the United States from the mid-1970s to the mid-> 1980s. This is not true of changes in average earnings losses following job separations.> A search model with exogenous human capital accumulation calibrated> to match some selected moments of the U.S. labor market is used to measure the> effects of changes in the fraction of workers experiencing job separations (extensive> margin) versus changes in average earnings losses following job separations> (intensive margin). While both margins do well in accounting for the increase in> the college premium, only the changes in the extensive margin do well in accounting> for the increases in the variance of both the permanent and transitory> components of earnings.
    Keywords: Wages ; Income distribution
    Date: 2009
  18. By: Meta Brown; Christopher J. Flinn; Andrew Schotter
    Abstract: While widely accepted models of labor market search imply a constant reservation wage policy, the empirical evidence strongly suggests that reservation wages decline in the duration of search. This paper reports the results of the first real-time-search laboratory experiment. The controlled environment that subjects face is stationary, and the payoff-maximizing reservation wage is constant. Nevertheless, subjects' reservation wages decline sharply over time. We investigate two hypotheses to explain this decline: 1) searchers respond to the stock of accruing search costs, and 2) searchers experience nonstationary subjective costs of time spent searching. Our data support the latter hypothesis, and we substantiate this conclusion both experimentally and econometrically.
    Keywords: Labor market ; Job hunting ; Wages ; Employment
    Date: 2009
  19. By: Arend, Mario
    Abstract: The aim of this paper is to explore the effects of interest rate ceilings in a small open economy. In order to account for many individuals and lending, a model with heterogenous agents is considered. The investigation is focused on two issues: first, how effective are interest rate ceilings at reducing loans and risk in the economy and at what cost; and second, whether imposing interest rate limits produce any different response of the variables to aggregate shocks in the economy. The results obtained from the model show that interest rate ceilings are effective at reducing high risk debt in the financial system. The cost on consumption of reducing this risk is minimum in the model. The findings for the second issue show that interest rate ceilings make debt more responsive to shocks on the interest rates. In particular, the effect in percentage points of an increase of interest rates could be twice as negative on debt under interest rate ceilings.
    Keywords: Small open economy; Heterogenous Agents; Incomplete markets; Interest rate ceilings; Financial frictions; Numerical solutions.
    JEL: C6 D52 E44 F41
    Date: 2009–12–18
  20. By: Jerome Creel (Observatoire Français des Conjonctures Économiques); Francesco Saraceno (Observatoire Français des Conjonctures Économiques)
    Abstract: The debate on public finances’ sustainability has long focused on the conditions for the accumulation of debt. This implied that, empirically, the analyses revolved around estimations of dynamic versions of the debt accumulation equation, through unit root tests and cointegration tests between e.g. revenues and primary expenditures, or debt and deficit. Bohn [2007, Journal of Monetary Economics], has forcefully argued in favour of a stronger focus on theory. The model of this paper shows to which extent and under which conditions earlier results considering fiscal policy in an endogenous growth setting are modified if government spending is not entirely tax-financed. Therefore the model uses Barro’s [1990, Journal of Political Economy] production function and Blanchard [1985, Journal of Political Economy]-type consumers to assess fiscal sustainability and the determinants of long-run (or potential) growth, in presence of productive capital services. The main conclusion is that, provided public spending is not too high, it will be growth-enhancing. This feature does not hurt fiscal sustainability if taxes are adjusted appropriately. We also calibrate the model to show that the current level of public capital is low in France, the UK and the USA.
    Keywords: Endogenous Growth, Government Spending, Public Investment, Debt Sustainability
    JEL: H11 H54 O40
    Date: 2009–12
  21. By: Alfonso R. Sánchez Martín; Virginia Sánchez Marcos
    Abstract: Recent pension reforms in Spain have been guided by two opposite goals, achieving financial stability and improving redistributive aspirations. In particular, reforms implemented in 1997/2002 entailed a mixture of both through (i) changes in the pension formula, (ii) the extension in the entitlement to early retirement to all cohorts, and, finally, (iii) increases in survival pensions. This paper builds an Applied General Equilibrium OLG model that captures the fundamental non-stationarity of the Spanish reality (ageing population, education transition and increasing female's attachment to the labour market) to assess the impact of those reforms. As a novel feature with respect to the literature, households in our model economy are made of two potential earners that make saving and labour supply decisions. Our main conclusions from the analysis are at three different levels. First, the Spanish pension system is clearly unsustainable, the pension expenditure will reach a figure of about 18% of the GDP in 2050, and the reforms have been clearly ineffective in improving the financial prospects of it. Second the reforms have had substantial redistributed effects, benefiting low educated groups against high educated and future cohorts against current cohorts. Finally we show that exploring the financial prospects with traditional single earner households models may result in underestimates of the future financial burden of the pension system.
    Date: 2009–12
  22. By: R. Jason Faberman
    Abstract: This paper revisits the argument, posed by Rupert, Rogerson, and Wright (2000), that estimates of the intertemporal elasticity of labor supply that do not account for home production are biased downward. The author uses the American Time Use Survey, a richer and more comprehensive data source than those used previously, to replicate their analysis, but he also explores how other factors interact with household and market work hours to affect the elasticity of labor supply. An exact replication of their analysis yields an elasticity of about 0.4, somewhat larger than previously estimated. Once the author accounts for demographics and household characteristics, particularly the number of children in the household, the estimate is essentially zero. This is true even when accommodating extensive-margin labor adjustments. Households' biological inability to smooth childbearing over the life cycle and the resulting income effect on market work hours drive this result.
    Keywords: Labor supply ; Hours of labor ; Labor productivity
    Date: 2010
  23. By: Fischer, Carolyn (Resources for the Future); Springborn, Michael R.
    Abstract: For reducing greenhouse gas emissions, intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps. For the same expected emissions, however, the economic responses to unexpected productivity shocks differ. Using a real business cycle model, we find that a cap dampens the effects of productivity shocks in the economy. An emissions tax leads to the same expected outcomes as a cap but with greater volatility. Certainty-equivalent intensity targets maintain higher levels of labor, capital, and output than other policies, with lower expected costs and no more volatility than with no policy.
    Keywords: emissions tax, cap-and-trade, intensity target, business cycle
    JEL: Q2 Q43 Q52 H2 E32
    Date: 2009–11–10
  24. By: Raquel Fonseca; Pierre-Carl Michaud; Titus Galama; Arie Kapteyn
    Abstract: The authors use a calibrated stochastic life-cycle model of endogenous health spending, asset accumulation and retirement to investigate the causes behind the increase in health spending and life expectancy over the period 1965-2005. They estimate that technological change along with the increase in the generosity of health insurance may explain independently 53% of the rise in health spending (insurance 29% and technology 24%) while income less than 10%. By simultaneously occurring over this period, these changes may have lead to a "synergy" or interaction effect which helps explain an additional 37% increase in health spending. They estimate that technological change, taking the form of increased productivity at an annual rate of 1.8%, explains 59% of the rise in life expectancy at age 50 over this period while insurance and income explain less than 10%.
    Keywords: demand for health, health spending, insurance, technological change, longevity
    JEL: I10 I38 J26
    Date: 2009–12

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