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on Dynamic General Equilibrium |
| By: | Ferre de Graeve; Maarten Dossche; Marina Emiris; Henri Sneessens; Raf Wouters (CREA, University of Luxembourg) |
| Abstract: | We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in attitude towards risk and intertemporal sub- stitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and via an efficient labor contract. The result is a combi- nation of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and counter- cyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical la- bor share. Based on the empirical estimates for the two sources of real macroeconomic risk, the model generates significant and plausible time variation in both bond and equity risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession. |
| JEL: | E32 E44 G12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:09-17&r=dge |
| By: | Fanti, Luciano; Gori, Luca |
| Abstract: | This article analyses the dynamics of an overlapping generations economy (Diamond, 1965) with pay-as-you-go financed public pensions and myopic expectations. It is shown that large PAYG pensions triggers economic fluctuations depending on the mutual relationship between technology and preference parameters. Our findings constitute a policy warning about the size of social security and provide another explanation of the occurrence of persistent cycles. |
| Keywords: | Myopic foresight; PAYG pensions; Stability; OLG model |
| JEL: | H55 J26 C62 |
| Date: | 2010–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19984&r=dge |
| By: | Sharon Harrison; Mark Weder |
| Abstract: | We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumer’s choice of leisure. Unlike this model without a collateral constraint, we Þnd that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulÞlling expectations. This is the case for more realistic parametrizations than in previous, similar models without these features. |
| Keywords: | Business cycles, Credit markets, Collateral Constraint, Sunspots. |
| JEL: | E32 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1001&r=dge |
| By: | Dennis Wesselbaum |
| Abstract: | Shocks driving the business cycle have different effects on low-skilled and high-skilled workers. This paper studies the effects of temporary and permanent sector-specific shocks in a New Keynesian matching model. We show that temporary sector-specific shocks have reallaction and aggregate effects. Permanent shocks explain wedges in real wages and different performances in labor markets. Furthermore, the model is able to replicate an aggregate Beveridge curve |
| Keywords: | Beveridge Curve, Matching, Sectoral Productivity Shock |
| JEL: | E24 J24 J41 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1585&r=dge |
| By: | Efrem Castelnuovo (University of Padua); Salvatore Nisticò (Università di Roma "Tor Vergata" and LUISS "Guido Carli") |
| Abstract: | This paper investigates the interactions between stock market fluctuations and monetary policy within a DSGE model for the U.S. economy. First, we design a framework in which fluctuations in households financial wealth are allowed - but not necessarily required - to exert an impact on current consumption. This is due to the interaction, in the financial markets, of long-time traders holding wealth accumulated over time with newcomers holding no wealth at all. Importantly, we introduce nominal wage stickiness to induce pro-cyclicality in real dividends. Additional nominal and real frictions are modeled to capture the pervasive macroeconomic persistence of the observables employed to estimate our model. We fit our model to post-WWII U.S. data, and report three main results. First, the data strongly support a significant role of stock prices in affecting real activity and the business cycle. Second, our estimates also identify a significant and counteractive response of the Fed to stock-price fluctuations. Third, we derive from our model a microfounded measure of financial slack, the "stock-price gap", which we then contrast to alternative ones, currently used in empirical studies, to assess the properties of the latter to capture the dynamic and cyclical implications of our DSGE model. The behavior of our "stock-price gap" is consistent with the episodes of stock-market booms and busts occurred in the post-WWII, as reported by independent analyses, and closely correlates with the current financial meltdown. Typically employed proxies of financial slack such as detrended log-indexes or growth rates show limited capabilities of capturing the implications of our model-consistent index of financial stress. Cyclical properties of the model as well as counterfactuals regarding shocks to our measure of financial slackness and monetary policy shocks are also proposed. |
| Keywords: | Stock Prices, Monetary Policy, Bayesian Estimation, Wealth Effects. |
| JEL: | E30 E52 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0107&r=dge |
| By: | Michael A. Cohen (University of Connecticut); Marina-Selini Katsaiti (University of Connecticut and University of Athens) |
| Abstract: | We present an overlapping-generations (OLG) macroeconomic model that applies a behavioral interpretation of preferences for goods that generate health risks. In this paper proneness to poor health is viewed as a cognitive miscalculation by economic agents between their expected health state over various consumption bundles and the actual health care they require for their health outcome. To model this the paper borrows insight from prospect theory and applies the reference-dependent preference framework to the specication of out utility model. In our model of the economy individual preferences are decomposed into intrinsic consumption utility and gain-loss utility associated with the miscalculation. Agents in the economy are stratied in their health states as well as their expected health care consumption according to some probability measure over the population. Heterogeneity introduced in this way generates consumers of varied proneness to risk associated with consumption of unhealthy goods because individuals have various marginal valuations of their miscalculation. In such a population, when all agents pay the same insurance premium, health-conscious agents shoulder the health care costs of their less health-conscious counterparts and the less health-conscious are engaged in less healthy consumption than they would if they paid actuarially fair premia. We demonstrate these eects in simulations by comparing the risk pooling equilibria to the actuarially fair pricing equilibria. This paper introduces the mathematical programming equilibrium constraint (MPEC) computational approach to compute model equilibria; we believe this approach is new to heterogeneous agent OLG model simulation. |
| Keywords: | Risky Consumption, Health care Cost, Insurance Premia Pricing, Two Sector Model, Obesity. |
| JEL: | I19 E21 O41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2009-43&r=dge |
| By: | Totzek, Alexander |
| Abstract: | As GDP is highly correlated with both entering and exiting firms, we develop a totally microfounded DSGE model with endogenous firms entry as well as exit decisions. We show that the simplifying assumption of a constant firms' death rate made by the recent literature on DSGE modelling can lead to counterfactual implications of the resulting dynamics. We further demonstrate that the feature of endogenous exits significantly improves the performance of the resulting model when comparing the generated second moments with those of existing models assuming exogenous exits and with the data. Moreover, we estimate the resulting Phillips curve which turns out to be also a function of the change in the mass of producers using the generalized method of moments. -- |
| Keywords: | Heterogeneity,Producer entry and exit,Business cycles,GMM |
| JEL: | E32 E31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:200911&r=dge |
| By: | Pedro Rui Mazeda Gil (CEF.UP and Faculdade de Economia, Universidade do Porto); Paulo Brito (Instituto Superior de Economia e Gestão and UECE, Universidade Técnica de Lisboa); Óscar Afonso (CEF.UP and Faculdade de Economia, Universidade do Porto) |
| Abstract: | This paper develops a tournament model of horizontal and vertical R&D under a lab-equipment specification. A key feature is that the overall growth rate is endogenous, as the splitting of the growth rate between the intensive and the extensive margin is itself endogenous. This setup gives rise to strong inter-R&D composition effects, while making economic growth and firm dynamics closely related, both along the balanced-growth path and transition. The model hence offers a (qualitative) explanation for the negative or insignificant empirical correlation between aggregate R&D intensity and both firm size and economic growth, a well-known puzzle in the growth literature. |
| Keywords: | endogenous growth, vertical and horizontal R&D, firm dynamics, transitional dynamics |
| JEL: | O41 D43 L16 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:356&r=dge |
| By: | Zeno Enders |
| Abstract: | A model of segmented asset markets is developed, in which varieties of consumption bundles are purchased sequentially. By this, a non-degenerate heterogeneity in wealth and the effective elasticity of substitution across households arises, affecting optimal markups chosen by firms. Furthermore, the model features an internal propagation mechanism that stems from the slow dissemination of newly injected money via second-round effects. These mechanisms generate a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, procyclical profits and wages after monetary shocks. Furthermore, the responses of output, inflation, hours worked, velocity, and profits are quantitatively in line with VAR evidence. |
| Keywords: | Limited Participation, Countercyclical Markups, Liquidity Effect, Segmented Asset Markets |
| JEL: | E31 E32 E51 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse30_2009&r=dge |
| By: | Piero Gottardi (European University Instutite); Atsushi Kajii (Institute of Economic Research, Kyoto University); Tomoyuki Nakajima (Institute of Economic Research, Kyoto University) |
| Abstract: | Should capital and labor be taxed, and if so how when individuals' labor and capital income are subject to uninsurable idiosyncratic risks? In a two period general equilibrium model with production, we first show that reducing investment is welfare improving if households are ho- mogeneous enough ex ante. On the other hand, when the degree of heterogeneity is sufficiently high a welfare improvement is achieved by increasing investment, even if the investment level is already higher than at the e¢ cient allocation obtained when full insurance markets were avail- able. Consequently, the optimal capital tax rate might be negative. We derive a decomposition formula of the effects of the tax which allow us to determine how the sign of optimal tax on capital and labor depends both on the nature of the shocks and the degree of heterogeneity among consumers as well as on the way in which the tax revenue is allocated. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:694&r=dge |
| By: | Luisa Lambertini (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland); Caterina Mendicino; Maria Teresa Punzi |
| Abstract: | This paper analyzes housing market boom-bust cycles driven by changes in households' expectations. We introduce expectations-driven fluctuations into the housing-market model developed by Iacoviello and Neri (2009). We find that changes in expectations about the future state of productivity, investment cost, housing supply, inflation, the policy rate and the central bank's inflation target can generate macroeconomic boom-bust cycles in accordance with the data. Contrary to previous literature, we show that a strong anti-inflationary stance is detrimental both in terms of macroeconomic volatility and welfare. We also document that economies subject to a lower degree of credit friction experience higher volatility in both consumption household indebtedness. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:cif:wpaper:201001&r=dge |
| By: | Mc Morrow, Kieran (European Commission); Röger, Werner (European Commission) |
| Abstract: | This paper reviews the empirical literature on rates of return on R&D and interprets the economic significance of these estimates using a semi-endogenous growth model with a calibrated knowledge production sector. We analyse how R&D subsidies, a reduction of entry barriers for start-ups and increasing high-skilled labour would contribute towards raising productivity and knowledge investment in the EU. The simulation results show that substantial efforts will have to be made if Europe wants to come close to achieving the Lisbon productivity and knowledge-investment targets. Achieving US standards in all three areas would reduce the productivity gap by about 50 percent. Improving the quality of tertiary education and increasing competition in non-manufacturing sectors would also help the EU to get to the productivity frontier. |
| Keywords: | Productivity differences; endogenous growth; R&D; DSGE models |
| JEL: | E10 O20 O30 O41 |
| Date: | 2009–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:ris:eibpap:2009_004&r=dge |