nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒01‒30
fifteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Who Owns Children and Does It Matter? By Alice Schoonbroodt
  2. Lending Relationships and Monetary Policy By Henrique S. Basso and Javier Coto-Martinez, Yunus Aksoy,
  3. Inefficient Worker Turnover By Nicolas L. Jacquet
  4. Directed Search on the Job, Heterogeneity, and Aggregate Fluctuations By Guido Menzio; Shouyong Shi
  5. On the Segmentation of Markets By Nicolas L. Jacquet; Serene Tan
  6. Mortality, Human Capital and Persistent Inequality By Shankha Chakraborty
  7. Individual vs. Collective Bargaining in the Large Firm Search Model By Bauer, Christian; Lingens, Jörg
  8. On the Relation Between the Endogenous Growth Rate of the Economy and the Dynamics of Renewable Resources By José Manuel Madeira Belbute; Paulo Brito
  10. Capital Controls and Welfare By Shigeto Kitano
  11. The Evolution of Education: A Macroeconomic Analysis By Diego Restuccia; Guillaume Vandenbroucke
  12. Pension Benefit and Hours Worked By MIYAZAWA Kensuke
  13. Non-uniform staggered prices and output persistence By Söderberg, Johan
  14. Growth, fluctuations and technology in the U.S. post-war economy By Jesús Rodríguez López
  15. Capital liberalization and the US external imbalance By Elvira Prades; Katrin Rabitsch

  1. By: Alice Schoonbroodt
    Abstract: In this paper a particular market failure that may lead to inefficiently low equilibrium fertility and therefore to a need for government intervention are analysed. The friction which is investigated is related to the ownership of children. If parents have no claim on their children’s income, then the private benefit from producing a child may be smaller than the social benefit. We present an overlapping-generations (OLG) model with fertility choice and altruism, and model ownership by introducing a minimum constraint on transfers from parents to children.
    Keywords: children, altruism, child, parents, Overlapping generations, Fertility, Efficiency, market failure, social security
    Date: 2010
  2. By: Henrique S. Basso and Javier Coto-Martinez, Yunus Aksoy, (,
    Abstract: Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements.
    Keywords: Endogenous Banking Spread; Credit Markets; Cost Chanell of Monetary Transmission; Firm-bank Relationships
    JEL: E44 E52 G21
    Date: 2010–01–21
  3. By: Nicolas L. Jacquet (Singapore Management University)
    Abstract: This paper considers the efficiency properties of risk-neutral workers’ mobility decisions in an equilibrium model with search frictions, but no search externalities, when the rent accruing to a match is split through bargaining. Matches are ex ante homogeneous and their true productivity is learnt after the match is formed. It is shown that the efficiency of worker turnover depends on contract enforceability, and that in the absence of complete enforceability the equilibrium fails to be efficient. This is because without complete enforceability firms cannot credibly offer workers contracts that will guarantee them the entire future of all potential future matches.
    Keywords: On-the-Job Search, Learning, Bargaining, Contracts, Enforceability
    JEL: J30 J63
    Date: 2010–01
  4. By: Guido Menzio; Shouyong Shi
    Abstract: We study a labor market where workers search for jobs both on the job and off the job. In the model, there are aggregate productivity shocks and match-specific shocks. We outline the proof of existence of an equilibrium which we call a block recursive equilibrium (BRE), in which individuals' decisions and market tightness are independent of the distribution of workers over wages or contracts. A critical assumption that is responsible for a BRE to exist is that search is directed by firms' posting of contracts. We explain why a BRE does exist under the assumption of directed search and why it does not under the assumption of random search. Finally, we generalize the proof of existence of a BRE to allow workers to be ex-ante heterogeneous with respect to some observable characteristics such as education and skill.
    Keywords: Directed Search; On the Job Search; Heterogeneity; Aggregate Fluctuations
    JEL: E24 E32 J64
    Date: 2010–01–21
  5. By: Nicolas L. Jacquet; Serene Tan (Singapore Management University)
    Abstract: This paper endogenizes the market structure of an economy with heterogeneous agents who want to form bilateral matches in the presence of search frictions and when utility is non-transferable. We depart from standard matching models where all agents are assumed to be in a unique meeting place by assuming the existence of in…finitely many meeting places and allowing each agent to choose which meeting place to be in. The market is thus allowed to be segmented into di¤erent meeting places, and agents not only get to choose who to match with, but also who they meet with. We show that in equilibrium all market structures feature perfect segmentation where agents match with the …rst person they meet. All these market structures have the same matching pattern, implying that the value of search to each agent is the same. Although perfect assortative matching cannot be obtained in equilibrium, the degree of assortativeness is nevertheless greater than in standard models.
    Keywords: search, matching, segmentation, market structure
    JEL: J42 D83
    Date: 2010–01
  6. By: Shankha Chakraborty
    Abstract: Available evidence suggests high intergenerational correlation of economic status, and persistent disparities in health status between the rich and the poor. This paper proposes a novel mechanism linking the two. Health human capital is introduced into a two-period overlapping generations model. [CDE WP No. 119].
    Keywords: Life Expectancy, human capital, intergenerational correlation, Health, Human Capital, Income Distribution, health status, rich, poor, intergenerational mobility, equity, US economy
    Date: 2010
  7. By: Bauer, Christian; Lingens, Jörg
    Abstract: We analyze the welfare and employment effects of different wage bargaining regimes. Within the large firm search model, we show that collective bargaining affects employment via two channels. Collective bargaining exerts opposing effects on job creation and wage setting. Firms have a stronger incentive for strategic employment, while workers benefit from the threat of a strike. We find that the employment increase due to the strategic motive is dominated by the employment decrease due to the increase in workers' threat point. In aggregate equilibrium, employment is ineciently low under collective bargaining. But it is not always true that equilibrium wages exceed those under individual bargaining. If unemployment benefits are sufficiently low, collectively bargained wages are smaller. The theory sheds new light on policies concerned with strategic employment and the relation between replacement rates and the extent of collective wage bargaining.
    Keywords: search; overemployment; collective wage bargaining; wage determination
    JEL: J30 J50 J41
    Date: 2010–01
  8. By: José Manuel Madeira Belbute (Department of Economics, University of Évora; CEFAGE-UE); Paulo Brito (Department of Economics, Technical University of Lisbon; UECE)
    Abstract: In this paper we study a simple endogenous growth model in which the two engines of growth are the exogenous technical progress in dematerialization and the accumulation of a renewable natural resource. The model is also labeled as been "endogenous" as the rate of growth of natural capital is endogenously determined and should lie between zero and the rate of technical progress. In this context, it is possible to combine permanent economic growth with permanent growth of the environmental asset. the endogenous rate of growth of the stock of natural resources is a positive function of the physical rate of regeneration (which will occur if consumption would be zero) and of the rate of technical progress. However, in order to assure sustainability, the former growth rate should be larger than zero but smaller than the later. Second, the output growth rate (which in our model is equal to the rate of consumption) should lie between the rate of technical progress and the sum of the rate of technical progress and the natural rate of regeneration. Therefore, even in the case in which the physical rate of renewal is mall, this will allow for unbounded growth. Third, in our simple model, there is no transitional dynamics.
    Keywords: Endogenous growth, environmental preservation, habit-formation
    JEL: C61 Q56 O39 O40
    Date: 2009
  9. By: Aronsson, Thomas (Department of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper concerns optimal nonlinear taxation in an OLG model with two ability-types, where people care about their own consumption relative to (i) other people’s current consumption, (ii) own past consumption, and (iii) other people’s past consumption. We show that intertemporal consumption comparisons affect the marginal income tax structure in the same qualitative way as comparisons based on other people’s current consumption. Based on available empirical estimates, comparisons with other people’s current and previous consumption tend to substantially increase the optimal marginal labor income tax rates, while they may either increase or decrease the optimal marginal capital income tax rates.<p>
    Keywords: Optimal income taxation; asymmetric information; relative consumption; status; habit formation; positional goods
    JEL: D62 H21 H23 H41
    Date: 2010–01–22
  10. By: Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: This paper computes welfare levels under different degree of capital controls and compares them with the welfare level under perfect capital mobility by using the methodology of Schmitt-Grohe and Uribe (2007). We show that perfect capital mobility is not always optimal and that capital controls may enhance an economy's welfare level. There exists an optimal degree of capital-account restriction that achieves a higher level of welfare than that under perfect capital mobility, if the economy has a distortion due to financial intermediaries such as inefficient banks. The results of our analysis imply that as the domestic financial intermediaries are less efficient, the government should impose stricter capital controls in the form of a tax on foreign borrowing.
    Keywords: Jcapital controls, welfare, DSGE, small open economy
    JEL: F41
    Date: 2010–01
  11. By: Diego Restuccia; Guillaume Vandenbroucke
    Abstract: Between 1940 and 2000 there has been a substantial increase of educational attainment in the United States. What caused this trend? Using a simple model of schooling decisions, we assess the quantitative contribution of changes in the return to schooling in explaining the evolution of education. We restrict changes in the returns to schooling to match data on earnings across educational groups and growth in aggregate labor productivity. These restrictions imply modest increases in returns that nevertheless generate a substantial increase in educational attainment: average years of schooling increase by 37 percent in the model compared to 23 percent in the data. This strong quantitative effect is robust to relevant variations of the model including allowing for changes in the relative cost of acquiring education. We also find that the substantial increase in life expectancy observed during the period contributed to only 7 percent of the change in educational attainment in the model.
    Keywords: educational attainment, schooling, skill-biased technical progress, human capital
    JEL: E1 O3 O4
    Date: 2010–01–19
  12. By: MIYAZAWA Kensuke
    Abstract: This paper clarifies the effects of pension benefit systems on aggregate hours worked. By incorporating the labor income taxes and the social security taxes into a representative agent model, previous studies successfully explain the long term decline in the hours worked in some continental European countries, and the differences between these European countries and the U.S. in recent years. However, their model underpredicts the hours worked in Japan and Sweden. We measure the marginal pension benefit rates of the labor supply, which the previous studies do not take into account, and incorporate them into previous studies. We fid that the marginal pension benefit can explain much of the discrepancy between the actual hours worked and the predictions of the previous studies. This result also implies that the pension benefit might offset the effect of the unemployment insurance that is thought to make the prediction worse in some continental European countries.
    Date: 2010–01
  13. By: Söderberg, Johan (Department of Economics)
    Abstract: Staggered prices are a fundamental building block of New Keynesian dynamic stochastic general equilibrium models. In the standard model, prices are uniformly staggered but recent empirical evidence suggest that deviations from uniform staggering are common, This paper analyzes how synchronization of price changes affects the response to monetary policy shocks. I find that even large deviations from uniform staggering have small effects on the response in output. Aggregate dynamics in a model of uniform staggering may serve well as an approximation to a more complicated model with some degree of synchronization in price setting.
    Keywords: Price setting; Staggering; Synchronization; Persistence
    JEL: E31 E32
    Date: 2010–01–21
  14. By: Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide)
    Abstract: This paper explores several issues concerning how technology affects growth and fluctuations during several U.S. postwar series. The nature of technology is divided into neutral progress and investment-specific progress. Accounting for several changes in the first and second order moments of these series (the slowdown of productivity in 1974, the moderation of 1984 and the resurgence in productivity after 1994), I find that the contribution of investment-specific progress to growth has increased over time. I also find that neutral progress is crucial in explaining the cyclical component of output (before and after 1984), contrary to results found in related literature. However, the shocks to investment-specific progress have played an increasing role in output and other macroeconomic variables. Finally, I conclude that moderation in the macroeconomic series can be associated with technology. In sum, the quality of technological processes affecting long run growth and fluctuations has changed over the past decades.
    Keywords: Productivity growth; Investment-specific technological change; Neutral technological change
    JEL: O3 O4
    Date: 2010–01
  15. By: Elvira Prades (BBVA Research Department); Katrin Rabitsch (Department of Economics, Central European University and Research Department, Magyar Nemzeti Bank.)
    Abstract: Differences in financial systems are often named as a prime candidate for the current state of global imbalances. This paper argues that the process of capital liberalization can explain a substantial fraction of the US net external liabilities. We present a simple two-country model with an internationally traded bond, in which capital controls are reflected in the presence of borrowing and lending constraints on that bond. In a US versus the rest of the world (RoW) scenario, we perform experiments that are largely consistent with countries’ liberalization experiences. A reduction in the RoW’s controls on capital outflows and/or a tightening in the RoW’s borrowing constraint enables the US economy to better insure against consumption risk relative to the rest of the world, and therefore decreases its motives for precautionary asset holdings relative to the rest of the world. As a result of these asymmetric shifts in countries’ barriers to capital mobility, the US runs a long run external deficit.
    Keywords: capital liberalization, external imbalances, net foreign asset position, precautionary savings, borrowing and lending constraints.
    JEL: F32 F34 F41
    Date: 2009

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