nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒02‒05
twelve papers chosen by
Christian Zimmermann
University of Connecticut

  1. Bank capital regulation, the lending channel and business cycles By Zhang, Longmei
  2. Fertility-related pensions and cyclical instability By Fanti, Luciano; Gori, Luca
  3. PAYG pensions, tax-cum-subsidy and optimality By Fanti, Luciano; Gori, Luca
  4. How Powerful is Demography? The Serendipity Theorem Revisited By David de la CROIX; Pierre PESTIEAU; Grefory PONTHIERE
  5. Traditional dynamics of output and factor income shares: lessons from East Germany By Simona E. Cociuba
  6. A multi-sectoral approach to the U.S. Great Depression By Pedro S. Amaral; James C. MacGee
  7. Endogenous Time Preference and Strategic Growth By Carmen CAMACHO; Cagri SAGLAM; Agah TURAN
  8. Family Policies: What Does The Standard Endogenous Fertility Model Tell Us? By Thomas BAUDIN
  9. Limited asset market participation and the consumption-real exchange rate anomaly By Robert Kollmann
  10. The long run effects of changes in tax progressivity By Daniel R. Carroll; Eric R. Young
  11. On the Informational Loss Inherent in Approximation Procedures: Welfare Implications and Impulse Responses By Sebastian Sienknecht
  12. Resource Wealth, Innovation and Growth in the Global Economy By Pietro F. Peretto; simone Valente

  1. By: Zhang, Longmei
    Abstract: This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model to study how the instability of the banking sector can amplify and propagate business cycles. The model builds on Bernanke, Gertler and Gilchrist (BGG) (1999), who consider credit demand friction due to agency cost, but it deviates from BGG in that financial intermediaries have to share aggregate risk with entrepreneurs, and therefore bear uncertainty in their loan portfolios. Unexpected aggregate shocks will drive loan default rate away from expected, and have an impact on both firm and bank's balance sheet via the financial contract. Low bank capital position can create strong credit supply contraction, and have a significant effect on business cycle dynamics. --
    Keywords: Bank capital regulation,banking instability,financial friction,business cycle
    JEL: E32 E44 E52
    Date: 2009
  2. By: Fanti, Luciano; Gori, Luca
    Abstract: We show that the introduction of unfunded public pensions in a Cobb-Douglas economy with overlapping generations and endogenous fertility may cause complex economic cycles when individuals are short-sighted. In particular, the risk of cyclical instability increases with both the individual degree of thriftiness and the relative weight of individual fertility in the pension system. Our results provide a possible explanation of the occurrence of persistent cycles in an overlapping generations context and represent a policy warning about the dramatic destabilising effects of a fertility-related pension reform.
    Keywords: Endogenous fertility; Fertility-related pensions; Myopic foresight; OLG model
    JEL: H55 J14 J18 J26 C62
    Date: 2010–01–23
  3. By: Fanti, Luciano; Gori, Luca
    Abstract: Using a simple OLG small open economy with endogenous fertility we show that the command optimum can be decentralised in a market setting using both a PAYG transfer from the young (old) to the old (young) and a tax-cum-subsidy (subsidy-cum-tax) policy, to redistribute within the working age generation. The latter instrument, in fact, reduces (increases) the opportunity cost of bearing children and, hence, stimulates (depresses) fertility. The policy implications are straightforward: when PAYG transfers exist and child rearing is time consuming, a tax-cum-subsidy (subsidy-cum-tax) policy can be used to internalise the externality of children, while also representing a Pareto improvement.
    Keywords: Overlapping generations; PAYG Pensions; Small open economy; Tax-cum-subsidy
    JEL: J13 H55 H24 J26
    Date: 2010–01–23
  4. By: David de la CROIX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques etSsociales (IRES) and Center for Operations Research and Econometrics (CORE)); Pierre PESTIEAU (University of Liege, CORE, Paris School of Economics and CEPR); Grefory PONTHIERE (Paris School of Economics and Ecole Normale Superieure, Paris)
    Abstract: Introduced by Samuelson (1975), the Serendipity Theorem states that the competitive economy will converge towards the optimum steady-state provided the optimum population growth rate is imposed. This paper aims at exploring whether the Serendipity Theorem still holds in an economy with risky lifetime. We show that, under general conditions, including a perfect annuity market with actuarially fair return, imposing the optimum fertility rate and the optimum survival rate leads the competitive economy to the optimum steady-state. That Extended Serendipity Theorem is also shown to hold in economies where old adults work some fraction of the old-age, whatever the retirement age is fixed or chosen by the agents.
    Keywords: Serendipity Theorem, fertility, mortality, overlapping generations, retirement
    JEL: E13 E21 I18 J10
    Date: 2009–12–11
  5. By: Simona E. Cociuba
    Abstract: I evaluate the quantitative implications of technology change and government policies for output and factor income shares during East Germany's transition since 1990. I model an economy that gains access to a high productivity technology embodied in new plants. As existing low productivity plants decrease production, the capital income share varies due to variation in the profit share of these plants. Two policies - transfers and government-mandated wage increases - have opposite effects on output growth, but both contribute to reducing the capital share during the transition. The model's output and capital share line up with counterparts in East German data.
    Keywords: Income distribution ; Economic development ; Technology - Economic aspects ; Productivity ; Capital investments ; Wages
    Date: 2010
  6. By: Pedro S. Amaral; James C. MacGee
    Abstract: We document sectoral differences in changes in output, hours worked, prices, and nominal wages in the United States during the Great Depression. We explore whether contractionary monetary shocks combined with different degrees of nominal wage frictions across sectors are consistent with both sectoral as well as aggregate facts. To do so, we construct a two-sector model where goods from each sector are used as intermediates to produce the sectoral goods that in turn produce final output. One sector is assumed to have flexible nominal wages, while nominal wages in the other sector are set using Taylor contracts. We calibrate the model to the U.S. economy in 1929, and then feed in monetary shocks estimated from the data. We find that while the model can qualitatively replicate the key sectoral facts, it can account for less than a third of the decline in aggregate output. This decline in output is roughly half as large as the one implied by a one-sector model. Alternatively, if wages are set using Calvo-type contracts, the decline in output is even smaller.
    Keywords: Depressions ; Wages ; Prices
    Date: 2009
  7. By: Carmen CAMACHO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Cagri SAGLAM (Department of Economics, Bilkent University, Turkey); Agah TURAN (Department of Economics, Bilkent University, Turkey)
    Abstract: This paper presents a strategic growth model that analyzes the impact of Endogenous preferences on equilibrium dynamics by employing the tools provided by lattice theory and supermodular games. Supermodular game structure of the model let us provide monotonicity results on the greatest and the least equilibrium without making any assumptions regarding the curvature of the production function. We also sharpen these results by showing the differentiability of the value function and the uniqueness of the best response correspondence almost everywhere. We show that, unlike globally monotone capital sequences obtained under corresponding optimal growth models, a non-monotonic capital sequence can be obtained. We conclude that the rich can help the poor avoid poverty trap whereas even under convex technology, the poor may theoretically push the rich to her lower steady state.
    Keywords: Lattice programming, Endogenous time preference
    JEL: C61
    Date: 2010–01–11
  8. By: Thomas BAUDIN (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE) and Institut de Recherches Economiques et sociales (IRES))
    Abstract: Very few studies have explored the optimality properties of the "standard model" of fertility where parents must determine their optimal trade-off between quality and quantity. The present paper works to fill that gap and find three main results. First, when there exist positive externalities in the accumulation of human capital, it is optimal to subsidize education and to tax births. Second, when the Social Welfare Function does not consist of the average utility, the social returns on educational investments can be weaker than the private returns when the optimal population growth rate is negative. In this case, the optimal economic policy consists in subsidizing births and taxing education. Finally, when the health expenditure is introduced as another source of positive externalities, it can be optimal to tax the parental health expenditure to decentralize the first-best path even if this expenditure is always too low at the laissez-faire equilibrium.
    Keywords: Fertility, Education, Family Policy, Mortality, Quality Quantity Trade-off
    JEL: H21 I0 J13 J18
    Date: 2009–12–16
  9. By: Robert Kollmann
    Abstract: Under efficient consumption risk sharing, as assumed in standard international business cycle models, a country's aggregate consumption rises relative to foreign consumption, when the country's real exchange rate depreciates. Yet, empirically, relative consumption and the real exchange rate are essentially uncorrelated. I show that this "consumption-real exchange rate anomaly" can be explained by a simple model in which a subset of households trade in complete financial markets, while the remaining households lead hand-to-mouth (HTM) lives. HTM behavior also generates greater volatility of the real exchange rate and of net exports, which likewise brings the model closer to the data.
    Keywords: International economic integration ; Economic forecasting ; Financial markets ; Foreign exchange rates ; Consumption (Economics)
    Date: 2010
  10. By: Daniel R. Carroll; Eric R. Young
    Abstract: This paper compares the steady state outcomes of revenue-neutral changes to the progressivity of the tax schedule. Our economy features heterogeneous households who differ in their preferences and permanent labor productivities, but it does not have idiosyncratic risk. We find that increases in the progressivity of the tax schedule are associated with long-run distributions with greater aggregate income, wealth, and labor input. Average hours generally declines as the tax schedule becomes more progressive implying that the economy substitutes away from less productive workers toward more productive workers. Finally, as progressivity increases, income inequality is reduced and wealth inequality rises. Many of these results are qualitatively different than those found in models with idiosyncratic risk, and therefore suggest closer attention should be paid to modeling the insurance opportunities of households.
    Keywords: Taxation ; Income tax
    Date: 2009
  11. By: Sebastian Sienknecht (Department of Economics, Friedrich-Schiller-University of Jena)
    Abstract: This paper shows the inappropriatedness of approximation procedures for welfare rankings across suboptimal policy strategies. On the grounds of a simple general equilibrium model, we ï¬nd that even commonly accepted techniques are not suitable to achieve accurate welfare orderings. This result points to a non-universality of these methods, since we unveil welfare reversals when we compare them with the implications of the corresponding Ramsey problem. We believe that the spurious outcomes originate from restricting the approximations to only ï¬rst and second-order moments. The order of approximation needed to obtain accuracy obviously depends on the underlying type of general equilibrium model and on its parameter values. But this creates uncertainty about the correct degree of approximation adopted by researchers in order to obtain clear welfare insights. Therefore, we strongly recommend that normative analyses should rely exclusively on the exact optimality conditions delivered by the Ramsey problem. Nonetheless, we are able to propose approximation methods in order to characterize macroeconomic fluctuations triggered by small disturbances.
    Keywords: Monetary Policy, Macroeconomic Policy Consistency, First-order approximation, Second-order approximation, Purely quadratic approach
    JEL: C63 E52 E61
    Date: 2010–01–20
  12. By: Pietro F. Peretto (Duke University); simone Valente (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: We analyze the relative growth performance of open economies in a two-country model where different endowments of labor and a natural resource generate asymmetric trade. A resource-rich economy trades resource-based intermediates for final manufacturing goods produced by a resource-poor economy. Productivity growth in both countries is driven by endogenous innovations. The effects of a sudden increase in the resource endowment depend crucially on the elasticity of substitution between resources and labor in interme- diates' production. Under substitution (complementarity), the resource boom generates higher (lower) resource income, lower (higher) employment in the resource-intensive sector, higher (lower) knowledge creation and faster (slower) growth in the resource-rich economy. The resource-poor economy adjusts to the shock by raising (reducing) the relative wage, and experiences a positive (negative) growth effect that is exclusively due to trade.
    Keywords: Endogenous Growth, Endogenous Technological Change, Natural Resources, International Trade.
    JEL: E10 F43 L16 O31 O40
    Date: 2010–01

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