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on Dynamic General Equilibrium |
| By: | Guido Ascari (University of Pavia and Kiel Institute for the World Economy); Tiziano Ropele (Bank of Italy and Kiel Institute for the World Economy JEL classification: E31, E5) |
| Abstract: | When taken to examine disinflation monetary policies, the current workhorse DSGE model of business cycle fluctuations successfully accounts for the main stylized facts in terms of recessionary effects and sacrifice ratio. We complement the transitional analysis of the short-run costs with a rigorous welfare evaluation and show that, despite the long-lasting economic downturn, disinflation entails non-zero overall welfare gains. |
| Keywords: | disinflation, sacrifice ratio, non-linearities |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_736_10&r=dge |
| By: | Andrea Gerali (Bank of Italy); Stefano Neri (Bank of Italy); Luca Sessa (Bank of Italy); Federico M. Signoretti (Bank of Italy) |
| Abstract: | This paper studies the role of credit-supply factors in business cycle fluctuations. For this purpose, we introduce an imperfectly competitive banking sector into a DSGE model with financial frictions. Banks issue collateralized loans to both households and firms, obtain funding via deposits and accumulate capital from retained earnings. Margins charged on loans depend on bank capital-to-assets ratios and on the degree of interest rate stickiness. Bank balance-sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the existence of a banking sector partially attenuates the effects of demand shocks, while it helps propagate supply shocks. Second, shocks originating in the banking sector explain the largest share of the fall of output in 2008 in the euro area, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital has a substantial impact on the real economy and particularly on investment. |
| Keywords: | collateral constraints, banks, banking capital, sticky interest rates |
| JEL: | E30 E32 E43 E51 E52 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_740_10&r=dge |
| By: | Kudoh, Noritaka; Nguyen, Hong Thang |
| Abstract: | We explore the implications of adopting a Taylor-type interest-rate rule in a simple monetary growth model in which budget deficits are financed partly by unbacked government debt. To ensure uniqueness of the steady-state equilibrium, monetary policy cannot be either too "active" or too "passive". The effects of fiscal policy depend crucially on whether monetary policy is active or passive, and are independent of the "tightness" of monetary policy. |
| Keywords: | monetary policy rules, fiscal policy, overlapping generations, |
| JEL: | E52 E62 H62 H63 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:hok:dpaper:220&r=dge |
| By: | Jonathan Berk; Johan Walden |
| Abstract: | The non-tradability of human capital is often cited for the failure of traditional asset pricing theory to explain agents' portfolio holdings. In this paper we argue that the opposite might be true --- traditional models might not be able to explain agent portfolio holdings because they do not explicitly account for the fact that human capital does trade (in the form of labor contracts). We derive wages endogenously as part of a dynamic equilibrium in a production economy. Risk is shared in labor markets because firms write bilateral labor contracts that insure workers, allowing agents to achieve a Pareto optimal allocation even when the span of asset markets is restricted to just stocks and bonds. Capital markets facilitate this risk sharing because it is there that firms offload the labor market risk they assumed from workers. In effect, by investing in capital markets investors provide insurance to wage earners who then optimally choose not to participate in capital markets. The model can produce some of the most important stylized facts in asset pricing: (1) limited asset market participation, (2) the seemingly high equity risk premium, (3) the very large disparity in the volatility of consumption and the volatility of asset prices, and (4) the time dependent correlation between consumption growth and asset returns. |
| JEL: | G11 G12 J24 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15709&r=dge |
| By: | Gonzalo Fernández-de-Córdoba (Universidad de Málaga); Jesús Vázquez (Universidad del País Vasco) |
| Abstract: | This paper provides a new growth model by considering strategic behaviour in the supply of labour. Workers form a labour union with the aim of manipulating wages in their own benefit. We analyse the implications on labor market dynamics at business cycle frequencies of getting away from the price-taking assumption. A calibrated monetary version of the union model does quite a reasonable job in replicating the dynamic features of labour market variables observed in post-war U.S. data. |
| Keywords: | Labour union, productivity versus monetary shocks, business cycle |
| JEL: | E24 E32 |
| Date: | 2010–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:201002&r=dge |
| By: | Martin M. Andreasen (Bank of England and CREATES) |
| Abstract: | This paper improves the accuracy and speed of particle filtering for non-linear DSGE models with potentially non-normal shocks. This is done by introducing a new proposal distribution which i) incorporates information from new observables and ii) has a small optimization step that minimizes the distance to the optimal proposal distribution. A particle filter with this proposal distribution is shown to deliver a high level of accuracy even with relatively few particles, and this filter is therefore much more efficient than the standard particle filter. |
| Keywords: | Likelihood inference, Non-linear DSGE models, Non-normal shocks, Particle filtering |
| JEL: | C13 C15 E10 E32 |
| Date: | 2010–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2010-05&r=dge |
| By: | Alberto Bucci (University of Milan); Chiara Del Bo (University of Milan) |
| Abstract: | This paper examines two possible sources of interaction between private and public capital in an endogenous growth model with productive public investment, which is used as an input both in the production of final output and in the production of new public capital. On the one hand ,public investment and private capital are complementary with each other in the production of goods. On the other, they can be either complementary or substitutes in the production of new productive public capital .In our model private and public capital are two reproducible productive inputs interacting with each other in goods production and in productive public capital investment. The share of public capital devoted to output production can be exogenous or endogenous, and we consider a Cobb-Douglas and a more general CES aggregate production function. Our main results are that, when the share of public capital devoted to output production is exogenous along the balanced growth path equilibrium the common growth rate is a negative function of this share and a positive function of the degree of complementarity between the two forms of capital in infrastructure capital investment. When the sectoral allocation of productive public capital is endogenous, the main determinant of the economy's long run growth rate is, along with the model's preferences parameters, the public capital's share in GDP. Unlike existing literature (notably, Barro 1990), we find that the relationship linking the economy's growth rate and the public capital's share in GDP is U-shaped, rather than monotonically decreasing. |
| Keywords: | Economic Growth; Complementarity; Productive Public Investment; Private Capital, |
| Date: | 2009–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:bep:unimip:1092&r=dge |
| By: | Jonas D. M. Fisher |
| Abstract: | This comment explains why the findings presented in Beaudry and Lucke (2009) are misleading. |
| Keywords: | Technology shocks, investment-specific shocks, neutral shocks, news shocks, business cycle |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2010-01&r=dge |
| By: | Morris A. Davis; Jonas D. M. Fisher; Toni M. Whited |
| Abstract: | The authors construct a dynamic general equilibrium model of cities and use it to estimate the effect of local agglomeration on per capita consumption growth. Agglomeration affects growth through the density of economic activity: higher production per unit of land raises local productivity. Firms take productivity as given; produce using a technology that has constant returns in developed land, capital, and labor; and accumulate land and capital. If land prices are rising, as they are empirically, firms economize on land. This behavior increases density and contributes to growth. They use a panel of U.S. cities and our model's predicted relationship among wages, output prices, housing rents, and labor quality to estimate the net effect of agglomeration on local wages. The impact of agglomeration on the level of wages is estimated to be 2 percent. Combined with their model and observed increases in land prices, this estimate implies that agglomeration raises per capita consumption growth by 10 percent. |
| Keywords: | Balanced Growth, Economic Growth, Productivity, Externalities, Increasing Returns, Agglomeration, Density |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2010-02&r=dge |
| By: | Alberto Bucci (University of Milan) |
| Abstract: | This paper analyzes how population and product market competition may interact with each other in affecting the pace of productivity growth. We find that the impact of a change in population (size/growth) and in the degree of market concentration on economic growth varies depending on the structure of the underlying model economy and, more precisely, depending on the presence of purposeful human (versus physical) capital investment, the type of input used in the uncompetitive sector, the form of households' intertemporal utility and whether product market competition (measured by the elasticity of substitution between differentiated intermediates) is disentangled or not from the input-shares in total income. We also find that only a fully endogenous growth model with purposeful human capital investment at the individual level and a continuum of degrees of inter-generational altruism is simultaneously able to predict an ambiguous link between population and economic growth rates and to display no strong scale effects in economic growth, while keeping the property that positive economic growth is feasible even without any population change. The paper also examines the conditions under which population (size/growth) and product market competition/monopoly power can be complementary factors in economic growth. |
| Keywords: | Population (size and growth); Endogenous and Semi-endogenous Economic Growth; Human and Physical Capital Investment; Innovation; Scale Effects; Competition, |
| Date: | 2009–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:bep:unimip:1095&r=dge |
| By: | Pedro Gomis Porqueras; Luca Bossi |
| Abstract: | In this paper, we show that Ricardian equivalence does not hold in a representative agent framework if one considers goods whose current consumption affect future marginal utilities. We find that, when the intertemporal elasticity of substitution changes over time, the timing of lump sum taxation has an asymmetric effect on current and future consumption. This in turn induces distinctive welfare consequences even if the government and individual budget constraints are unchanged in present value terms. |
| JEL: | H2 H3 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2010-512&r=dge |