nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒03‒13
twelve papers chosen by
Christian Zimmermann
University of Connecticut

  1. Correlated disturbances and U.S. business cycles By Vasco Cúrdia; Ricardo Reis
  2. Endogenous Persistence in an Estimated DSGE Model under Imperfect Information By Paul Levine; Joseph Pearlman; George Perendia; Bo Yang
  3. The design of unemployment transfers: Evidence from a dynamic structural life-cycle model By Peter Haan; Victoria Prowse
  4. A Note on R&D Spillovers, Multiple Equilibria and Indeterminacy By Been-Lon Chen; Angus C. Chu
  5. Time Preference and the Distributions of Wealth and Income By Richard M. H. Suen
  6. Two-sided Intergenerational Transfer Policy and Economic Development: A Politico-economic Approach By Naito, Katsuyuki
  7. Matching Firms, Managers, and Incentives By Oriana Bandiera; Luigi Guiso; Andrea Prat; Raffaella Sadun
  8. The Solaria Syndrome: Social capital in a growing hypertechnological economy By Antoci Angelo; Sabatini Fabio; Sodini Mauro
  9. The Dynamics of Knowledge Diversity and Economic Growth By Berliant, Marcus; Fujita, Masahisa
  10. Testable implications of general equilibrium models: an integer programming approach. By Cherchye, Laurens; Demuynck, Thomas; De Rock, Bram
  11. Evaluating the Welfare Cost of Inflation in a Monetary Endogenous Growth General Equilibrium Model: The Case of South Africa By Rangan Gupta; Josine Uwilingiye
  12. Innovation, Public Capital, and Growth By Pierre-Richard Agénor; Kyriakos C. Neanidis

  1. By: Vasco Cúrdia; Ricardo Reis
    Abstract: The dynamic stochastic general equilibrium (DSGE) models used to study business cycles typically assume that exogenous disturbances are independent first-order autoregressions. This paper relaxes this tight and arbitrary restriction by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure. Our first contribution is a new Bayesian econometric method that uses conjugate conditionals to allow for feasible and quick estimation of DSGE models with correlated disturbances. Our second contribution is a reexamination of U.S. business cycles. We find that allowing for correlated disturbances resolves some conflicts between estimates from DSGE models and those from vector autoregressions and that a key missing ingredient in the models is countercyclical fiscal policy. According to our estimates, government spending and technology disturbances play a larger role in the business cycle than previously ascribed, while changes in markups are less important.
    Keywords: Business cycles ; Equilibrium (Economics) ; Bayesian statistical decision theory ; Vector autoregression ; Fiscal policy ; Government spending policy
    Date: 2010
  2. By: Paul Levine; Joseph Pearlman; George Perendia; Bo Yang
    Abstract: We provide a tool for estimating DSGE models by Bayesian Maximum-likelihood meth?ods under very general information assumptions. This framework is applied to a New Keynesian model where we compare the standard approach, that assumes an informa?tional asymmetry between private agents and the econometrician, with an assumption of informational symmetry. For the former, private agents observe all state variables including shocks, whereas the econometrician uses only data for output, inflation and interest rates. For the latter both agents have the same imperfect information set and this corresponds to what we term the ¡®informational consistency principle¡¯. We first assume rational expectations and then generalize the model to allow some households and firms to form expectations adaptively. We find that in terms of model posterior probabilities, impulse responses, second moments and autocorrelations, the assumption of informational symmetry by rational agents significantly improves the model fit. We also find qualified empirical support for the heterogenous expectations model.
    Keywords: Imperfect Information, DSGE Model, Rational versus Adaptive Expectations, Bayesian Estimation.
    JEL: C11 C52 E12 E32
    Date: 2010–02
  3. By: Peter Haan; Victoria Prowse
    Abstract: In this paper we use a dynamic structural life-cycle model to analyze the employment, fiscal and welfare effects induced by unemployment insurance. The model features a detailed specification of the tax and transfer system, including unemployment insurance benefits which depend on an individual’s employment and earnings history. The model also captures the endogenous accumulation of experience which impacts on future wages, job arrivals and job separations. For better identification of the structural parameters we exploit a quasi-natural experiment, namely reductions over time in the entitlement period for unemployment insurance benefits which varied by age and experience. The results show that a policy cut in the generosity of unemployment insurance operationalized as a reduction in the entitlement period generates a larger increase in employment and yields a bigger fiscal saving than a cut operationalized as a reduction in the replacement ratio. Welfare analysis of revenue neutral tax and transfer reforms also favors a reduction in the entitlement period.
    Keywords: Unemployment insurance, Replacement ratio, Entitlement period, Life-cycle labor supply, Tax reform, Method of Simulated Moments
    JEL: C23 C25 J22 J64
    Date: 2010
  4. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Angus C. Chu (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Empirical studies often find significant and positive R&D spillovers across firms. In this note, we incorporate this spillover effect into a scale-invariant quality-ladder model. We find that the modified model features multiple steady states (i) a high-R&D steady state, (ii) a low-R&D steady state and (iii) a zero-R&D steady state. As for dynamics, when R&D spillovers are small, only the zero-R&D steady state is stable, and it emerges as a no-growth trap. In this case, the economy is subject sunspot fluctuations around this trap (i.e., local indeterminacy). When R&D spillovers are large, both the zero-R&D and high-R&D steady states are stable and locally indeterminate. In this case, increasing patent breadth may cause the high-R&D steady state to become unstable and the economy to converge to the no-growth trap. Therefore, strengthening patent protection may stifle innovation through the occurrence of a bifurcation.
    Keywords: endogenous-growth model, R&D spillovers, indeterminacy, multiple equilibria, bifurcation
    JEL: O31 O41 E32
    Date: 2010–02
  5. By: Richard M. H. Suen (Department of Economics, University of California Riverside)
    Abstract: This paper presents a dynamic competitive equilibrium model with heterogeneous time pref- erences that can account for the observed patterns of wealth and income inequality in the United States. This model generalizes the standard neoclassical growth model by including (i) a demand for status by the consumers and (ii) human capital formation. The Örst feature prevents the wealth distribution from collapsing into a degenerate distribution. The second feature generates a strong positive correlation between earnings and wealth across agents. A calibrated version of this model succeeds in replicating the wealth and income distributions of the United States.Length: 38 pages
    Keywords: Inequality, Heterogeneity, Time Preference, Human Capital
    JEL: D31 E21 O15
    Date: 2010–02
  6. By: Naito, Katsuyuki
    Abstract: We consider an overlapping generations model with public education and social security where the overall size of these policies is determined in a repeated voting game. We investigate the interaction between the politically determined policies and economic development in a Markov perfect equilibrium. The following results are obtained. First, the level of human capital determines whether these policies are sustained in the Markov perfect equilibrium. Second, if the level of initial human capital is sufficiently high, human capital grows forever. In contrast, if the level of initial human capital is low, the economy might be caught in a poverty trap.
    Keywords: Public education; Social security; Markov perfect equilibrium; Economic development
    JEL: H55 O16
    Date: 2010–02–27
  7. By: Oriana Bandiera (London School of Economics); Luigi Guiso (European University Institute); Andrea Prat (London School of Economics); Raffaella Sadun (Harvard Business School, Strategy Unit; London School of Economics - Centre for Economic Performance)
    Abstract: We provide evidence on the match between firms, managers, and incentives using a new survey that contains information on managers’ risk preferences and human capital, on their compensation schemes, and on the firms they work for. The data is consistent with the equilibrium correlations predicted by a model where firms with di¤erent owner-ship structure and managers with different risk aversion and talent match endogenously through incentive contracts. The model predicts and the data support that, compared to widely-held firms, family firms use contracts that are less sensitive to performance; these contracts attract less talented and more risk averse managers; these managers work less hard, earn less, and display lower job satisfaction.
    Date: 2010–02
  8. By: Antoci Angelo; Sabatini Fabio; Sodini Mauro
    Abstract: We develop a dynamic model to analyze the sources and the evolution of social participation and social capital in a growing economy characterized by exogenous technical progress. Starting from the assumption that the well-being of agents basically depends on material and relational goods, we show that the best-case scenarios hold when technology and social capital both support just one of the two productions at the expenses of the other. However, trajectories are possible where technology and social interaction balance one another in fostering the growth of both the social and the private sector of the economy. Along such tracks, technology may play a crucial role in supporting a “socially sustainable” economic growth.
    Keywords: Technology, economic growth, relational goods, social participation, social capital
    JEL: O33 J22 O41 Z13
    Date: 2010–02
  9. By: Berliant, Marcus; Fujita, Masahisa
    Abstract: How is long run economic growth related to the endogenous diversity of knowledge? We formulate and study a microeconomic model of knowledge creation, through the interactions among a group of heterogeneous R & D workers, embedded in a growth model to address this question. In contrast with the traditional literature, in our model the composition of the research work force in terms of knowledge heterogeneity matters, in addition to its size, in determining the production of new knowledge. Moreover, the heterogeneity of the work force is endogenous. Income to these workers accrues as patent income, whereas transmission of newly created knowledge to all such workers occurs due to public transmission of patent information. Knowledge in common is required for communication, but differential knowledge is useful to bring originality to the endeavor. Whether or not the system reaches the most productive state depends on the strength of the public knowledge transmission technology. Equilibrium paths are found analytically. Long run economic growth is positively related to both the effectiveness of pairwise R & D worker interaction and to the effectiveness of public knowledge transmission.
    Keywords: knowledge creation; knowledge externalities; microfoundations of endogenous growth; knowledge diversity and growth
    JEL: D90 D83 O31
    Date: 2010–02–27
  10. By: Cherchye, Laurens; Demuynck, Thomas; De Rock, Bram
    Abstract: Focusing on the testable implications on the equilibrium manifold, we show that the rationalizability problem is NP-complete. Subsequently, we present an integer programming (IP) approach to characterizing general equilibrium models. This approach avoids the use of the Tarski-Seidenberg algorithm for quantifier elimination that is commonly used in the literature. The IP approach naturally applies to settings with any number of observations, which is attractive for empirical applications. In addition, it can easily be adjusted to analyze the testable implications of alternative general equilibrium models (that include, e.g., public goods, externalities and/or production). Further, we show that the IP framework can easily address recoverability questions (pertaining to the structural model that underlies the observed equilibrium behavior), and account for empirical issues when bringing the IP methodology to the data (such as goodness-of-fit and power). Finally, we show how to develop easy-to-implement heuristics that give a quick (but possibly inconclusive) answer to whether or not the data satisfy the general equilibrium models.
    Keywords: General equilibrium; Equilibrium manifold; Exchange economies; Production economies; NP-completeness; Nonparametric restrictions; GARP; integer programming;
    Date: 2009–07
  11. By: Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria)
    Abstract: This paper uses the general equilibrium monetary endogenous growth model of Dotsey and Ireland (1996), in which inflation distorts a variety of marginal decisions, to evaluate the welfare cost of inflation in South Africa – a country, where, since the February of 2000, the sole objective of the central bank has been to keep the inflation rate within the target band of 3 percent to 6 percent. Although individually none of the distortions is very large, they combine to yield substantial welfare cost estimates ranging between 0.70 percent of GDP to 1.33 percent of GDP for the lower and upper limits of the target band. More importantly, the welfare costs obtained here are at least three times more than those derived previously for the South African economy based on partial equilibrium approaches. These higher estimates, thus, tend to make a case for a possibly lower and narrower target band.
    Keywords: Inflation, Growth, Welfare
    JEL: E31
    Date: 2010–02
  12. By: Pierre-Richard Agénor; Kyriakos C. Neanidis
    Abstract: This paper studies interactions between public capital, human capital, and innovation in a three-period OLG model of endogenous growth. Public capital affects growth not only through productivity, but also through the diffusion rate of new technologies, the capacity to innovate, and the ability to produce human capital. Trade-offs involved in the allocation of public spending to R&D subsidies and nonlinearities are discussed. Panel data regressions based on a sample of 38 industrial and developing countries are used to test, using a variety of estimation techniques and variable definitions, the implications of the model over the period 1981-2008. Results show that higher innovation performance promotes growth directly, whereas public capital (both quantity and quality) has both direct and indirect effects on growth by promoting human capital accumulation and raising the capacity to innovate. The latter effect appears to operate in a nonlinear fashion, in line with “critical mass” models of infrastructure. Taking proper account of the government’s budget constraint, our estimates also suggest that public spending on R&D contributes to growth by fostering innovation.
    Date: 2010

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