nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒03‒28
twenty papers chosen by
Christian Zimmermann
University of Connecticut

  1. Public health spending, old-age productivity and economic growth: chaotic cycles under perfect foresight By Fanti, Luciano; Gori, Luca
  2. The taxation of savings in overlapping generations economies with unbacked risky assets By DAVILA, Julio
  3. How powerful is demography ? The Serendipity Theorem revisited By DE LA CROIX, David; PESTIEAU, Pierre; PONTHIERE, Gregory
  4. The Design of Unemployment Transfers: Evidence from a Dynamic Structural Life-cycle Model By Peter Haan; Victoria Prowse
  5. An Estimated Model with Macrofinancial Linkages for India By Shanaka J. Peiris; Magnus Saxegaard; Rahul Anand
  6. Can education be good for both growth and the environment? By BRECHET, Thierry; PRIEUR, Fabien
  7. Optimal education and pensions in an endogenous growth model By DEL REY, Elena; LOPEZ-GARCIA, Miguel
  8. On the fiscal treatment of life expectancy related choices By DAVILA, Julio; LEROUX, Marie-Louise
  9. Education and the Welfare Gains from Employment Protection By Charlot, Olivier; Malherbet, Franck
  10. Informal Labour and Credit Markets: A Survey By Nicoletta Batini; Paul Levine; Young-Bae Kim; Emanuela Lotti
  11. Bankruptcy and Firm Dynamics: The Case of the Missing Firms By Jose Daniel Rodríguez-Delgado
  12. Endogeneous Labor Supply, Borrowing Constraint and Credit Cycles By Anna Agliari; George Vachadze
  13. Optimal Monetary Policy with Overlapping Generations of Policymakers By Maral Shamloo
  14. Stochastic Search Equilibrium By Giuseppe Moscarini; Fabien Postel-Vinay
  15. Optimal Monetary Policy with Durable Consumption Goods and Factor Demand Linkages By Petrella, Ivan; Santoro, Emiliano
  16. The Composition and Cyclical Behavior of Trade Flows in Emerging Economies By Reinout De Bock
  17. Motivated Sellers in the Housing Market By Selcuk, Cemil
  18. Growth and Capital Flows with Risky Entrepreneurship By Damiano Sandri
  19. The Global Integrated Monetary and Fiscal Model (GIMF) – Theoretical Structure By Michael Kumhof; Dirk Muir; Susanna Mursula; Douglas Laxton
  20. In-Work Benefits and Unemployment By Kolm, Ann-Sofie; Tonin, Mirco

  1. By: Fanti, Luciano; Gori, Luca
    Abstract: This paper analyses the dynamics of a double Cobb-Douglas economy with overlapping generations and public health investments that affect the supply of efficient labour of the old-aged. It is shown that the positive steady state of the economy is unique. Moreover, we provide necessary and sufficient conditions for the emergence of endogenous deterministic complex cycles when individuals are perfect foresighted. Interestingly, the equilibrium dynamics shows rather complicated phenomena such as a multiplicity of period-bubbling.
    Keywords: OLG model; Productivity; Perfect foresight; Public health expenditure
    JEL: O41 I18 C62
    Date: 2010–03–11
  2. By: DAVILA, Julio (UniversitŽ catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)
    Abstract: This paper establishes, in the context of the Diamond (1965) overlapping generations economy with production, that the risk that savings in unbacked assets (like fiat money or public debt) become worthless implies that, not only the first-best steady state, but even the best steady state attainable with those saving instruments fails to be a competitive equilibrium outcome under laissez-faire. It is nonetheless shown as well that this best monetary steady state can be implemented as a competitive equilibrium with the adequate policy of taxes on returns to capital, subsidies to returns to monetary savings, and lump-sum transfers. Interestingly enough, this policy requires no redistribution of income among agents, unlike the implementation of the first-best steady state. The policy is balanced every period at the steady state and, since no public spending exists in the model, it serves the only purpose of implementing a steady state that provides all agents with a higher utility than the laissez-faire competitive equilibrium steady state. The results thus provide a rationale for an active fiscal policy that has nothing to do with redistributive goals or the need to fund any kind of public sending
    Keywords: taxation of savings, overlapping generations, asset bubble
    JEL: E62 E21 E22 H21
    Date: 2009–12–01
  3. By: DE LA CROIX, David (UniversitŽ catholique de Louvain, CORE and IRES, B-1348 Louvain-la-Neuve, Belgium); PESTIEAU, Pierre (UniversitŽ catholique de Louvain, CORE and IRES, B-1348 Louvain-la-Neuve, Belgium); PONTHIERE, Gregory (Paris School of Economics and Ecole Normale SupŽrieure, Paris, France)
    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: 2009–12–01
  4. 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
  5. By: Shanaka J. Peiris; Magnus Saxegaard; Rahul Anand
    Abstract: This paper develops a small open economy dynamic stochastic general-equilibrium model with macrofinancial linkages. The model includes a financial accelerator--entrepreneurs are assumed to partially finance investment using domestic and foreign currency debt--to assess the importance of financial frictions in the amplification and propagation of the effects of transitory shocks. We use Bayesian estimation techniques to estimate the model using India data. The model is used to assess the importance of the financial accelerator in India and the optimality of monetary policy.
    Keywords: Bank credit , Capital flows , Corporate sector , Economic models , Exchange rates , External borrowing , External financing , External shocks , Financial sector , Foreign exchange , India , Monetary policy ,
    Date: 2010–01–28
  6. By: BRECHET, Thierry (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); PRIEUR, Fabien
    Keywords: overlapping generations, public education, environmental maintenance, green awareness, sustainable growth
    JEL: Q56 D62 D91
    Date: 2009–03–01
  7. By: DEL REY, Elena (Universitat de Girona, Spain); LOPEZ-GARCIA, Miguel (Universitat Autonoma de Barcelona, Spain)
    Abstract: It is well known that, in OLG economies with life-cycle saving and exogenous growth, competitive equilibria will in general fail to achieve optimality and may even be dynamically inefficient. This is a consequence of individuals accumulating amounts of physical capital that differ from the level which would maximize welfare along a balanced growth path (the Golden Rule). With human capital, a second potential source of departure from optimality arises, to wit: individuals may not choose the correct amount of education investment. However, the Golden Rule concept, widely used in exogenous growth frameworks, has not found its way into endogenous growth models. In this paper, we propose to recover the Golden Rule of physical and also human capital accumulation. The optimal policy to decentralize the Golden Rule balanced growth path when there are no constraints for individuals to finance their education investments is also characterized. It is shown that it involves positive pensions and negative education subsidies (i.e., taxes)
    Keywords: endogenous growth, human capital, intergenerational transfers, education policy
    JEL: D90 H21 H52 H55
    Date: 2009–12–01
  8. By: DAVILA, Julio (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); LEROUX, Marie-Louise (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: In an overlapping generations economy setup we show that, if individuals can improve their life expectancy by exerting some effort, costly in terms of either resources or utility, the competitive equilibrium steady state differs from the Þrst best steady state. This is due to the fact that under perfect competition individuals fail to anticipate the impact of their longevity-enhancing effort on the return of their annuitized savings. We identify the policy instruments required to implement the Þrst-best into a competitive equilibrium and show that they are speciÞc to the form, whether utility or resources, that the effort takes.
    Keywords: life expectancy, health expenditures, taxation
    JEL: H21 D91
    Date: 2009–09–01
  9. By: Charlot, Olivier (Université des Antilles et de la Guyane); Malherbet, Franck (University of Cergy-Pontoise)
    Abstract: This paper studies the impact of an European-like labor market regulation on the return to schooling, equilibrium unemployment and welfare. We show that firing costs and temporary employment have opposite effects on educational choices. We furthermore demonstrate that a laissez faire economy with no regulation is inefficient as it is characterized by insufficient educational investments leading to excess job destruction and inadequate job creation. By stabilizing employment relationships, firing costs may spur educational investments and therefore lead to welfare and productivity gains, though a first-best policy would be to subsidize education. However, there is little chance for a dual labor market, as is common in many European countries, with heavily regulated long-term contracts and more flexible short-term contracts to raise the incentives to schooling and aggregate welfare.
    Keywords: human capital, job destruction, matching frictions, efficiency
    JEL: I20 J20 J60
    Date: 2010–03
  10. By: Nicoletta Batini; Paul Levine; Young-Bae Kim; Emanuela Lotti
    Abstract: This paper reviews the literature on the informal economy, focusing first on empirical findings and then on existing approaches to modeling informality within both partial and general equilibrium environments. We concentrate on labour and credit markets, since these tend to be most affected by informality. The phenomenon is particularly important in emerging and other developing economies, given their high degrees of informal labour and financial services and the implications these have for the effectiveness of macroeconomic policy. We emphasize the need for dynamic general equilibrium (DGE) and ultimately dynamic stochastic general equilibrium (DSGE) models for a full understanding of the costs, benefits and policy implications of informality. The survey shows that the literature on informality is quite patchy, and that there are several unexplored areas left for research.
    Keywords: Access to capital markets , Credit , Developing countries , Economic models , Emerging markets , Labor markets , Monetary policy , Private sector ,
    Date: 2010–02–22
  11. By: Jose Daniel Rodríguez-Delgado
    Abstract: Financial frictions have been documented as an important determinant of firm dynamics. In this paper I model bankruptcy procedures, liquidation in particular, as an institutional feature that affects both sides of financial transactions. I construct a model of firm dynamics that generate endogenous borrowing limits and I find that a) inefficient bankruptcy procedures can have quantitatively important aggregate effects, but more importantly; b) that such effects would not be directly visible in the firms that industrial censuses and surveys focus on. I conclude that to capture the effects of the legal framework we need to look beyond the existing firms.
    Keywords: Bankruptcy , Borrowing , Economic models , External debt , Private investment , Private sector ,
    Date: 2010–02–22
  12. By: Anna Agliari (DISCE, Università Cattolica); George Vachadze (CUNY, New York (USA))
    Abstract: We investigate Matsuyama's (Econometrica, 72, pp. 853-84, 2004) model modi- fied only to include endogenous and forward looking labor supply decision. Young agents supply one unit of labor endowment elastically to a competitive labor market. While, old agents of ex-ante identical individuals are divided in equi- librium into depositors and entrepreneurs. Depositors lend funds in the form of interest bearing loans, while entrepreneurs borrow funds in the competitive credit market. We emphasize the interaction between credit and labor markets and show the possibility of occurrence of multiple steady states, local and global indeterminacy, and endogenous fluctuations. When young agents become optimistic about the future deposit rate then they decide to work harder and invest more. Countercyclical borrowing constraint will help agents to fulfill their initial optimistic expectations, because the next period credit volume and deposit rate can increase simultaneously. By conducting global bifurcation analysis, we show that credit cycles can occur through a self- fulfilling expectation mechanism. History-versus-expectations considerations can exist and escape from underdevelopment as well as fall into poverty can to be a self-fulfilling prophecy.
    Keywords: Borrowing constraint; Credit cycles; Elastic labor supply; Endogenous fluctuations; Self-fulfilling expectations.
    JEL: C62 E32 E44 J22 O11 O16 O41
    Date: 2010–01
  13. By: Maral Shamloo
    Abstract: In this paper I study the effect of imperfect central bank commitment on inflationary outcomes. I present a model in which the monetary authority is a committee that consists of members who serve overlapping, finite terms. Older and younger generations of Monetary Policy Committee (MPC) members decide on policy by engaging in a bargaining process. I show that this setup gives rise to a continuous measure of the degree of monetary authority's commitment. The model suggests that the lower the churning rate or the longer the tenure time, the closer social welfare will be to that under optimal commitment policy.
    Keywords: Economic models , Governance , Monetary authorities , Monetary policy , Russian Federation ,
    Date: 2010–02–16
  14. By: Giuseppe Moscarini; Fabien Postel-Vinay
    Date: 2010–03–17
  15. By: Petrella, Ivan; Santoro, Emiliano
    Abstract: This paper deals with the implications of factor demand linkages for monetary policy design. We consider a dynamic general equilibrium model with two sectors that produce durable and non-durable goods, respectively. Part of the output of each sector serves as a production input in both sectors, in accordance with a realistic input-output structure. Strategic complementarities induced by factor demand linkages significantly alter the transmission of exogenous shocks and amplify the loss of social welfare under optimal monetary policy, compared to what is observed in standard two-sector models. The distinction between value added and gross output that naturally arises in this context is of key importance to explore the welfare properties of the model economy. A flexible inflation targeting regime is close to optimal only if the central bank balances inflation and value added variability. Otherwise, targeting gross output variability entails a substantial increase in the loss of welfare.
    Keywords: Input-Output Interactions; Durable Goods; Optimal Monetary Policy
    JEL: E32 E23 E52
    Date: 2010–03–11
  16. By: Reinout De Bock
    Abstract: Trade flows data show that the composition and cyclical properties of imports are similar in developed economies and emerging markets (EM) but this is not the case for exports. Unlike developed economies, (i) EM export few or only a selective set of capital goods and (ii) capital good and overall exports tend to be acyclical. The lack of procyclicality in exports drives the strong countercyclicality of EM trade balances observed in previous studies. A quantitative exercise demonstrates how the standard small open economy business cycle model can be improved for EM by incorporating these features.
    Keywords: Balance of trade , Business cycles , Capital goods , Consumption , Cross country analysis , Economic models , Emerging markets , Exports , Imports , International trade , Productivity ,
    Date: 2010–02–23
  17. By: Selcuk, Cemil (Cardiff Business School)
    Abstract: We present a search-and-matching model of the housing market where potential buyers' willingness to pay is private information and sellers may become desperate as they are unable to sell. A unique steady state equilibrium exists where desperate sellers offer sizeable price cuts and sell faster. If the number of distressed sales rises then even relaxed sellers are forced to lower their prices. Buyers, on the other hand, become more selective and search longer for better deals. The model yields a theoretical density function of the time-to-sale, which is positively skewed and may be hump-shaped. These results are consistent with recent empirical findings.
    Keywords: housing; private information; random search; motivated sellers
    JEL: D39 D49 D83
    Date: 2010–03
  18. By: Damiano Sandri
    Abstract: This paper shows that the behavior of entrepreneurs facing incomplete financial markets and risky investment can explain why growth accelerations in developing countries tend to be associated with current account improvements. The uninsurable risk of losing invested capital forces entrepreneurs to rely on self-financing, so that when business opportunities open up entrepreneurs increase saving to finance the investment that produces growth. The key insight is that saving has to rise more than investment to allow also for the accumulation of precautionary assets. Plausibly calibrated simulations show that this net saving increase can sustain large and persistent net capital outflows.
    Keywords: Capital flows , Capital outflows , Economic growth , Economic models , Financial risk , Private investment , Private savings , Private sector ,
    Date: 2010–02–18
  19. By: Michael Kumhof; Dirk Muir; Susanna Mursula; Douglas Laxton
    Abstract: This working paper presents a comprehensive overview of the theoretical structure of the Global Integrated Monetary and Fiscal Model (GIMF), a multi-region dynamic general equilibrium model that is used by the IMF for a variety of tasks including policy analysis, risk analysis, and surveillance.
    Keywords: Banking sector , Central banks , Corporate sector , Cross country analysis , Economic integration , Economic models , Fiscal policy , Monetary policy , Private consumption , Private investment , Private savings , Private sector ,
    Date: 2010–02–17
  20. By: Kolm, Ann-Sofie; Tonin, Mirco
    Abstract: In-work benefits are becoming an increasingly relevant labour market policy, gradually expanding in scope and geographical coverage. This paper investigates the equilibrium impact of in-work benefits and contrasts it with the traditional partial equilibrium analysis. We find under which conditions accounting for equilibrium wage adjustments amplifies the impact of in-work benefits on search intensity, participation, employment, and unemployment, compared to a framework in which wages are fixed. We also account for the financing of these benefits and determine the level of benefits necessary to achieve efficiency in a labour market characterized by search externalities. <br><br> Keynames; In-work benefits, search, labour force participation, wage adjustment <br><br> JEL Classification: J21, J38, H24
    Date: 2010–03–01

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