nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒04‒04
nineteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Factor income taxation and growth with increasing integration of world capital markets By Ho, Wai Hong; Yang , C. C.
  2. The Ins and Outs of Unemployment: A Conditional Analysis By Fabio Canova; David Lopez-Salido; Claudio Michelacci
  3. Economic Growth with Bubbles By Alberto Martin; Jaume Ventura
  4. Optimal research and development expenditure: a general equilibrium approach By Galo Nuño
  5. The Effect of Job Flexibility on Female Labor Market Outcomes: Estimates from a Search and Bargaining Model By Flabbi, Luca; Moro, Andrea
  6. A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment By Hungerbühler, Mathias; Lehmann, Etienne; Parmentier, Alexis; Van der Linden, Bruno
  7. The Dynamics of the Trade Balance and the Terms of Trade in Central and Eastern European Countries By Alexandra Ferreira-Lopes; Tiago Neves Sequeira
  8. Centralized wage setting and labor market policies: the nordic model case By Vona, Francesco; Zamparelli, Luca
  9. Information Externalities and Intermediaries in Frictional Search Markets By Xianwen Shi; Aloysius Siow
  10. Fiscal Policy, Fairness between Generations and National Saving By Ray Barrell; Martin Weale
  12. Bank Liquidity, Interbank Markets and Monetary Policy By Xavier Freixas; Antoine Martin; David Skeie
  14. Inflation Expectations and Stability in an Overlapping Generations Experiment with Money Creation By Peter Heemeijer; Cars Hommes; Joep Sonnemans; Jan Tuinstra
  15. Macro Modelling with Many Models By James Mitchell; Bache, I.W., Ravazzolo, F., Vahey, S.P.
  16. Demographic Change and the Labour Share of Income By Torsten Schmidt; Simeon Vosen
  17. Spatial Development By Klaus Desmet; Esteban Rossi-Hansberg
  18. Quality Ladders, Competition and Endogenous Growth By Michele Boldrin; David K Levine
  19. New Monetarist Economics: Methods By Williamson, Stephen D.; Wright, Randall

  1. By: Ho, Wai Hong; Yang , C. C.
    Abstract: In a closed economy, the infinite-horizon and the overlapping generations (OG) model prescribe diametrically opposite policies on factor taxation: the former argues that the growth-maximizing capital income tax rate should be set to zero, whereas the latter argues that it should be set as high as possible. This note investigates the issue by taking into account global capital market integration. We show that the long-run growth-maximizing capital income tax rate in a small open OG economy is decreasing as the economy's capital market is increasingly integrated with the rest of the world, and will be equal to zero as prescribed in the infinite-horizon model once the degree of integration becomes sufficiently high.
    Keywords: Capital mobility; Endogenous growth; Factor income taxation; Overlapping generations; Small open economy
    JEL: F15 H21 O41
    Date: 2010–02
  2. By: Fabio Canova; David Lopez-Salido; Claudio Michelacci
    Abstract: We analyze how unemployment, job finding and job separation rates react to neutral and investment-specific technology shocks. Neutral shocks increase unemployment and explain a substantial portion of unemployment volatility; investment-specific shocks expand employment and hours worked and mostly contribute to hours worked volatility. Movements in the job separation rates are responsible for the impact response of unemployment while job finding rates for movements along its adjustment path. Our evidence qualifies the conclusions by Hall (2005) and Shimer (2007) and warns against using search models with exogenous separation rates to analyze the effects of technology shocks.
    Keywords: Unemployment, technological progress, labor market flows, business cycle models.
    JEL: E00 J60 O33
    Date: 2009–10
  3. By: Alberto Martin; Jaume Ventura
    Abstract: We develop a stylized model of economic growth with bubbles. In this model, financial frictions lead to equilibrium dispersion in the rates of return to investment. During bubbly episodes, unproductive investors demand bubbles while productive investors supply them. Because of this, bubbly episodes channel resources towards productive investment raising the growth rates of capital and output. The model also illustrates that the existence of bubbly episodes requires some investment to be dynamically inefficient: otherwise, there would be no demand for bubbles. This dynamic inefficiency, however, might be generated by an expansionary episode itself.
    Keywords: asset bubbles, dynamic inefficiency, economic growth, financial frictions, pyramid schemes.
    JEL: E32 E44 O40
    Date: 2010–03
  4. By: Galo Nuño (Banco de España)
    Abstract: How much should be spent in research and development (R&D)? How should R&D vary over the business cycle? In this paper we answer both questions in the context of a calibrated dynamic general equilibrium model with Schumpeterian endogenous growth. Firstly, we demonstrate that, although the existence of distortions in a decentralized economy produces underinvestment in R&D, a simple proportional subsidy to R&D spending alone cannot restore the first best allocation. The optimal proportional R&D subsidy attains a second best allocation in which R&D spending exceeds its first best level. Secondly, we show how the observed procyclicality of R&D is socially inefficient. However, the welfare loss due to this dynamic inefficiency is much smaller than the loss due to underinvestment in R&D.
    Keywords: Schumpeterian growth, technology adoption, optimal subsidy
    JEL: E32 O38 O40
    Date: 2010–03
  5. By: Flabbi, Luca (Georgetown University); Moro, Andrea (Vanderbilt University)
    Abstract: This paper develops and estimates a search model of the labor market where jobs are characterized by wages and work-hours flexibility. Flexibility is valued by workers, and is costly to provide for employers. The model generates observed wage distributions directly related to the preference for flexibility parameters: the higher the preference for flexibility, the wider is the support of the wage distribution at flexible jobs and the larger is the discontinuity between the wage distribution at flexible and non-flexible jobs. Estimation results show that more than one third of women place positive value to flexibility, with women with a college degree valuing flexibility more than women with a high school degree. Counterfactual experiments show that flexibility has a substantial impact on the wage distribution but not on the unemployment rate. We comment on the implications of our approach for gender differentials in wages and schooling.
    Keywords: search model, work-hours flexibility, structural estimation
    JEL: J30 C5
    Date: 2010–03
  6. By: Hungerbühler, Mathias (University of Namur); Lehmann, Etienne (CREST-INSEE); Parmentier, Alexis (University of Evry); Van der Linden, Bruno (Université Catholique de Louvain)
    Abstract: We propose a canonical model of optimal nonlinear redistributive taxation with matching unemployment. In our model, agents are endowed with different skill levels and labor markets are perfectly segmented by skill. The government only observes negotiated wages. More progressive taxation leads to wage moderation that boosts labor demand. We design the optimal nonlinear redistributive tax schedule in the absence of welfare benefits and extensive labor supply margin. Compared to their efficient values, at the optimum gross wages and unemployment are lower. Average tax rates are moreover increasing in wages. The robustness of these properties is also discussed.
    Keywords: optimal income taxation, unemployment, matching
    JEL: H21 H23 J64
    Date: 2010–03
  7. By: Alexandra Ferreira-Lopes (ISCTE - Lisbon University Institute - Department of Economics, UNIDE-ERC and DINÂMIA); Tiago Neves Sequeira (UBI and INOVA-UNL)
    Abstract: In this work we assess the existence of a S-Curve pattern in ten Central and Eastern European Countries (CEEC-10) for the relation between the trade balance and the terms of trade. Empirical results support the existence of this curve for Slovenia, Czech Republic, Hungary, and also for an aggregate of the ten transition countries. In the case of Lithuania, Poland, Romania, and Slovakia the pattern is weaker than in the mentioned countries but it stills prevails. We then document this property of business cycles in the dynamic general equilibrium trade model of Backus, Kehoe, and Kydland (1994) calibrated specifically to match the CEEC-10 aggregate economy. Results support the existence of a S-Curve, except when technology shocks are absent and domestic and imported goods are perfect substitutes.
    Keywords: Central and Eastern European Countries, Current Account Dynamics, Terms of Trade, S-Curve.
    JEL: C68 F32 F41
    Date: 2010
  8. By: Vona, Francesco; Zamparelli, Luca
    Abstract: It is often argued that rigid labour market and centralized bargaining are harmful employment and growth. This paper looks at the case of Nordic countries as a counter-example pointing to some weaknesses of this view. Rigid labour markets, while reducing the offer of low quality jobs, increase average labor productivity by favoring job relocation in high quality jobs. Moene and Wallerstein (1997) adopted a vintage-capital model to compare centralized and decentralized bargaining: they show that centralized bargaining systems yield higher labor productivity and higher structural unemployment. By introducing a frictional labor market in the vintage-capital framework , we show that the negative effects on employment characterizing centralized bargaining can be reduced by adopting active labor market policy.
    Keywords: Centralized wage setting; structural change; labor market policy; frictional unemployment; Centralized wage setting, structural change, labor market policy, frictional unemployment
    JEL: L16 J60 J31
    Date: 2010–01
  9. By: Xianwen Shi; Aloysius Siow
    Abstract: In frictional matching markets, buyers incur discrete inspection costs when assessing the suitability of goods on offer, and sellers incur discrete 'show' costs. This paper studies how intermediaries can help reduce these costs. Intermediaries, whose value derives from inventory, learning and memory, are shown to exist if goods are sufficiently heterogeneous. Intermediaries may either be firms that buy goods and hold inventory or brokers who search on behalf of their clients but do not buy or hold inventory. The parameter space, in terms of the ratio of inspection to show costs, naturally separates into two regions where firms exist versus where brokers exist.
    Keywords: Information Externalities, Intermediaries, Search, Matching
    JEL: D82 D83 D21
    Date: 2010–03–21
  10. By: Ray Barrell; Martin Weale
    Abstract: We assess fiscal policy from the perspective of fairness between generations and the relationship between this and national saving , in the context where the United Kingdom is the lowest-saving of all the OECD economies. Cross-section and pooled data suggest that governments are in a position to influence national saving and we set out a simple overlapping generation model to show the effects of national debt, of pay as you benefit systems, of legacies and movements to land prices as means of effecting transfers between generations. Having shown that governments can influence the distribution of resources between generations we then discuss three notions of fairness between generations, i) that each cohort should pay its own way, ii) that a social planner should reallocate resources between generations to achieve and inter-temporal optimum and iii ) that resources should be reallocated so that generations alive at the same time have similar living standards. In the light of these observations we di cuss appropriate responses to a variety of economic shocks and we conclude with implications for policy in the aftermath of the recession.
    Date: 2009–09
  11. By: Zuzana Brixiova; Balazs Egert
    Abstract: The transition paths from plan to market have varied markedly across countries. Central and Eastern European and the Baltic countries, which opted for a fast and profound transformation of their institutions including business climates, rapidly narrowed the productivity gap with advanced economies. In contrast, in countries of the Commonwealth of Independent States, which embarked on reforms later and contented with less depth, the productivity gap remains substantial. While the literature has focused mainly on empirical studies, this paper develops a dynamic search model of the firm start-ups that is consistent with the above trends. The model shows that an enabling institutional set up stimulates start-ups of highly productive firms at an earlier stage of transition, underscoring the importance of reforms. The role of the state sector as an employer during transition rises in countries where reforming institutions is particularly costly.
    Keywords: Start-ups, dynamic search model, business climate, productivity, transition
    JEL: O43 O14 O57 C61 C63
    Date: 2010–02–01
  12. By: Xavier Freixas; Antoine Martin; David Skeie
    Abstract: A major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs. This paper studies the efficiency of the interbank lending market in allocating funds. We consider two different types of liquidity shocks leading to different implications for optimal policy by the central bank. We show that, when confronted with a distributional liquidity-shock crisis that causes a large disparity in the liquidity held among banks, the central bank should lower the interbank rate. This view implies that the traditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two different instruments, interest rates and liquidity injection, are therefore required to cope with the two different types of liquidity shocks. Finally, we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs.
    Keywords: Bank liquidity, interbank markets, central bank policy, financial fragility, bank runs.
    JEL: G21 E43 E44 E52 E58
    Date: 2010–02
  13. By: Hassan Benchekroun; Cees Withagen
    Abstract: We provide the closed form solution to the Dasgupta-Heal-Solow-Stiglitz (DHSS) model. The DHSS model is based on the seminal articles Dasgupta and Heal (Rev. Econ. Stud., 1974), Solow (Rev. Econ. Stud., 1974) and Stiglitz (Rev. Econ. Stud., 1974) and describes an economy with two assets, man-made capital and a nonrenewable resource stock. We explicitly characterize, for such an economy, the dynamics along the optimal trajectory of all the variables in the model and from all possible initial values of the stocks. We use the analytical solution to prove several properties of the optimal consumption path. In particular, we show that the initial consumption under a utilitarian criterion starts below the maximin rate of consumption if and only the resource is abundant enough and that under a utilitarian criterion, it is not necessarily the present generation that benefits most from a windfall of resources.
    JEL: E20 Q30 C65
    Date: 2010–01
  14. By: Peter Heemeijer; Cars Hommes; Joep Sonnemans; Jan Tuinstra
    Abstract: We investigate how non-specialists form inflation expectations by running an experiment using a basic Overlapping Generations (OLG) model. The participants of the experiment are students of the University of Amsterdam, who predict inflation during 50 successive periods and are rewarded based on their accuracy. We include a central bank in the OLG model which increases the money supply at a constant rate. Participants are placed in separate OLG economies and are divided over two treatments: one with a "low" and one with a "high" money supply growth. We find that participants in the second treatment have substantially more difficulty in stabilizing inflation development by submitting accurate predictions than participants in the first treatment. However, when linear prediction rules are estimated on individual predictions, there is little difference between the two treatments. In both treatments, the most popular rules are Fundamentalist Expectations (predictions equal to the inflation sample mean) and Focal Expectations (predictions equal to a constant close to equilibrium). To verify whether participants adjust their prediction rules during the experiment, the estimated rules are checked for structural breaks. We find a surprisingly small number of structural breaks in both treatments.
    Keywords: Experimental economics; Expectations feedback; Inflation expectations; Price stability; Anchoring.
    JEL: C D E1 E2 E6 G J
    Date: 2010–02
  15. By: James Mitchell; Bache, I.W., Ravazzolo, F., Vahey, S.P.
    Abstract: We argue that the next generation of macro modellers at Inflation Targeting central banks should adapt a methodology from the weather forecasting literature known as `ensemble modelling\\\'. In this approach, uncertainty about model specifications (e.g., initial conditions, parameters, and boundary conditions) is explicitly accounted for by constructing ensemble predictive densities from a large number of component models. The components allow the modeller to explore a wide range of uncertainties; and the resulting ensemble `integrates out\\\' these uncertainties using time-varying weights on the components. We provide two examples of this modelling strategy: (i) forecasting inflation with a disaggregate ensemble; and (ii) forecasting inflation with an ensemble DSGE.
    Date: 2009–08
  16. By: Torsten Schmidt; Simeon Vosen
    Abstract: Despite similar levels of per capita income, education, and technology the development of labour shares in OECD countries has displayed diff erent patterns since 1960. The paper examines the role of demography in this regard. Employing an overlapping generations model we fi rst examine the mechanisms through which demographic change can aff ect labour shares. Model simulations show that demographic eff ects on the labour share are larger in open than in closed economies. Empirical estimates, conducted using panel cointegration techniques for a panel of 18 OECD countries, provide strong support for demographic eff ects on the labour share. In line with the simulation results, we also fi nd evidence that openness increases this impact.
    Keywords: Labour share; demographic change; panel cointegration
    JEL: E25 J10 D91 C23
    Date: 2010–02
  17. By: Klaus Desmet (Universidad Carlos III de Madrid); Esteban Rossi-Hansberg (Princeton University)
    Abstract: We present a theory of spatial development. A continuum of locations in a geographic area choose each period how much to innovate (if at all) in manufacturing and services. Locations can trade subject to transport costs and technology diffuses spatially across locations. The result is an endogenous growth theory that can shed light on the link between the evolution of economic activity over time and space. We apply the model to study the evolution of the U.S. economy in the last few decades and find that the model can generate the reduction in the employment share in manufacturing, the increase in service productivity in the second part of the 1990s, the increase in land rents in the same period, as well as several other spatial and temporal patterns.
    Keywords: Dynamic Spatial Models, Growth, Innovation, Land Rent Evolution, Structural Transformation, Technology Diffusion, Trade
    JEL: E32 O11 O18 O33 R12
    Date: 2010–03
  18. By: Michele Boldrin; David K Levine
    Date: 2010–03–23
  19. By: Williamson, Stephen D.; Wright, Randall
    Abstract: This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: it has something in common with Old Monetarism, but there are also some important differences; it has little in common with Old or New Keynesianism. We describe the key principles of these schools and contrast them with our approach. To show how it works in practice, we build a benchmark New Monetarist model, and use it to address frontier issues concerning asset markets and banking.
    Keywords: New Monetarism; Monetary economoics; financial intermediation; New Keynesian
    JEL: E5 E6 E10 E4 G21
    Date: 2010–03–17

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