nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒04‒24
twelve papers chosen by
Christian Zimmermann
University of Connecticut

  1. Reciprocity and Matching Frictions By Dennis Wesselbaum
  2. Debt Policy and Economic Growth in a Small Open Economy Model with Productive Government Spending By Futagami, Koichi; Hori, Takeo; Ohdoi, Ryoji
  3. Eppur si Muove! Spain: Growing without a Model By Michele Boldrin; José Ignacio Conde-Ruiz; Javier Díaz Giménez
  5. Heterogeneous consumers, segmented asset markets,and the effects of monetary policy By Zeno Enders
  6. Tapping the Supercomputer Under Your Desk: Solving Dynamic Equilibrium Models with Graphics Processors By Eric M. Aldrich; Jesús Fernández-Villaverde; A. Ronald Gallant; Juan F. Rubio-Ramírez
  8. Emergent Pareto-Levy Distributed Returns to Research in a Multi-Agent Model of Endogenous Technical Change By Michael D. Makowsky; David M. Levy
  9. Nominal and Real Wage Rigidities. In Theory and in Europe By Markus Knell
  10. Models of Growth and Firm Heterogeneity By Erzo G. J. Luttmer
  11. The global crisis and the Peruvian labor market: impact and policy options By Moron, Eduardo; Castro, Juan F.; Villacorta, Lucciano
  12. Oil shocks and optimal monetary policy By Carlos Montoro

  1. By: Dennis Wesselbaum
    Abstract: We build a RBC endogenous separation matching model and introduce efficiency wages along the lines of Akerlof (1982). While the standard endogenous separation matching model reveals shortcomings in explaining correlations and volatilities jointly, this approach performs reasonably well along both dimensions. The proper introduction of real rigidities can consistently enhance the performance of the (endogenous separation) matching model
    Keywords: Efficiency Wages, Endogenous Separations, Search and Matching
    JEL: E32 J41 J64
    Date: 2010–04
  2. By: Futagami, Koichi (Asian Development Bank Institute); Hori, Takeo (Asian Development Bank Institute); Ohdoi, Ryoji (Asian Development Bank Institute)
    Abstract: In this paper, we examine the effects of introducing constraints on government borrowing using a continuous-time overlapping generations model of a small open economy. We consider government placing constraints on the amount of government bonds outstanding by establishing an upper limit, or target level, for the ratio of government bonds to gross domestic product. We first show that there exist multiple steady states in the model small open economy. One is a steady state with high growth, the other a steady state with low growth. We next examine how changes in the target level for bonds affect economic growth rates at the steady states. If the economy has a positive amount of asset holdings, we obtain the following results. When the government runs budget surpluses, an increase in the target level for government bonds reduces the growth rate of the low-growth economy, but raises the growth rate of the high-growth economy. However, when the government runs budget deficits, an increase in the target level for government bonds raises the growth rate of the low-growth economy, but reduces the growth rate of the high-growth economy. If the economy has a negative amount of asset holdings, the results are ambiguous.
    Keywords: constraints on government borrowing; small open economy
    JEL: H54 H63 O10
    Date: 2010–04–14
  3. By: Michele Boldrin; José Ignacio Conde-Ruiz; Javier Díaz Giménez
    Abstract: The purpose of this article is to analyze the growth of the Spanish economy since the advent of democracy until today. In the first part, the specificities of the growth model are analysed, showing that the empirical evidence is not consistent with the conclusions of the standard growth models (i.e. neoclassical growth model with exogenous TFP). More precisely, in the last 30 years Spain has experienced two long growth cycles which, far from being balanced, have shown major differences in the path of the relevant aggregated ratios. While the first cycle (1978-1993) showed a relatively small increase in employment and a considerable rise in productivity, the second cycle (1994-08) proved exactly the opposite: a spectacular increase in employment and a small gain in productivity. In the second part we develop a dynamic general equilibrium model of technology adoption dynamic à la Boldrin and Levine (2002), trying to account qualitatively for the main Spanish growth facts. We show that the characteristics of the labor market in Spain, with a dual system that protects permanent workers at the expense of temporary ones and an inefficient collective wage bargaining system have played a very relevant role in explaining the growth patterns of the last 30 years.
    Date: 2010–03
  4. By: Bruno Decreuse (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: Searching for partners involves informational persistence that reduces future traders' matching probability. In this paper, traders that are no longer available but who left tracks on the market are called phantoms. I examine a discrete-time matching market in which phantom traders are a by-product of search activity, no coordination frictions are assumed, and non-phantom traders may lose time trying to match with phantom traders. The resulting aggregate matching technology features increasing returns to scale in the short run, but has constant returns to scale in the long run. I discuss the labor market evidence and argue that there is observational equivalence between phantom unemployed and on-the-job seekers.
    Keywords: Endogenous matching technology; Intertemporal and intratemporal congestion externalities; Information persistence
    Date: 2010–04–13
  5. By: Zeno Enders
    Abstract: This paper examines the implications of segmented assets markets for the real and nominal effects of monetary policy. I develop a model, in which varieties of consumption bundles are purchased sequentially. Newly injected money thus disseminates slowly through the economy via second-round effects and induces a non-degenerate, long-lasting heterogeneity in wealth. As a result, the effective elasticity of substitution differs across households, affecting optimal markups chosen by producers. In line with empirical evidence, the model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and procyclical profits and wages after monetary shocks.
    Keywords: Segmented Asset Markets, Monetary Policy, CountercyclicalMarkups Liquidity Effect, Limited Participation
    JEL: E31 E32 E51
    Date: 2010–04
  6. By: Eric M. Aldrich; Jesús Fernández-Villaverde; A. Ronald Gallant; Juan F. Rubio-Ramírez
    Abstract: This paper shows how to build algorithms that use graphics processing units (GPUs) installed in most modern computers to solve dynamic equilibrium models in economics. In particular, we rely on the compute unified device architecture (CUDA) of NVIDIA GPUs. We illustrate the power of the approach by solving a simple real business cycle model with value function iteration. We document improvements in speed of around 200 times and suggest that even further gains are likely.
    JEL: C87 E0
    Date: 2010–04
  7. By: Thomas Seegmuller (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Stefano Bosi (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)
    Abstract: We revisit the seminal paper on endogenous fertility by Barro and Becker (1989) taking into account households' heterogeneity in terms of capital endowments, mortality differential and cost per surviving child. Focusing on an endogenous growth version, we show at first that there exists a unique balanced growth path (BGP) where the population growth rates of all dynasties are identical. Then, we study the long-run effects of shocks on mortality rates (such as epidemics), mortality differential and total factor productivity (TFP) on the economic and demographic growth rates. The main mechanism rests on the adjustment of the average rearing cost of a surviving child. Finally, we extend the model considering the effects of labor taxation. We find that a higher tax rate may, on the one side, enhance growth but, on the other side, raise wealth inequalities.
    Keywords: endogenous fertility, heterogeneous households, mortality differential, labor taxation, endogenous growth
    Date: 2010–04–13
  8. By: Michael D. Makowsky (Department of Economics, Towson University); David M. Levy (Department of Economics, George Mason University)
    Abstract: We build a multi-agent model of endogenous technical change in which heterogeneous investments in patented knowledge generate Pareto-Levy and lognormal distributed returns to investment in research from very weak distributional assumptions. Firms produce a homogenous good and a public stock of knowledge accumulates from the expired patents of privately produced knowledge. Increasing returns to scale are derivative of endogenously produced technology, but the market remains competitive due to imperfect information and costly household search. The interaction of heterogeneous knowledge, research investment, revenues, and search outcomes across agents endogenously generates the empirically observed but seemingly idiosyncratic Pareto- Levy and lognormal mixture distribution of market returns. These distributional characteristics have ramifications for endogenous growth models given the importance of extreme values and market leaders in technological advancement. Average growth rates in the model have a global maximum at a finite, non-zero patent length. The distribution of growth rates is characterized by “fat tails.” The variance of growth rates increases with patent length.
    Keywords: patents, endogenous growth, increasing returns to scale, price dispersion, search, heterogeneous agents.
    JEL: C63 L11 O33 D83
    Date: 2010–04
  9. By: Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner-Platz 3, POB 61, A-1011 Vienna)
    Abstract: In this paper I study the relation between real wage rigidity (RWR) and nominal price and wage rigidity. I show that in a standard DSGE model RWR is mainly affected by the interaction of the two nominal rigidities and not by other structural parameters. The degree of RWR is, however, considerably influenced by the modelling assumption about the structure of wage contracts (Calvo vs. Taylor) and about other institutional characteristics of wage-setting (clustering of contracts,heterogeneous contract length, indexation). I use survey evidence on price- and wage-setting for 15 European countries to calculate the degrees of RWR implied by the theoretical model. The average levels of RWR are broadly in line with empirical estimates based on macroeconomic data. In order to be able to also match the observed cross-country variation in RWR it is, however, essential to move beyond the country-specific durations of price and wages and to take more institutional details into account.
    Keywords: Inflation Persistence, Real Wage Rigidity, Nominal Wage Rigidity, DSGE models, Staggered Contracts,
    JEL: E31 E32 E24 J51
    Date: 2010–03–29
  10. By: Erzo G. J. Luttmer (Department of Economics, University of Minnesota and Federal Reserve Bank of Minnesota)
    Abstract: Although employment at individual firms tends to be highly non-stationary, the employment size distribution of all firms in the United States appears to be stationary. It closely resembles a Pareto distribution. There is a lot of entry and exit, mostly of small firms. This paper surveys general equilibrium models that can be used to interpret these facts and explores the role of innovation by new and incumbent firms in determining aggregate growth. The existence of a balanced growth path with a stationary employment size distribution depends crucially on assumptions made about the cost of entry. Some type of labor must be an essential input in setting up new firms.
    Keywords: firm size distribution, organization capital, heterogeneous productivity, selection.
    JEL: L1 O4
    Date: 2010–04–13
  11. By: Moron, Eduardo; Castro, Juan F.; Villacorta, Lucciano
    Abstract: After almost 20 years of prudent macro policies, Peru seems in better shape than before to withstand the effects of a financial crisis. Progress, however, has left some policy areas unscathed and the labor market is one of them. In this paper we analyze the potential effects of the crisis on labor market outcomes, and discuss policy options to address short run and structural considerations. We review stylized facts from this and previous crisis to account for potential transmission mechanisms, review policy options and results from past and existing labor market interventions, and build a DSGE model to provide further insight regarding labor market outcomes and the effects of transitory and permanent policy measures. On the countercyclical front, our analysis reveals that the main risk that the policymaker should aim to mitigate is a surge in informality and underemployment. For this, job protection alternatives (as temporary payroll tax holidays already implemented) have to be accompanied by a strengthened and better focalized reemployment service, especially if the shock transpires into the nontradable sector. On the more structural side, policy should aim at the prime drivers of informality in our country: low productivity and high formal labor costs. For the latter, progressive access to labor benefits for small firms (already introduced via a special labor regime) could be complemented by introducing different minimum wage levels according to firm size and a generalized reduction in firing costs. Low productivity issues, on the other hand, can be addressed by strengthening and integrating existing training programs and information networks which have already proven successful in terms of formal job creation. Simulations reveal that permanent non-wage cost reductions (like those introduced via the special labor regime) can increase formal employment and formal GDP participation by 2 percentage points. Structural policy interventions also exhibit a large countercyclical potential due to their permanent nature. This implies that we should not wait for the crisis to be over to start their implementation.
    Keywords: Global crisis; labor markets; Peru
    JEL: J08 E32 D58
    Date: 2009–10–16
  12. By: Carlos Montoro
    Abstract: In practice, central banks have been confronted with a trade-off between stabilising inflation and output when dealing with rising oil prices. This contrasts with the result in the standard New Keynesian model that ensuring complete price stability is the optimal thing to do, even when an oil shock leads to large output drops. To reconcile this apparent contradiction, this paper investigates how monetary policy should react to oil shocks in a microfounded model with staggered price-setting and with oil as an input in a CES production function. In particular, we extend Benigno and Woodford (2005) to obtain a second order approximation to the expected utility of the representative household when the steady state is distorted and the economy is hit by oil price shocks. The main result is that oil price shocks generate an endogenous trade-off between inflation and output stabilisation when oil has low substitutability in production. Therefore, it becomes optimal for the monetary authority to stabilise partially the effects of oil shocks on inflation and some inflation is desirable. We also find, in contrast to Benigno and Woodford (2005), that this trade-off is reduced, but not eliminated, when we get rid of the effects of monopolistic distortions in the steady state. Moreover, the size of the endogenous "cost-push" shock generated by fluctuations in the oil price increases when oil is more difficult to substitute by other factors.
    Keywords: optimal monetary policy, welfare, second order solution, oil price shocks, endogenous trade-off
    Date: 2010–04

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