nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒05‒02
thirty-one papers chosen by
Christian Zimmermann
University of Connecticut

  1. Externalities, income taxes and indeterminacy in OLG models By Chen, Yan; Zhang, Yan
  2. General Equilibrium Restrictions for Dynamic Factor Models By David de Antonio Liedo
  3. Simple rules versus optimal policy: what fits? By Ida Wolden Bache; Leif Brubakk; Junior Maih
  4. Matching and Saving in Continuous Time: Theory By Christian Bayer; Klaus Wälde
  6. Inventories and Optimal Monetary Policy By Thomas A. Lubik; Wing Leong Teo
  7. Correlated Disturbances and U.S. Business Cycles By Vasco Curdia; Ricardo Reis
  8. Reading the Recent Monetary History of the U.S., 1959-2007 By Jesús Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
  9. Employment fluctuations in a dual labor market By James Costain; Juan F. Jimeno; Carlos Thomas
  10. Fiscal and Monetary Policy Interaction: a simulation based analysis of a two-country New Keynesian DSGE model with heterogeneous households By Marcos Valli; Fabia A. de Carvalho
  11. Trading Off Generations: Infinitely-Lived Agent Versus OLG By Maik T. Schneider; Christian Traeger; Ralph Winkler
  13. Size, openness, and macroeconomic interdependence By Alexander Chudik; Roland Straub
  14. The external finance premium in the euro area A useful indicator for monetary policy? By Paolo Gelain
  15. Educational Support and Individual Ability with Endogenous Fertility By OGURO Kazumasa; OSHIO Takashi; TAKAHATA Junichiro
  16. Nominal and real wage rigidities. In theory and in Europe By Markus Knell
  17. Fiscal Policy with Intertemporally Non-Separable Preferences By Luca Bossi; Pedro Gomis Porqueras
  18. Optimal Target Criteria for Stabilization Policy By Mark P. Giannoni; Michael Woodford
  19. Fiscal policy, composition of intergenerational transfers, and income distribution By Jaime Alonso-Carrera; Jordi Caballé; Xavier Raurich
  20. Models of firm heterogeneity and growth By Erzo G.J. Luttmer
  21. The Employed, the Unemployed, and the Unemployable: Directed Search with Worker Heterogeneity By Suren Basov; Ian King; Lawrence Uren
  22. Quantitative properties of sovereign default models: solution methods matter By Juan Carlos Hatchondo; Leonardo Martinez; Horacio Sapriza
  23. Bank Liquidity, Interbank markets, and Monetary Policy By Freixas, X.; Martin, A.; Skeie, D.
  24. How far are we from the slippery slope? The Laffer curve revisited By Mathias Trabandt; Harald Uhlig
  26. Unemployment and Workplace Safety in a Search and Matching Model By Masaru Sasaki
  27. The Dynamics of Knowledge Diversity and Economic Growth By Marcus BERLIANT; FUJITA Masahisa
  28. Competing engines of growth: innovation and standardization By Daron Acemoglu; Gino Gancia; Fabrizio Zilibotti
  29. Matching and Saving in Continuous Time: Proofs By Christian Bayer; Klaus Wälde
  30. Offshore production and business cycle dynamics with heterogeneous firms By Andrei Zlate
  31. Repo runs By Antoine Martin; David Skeie; Ernst-Ludwig von Thadden

  1. By: Chen, Yan; Zhang, Yan
    Abstract: Using an aggregate two-periods overlapping generations model with endogenous labor, consumption in both periods of life, homothetic preferences and productive external effects [Lloyd-Braga et al., 2007. Indeterminacy in dynamic models: When Diamond meets Ramsey. Journal of Economic Theory 134, 513-536], we examine the effects of alternative government financing methods on the range of values of increasing returns leading to indeterminacy. We show that under a large enough share of first period consumption over the wage income, local indeterminacy can easily occur for mild externalities if constant government expenditure is financed through either labor or capital income taxes. More precisely, we show that, with labor income taxes and mild externalities, small government expenditures are helpful to local indeterminacy, while large government expenditures are useful to stabilize the economy. With capital income taxes and mild externalities, local indeterminacy always exists. Moreover, we explore how our previous results are changed once government expenditure is endogenously determined for fixed rates on labor and capital income under the balanced-budget rule.
    Keywords: Indeterminacy; Endogenous income tax rates; Externalities.
    JEL: C62
    Date: 2010–04–28
  2. By: David de Antonio Liedo (Banco de España)
    Abstract: This paper proposes the use of dynamic factor models as an alternative to the VAR-based tools for the empirical validation of dynamic stochastic general equilibrium (DSGE) theories. Along the lines of Giannone et al. (2006), we use the state-space parameterisation of the factor models proposed by Forni et al. (2007) as a competitive benchmark that is able to capture weak statistical restrictions that DSGE models impose on the data. Beyond the weak restrictions, which are given by the number of shocks and the number of state variables, the behavioural restrictions embedded in the utility and production functions of the model economy contribute to achieve further parsimony. Such parsimony reduces the number of parameters to be estimated, potentially helping the general equilibrium environment improve forecast accuracy. In turn, the DSGE model is considered to be misspecified when it is outperformed by the state-space representation that only incorporates the weak restrictions.
    Keywords: dynamic and static rank, factor models, DSGE models, forecasting
    JEL: E32 E37 C52
    Date: 2010–04
  3. By: Ida Wolden Bache (Norges Bank (Central Bank of Norway)); Leif Brubakk (Norges Bank (Central Bank of Norway)); Junior Maih (Norges Bank (Central Bank of Norway))
    Abstract: We estimate a small open-economy DSGE model for Norway with two specifications of monetary policy: a simple instrument rule and optimal policy based on an intertemporal loss function. The empirical fit of the model with optimal policy is as good as the model with a simple rule. This result is robust to allowing for misspecification following the DSGE-VAR approach proposed by Del Negro and Schorfheide (2004). The interest rate forecasts from the DSGE-VARs are close to Norges Bank's official forecasts since 2005. One interpretation is that the DSGE-VAR approximates the judgment imposed by the policymakers in the forecasting process.
    Keywords: DSGE models, forecasting, optimal monetary policy
    JEL: C53 E52
    Date: 2010–04–07
  4. By: Christian Bayer (Institute of Mathematics, Technische Universität Berlin, Germany); Klaus Wälde (Chair in Macroeconomics, Johannes Gutenberg-Universität Mainz, Germany)
    Abstract: We analyse optimal saving of risk-averse households when labour income stochastically jumps between two states. The generalized Keynes-Ramsey rule includes a precautionary savings term. A phase diagram analysis il- lustrates consumption and wealth dynamics within and between states. There is an endogenous lower and upper limit for wealth. We derive the Fokker-Planck equations for the densities of individual wealth and em- ployment status. These equations also characterize the aggregate distrib- ution of wealth and allow us to describe general equilibrium. An optimal consumption path exists and distributions converge to a unique limiting distribution.
    Keywords: matching model, optimal saving, incomplete markets, Poisson uncertainty, Fokker-Planck equations, general equilibrium
    JEL: D91 E24 J63 J64
    Date: 2010–01–13
    Abstract: We examine the sources of macroeconomic economic fluctuations by es- timating a variety of medium-scale DSGE models within a unified framework that incorporates regime switching both in shock variances and in the inflation target. Our general framework includes a number of different model features studied in the liter- ature. We propose an efficient methodology for estimating regime-switching DSGE models. The model that best fits the U.S. time-series data is the one with synchro- nized shifts in shock variances across two regimes and the fit does not rely on strong nominal rigidities. We find little evidence of changes in the inflation target. We identify three types of shocks that account for most of macroeconomic fluctuations: shocks to total factor productivity, wage markup, and the capital depreciation rate.
    Date: 2010–04
  6. By: Thomas A. Lubik; Wing Leong Teo
    Abstract: We introduce inventories into a standard New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to study the effect on the design of optimal monetary policy. The possibility of inventory investment changes the transmission mechanism in the model by decoupling production from final consumption. This allows for a higher degree of consumption smoothing since firms can add excess production to their inventory holdings. We consider both Ramsey optimal monetary policy and a monetary policy that maximizes consumer welfare over a set of simple interest rate feedback rules. We find that in contrast to a model without inventories, Ramsey-optimal monetary policy in a model with inventories deviates from complete inflation stabilization. In the standard model, nominal price rigidity is a deadweight loss on the economy, which an optimizing policymaker attempts to remove. With inventories, a planner can reduce consumption volatility and raise welfare by accumulating inventories and letting prices change as an equilibrating mechanism. We find also find that the application of simple rules comes very close to replicating Ramsey optimal outcomes.
    JEL: E24 E32 J64
    Date: 2010–02
  7. By: Vasco Curdia (Federal Reserve Bank of New York); Ricardo Reis (Columbia University - Department of Economics)
    Abstract: The dynamic stochastic general equilibrium (DSGE) models that are used to study business cycles typically assume that exogenous disturbances are independent autoregressions of order one. 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 make the estimation of DSGE models with correlated disturbances feasible and quick. Our second contribution is a re-examination 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.
    JEL: E30 E10
    Date: 2010
  8. By: Jesús Fernández-Villaverde (Department of Economics, University of Pennsylvania); Pablo Guerrón-Quintana (Federal Reserve Bank of Philadelphia); Juan F. Rubio-Ramírez (Department of Economics, Duke University)
    Abstract: In this paper we report the results of the estimation of a rich dynamic stochastic general equilibrium (DSGE) model of the U.S. economy with both stochastic volatility and parameter drifting in the Taylor rule. We use the results of this estimation to examine the recent monetary history of the U.S. and to interpret, through this lens, the sources of the rise and fall of the great American inflation from the late 1960s to the early 1980s and of the great moderation of business cycle fluctuations between 1984 and 2007. Our main findings are that while there is strong evidence of changes in monetary policy during Volcker’s tenure at the Fed, those changes contributed little to the great moderation. Instead, changes in the volatility of structural shocks account for most of it. Also, while we find that monetary policy was different under Volcker, we do not find much evidence of a big difference in monetary policy among Burns, Miller, and Greenspan. The difference in aggregate outcomes across these periods is attributed to the time- varying volatility of shocks. The history for inflation is more nuanced, as a more vigorous stand against it would have reduced inflation in the 1970s, but not completely eliminated it. In addition, we find that volatile shocks (especially those related to aggregate demand) were important contributors to the great American inflation.
    Keywords: DSGE models, Stochastic volatility, Parameter drifting, Bayesian methods.
    JEL: E10 E30 C11
    Date: 2010–04–15
  9. By: James Costain (Banco de España); Juan F. Jimeno (Banco de España); Carlos Thomas (Banco de España)
    Abstract: In light of the huge cross-country differences in job losses during the recent crisis, we study how labor market duality - meaning the coexistence of "temporary" contracts with low firing costs and "permanent" contracts with high firing costs - affects labor market volatility. In a model of job creation and destruction based on Mortensen and Pissarides (1994), we show that a labor market with these two contract types is more volatile than an otherwise-identical economy with a single contract type. Calibrating our model to Spain, we find that unemployment fluctuates 21% more under duality than it would in a unified economy with the same average firing cost, and 33% more than it would in a unified economy with the same average unemployment rate. In our setup, employment grows gradually in booms, due to matching frictions, whereas the onset of a recession causes a burst of firing of "fragile" low-productivity jobs. Unlike permanent jobs, some newly-created temporary jobs are already near the firing margin, which makes temporary jobs more likely to be fragile and means they play a disproportionate role in employment fluctuations. Unifying the labor market makes all jobs behave more like the permanent component of the dual economy, and therefore decreases volatility. Unfortunately, it also raises unemployment; to avoid this, unification must be accompanied by a decrease in the average level of firing costs. Finally, we confirm that factors like unemployment benefits and wage rigidity also have a large, interacting effect on labor market volatility; in particular, higher unemployment benefits increase the impact of duality on volatility.
    Keywords: firing costs, temporary jobs, unemployment volatility, matching model, endogenous separation
    JEL: E32 J42 J63 J64 J65
    Date: 2010–04
  10. By: Marcos Valli; Fabia A. de Carvalho
    Abstract: This paper models a fiscal policy that pursues primary balance targets to stabilize the debt-to-GDP ratio in an open and heterogeneous economy where firms combine public and private capital to produce their goods. The model extends the European NAWM presented in Coenen et. al. (2008) and Christoffel et. al. (2008) by broadening the scope for fiscal policy implementation and allowing for heterogeneity in labor skills. The domestic economy is also assumed to follow a forward looking Taylor-rule consistent with an inflation targeting regime. We correct the NAWM specification of the final-goods price indices, the recursive representation of the wage setting rule, and the wage distortion index. We calibrate the model for Brazil to analyze some implications of monetary and fiscal policy interaction and explore some of the implications of fiscal policy in this class of DSGE models.
    Date: 2010–04
  11. By: Maik T. Schneider (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Christian Traeger (Department of Agricultural and Resource Economics, UC Berkeley); Ralph Winkler (Oeschger Centre for Climate Change Research, University of Bern)
    Abstract: The prevailing literature discusses intergenerational trade-offs predominantly in infinitely-lived agent models despite the finite lifetime of individuals. We discuss these trade-offs in a continuous time OLG framework and relate the results to the infinitely-lived agent setting. We identify three shortcomings of the latter: First, underlying normative assumptions about social preferences cannot be deduced unambiguously. Second, the distribution among generations living at the same time cannot be captured. Third, the optimal solution may not be implementable in overlapping generations market economies. Regarding the recent debate on climate change, we conclude that it is indispensable to explicitly consider the generations' life cycles.
    Keywords: climate change, discounting, infinitely-lived agents, intergenerational equity, overlapping generations, time preference
    JEL: D63 H23 Q54
    Date: 2010–03
    Abstract: A dynamic economy with markets of equities and bonds is considered. The rational expectations equilibrium is defined in an asset pricing model and a condition under which the Modigliani-Miller theorem holds is shown. In an aggregate model the existence of a rational expectations equilibrium is proved.
    Keywords: The Modigliani-Miller theorem, rational expectations, asset pricing
    JEL: C02 C61 D80 D90 O41
    Date: 2010–04
  13. By: Alexander Chudik (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.)
    Abstract: The curse of dimensionality, a problem associated with analyzing the interaction of a relatively large number of endogenous macroeconomic variables, is a prevailing issue in the open economy macro literature. The most common practise to mitigate this problem is to apply the so-called Small Open Economy Framework (SOEF). In this paper, we aim to review under which conditions the SOEF is a justifiable approximation and how severe the consequences of violation of key conditions might be. Thereby, we use a multicountry general equilibrium model as a laboratory. First, we derive the conditions that ensure the existence of the equilibrium and study the properties of the equilibrium using large N asymptotics. Second, we show that the SOEF is a valid approximation only for economies (i) that have a diversified foreign trade structure and if (ii) there is no globally dominant economy in the system. Third, we illustrate that macroeconomic interdependence is primarily related to the degree of trade diversification, and not to the extent of trade openness. Furthermore, we provide some evidence on the pattern of global macroeconomic interdependence by calculating probability impulse response functions in our calibrated multicountry model using data for 153 economies. JEL Classification: F41.
    Keywords: DSGE models, Open Economy Macroeconomics, Weak and Strong Cross Section Dependence, Factor models.
    Date: 2010–04
  14. By: Paolo Gelain (School of Economics and Finance – University of St Andrews – Castlecliffe, The Scores, Fife, United Kingdom, KY1 9AL,)
    Abstract: In this paper I estimate a New Keynesian Dynamic Stochastic General Equilibrium model for the Euro Area, which closely follows the structure of the model developed by Smets and Wouters (2003, 2005, 2007), with the addition of the so-called financial accelerator mechanism developed in Bernanke, Gertler and Gilchrist (1999). The main aim is to obtain a time series for the unobserved external finance premium that entrepreneurs pay on their loans, with the further aim of providing a dynamic analysis of it. Results confirm in general what was recently found for the US by De Graeve (2008), namely that (1) the model incorporating financial frictions can generate a series for the premium, without using any financial macroeconomic aggregates, that is highly correlated with available proxies for it, (2) the estimated premium is not necessarily counter-cyclical (this depends on the shock considered). Nevertheless, although in addition the model with financial frictions better describes Euro Area data than the model without them, the former is not satisfactory in many other respects. For instance, the accelerator effect turns out to be statistically not significant. However, this does not impede financial frictions from remaining a key ingredient to model. In fact, I found that the estimated premium is a very powerful predictor of inflation. It overcomes, in terms of the Mean Squared Forecast Error, the traditional output gap measure in a Phillips curve specification. JEL Classification: E4, E5, E37.
    Keywords: NK DSGE, Euro Area External Finance Premium, Financial Accelerator, Bayesian Estimation, Inflation Forecast
    Date: 2010–04
  15. By: OGURO Kazumasa; OSHIO Takashi; TAKAHATA Junichiro
    Abstract: In this paper, we present an OLG simulation model with transmission of individual ability and endogenous fertility in order to capture the effects that strengthening income redistribution, expansion of child benefit, and expansion of educational support have on economic disparity and economic growth. Our simulation results show that expansion of educational support will achieve a reduction in inequality and maintenance or an increase in economic growth. In addition, the effects of expanded educational support are greater with a stronger correlation between parent and child ability. On the other hand, our findings show that policies increasing child benefit or expanded minimum income cannot be expected to lead to reduction in inequality or improvement in economic growth.
    Date: 2010–04
  16. By: Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner-Platz 3, POB-61, A-1011 Vienna, Austria.)
    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. JEL Classification: E31, E32, E24, J51.
    Keywords: Inflation Persistence, Real Wage Rigidity, Nominal Wage Rigidity, DSGE models, Staggered Contracts.
    Date: 2010–04
  17. By: Luca Bossi; Pedro Gomis Porqueras
    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: H3
    Date: 2010–04
  18. By: Mark P. Giannoni (Columbia University - Business School); Michael Woodford (Columbia University - Department of Economics)
    Abstract: This paper considers a general class of nonlinear rational-expectations models in which policymakers seek to maximize an objective function that may be household expected utility. We show how to derive a target criterion that is: (i) consistent with the model's structural equations, (ii) strong enough to imply a unique equilibrium, and (iii) optimal, in the sense that a commitment to adjust the policy instrument at all dates so as to satisfy the target criterion maximizes the objective function. The proposed optimal target criterion is a linear equation that must be satisfied by the projected paths of certain economically relevant "target variables." It takes the same form at all times and generally involves only a small number of target variables, regardless of the size and complexity of the model. While the projected path of the economy requires information about the current state, the target criterion itself can be stated without reference to a complete description of the state of the world. We illustrate the application of the method to a nonlinear DSGE model with staggered price-setting, in which the objective of policy is to maximize household expected utility.
    JEL: C61 C62 E32 E52
    Date: 2010
  19. By: Jaime Alonso-Carrera; Jordi Caballé; Xavier Raurich
    Abstract: In this paper, we characterize the relationship between the initial distribution of human capital and physical inheritances among individuals and the long-run distri- bution of these two variables. In a model with indivisible investment in education, we analyze how the initial distribution of income determines the posterior intergen- erational mobility in human capital and the evolution of intragenerational income inequality. This analysis enables us in turn to characterize the e¤ects of ?scal policy on future income distribution and mobility when the composition of inter- generational transfers is endogenous. We ?nd that a tax on inheritance results in both less intergenerational mobility and smaller investment in human capital. However, a tax on labor income may promote human capital accumulation if the education premium is sufficiently high.
    JEL: D64 E21 E13 E62
    Date: 2010–02
  20. By: Erzo G.J. Luttmer
    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: Productivity
    Date: 2010
  21. By: Suren Basov; Ian King; Lawrence Uren
    Abstract: We examine the implications of worker heterogeneity on the equilibrium matching process, using a directed search model. Worker abilities are selected from a general distribution, subject to some weak regularity requirements, and the firms direct their job offers to workers. We identify conditions under which some fraction of the workforce will be "unemployable": no firm will approach them even though they offer positive surplus. For large markets we derive a simple closed form expression for the equilibrum matching function. This function has constant returns to scale and two new terms, which are functions of the underlying distribution of worker productivities: the percentage of unemployable workers, and a measure of heterogeneity (?).The equilibrium unemployment rate is increasing in ? and, under certain circumstances, is increasing in the productivity of highly skilled workers, despite endogenous entry. A key empirical prediction of the theory is that ? ? 1. We examine this prediction, using data from several countries.
    Keywords: Directed search; worker heterogeneity; unemployment
    JEL: C78 J41 J64
    Date: 2010
  22. By: Juan Carlos Hatchondo; Leonardo Martinez; Horacio Sapriza
    Abstract: We study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies. This model is often solved using the discrete state space technique with evenly spaced grid points. We show that this method necessitates a large number of grid points to avoid generating spurious interestrate movements. This makes the discrete state technique significantly more inefficient than using Chebyshev polynomials or cubic spline interpolation to approximate the value functions. We show that the inefficiency of the discrete state space technique is more severe for parameterizations that feature a high sensitivity of the bond price to the borrowing level for the borrowing levels that are observed more frequently in the simulations. In addition, we find that the efficiency of the discrete state space technique can be greatly improved by (i) finding the equilibrium as the limit of the equilibrium of the finite-horizon version of the model, instead of iterating separately on the value and bond price functions and (ii) concentrating grid points in asset levels at which the bond price is more sensitive to the borrowing level and in levels that are observed more often in the model simulations. Our analysis is also relevant for the study of other credit markets. ; WP 10-04 replaces earlier versions listed as WP 09-13 and WP 06-11
    Date: 2010
  23. By: Freixas, X.; Martin, A.; Skeie, D. (Tilburg University, Center for Economic Research)
    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 di¤erent implications for optimal policy by the central bank. We show that, when confronted with a distribu- tional 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 mon- etary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two di¤erent instruments, interest rates and liquidity injection, are therefore required to cope with the two di¤erent 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
  24. By: Mathias Trabandt (Fiscal Policies Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Harald Uhlig (Department of Economics, University of Chicago, 1126 East 59th Street, Chicago, IL 60637, USA.)
    Abstract: We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring ”constant Frisch elasticity” (CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation. JEL Classification: E0, E60, H0.
    Keywords: Laffer curve, incentives, dynamic scoring, US and EU-14 economy.
    Date: 2010–04
  25. By: James B. Ang; Jakob B. Madsen
    Abstract: Using data for six Asian miracle economies over the period from 1953 to 2006, this paper examines the extent to which growth has been driven by R&D and tests which second-generation endogenous growth model is most consistent with the data. The results give strong support to Schumpeterian growth theory but only limited support to semi-endogenous growth theory. Furthermore, it is shown that R&D has played a key role for growth in the Asian miracle economies.
    JEL: O30 O40
    Date: 2010–02
  26. By: Masaru Sasaki (Institute of Social and Economic Research, Osaka University)
    Abstract: Are recessions really good for workplace safety? This paper develops a model with search to consider the determinants of workplace safety and then investigates the relationship between unemployment and the incidence of work-related injury. There is a view following Arai and Thoursie (2005), Ruhm (2000) and Boone and van Ours (2006) that the rate of work-related injury is procyclical. However, data from several countries do not necessarily support this view. This paper considers an alternative approach to support the countercyclical variation in the rate of work- related injury in which the firm bargains about the optimal input for workplace safety.
    Keywords: Job Search, Workplace Safety, Work-Related Injury and Illness, Unemployment
    JEL: J64 J65 J81
    Date: 2010–04
  27. By: Marcus BERLIANT; 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.
    Date: 2010–04
  28. By: Daron Acemoglu; Gino Gancia; Fabrizio Zilibotti
    Abstract: We study a dynamic general equilibrium model where innovation takes the form of the introduction new goods, whose production requires skilled workers. Innovation is followed by a costly process of standardization, whereby these new goods are adapted to be produced using unskilled labor. Our framework highlights a number of novel results. First, standardization is both an engine of growth and a potential barrier to it. As a result, growth in an inverse U-shaped function of the standardization rate (and of competition). Second, we characterize the growth and welfare maximizing speed of standardization. We show how optimal IPR policies affecting the cost of standardization vary with the skill-endowment, the elasticity of substitution between goods and other parameters. Third, we show that the interplay between innovation and standardization may lead to multiple equilibria. Finally, we study the implications of our model for the skill-premium and we illustrate novel reasons for linking North-South trade to intellectual property rights protection.
    Keywords: Growth, technology adoption, competition policy, intellectual property rights
    JEL: F43 O31 O33 O34
    Date: 2010–04
  29. By: Christian Bayer (Institute of Mathematics, Technische Universität Berlin, Germany); Klaus Wälde (Chair in Macroeconomics, Johannes Gutenberg-Universität Mainz, Germany)
    Abstract: This paper provides the proofs to the analysis of a continuous time match- ing model with saving in Bayer and Wälde (2010a). The paper proves the results on consumption growth, provides an existence proof for optimal consumption and a detailed derivation of the Fokker-Planck equations.
    Keywords: continuous time uncertainty, Fokker-Planck equations, existence proof
    JEL: C62 C65
    Date: 2010–01–13
  30. By: Andrei Zlate
    Abstract: Cross-country variation in production costs encourages the relocation of production facilities to other countries, a process known as offshoring through vertical foreign direct investment. I examine the effect of offshoring on the international transmission of business cycles. Unlike the existing macroeconomic literature, I distinguish between fluctuations in the number of offshoring firms (the extensive margin) and in the value added per offshoring firm (the intensive margin) as separate transmission mechanisms. The firms' decision to produce offshore depends on the firm-specific level of labor productivity, on fluctuations in the relative cost of effective labor, and on the fixed and trade costs of offshoring. The model replicates the procyclical pattern of offshoring and the dynamics along its two margins, which I document using data from U.S. manufacturing and Mexico's maquiladora sectors. Offshoring enhances the synchronization of business cycles, and dampens the real exchange rate appreciation generated by aggregate productivity differentials across countries.
    Date: 2010
  31. By: Antoine Martin; David Skeie; Ernst-Ludwig von Thadden
    Abstract: This paper develops a model of financial institutions that borrow short-term and invest in long-term marketable assets. Because these financial intermediaries perform maturity transformation, they may be vulnerable to runs. We endogenize the profits of an intermediary and derive distinct liquidity and solvency conditions that determine whether a run can be prevented. We first characterize these conditions for an isolated intermediary and then generalize them to cases in which the intermediary can sell assets to prevent runs. The sale of assets can eliminate runs if the intermediary is solvent but illiquid. However, because of cash-in-the-market pricing, this possibility becomes less likely as more intermediaries face problems. In the limit, if a general market run occurs, no intermediary can sell assets to forestall a run, and our original solvency and liquidity constraints are again relevant for the stability of financial institutions.
    Date: 2010

This nep-dge issue is ©2010 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.