nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒06‒11
fifteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies By di Pace, Federico; Faccini, Renato
  2. Involuntary unemployment and the business cycle By Lawrence J. Christiano; Mathias Trabandt; Karl Walentin
  3. Endogenous Growth, Population Growth and the Repugnant Conclusion By Simone Marsiglio
  4. Sunspots and Credit Frictions By Sharon G. Harrison; Mark Weder
  5. On the dynamics of unemployment and wage distributions By Jean-Marc Robin
  6. Labor Market Cycles and Unemployment Insurance Eligibility By Miquel Faig; Min Zhang
  7. Technology shocks, employment and labour market frictions By Mandelman, Federico S; Zanetti, Francesco
  8. Existence of financial equilibria with endogenous borrowing restrictions and real assets By Michele Gori; Marina Pireddu; Antonio Villanacci
  9. Intergenerational risk sharing and labour supply in collective funded pension schemes with defined benefits By Jan Bonenkamp; Ed Westerhout
  10. Subsidizing job creation in the Great Recession By Sagiri Kitao; Aysegül Sahin; Joseph Song
  11. Regularity and Pareto Improving on financial equilibria with endogenous borrowing restrictions By Michele Gori; Marina Pireddu; Antonio Villanacci
  12. Exploring Cross-Country Variation in Government Shares: What Can We Learn from Relative Productivities? By Maksym Obrizan
  13. Economic Growth, Ecological Technology and Public Intervention By Mónica Meireles; Isabel Soares; Óscar Afonso
  14. Microfoundations of Inflation Persistence in the New Keynesian Phillips Curve By Marcelle, Chauvet; Insu, Kim
  15. Contingent Worksharing By Giulio Piccirilli

  1. By: di Pace, Federico (Department of Economics, Mathematics and Statistics, Birkbeck, University of London); Faccini, Renato (Bank of England)
    Abstract: We extend the standard textbook search and matching model by introducing deep habits in consumption. The cyclical fluctuations of vacancies and unemployment in our model can replicate those observed in the US data, with labour market tightness being 20 times more volatile than consumption. Vacancies display a hump-shaped response to technology shocks as well as autocorrelation coefficients that are in line with the empirical evidence. Our model preserves the assumption of fully flexible wages for the new hires and the calibration is consistent with the estimated elasticity of unemployment to unemployment benefits. The numerical simulations generate an artificial Beveridge curve which is in line with the data.
    Keywords: Consumption; business cycles; labour market fluctuations; search and matching; wage bargaining
    JEL: E21 E24 E32 J41 J64
    Date: 2010–06–03
  2. By: Lawrence J. Christiano (Northwestern University, Department of Economics, 2001 Sheridan Road, Evanston, Illinois 60208, USA.); Mathias Trabandt (European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Karl Walentin (Sveriges Riksbank, Research Division, 103 37 Stockholm, Sweden.)
    Abstract: We propose a monetary model in which the unemployed satisfy the official US definition of unemployment: they are people without jobs who are (i) currently making concrete efforts to find work and (ii) willing and able to work. In addition, our model has the property that people searching for jobs are better off if they find a job than if they do not (i.e., unemployment is ‘involuntary’). We integrate our model of involuntary unemployment into the simple New Keynesian framework with no capital and use the resulting model to discuss the concept of the ‘non-accelerating inflation rate of unemployment’. We then integrate the model into a medium sized DSGE model with capital and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to the three shocks. JEL Classification: E2, E3, E5, J2, J6.
    Keywords: DSGE, unemployment, business cycles, monetary policy, Bayesian estimation.
    Date: 2010–06
  3. By: Simone Marsiglio (University of Milan)
    Abstract: This paper studies the impact of endogenous population change on economic growth, analyzing the simplest optimal endogenous growth model, an AK type model, driven by human capital accumulation. We show that in steady state both demographic change and economic growth are constant, but the rate of these growth can be positive, negative or null accordingly to parameter values. Population dynamics is determined by the difference between the stationary fertility rate and the exogenous mortality rate: if this is positive population size indefinitely increases, otherwise it reaches a stationary level, which can be positive (if the difference is null) or null (if it is negative). If fertility is strictly lower than mortality, population size will constantly decrease in finite time and we end up with a complete collapse of the economy, characterized by the total extinction of the population. We also analyze the problem of optimal population size and its relationship with growth. The seminal work of Parfit (1984) suggests that total utilitarianism leads to increase population size indefinitely, even if it the average welfare tends to zero. We show that in our model economy, under certain parametric conditions, the repugnant conclusion holds; in particular, this happens when consumption growth is negative and the stationary fertility rate is higher than the exogenous mortality rate.
    Keywords: Economic Growth, Human Capital Accumulation, Endogenous Fertility, Optimal Population, Repugnant Conclusion,
    Date: 2010–04–12
  4. By: Sharon G. Harrison (Department of Economics, Barnard College, Columbia University); Mark Weder (School of Economics, University of Adelaide)
    Abstract: We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumer's choice of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parametrizations than in previous, similar models without these features.
    Keywords: Business cycles, Credit markets, Collateral Constraint, Sunspots
    JEL: E32
    Date: 2010–01
  5. By: Jean-Marc Robin (Institute for Fiscal Studies and EUREQua, University of Paris 1)
    Abstract: <p>Postel-Vinay and Robin's (2002) sequential auction model is extended to allow for aggregate productivity shocks. Workers exhibit permanent differences in ability while firms are identical. Negative aggregate productivity shocks induce job destruction by driving the surplus of matches with low ability workers to negative values. Endogenous job destruction coupled with worker heterogeneity thus provides a mechanism for amplifying productivity shocks that offers an original solution to the unemployment volatility puzzle (Shimer, 2005). Moreover, positive or negative shocks may lead employers and employees to renegotiate low wages up and high wages down when agents' individual surpluses become negative. The model delivers rich business cycle dynamics of wage distributions and explains why both low wages and high wages are more procyclical than wages in the middle of the distribution and why wage inequality may be countercyclical, as the data seem to suggest is true.</p>
    Date: 2010–03
  6. By: Miquel Faig; Min Zhang
    Abstract: If entitlement to Unemployment Insurance (UI) benefits must be earned with employment, generous UI is an additional benefit to an employment relationship, so it promotes job creation. If individuals are risk neutral, UI is fairly priced, and the UI system prevents moral-hazard, the generosity of UI has no effect on unemployment. As with Ricardian Equivalence, this result should be useful to pinpoint the effects of UI to violation of its premises. In itself, the endogenous entitlement of UI benefits does not resolve if the Mortensen-Pissarides model is able to generate realistic cycles. However, it brings some insights into this debate: The widespread concern in the design of UI systems to minimize moral-hazard unemployment only makes sense if workers have sufficiently high values of leisure (80 percent of labor productivity in our baseline calculation for the United States). Also, the fact that the generosity of UI has potentially a small effect on unemployment reconciles a high response of unemployment to changes in labor productivity with a small response to changes in UI benefits.
    Keywords: Search, Matching, UI Eligibility, Business Cycles, Labor Markets
    JEL: E24 E32 J64
    Date: 2010–05–31
  7. By: Mandelman, Federico S (Federal Reserve Bank of Atlanta); Zanetti, Francesco (Bank of England)
    Abstract: Recent empirical evidence suggests that a positive technology shock leads to a decline in labour inputs. However, the standard real business model fails to account for this empirical regularity. Can the presence of labour market frictions address this problem, without otherwise altering the functioning of the model? We develop and estimate a real business cycle model using Bayesian techniques that allows, but does not require, labour market frictions to generate a negative response of employment to a technology shock. The results of the estimation support the hypothesis that labour market frictions are the factor responsible for the negative response of employment.
    Keywords: Technology shocks; employment; labour market frictions
    JEL: E32
    Date: 2010–06–03
  8. By: Michele Gori (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze); Marina Pireddu (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze); Antonio Villanacci (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze)
    Abstract: We show existence of equilibria for a general class of economies in a model with real assets and restricted participation described by household specific endogenous borrowing constraints.
    Keywords: General equilibrium; Restricted participation; Financial markets; Real and numeraire assets.
    JEL: D50 D52 D53
    Date: 2010–05
  9. By: Jan Bonenkamp; Ed Westerhout
    Abstract: In many countries, collective funded pension schemes with defined benefits (DB) are being replaced by individual schemes with defined contributions. Collective funded DB pensions may indeed reduce social welfare. This will be the case when the schemes feature income-related contributions that distort the labour-leisure decision. However, these schemes also share risks between generations. This adds to welfare if these risks cannot be traded on capital markets. This paper compares the welfare gains from intergenerational risk sharing with the welfare losses that are due to labour market distortions. We adopt a two-period overlapping-generations model for a small open economy with risky returns to equity holdings. We derive analytically that the gains dominate the losses for the case of Cobb-Douglas preferences between labour and leisure. Numerical simulations for the more general CES case confirm these findings which also withstand a number of other model modifications, like the introduction of a short-sale constraint for households and the inclusion of a labour income tax. These results suggest that collective funded schemes with well-organized risk sharing are preferable over individual schemes, even if labour market distortions are taken into account.
    Keywords: risk sharing; labour market distortion; funded pensions; defined benefits
    JEL: E21 G11 H55
    Date: 2010–06
  10. By: Sagiri Kitao; Aysegül Sahin; Joseph Song
    Abstract: We analyze the effects of various labor market policies on job creation, job destruction, and employment. The framework of Mortensen and Pissarides (2003) is used to model the dynamic interaction between firms and workers and to simulate their responses to alternative policies. The equilibrium model is calibrated to capture labor market conditions at the end of 2009, including the unemployment, inflow, and outflow rates by workers of different educational attainment. We consider the equilibrium effects of a hiring subsidy, a payroll tax reduction, and an employment subsidy. While calibrating parameters that characterize these policies, we try to mimic the policies in the Hiring Incentives to Restore Employment (HIRE) Act of 2010. We find that a hiring subsidy and a payroll tax deduction, as in the HIRE Act, can stimulate job creation in the short term, but can cause a higher equilibrium unemployment rate in the long term. Employment subsidies succeed in lowering the unemployment rate permanently, but the policy entails high fiscal costs.
    Keywords: Employment ; Unemployment ; Unemployment insurance ; Labor market ; Subsidies ; Equilibrium (Economics)
    Date: 2010
  11. By: Michele Gori (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze); Marina Pireddu (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze); Antonio Villanacci (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze)
    Abstract: We consider a pure exchange, general equilibrium model, with two periods and a finite number of states, goods, numeraire assets, and households. Participation on the asset market is restricted in a household specific manner, imposing upper bounds on the amounts of borrowing which can be obtained using assets. Those bounds are assumed to depend on asset and good prices - hence the reference to endogenous borrowing restrictions in the title. After having established existence of equilibria, we show that for an open and dense subset of the set of the economies, equilibria are finite and regular. We then analyze optimality properties. We first show generic suboptimality. Afterwards, we restrict our attention to the significant set of economies in which a sufficiently high number of participation constraints is "strictly" binding, i.e., utilities of involved households could be increased relaxing those constraints. We prove that, generically in that set, associated equilibria are Pareto improvable through a local change of those constraints.
    Keywords: General equilibrium; Restricted participation; Financial markets; Numeraire assets; Sub-optimality; Pareto Improving
    JEL: D50 D53 D61
    Date: 2010–06
  12. By: Maksym Obrizan (Kyiv School of Economics, Kyiv Economics Institute)
    Abstract: Government shares in total output are characterized by significant variation across countries. As a starting point of my study, I notice strong negative correlation between government consumption share and price of government services in terms of private consumption. Motivated by this empirical observation, I develop a neoclassical growth model with added government that is capable of matching the variation in government shares very closely using only relative prices. In addition, I provide empirical evidence showing that the relative price of government consumption increases in income which is consistent with distortions prevailing in poor countries. These two observations combined imply that government shares tend to be higher in poorer countries.
    Keywords: Government consumption, Relative government shares, Relative international prices, Neoclassical growth model, the Penn World Table
    JEL: H50 H40 E13
    Date: 2010–06
  13. By: Mónica Meireles (Faculdade de Economia, Universidade do Porto, ISCTE-IUL, Portugal); Isabel Soares (CEF.UP, Faculdade de Economia, Universidade do Porto, Portugal); Óscar Afonso (CEF.UP, OBEGEF and Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: Seminal works on growth theory had mainly focused on exogenous technological change, where a certain given path of technological change was considered. At the end of the 1980s, a new growth theory emerged allowing for the endogeneity of technological change, where economic agents can affect the pace of technological change and where technology is essentially interpreted as “knowledge”. The present paper aims to develop a simple endogenous growth model to study the effects of taxation on dirty intensive resources and the effects of subsidies on clean/ecological intensive resources. It also intends to analyse how exogenous environmental quality can affect the development of better quality (environmentally cleaner) inputs to production. For that, a dynamic general equilibrium growth model is considered based on the endogenous skill-biased technological change literature. It is shown that final-good sector bias is caused by the technological-knowledge bias, which is promoted by government intervention.
    Keywords: economic growth, technological change, environment
    JEL: C61 O13 Q55 Q58
    Date: 2010–06
  14. By: Marcelle, Chauvet; Insu, Kim
    Abstract: This paper proposes a dynamic stochastic general equilibrium model that endogenously generates inflation persistence. We assume that although firms change prices periodically, they face convex costs that preclude optimal adjustment. In essence, the model assumes that price stickiness arises from both the frequency and size of price adjustments. The model is estimated using Bayesian techniques and the results strongly support both sources of price stickiness in the U.S. data. In contrast with traditional sticky price models, the framework yields inflation inertia, delayed effect of monetary policy shocks on inflation, and the observed "reverse dynamic" correlation between inflation and economic activity.
    Keywords: In Inflation Persistence; Phillips Curve; Sticky Prices; Convex Costs
    JEL: E30 E31
    Date: 2010–05
  15. By: Giulio Piccirilli (DISCE, Università Cattolica)
    Abstract: In a setting that focuses on efficient dynamic hours-workers substitution we show that contingent worksharing contributes to workers retention during bad business spells and to sustained hiring during good spells. As a consequence, average employment increases on both accounts. We also show that worksharing interacts with firing costs in affecting workforce decisions and determines the sign of the employment impact from an increase in firing restrictions.
    Keywords: Temporary worksharing, Firing Costs, Stochastic methods.
    JEL: J23 J63 C61
    Date: 2009–07

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