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on Dynamic General Equilibrium |
| By: | Nicoletta Batini (University of Surrey and IMF); Young-Bae Kim (University of Surrey); Paul Levine (University of Surrey); Emanuela Lotti (University of Surrey) |
| Abstract: | This paper reviews the literature on the informal economy, focusing first on empirical findings and then on existing approaches to modelling informality within both partial and general equilibrium environments. We concentrate on labour and credit markets, since these tend to be most affected by informality. The phenomenon is particularly important in emerging and other developing economies, given their high degrees of informal labour and financial services and the implications these have for the effectiveness of macroeconomic policy. We emphasize the need for dynamic general equilibrium (DGE) and ultimately dynamic stochastic general equilibrium (DSGE) models for a full understanding of the costs, benefits and policy implications of informality. The survey shows that the literature on informality is quite patchy, and that there are several unexplored areas left for research. JEL Classification: J65, E24, E26, E32 |
| Keywords: | Informal economy, labour market, search-matching models |
| JEL: | E52 E37 E58 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0609&r=dge |
| By: | Min Zhang |
| Abstract: | This paper shows that the Mortensen-Pissarides search and matching model can be successfully parameterized to generate observed large cyclical fluctuations in unemployment and modest responses of unemployment to changes in unemployment insurance (UI) benefits. The key features behind this success are the consideration of the eligibility for UI benefits and the heterogeneity of workers. With the linear utilities commonly assumed in the Mortensen-Pissarides model, a fully rated UI system designed to prevent moral hazard has no effect on unemployment. However, the UI system in the United States is neither fully rated nor able to prevent workers with low productivity from quitting their jobs or rejecting employment offers to collect benefits. As a result, an increase in UI generosity has a positive, but realistically small, effect on unemployment. This paper answers the Costain and Reiter (2008) criticism to the Hagedorn and Manovskii (2008) strategy of adopting a high value of non-market activities to generate realistic business cycles with the Mortensen-Pissarides model. |
| Keywords: | Search, Matching, Moral Hazard, UI Entitlement, Equilibrium Unemployment, Labor Markets |
| JEL: | E24 E32 J64 |
| Date: | 2010–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-405&r=dge |
| By: | Launov, Andrey (University of Mainz); Wälde, Klaus (University of Mainz) |
| Abstract: | The distribution of unemployment duration in our equilibrium matching model with spell-dependent unemployment benefits displays a time-varying exit rate. Building on Semi-Markov processes, we translate these exit rates into an expression for the aggregate unemployment rate. Structural estimation using a German micro-data set (SOEP) allows us to discuss the effects of a recent unemployment benefit reform (Hartz IV). The reform reduced unemployment by only 0.3%. Contrary to general beliefs, we find that both employed and unemployed workers gain (the latter from an intertemporal perspective). The reason is the rise in the net wage caused by more vacancies per unemployed worker. |
| Keywords: | non-stationary unemployment benefits, endogenous effort, matching model, structural estimation, semi-Markov process |
| JEL: | E24 J64 J68 C13 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4958&r=dge |
| By: | Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alexis Loublier |
| Abstract: | Epstein-Zin preferences have attracted significant attention within the macro-finance literature based on DSGE models as they allow to substantially increase risk aversion, and consequently generate non-trivial risk premia, without compromising the ability of standard models to achieve satisfactory macroeconomic data coherence. Such appealing features certainly hold for structural modelling frameworks where monetary policy is set according to Taylor-type rules or seeks to minimize an ad hoc loss function under commitment. However, Epstein-Zin preferences may have significant quantitative implications for both asset pricing and macroeconomic allocation under a welfare-based monetary policy conduct. Against this background, the paper focuses on the impact of such preferences on the Ramsey approach to monetary policy within a medium-scale model based on Smets and Wouters (2007) including a wide range of nominal and real frictions that have proven to be relevant for quantitative business cycle analysis. After setting an empirical benchmark that generates a mean value of 100 bp for the ten-year term premium, we show that Epstein-Zin preferences significantly affect the macroeconomic outcome when optimal policy is considered. The level and the dynamic pattern of risk premia are also markedly altered. We show that the effect of Epstein-Zin preferences is extremely sensitive to the presence of real rigidities in the form of quasi-kinked demands. We also analyse how this effect can be linked to a combined effect of capital accumulation and wage rigidities. JEL Classification: E44, E52, E61, G12. |
| Keywords: | Optimal monetary policy, macroeconometric equivalence, non time-separable preferences, term premium. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101209&r=dge |
| By: | Marco Del Negro (Federal Reserve Bank of New York); Fabrizio Perri (University of Minnesota, Federal Reserve Bank of Minneapolis, CEPR and NBER); Fabiano Schivardi (Universit`a di Cagliari, EIEF and CEPR) |
| Abstract: | The paper studies a fiscal policy instrument that can reduce fiscal distortions without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each citizen, whereby the citizen can choose to pay a fixed price in exchange for a given reduction in her tax rate for a period of time. We introduce the tax buyout in a dynamic overlapping generations economy, calibrated to match several features of the US income, taxes and wealth distribution. Under simple pricing, the introduction of the buyout is revenue neutral but, by reducing distortions,it benefits a significant fraction of the population and leads to sizable increases in aggregate labor supply, income and consumption. |
| JEL: | E62 H21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1007&r=dge |
| By: | Posch, Olaf; Trimborn, Timo |
| Abstract: | We propose a simple and powerful method for determining the transition process in continuous-time DSGE models under Poisson uncertainty numerically. The idea is to transform the system of stochastic differential equations into a system of functional differential equations of the retarded type. We then use the Waveform Relaxation algorithm to provide a guess of the policy function and solve the resulting system of ordinary differential equations by standard methods and fix-point iteration. Analytical solutions are provided as a benchmark from which our numerical method can be used to explore broader classes of models. We illustrate the algorithm simulating both the stochastic neoclassical growth model and the Lucas model under Poisson uncertainty which is motivated by the Barro-Rietz rare disaster hypothesis. We find that, even for non-linear policy functions, the maximum (absolute) error is very small. |
| Keywords: | Continuous-time DSGE, Optimal stochastic control, Waveform Relaxation |
| JEL: | E21 G11 O41 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-450&r=dge |
| By: | Sirin Saracoglu (Department of Economics, METU); Zeynep Akgul (Department of Economics, METU) |
| Abstract: | This paper examines the effects of international capital flows in a small open econ omy utilizing a dynamic general equilibrium framework based on a three-sector Ramsey growth model. In order to analyze the impact of international capital mobility on production, consumption and allocation of resources across three sectors ,two different economic environments are modelled. The first model represents an open economy with capital mobility (a more comprehensive environment),and the second model introduces a closed economy with no capital mobility. Numerical applications of the models use data from the Turkish economy for the year 2002. The numerical results demonstrate that the presence of capital mobility, despite being limited by a borrowing constraint, reverses the impact of economic growth on production and resource allocation. The results also show that while production in the closed economy model simply adjusts to domestic demand, that of the open economy model is not constrained by it. Results further point that although there is positive growth in income and output in both environments, income growth in the capital mobility environment falls short of that in the no capital mobility environment. This result can be attributed to the relatively slower accumulation of capi tal in the former, which may be compensated by a positive rate of technological progress to accompany international capital flows. |
| Keywords: | International Capital Flows,Human Capital, Multisector economy,Borrowing Constraint |
| JEL: | F43 O41 C61 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:1001&r=dge |
| By: | Natacha Raffin (Paris School of Economics - Centre d'Economie de la Sorbonne) |
| Abstract: | We develop a political economy model that might explain the different environmental performance of countries, through educational choices. Individuals decide whether to invest in additional education according to their expectations regarding future environmental quality. They also vote on a tax that will be exclusively used to finance environmental protection. We show that the model may generate multiple equilibria and agents' expectations may be self-fulfilling when the public policy is endogenous. Then, we analyse the long-term implications of a public policy that would favour education and make it possible to select the higher equilibrium. |
| Keywords: | Environmental quality, human capital, education, self-fulfilling prophecies, public policy. |
| JEL: | I28 H20 O16 O40 Q58 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10042&r=dge |
| By: | Theresa Grafeneder-Weissteiner (Department of Economics, Vienna University of Economics & B.A.) |
| Abstract: | This article presents a framework within which the effects of demographic change on both agglomeration and growth of economic activities can be analyzed. I introduce an overlapping generation structure into a New Economic Geography model with endogenous growth due to learning spillovers and focus on the effects of demographic structures on long-run equilibrium outcomes and stability properties. First, life-time uncertainty is shown to decrease long-run economic growth perspectives. In doing so, it also mitigates the pro-growth effects of agglomeration resulting from the localized nature of learning externalities. Second, the turnover of generations acts as a dispersion force whose anti-agglomerative effects are, however, dampened by the growth-linked circular causality being present as long as interregional knowledge spillovers are not perfect. Finally, lifetime uncertainty also reduces the possibility that agglomeration is the result of a self-fulfilling prophecy. |
| JEL: | F43 O33 J10 R11 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp132&r=dge |
| By: | L. Marattin; M. Marzo |
| Abstract: | Macroeconomic literature has traditionally regarded public expenditure as yielding no utility per se to any agent in the economy. In line with a few previous contributions (Linneman and Schabert 2004, Bouakez and Rebei 2007) we build a New Keynesian DSGE model with real and nominal rigidities and distortionary fiscal policy rules, calibrated on the Euro-area (1990:Q1-2008:Q4), where part of public spending is allowed to either Edgeworth complement or substitute private consumption by affecting its marginal utility. We show that the the interaction between the share of usefulness of public spending and the specification of fiscal and monetary policy rules is able to deliver private consumption multipliers which are in line with the empirical findings for the Euro-Area. |
| JEL: | E62 E63 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:704&r=dge |
| By: | Jean-Olivier Hairault (Paris School of Economics - Centre d'Economie de la Sorbonne et IZA); François Langot (GAINS-TEPP - Université du Mans, CEPREMAP et IZA) |
| Abstract: | Gali et al. (2007) have recently shown in a quantitative way that inefficient fluctuations in the allocation of resources do not generate sizable welfare costs. In this note, we show that their evaluation underestimates the welfare costs of inefficient fluctuations and propose a biased estimate of the impact of structural distortions on business cycle costs. As monopolistic suppliers, both firms and households aim at preserving their expected markups ; the interaction between aggregate fluctuations in the efficiency gap and price-setting behaviors results in making average consumption and employment lower than their counterparts in the flexible price economy. This level increases the welfare cost of business cycles. It is all the more sizable in that the degree of inefficiency is structurally high at the steady state. |
| Keywords: | Business cycle costs, inefficiency gap, new-Keynesian macroeconomics. |
| JEL: | E32 E12 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10043&r=dge |
| By: | C. Mendolicchio; D. Paolini; T. Pietra |
| Abstract: | We consider a random matching model where heterogeneous agents choose optimally to invest time and real resources in education. Generically, there is a steady state equilibrium, where some agents, but not all of them, invest. Regular steady state equilibria are constrained inefficient in a strong sense. The Hosios (1990) condition is neither necessary, nor sufficient, for constrained efficiency. We also provide restrictions on the fundamentals sufficient to guarantee that equilibria are characterized by overeducation (or undereducation), present some results on their comparative statics properties, and discuss the nature of welfare improving policies. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:702&r=dge |
| By: | Michael Sattinger |
| Abstract: | This paper develops a model of safety first consumption behavior in which the likelihood of survival to the next period depends on current consumption levels. Below a threshold asset level, individuals follow a decumulation path, and above that level they follow an accumulation path. Saving rates then vary discontinuously with asset level, generating a poverty trap and divergence in incomes. Reduction of risk raises saving rates. A more equitable distribution of assets can be consistent with greater aggregate savings and growth because of declining marginal propensity to save over some asset intervals. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:10-04&r=dge |
| By: | Adrian Masters |
| Abstract: | This paper considers the effect of monetary policy and inflation on retail markets. It analyzes a model in which: goods are dated and produced prior to being retailed, buyers direct their search on the basis of price and general quality and, buyers' match specific tastes are their private information. Sellers set the same price for all buyers but some do not value the good highly enough to purchase it. The market economy is typically inefficient as a social planner would have the good consumed. The Friedman rule represents optimal policy as long as there is free-entry of sellers. When the upper bound on the number of participating sellers binds sufficiently, moderate levels of inflation can be welfare improving. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:10-11&r=dge |
| By: | Michael Sattinger |
| Abstract: | This paper develops a model of safety first consumption behavior in which the likelihood of survival to the next period depends on current consumption levels. Below a threshold asset level, individuals follow a decumulation path, and above that level they follow an accumulation path. Saving rates then vary discontinuously with asset level, generating a poverty trap and divergence in incomes. Reduction of risk raises saving rates. A more equitable distribution of assets can be consistent with greater aggregate savings and growth because of declining marginal propensity to save over some asset intervals. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:10-03&r=dge |
| By: | Dennis Wesselbaum |
| Abstract: | In the recent New Keynesian literature a standard assumption is that the price for which an intermediate good is sold to the final good firm is equal to the marginal costs of the intermediate good firm. However, there is empirical evidence that this need not to hold. This paper introduces price bargaining into an otherwise standard New Keynesian DSGE model and show that this model performs reasonably well in replicating the observed persistence values. We further discuss the role of those product market imperfections for monetary policy and find a trade-off between stabilizing intermediate or final good inflation. In addition, the Ramsey optimal monetary policy can be approximated reasonably well with a Taylor-type interest rate rule with weights on both inflation rates and output |
| Keywords: | Inflation and Output Persistence, Monetary Policy, Price Bargaining |
| JEL: | E31 E52 L10 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1629&r=dge |
| By: | Deng, Binbin |
| Abstract: | In the past few decades, real business cycle theory has developed rapidly after the initiation of Kydland and Prescott in 1982. It has grown substantially as an independent literature and served as a widely recognized framework for studies of the economy at business cycle frequencies. It has enjoyed great success for its ability to replicate most of the observed characteristics of U.S. aggregate economic activity after WWII. Over the years, different extensions to and modifications of the real business cycle model have been proposed by many researchers. In the mean time, various criticisms and challenges have been exposed to the theory from different perspectives. Recently, new developments have been undergoing a constructive process and emerging questions are being considered to improve the empirical performance of the theory. To celebrate the theory, several works have been devoted to a comprehensive survey of the literature, represented by King and Rebelo (1999). Efforts have been also made to discuss open questions in the literature in an attempt to suggest future studies, such as Rebelo (2005). However, a systematic review of the real business cycle theory involving different perspectives to compact the literature into a narrative representation seems currently unavailable. This paper tries to fill the gap. |
| Keywords: | real business cycles; dynamic stochastic general equilibrium; aggregate shocks |
| JEL: | E10 |
| Date: | 2009–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17932&r=dge |
| By: | Theresa Grafeneder-Weissteiner (Department of Economics, Vienna University of Economics & B.A.); Klaus Prettner (Vienna Institute of Demography, Austrian Academy of Sciences) |
| Abstract: | This article investigates agglomeration processes in aging societies by introducing an overlapping generation structure into a New Economic Geography model. Whether higher economic integration leads to spatial concentration of economic activity crucially hinges on the economies' demographic properties. While population aging as represented by declining birth rates strengthens agglomeration processes, declining mortality rates weaken them. This is due to the fact that we allow for nonconstant population size. In particular, we show that population growth acts as an important dispersion force that augments the distributional effects on agglomeration processes resulting from the turnover of generations. |
| JEL: | R12 J10 F15 C61 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp131&r=dge |
| By: | Mitchell, Matthew; Zhang, Yuzhe |
| Abstract: | This paper studies the design of unemployment insurance when neither the searching effort nor the savings of an unemployed agent can be monitored. If the principal could monitor the savings, the optimal policy would leave the agent savings-constrained. With a constant absolute risk-aversion (CARA) utility function, we obtain a closed form solution of the optimal contract. Under the optimal contract, the agent is neither saving nor borrowing constrained. Counter-intuitively, his consumption declines faster than implied by Hopenhayn and Nicolini [4]. The efficient allocation can be implemented by an increasing benefit during unemployment and a constant tax during employment. |
| Keywords: | hidden savings; hidden wealth; repeated moral hazard; unemployment insurance. |
| JEL: | D86 J65 D82 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23214&r=dge |
| By: | Patrick Bolton (Finance and Economics Division, Columbia University Business School); Christopher Harris (Department of Economics, University of Cambridge) |
| Abstract: | We study a dynamic-contracting problem involving risk sharing between two parties – the Proposer and the Responder – who invest in a risky asset until an exogenous but random termination time. In any time period they must invest all their wealth in the risky asset, but they can share the underlying investment and termination risk. When the project ends they consume their final accumulated wealth. The Proposer and the Responder have constant relative risk aversion R and r respectively, with R > r > 0. We show that the optimal contract has three components: a non-contingent flow payment, a share in investment risk and a termination payment. We derive approximations for the optimal share in investment risk and the optimal termination payment, and we use numerical simulations to show that these approximations offer a close fit to the exact rules. The approximations take the form of a myopic benchmark plus a dynamic correction. In the case of the approximation for the optimal share in investment risk, the myopic benchmark is simply the classical formula for optimal risk sharing. This benchmark is endogenous because it depends on the wealths of the two parties. The dynamic correction is driven by counterparty risk. If both parties are fairly risk tolerant, in the sense that 2 > R > r, then the Proposer takes on more risk than she would under the myopic benchmark. If both parties are fairly risk averse, in the sense that R > r > 2, then the Proposer takes on less risk than she would under the myopic benchmark. In the mixed case, in which R > 2 > r, the Proposer takes on more risk when the Responder’s share in total wealth is low and less risk when the Responder’s share in total wealth is high. In the case of the approximation for the optimal termination payment, the myopic benchmark is zero. The dynamic correction tells us, among other things, that: (i) if the asset has a high return then, following termination, the Responder compensates the Proposer for the loss of a valuable investment opportunity; and (ii) if the asset has a low return then, prior to termination, the Responder compensates the Proposer for the low returns obtained. Finally, we exploit our representation of the optimal contract to derive simple and easily interpretable sufficient conditions for the existence of an optimal contract. |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ads:wpaper:0092&r=dge |
| By: | John Bailey Jones; Eric French |
| Abstract: | This paper provides an empirical analysis of the effects of employer-provided health insurance, Medicare, and Social Security on retirement behavior. Using data from the Health and Retirement Study, we estimate a dynamic programming model of retirement that accounts for both saving and uncertain medical expenses. Our results suggest that Medicare is important for understanding retirement behavior, and that uncertainty and saving are both important for understanding the labor supply responses to Medicare. Half the value placed by a typical worker on his employer-provided health insurance is the value of reduced medical expense risk. Raising the Medicare eligibility age from 65 to 67 leads individuals to work an additional 0.074 years over ages 60-69. In comparison, eliminating two years worth of Social Security benefits increases years of work by 0.076 years. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:10-10&r=dge |