nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒07‒03
twenty papers chosen by
Christian Zimmermann
University of Connecticut

  1. On-the-job search and the cyclical dynamics of the labor market By Michael U. Krause; Thomas A. Lubik
  2. Demographic Change, Human Capital and Welfare By Alexander Ludwig; Thomas Schelkle; Edgar Vogel
  3. Endogenous On-the-job Search and Frictional Wage Dispersion By Matthias S. Hertweck
  4. A Dynamic General Equilibrium Analysis of Japanese & Korean Immigration By Phillips, Kerk L.
  5. Shocks and Frictions under Right-to-Manage Wage Bargaining: A Transatlantic Perspective By Agostino Consolo; Matthias S. Hertweck
  6. Selective Reductions in Labor Taxation: Labor Market Adjustments and Macroeconomic Performance By Batyra, Anna; Sneessens, Henri R.
  7. Endogenous Incomplete Markets: A Production Model with Idiosyncratic Risk By P Stiefenhofer;
  8. Inflation and Unemployment in Competitive Search Equilibrium By Mei Dong
  9. The employed, the Unemployed, and the Unemployable: Directed Search with Worker Heterogeneity By Suren Basov; Ian King; Lawrence Uren
  10. The Optimum Structure for Government Debt By Wolfgang Kuhle
  11. Optimal simple monetary policy rules and welfare in a DSGE Model for Hungary By Zoltán M. Jakab; Henrik Kucsera; Katalin Szilágyi; Balázs Világi
  12. Should day care be subsidized? By Domeij, David; Klein, Paul
  13. Agglomeration processes in ageing societies By Theresa Grafeneder-Weissteiner; Klaus Prettner
  14. Endogenous differential information in financial markets By Sebastian cea-Echenique; Juan Pablo Torres-Martínez
  15. Economic Reform in North Korea: A Dynamic General Equilibrium Model By Bradford, Scott C.; Kim, Dong-jin; Phillips, Kerk L.
  16. Equilibrium yield curves under regime switching By Santiago García Verdú
  17. The last fifteen years of stagnation in Italy: A Business Cycle Accounting Perspective By R. Orsi; F. Turino
  18. Estimating Dynamic Models with Aggregate Shocks And an Application to Mortgage Default in Colombia By Juan Esteban Carranza; Salvador Navarro
  19. Global Climate Change and the Resurgence of Tropical Disease: An Economic Approach By Douglas Gollin; Christian Zimmermann
  20. Quantifying Optimal Growth Policy By Grossmann, Volker; Steger, Thomas M.; Trimborn, Timo

  1. By: Michael U. Krause; Thomas A. Lubik
    Abstract: We develop a business cycle model with search and matching frictions in the labor market and show that on-the-job search generates substantial amplification and propagation. Rising search by employed workers in an expansion amplifies the incentives of firms to post vacancies. By keeping job creation costs low for firms, on-the-job search amplifies exogenous shocks. In our calibration, this allows the model to generate fluctuations of unemployment, vacancies, and job-to-job transitions whose magnitudes are close to the data, and leads output to be highly autocorrelated. On-the-job search implies higher-order serial correlation that is absent from the standard search and matching model.
    Keywords: Labor market
    Date: 2010
  2. By: Alexander Ludwig; Thomas Schelkle; Edgar Vogel (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: This paper employs a large scale overlapping generations (OLG) model with endogenous human capital formation using a Ben-Porath (1967) technology to evaluate the quantitative role of human capital adjustments for the economic consequences of demographic change. We find that endogenous human capital formation is a quantitatively important adjustment mechanism which substantially mitigates the macroeconomic impact of population aging. On the aggregate level, the predicted decrease of the rate of return to physical capital is only one third of the predicted decrease in a standard model with a fixed human capital profile. In terms of welfare, while young agents with little assets gain up to 0.8% in consumption from increasing wages in both models, welfare losses from decreasing returns of older and asset rich households are substantial. But importantly, these losses are about 50 − 70% higher in the model without endogenous human capital formation. Ignoring this adjustment channel thus leads to quantitatively important biases of the welfare assessment of demographic change. We also document that not reforming the social security system but letting contribution rates increase will largely offset any positive welfare effects for future generations.
    JEL: C68 E17 E25 J11 J24
    Date: 2010–01–15
  3. By: Matthias S. Hertweck (University of Basel)
    Abstract: This paper addresses the large degree of frictional wage dispersion in US data. The standard job matching model without on-the-job search cannot replicate this pattern. With on-the-job search, however, unemployed job searchers are more will- ing to accept low wage offers since they can continue to seek for better employment opportunities. This explains why observably identical workers may be paid very dif- ferently. Therefore, we examine the quantitative implications of on-the-job search in a stochastic job matching model. Our key result is that the inclusion of variable on-the-job search increases the degree of frictional wage dispersion by an order of a magnitude.
    Keywords: Matching, On-the-job Search, Wage Dispersion
    JEL: E24 J31 J64
    Date: 2010
  4. By: Phillips, Kerk L.
    Abstract: This paper constructs a multi-sector dynamic general equilibrium model for a trading economy. We incorporate three major factors of production: capital, skilled labor & unskilled labor. We solve and calibrate the model using data from Japan and Korea. We then consider changes to immigration policy in both countries. We are able to examine the effects on output, consumption, wages, and utility. We do this for both the new steady state and for the time-path leading to that steady state. In addition, we are able, if we so wish, to impose a series of unrelated macroeconomic shock to the model. This has the advantage of allowing us to calculate confidence bands around our policy impulse response functions. We find that allowing skilled labor to immigrate leads to greater welfare gains in the steady state. We also show that there is a great deal of uncertainty surrounding the exact time path to a new steady state in the presence of the typical fluctuations associated with business cycles. We find a great deal of inertia in the transition to a new steady state.
    Keywords: labor migration; factor mobility; dynamic general equilibrium; Japan; Korea; DSGE
    JEL: F22 F15 F42
    Date: 2010–04
  5. By: Agostino Consolo; Matthias S. Hertweck (University of Basel)
    Abstract: This paper introduces staggered right-to-manage wage bargaining into a New <br />Keynesian business cycle model. Our key result is that the model is able to gener- <br />ate persistent responses in output, inflation, and total labor input to both neutral <br />technology and monetary policy shocks. Furthermore, we compare the model’s dy- <br />namic behavior when calibrated to the US and to an European economy. We find <br />that the degree of price rigidity explains most of the differences in response to a <br />monetary policy shock. When the economy is hit by a neutral technology shock, <br />both price and wage rigidities turn out to be important. <br /><br />
    Keywords: Business Cycles, Labor Market Search, Wage Bargaining, Inflation
    JEL: E24 E31 E32 J64
    Date: 2010
  6. By: Batyra, Anna (Université catholique de Louvain); Sneessens, Henri R. (University of Luxembourg)
    Abstract: We use a calibrated general equilibrium model with heterogeneous labor and search to evaluate the quantitative effects of various labor tax cut scenarios. The focus is on skill heterogeneity combined with downward wage rigidities at the low end of the skill ladder. Workers can take jobs for which they are overeducated. We compare targeted and non-targeted tax cuts, both with or without over-education effects. Introducing over-education changes substantially the employment, productivity and welfare effects of a tax cut, although tax cuts targeted on the least skilled workers always have larger effects.
    Keywords: minimum wage, job creation, job destruction, job competition, search unemployment, taxation, computable general equilibrium models
    JEL: C68 E24 J64
    Date: 2010–06
  7. By: P Stiefenhofer;
    Abstract: This paper considers a two period general equilibrium production model with incomplete markets (GEI). The novelty of this model is the endogenous smooth asset structure introduced in Stiefenhofer (2010). It is shown that incomplete markets is a consequence of idiosyncratic risk.
    Date: 2010–06
  8. By: Mei Dong
    Abstract: Using a monetary search model, Rocheteau, Rupert and Wright (2007) show that the relationship between inflation and unemployment can be positive or negative depending on the primitives of the model. The key features are indivisible labor, nonseparable preferences and bargaining. Their results are derived only for a special case of the bargaining solution, take-it-or-leave-it offer by buyers. Instead of bargaining, this paper considers competitive search (price posting with directed search). I show that the results in Rocheteau, Rupert and Wright (2007) can be generalized in an environment where both buyers and sellers have nonseparable preferences. In addition, the relationship between inflation and unemployment is robust to allowing free entry by sellers, which cannot be studied in Rocheteau, Rupert and Wright (2007).
    Keywords: Inflation: costs and benefits
    JEL: E40 E52 E12 E13
    Date: 2010
  9. By: Suren Basov (Department of Economics, LaTrobe University); Ian King (Department of Economics, The University of Melbourne); Lawrence Uren (Department of Economics, The University of Melbourne)
    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 "kappa".The equilibrium unemployment rate is increasing in "kappa" 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 "kappa" = 1. We examine this prediction, using data from several countries.
    Keywords: Directed search, worker heterogeneity, unemployment
    JEL: C78 J41 J64
    Date: 2010–03
  10. By: Wolfgang Kuhle (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: This article studies the structural differences between implicit and explicit government debt in a two-generations-overlapping model with stochastic factorprices. If a government can issue safe bonds and new claims to wage-indexed social security to service a given initial obligation, there exists a set of Pareto-efficient ways to do so. This set is characterized by the conflicting interests of the current young and the yet unborn generations regarding the allocation of factor-price risks. However, it is shown that there will always exist a simple intertemporal compensation mechanism which allows to reconcile these conflicting interests. This compensation mechanism narrows the set of Pareto-efficient debt structures until only one remains. This result hinges on the double-incomplete markets structure of stochastic OLG models where households can neither trade consumption-loans nor factor-price risks privately.
    JEL: H55
    Date: 2009–12–30
  11. By: Zoltán M. Jakab (Office of Fiscal Council); Henrik Kucsera (Magyar Nemzeti Bank); Katalin Szilágyi (Magyar Nemzeti Bank); Balázs Világi (Magyar Nemzeti Bank)
    Abstract: We explore the properties of welfare-maximizing monetary policy in a medium-scale DSGE model for Hungary. In order to make our results operational from a policymaker’s perspective, we approximate the optimal policy rule with a set of simple rules reacting only to observable variables. Our results suggest that “science of monetary policy” that is found robust in simple models, holds in this medium-scaled setting as well. That is, the welfare-maximizing policy that aims to eliminate distortions associated with nominal rigidities can be approximated by a simple inflation targeting rule. Adding exchange rate into the feedback rule only marginally improves the stabilization properties of the policy rule. However, a rule reacting to wage inflation can be significantly welfare-improving. These results may suggest that in our medium-sized model the distortions associated with sticky wage setting have at least as important welfare implications as those related to the price stickiness in product markets.
    Keywords: monetary policy, central banking, policy design.
    JEL: E52 E58 E61
    Date: 2010
  12. By: Domeij, David (Dept. of Economics, Stockholm School of Economics); Klein, Paul (Institute for International Economics)
    Abstract: In an economy with distortionary taxes on labor, can subsidies on day care, financed by an increase in taxes, raise welfare by encouraging women with small children to work? We show, within a heterogeneous-agent life-cycle framework, that the Ramsey optimal policy consists in equalizing consumption/leisure wedges over the life cycle and across agents. A simple way to implement this is to make day care expenses tax deductible. Calibrating our model to Germany, we find that tax deductibility for day care expenses leads to an approximate doubling of labor supply for both married and single mothers with small children. The overall welfare gain from optimal reform corresponds to a 1.0 percent increase in consumption.
    Keywords: Female labor force participation; Germany; day care subsidies
    JEL: E13 J13
    Date: 2010–06–11
  13. By: Theresa Grafeneder-Weissteiner; Klaus Prettner
    Abstract: This article investigates agglomeration processes in ageing 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.
    Keywords: Agglomeration; Population Aging; Population
    Date: 2010–06
  14. By: Sebastian cea-Echenique; Juan Pablo Torres-Martínez
    Abstract: We develop a two period general equilibrium model with incomplete financial markets and differential information. Making endogenous the traditional informational restriction on consumption, we allow agents to obtain information from physical and financial markets. Thus, the investment in financial promises and the trade of commodities in spot markets appear as natural channels to improve the information that an agent has about the realization of future states of nature.
    Keywords: Incomplete Markets, Differential information, Enlightening equilibrium.
    JEL: D52 D53 D82
    Date: 2010–07
  15. By: Bradford, Scott C.; Kim, Dong-jin; Phillips, Kerk L.
    Abstract: This paper examines the impact of hypothetical market reforms in North. We build a dynamic general equilibrium model and simulate multiple reform scenarios. We first construct a baseline model which mimicks the current command economy. In this scenario the government allocates output in an inefficient way and simulated economic growth is negative. We next model a semi-market transition that allows producers choices regarding the distribution of available capital. However, total capital is still chosen by the government. Lastly, we consider two scenarios with full market reform allowing for the usual market mechanisms derived from consumer utility maximization, firm profit maximization, and market clearing prices. In one scenario we keep government investment in public infrastructure unchanged at the low baseline level. In the other we drastically increase the rate of infrastructure investment so that it matches that of South Korea. In all we maintain a closed economy assumption and a constant size for the military. Our simulations show little hope for the North Korean economy without a significant increase in infrastructure. Although all of the reforms raise the level of output and consumption per capita, only with significant increases in infrastructure investment does output growth change from negative to positive.
    Keywords: factor mobility; dynamic general equilibrium; specific-factors; Korea
    JEL: F22 F15 F42
    Date: 2010–01
  16. By: Santiago García Verdú
    Abstract: This paper studies how inflation as a macroeconomic indicator affects nominal bond prices. I consider an economy with a representative agent with Epstein- Zin preferences. Regime switching affects the state-space capturing inflation and consumption growth. Thus, the agent is concerned about the intertemporal distribution of risk, which is affected by the persistence of the variables and the regimes. Regime switching allows for structural changes in the volatility of unexpected shocks. To the extent that inflationary unexpected shocks indicate lower consumption growth, nominal bond holders need to be compensated for these shocks. It follows that a switch in the regime state affecting the covariance of inflation and consumption growth can be interpreted as a change in the price of risk. I find coefficients of risk aversion from 40 to 90, and subjective discount factors above 0.99, depending on the exact specification of the model. The model yields have on average a positive slope, a consistent Principal Components decomposition, and predictability as in Cochrane and Piazzesi (2002).
    Keywords: Consumption-based Asset Pricing, Regime Switching, Recursive Preferences, Yield Curve, Term Structure of Interest Rates.
    JEL: G12 E42 E43 E44 E31
    Date: 2010–06
  17. By: R. Orsi; F. Turino
    Abstract: In this paper, we investigate possible sources of declining economic growth performance in Italy starting around the middle of the ’90s. A long-run data analysis suggests that the poor performance of the Italian economy cannot be ascribed to an unfortunate business cycle contingency. The rest of the euro area countries have shown better performance, and the macroeconomic data show that the Italian economy has not grown as rapidly as these other European economies. We investigate the sources of economic fluctuations in Italy by applying the Business Cycle Accounting procedure introduced by Chari, Kehoe and McGrattan (2007). We analyze the relative importance of efficiency, labor, investment and government wedges for business cycles in Italy over the 1982-2008 period. We find that different wedges have played different roles during the period, but the efficiency wedge is revealed to be the main factor responsible for the stagnation phase beginning around 1995. Our findings also show that the improvement in labor market distortions that occurred in Italy during the ’90s provided an alleviating effect, preventing an even stronger slowdown in per capita output growth.
    JEL: E65 O41 O52
    Date: 2010–06
  18. By: Juan Esteban Carranza; Salvador Navarro
    Abstract: We estimate a dynamic model of mortgage default for a cohort of Colombian debtors between 1997 and 2004. We use the estimated model to study the efects on default of a class of policies that afected the evolution of mortgage balances in Colombia during the 1990's. We propose a framework for estimating dynamic behavioral models accounting for the presence of unobserved state variables that are correlated across individuals and across time periods. We extend the standard literature on the structural estimation of dynamic models by incorporating an unobserved common correlated shock that afects all individuals' static payofs and the dynamic continuation payofs associated with diferent decisions. Given a standard parametric specification the dynamic problem, we show that the aggregate shocks are identifed from the variation in the observed aggregate behavior. The shocks and their transition are separately identifed, provided there is enough cross-sectional variation of the observed states
    Date: 2010–06–22
  19. By: Douglas Gollin (Williams College); Christian Zimmermann (University of Connecticut)
    Abstract: We study the impact of global climate change on the prevalence of tropi- cal diseases using a heterogeous agent dynamic general equilibrium model. In our framework, households can take actions (e.g., purchasing bednets or other goods) that provide partial protection from disease. However, these actions are costly and households face borrowing constraints. Parameterizing the model, we explore the impact of a worldwide temperature increase of 3 degrees Celsius. We find that the impact on disease prevalence and especially output should be modest and can be mitigated by improvements in protection efficacy.
    Date: 2010–06
  20. By: Grossmann, Volker (University of Fribourg); Steger, Thomas M. (University of Leipzig); Trimborn, Timo (University of Hannover)
    Abstract: The optimal mix of growth policies is derived within a comprehensive endogenous growth model. The analysis captures important elements of the tax-transfer system and takes into account transitional dynamics. Currently, for calculating corporate taxable income US firms are allowed to deduct approximately all of their capital and R&D costs from sales revenue. Our analysis suggests that this policy leads to severe underinvestment in both R&D and physical capital. We find that firms should be allowed to deduct between 2-2.5 times their R&D costs and about 1.5-1.7 times their capital costs. Implementing the optimal policy mix is likely to entail huge welfare gains.
    Keywords: economic growth, endogenous technical change, optimal growth policy, tax-transfer system, transitional dynamics
    JEL: H20 O30 O40
    Date: 2010–06

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