nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒07‒17
thirteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Public expenditure on health and private old-age insurance in an OLG growth model with endogenous fertility: chaotic cycles under perfect foresight By Fanti, Luciano; Gori, Luca
  2. Complex equilibrium dynamics in a simple OLG model of neoclassical growth with endogenous retirement age and public pensions By Fanti, Luciano; Gori, Luca
  3. Job Creation in Spain: Productivity Growth, Labour Market Reforms or both By J. Andrés; J.E. Boscá; R. Doménech; J. Ferri
  4. The Great Depression in Belgium: an Open-Economy Analysis By Luca PENSIEROSO
  5. Global Climate Change and the Resurgence of Tropical Disease: An Economic Approach By Douglas Gollin; Christian Zimmermann
  6. The dynamic effects of changes to Japanese immigration policy By Phillips, Kerk L.
  7. Financial Globalization, Financial Frictions and Optimal Monetary Policy. By Ester Faia; Eleni Iliopulos
  8. Revisiting Overborrowing and its Policy Implications By Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric Young
  9. Altrusim. Education Subsidy and Growth By Armellini, Mauricio; Basu, Parantap
  10. Rise of the service sector and female market work: Europe vs US By Michelle Rendall
  11. Costly Investment, Complementarities, International Technological-Knowledge Diffusion and the Skill Premium By Óscar Afonso; Pedro Neves; Maria João Ribeiro Thompson
  12. Price Dynamics in a Market with Heterogeneous Investment Horizons and Boundedly Rational Traders. By Alexander Subbotin; Thierry Chauveau
  13. Technical Appendix to "Transitional Dynamics of Dividend and Capital Gains Tax Cuts" By Francois Gourio; Jianjun Miao

  1. By: Fanti, Luciano; Gori, Luca
    Abstract: This paper analyses the dynamics of a simple overlapping generations economy with endogenous longevity, endogenous fertility and private transfers from children to parents. In this context, it is shown that both the public provision of health care services, which determines the individual length of life, and the size of the intra-family transfer may be a source of chaotic cycles when individuals are perfect foresighted. However, such economic factors also have the potential to ultimately suppress undesirable chaotic fluctuations. This suggests that the equilibrium dynamics of an OLG growth model may endogenously reconcile the existence of both irregular business cycles and the global stability of the economic system.
    Keywords: Endogenous fertility; OLG model; Perfect foresight; Private old-age support; Public health care services
    JEL: J14 H55 I18 J18 C62
    Date: 2010–07–06
  2. By: Fanti, Luciano; Gori, Luca
    Abstract: We analyse the steady-state equilibrium dynamics of the conventional overlapping generations economy à la Diamond (1965) with pay-as-you-go public pensions and second period of life divided between working and retirement time in a proportion dependent on the individual health status (a rather realistic assumption especially in the current world with high longevity). In contrast to an economy without public health spending – which is always stable with monotonic trajectories –, an economy with tax-financed health care services (which in turn affect the individual health status and hence the length of the retirement time) may experience complex equilibrium dynamics with deterministic chaotic business cycles and, in particular, complicated dynamical phenomena, such as multiple “bubblings” may occur when crucial economic parameters change. Interestingly, it is shown that increasing the size of PAYG pensions, although initially may trigger chaotic cycles, eventually works for stability.
    Keywords: Health; Old-age workers; OLG model; Perfect foresight; Public PAYG pensions
    JEL: H55 O41 I18 C62
    Date: 2010–07–06
  3. By: J. Andrés; J.E. Boscá; R. Doménech; J. Ferri
    Abstract: The benefits implied by changing the growth model are at the heart of the heated political and economic debate in Spain. Increases in productivity and the reallocation of employment towards more innovative sectors are defended as the panacea for most of the ills afflicting the Spanish economy. In this paper we use a DSGE model with price rigidities, and labour market search frictions a la Mortensen- Pissarides, to assess the effects of the change in the growth model on unemployment. In so doing, we assume that the vigorous demand shock which has been mostly responsible for recent economic growth in Spain will be successfully substituted by a productivity shock as the main driver of Spain‘s economic growth in the future. So we assume that we actually succeed in the so called "change in the growth model". We show that whatever the benefits that this change might bring to the Spanish economy, the time span needed to bring the unemployment rate down to the European average actually increases. We then analyze the impact of several reforms in the labour market and evaluate their interaction with the new growth model. We conclude that changes in the economic structure do not make labour reforms any less necessary, but rather the opposite if we want to shorten employment recovery significantly.
    Keywords: productivity, labour market, general equilibrium.
    JEL: E24 E27 E65
    Date: 2010–05
  4. By: Luca PENSIEROSO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper studies the Great Depression in Belgium within the open-economy dynamic general equilibrium approach. Results from the simulations show that a two-good model with total factor productivity shocks and nominal exchange rate shocks can account for most of the 1929-1934 output drop. The data mimicking ability of the model is good along other dimensions as well, most notably hours worked, the consumption price index and the terms of trade. The model is also able to catch some of the dynamics of imports and exports.
    Keywords: Great Depression, Belgium, Dynamic Stochastic General Equilibrium, Open Economy
    JEL: N14 F41 E13
    Date: 2010–05–31
  5. By: Douglas Gollin (Williams College); Christian Zimmermann (University of Connecticut)
    Abstract: We study the impact of global climate change on the prevalence of tropical diseases using a heterogeneous agent dynamic general equilibrium model. In our framework, households can take actions (e.g., purchasing bed nets 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 3C. We find that the impact on disease prevalence and especially output should be modest and can be mitigated by improvements in protection efficacy.
    Keywords: DSGE model, climate change, tropical disease, incomplete markets
    JEL: I1 O11 E13 E21 Q54
    Date: 2010–06
  6. 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. We then consider changes to immigration policy. 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. However, even with exclusively unskilled immigration, existing workers are made slightly better off on average when immigration restrictions are relaxed. 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
    JEL: F22 F15 F42
    Date: 2010–07
  7. By: Ester Faia (Goethe University Frankfurt et CEPREMAP); Eleni Iliopulos (Centre d'Economie de la Sorbonne - Paris School of Economice et CEPREMAP)
    Abstract: How should monetary policy be optimally designed in an environment with high degrees of financial globalization ? To answer this question we lay down an open economy model where net lending toward the rest of the world is constrained by a collateral constraint motivated by limited enforcement. Borrowing is secured by collateral in the form of durable goods whose accumulation is subject to adjustment costs. We demonstrate that, although this economy can generate persistent current account deficits, it can also deliver a stationary equilibrium. The comparison between different monetary policy regimes (floating versus pegged) shows that the impossible trinity is reversed : a higher degree of financial globalization, by inducing more persistent and volatile current account deficits, calls for exchange rate stabilization. Finally, we study the design of optimal (Ramsey) monetary policy. In this environment the policy maker faces the additional goal of stabilizing exchange rate movements, which exacerbate fluctuations in the wedges induced by the collateral constraint. In this context optimality requires deviations from price stability and calls for exchange rate stabilization.
    Keywords: Global imabalances, collateral constraints, monetary regimes.
    JEL: E52 F1
    Date: 2010–06
  8. By: Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric Young
    Abstract: This paper analyzes quantitatively the extent to which there is overborrowing (i.e., inefficient borrowing) in a business cycle model for emerging market economies with production and an occasionally binding credit constraint. The main finding of the analysis is that overborrowing is not a robust feature of this class of model economies: it depends on the structure of the economy and its parametrization. Specifcally, underborrowing in a production economy is found with the baseline calibration, but overborrowing with more impatient agents and more volatile shocks. Endowment economies display overborrowing regardless of parameter values, but they do not allow for policy intervention when the constraint binds (in crisis times). Quantitatively, the welfare gains from implementing the constrained¬effcient allocation are always larger near crisis times than in normal ones. In production economies, they are one order of magnitude larger than in endowment economies both in crisis and normal times. This suggests that the scope for economy¬widemacro¬prudential policy interventions (e.g., prudential taxation of capital flows and capital controls) is weak in this class of models.
    Keywords: Bailouts, Financial Frictions, Macro Prudential Policies, Overborrowing
    JEL: E52 F37 F41
    Date: 2010–07
  9. By: Armellini, Mauricio; Basu, Parantap
    Abstract: An optimal education subsidy formula is derived using an overlapping generations model with parental altruism. The model predicts that public education subsidy is greater in economies with lesser parental altruism because a benevolent government has to compensate for the shortfall in private education spending of less altruistic parents with a finite life. On the other hand, growth is higher in economies with greater parental altruism. Cross-country regressions using the World Values Survey for altruism lend support to our model predictions. The model provides insights about the reasons for higher education subsidy in richer countries.
    Keywords: Human Capital; Altrusim; Education Subsidy;
    JEL: D90
    Date: 2010–07–03
  10. By: Michelle Rendall
    Abstract: Continental Europe has seen a smaller rise in formal female employment compared with the United States or the Nordic countries. Additionally, Continental Europe has a substantially smaller service sector. These facts coincide with job requirements shifting from physical strength to intellectual capacity. Given empirical evidence, this paper develops a model of endogenous technical change, where new 'technologies' can be invented to increase the productivity of brain-inputs. Two inputs, brain and brawn, are combined through CES production functions into services and industrial goods, with the production sector for goods requiring more brawn than brain. Households allocate time to working at home or the labor market, choose consumption of services and goods, and invest in new technologies. The key is households can produce a substitute for market services and women have, on average, less brawn than men, giving them a comparative advantage with respect to staying home and working in the service sector. Therefore, an economy that does not facilitate the movement of women into the labor market, by imposing high taxes, causes service production to remain at home. This reduces technological innovation, pushing an economy into a self-reinforcing loop, where a small service sector feeds back into low total hours worked by women (and men), further depressing the service sector.
    Keywords: Technological progress, sectoral labor allocation, cross-country differences, gender wage gap, labor demand/supply.
    JEL: E21 E24 J20
    Date: 2010–07
  11. By: Óscar Afonso (Universidade do Porto); Pedro Neves (Universidade do Porto); Maria João Ribeiro Thompson (Universidade do Minho)
    Abstract: We examine the behaviour of the skill premium in a two-country general equilibrium growth model assuming (i) technological-knowledge diffusion; (ii) internal costly investment in both physical capital and R&D; and (iii) complementarities between intermediate goods in production. We find that these three economic features affect the steady-state growth rate in both countries. However, only in the imitator country do they influence the skill premium. We also find that the steady-state skill premium in the innovator country is affected by its relative labor productivity rather than by its relative labor endowments. This result contrasts with most skill-biased technological change models and suggests that the sustained increase in the skill premium observed in several developed countries over the last three decades may have been due to increases in the relative productive advantage of skilled labor.
    Keywords: technological-knowledge bias, skill premium, complementarities, costly investment, technological-knowledge diffusion
    JEL: F43 J31 O31 O33 O47
    Date: 2010
  12. By: Alexander Subbotin (Centre d'Economie de la Sorbonne); Thierry Chauveau (Centre d'Economie de la Sorbonne)
    Abstract: This paper studies the effects of multiple investment horizons and investors' bounded rationality on the price dynamics. We consider a pure exchange economy with one risky asset, populated with agents maximizing CRRA-type expected utility of wealth over discrete investment periods. An investor's demand for the risky asset may depend on the historical returns, so that our model encompasses a wide range of behaviorist patterns. The necessary conditions, under which the risky return can be a stationary iid process, are established. The compatibility of these conditions with different types of demand functions in the heterogeneous agents' framework are explored. We find that conditional volatility of returns cannot be constant in many generic situations, especially if agents with different investment horizons operate on the market. In the latter case the return process can display conditional heteroscedasticity, even if all investors are so-called "fundamentalists" and their demand for the risky asset is subject to exogenous iid shocks. We show that the heterogeneity of investment horizons can be a possible explanation of different stylized patterns in stock returns, in particular, mean-reversion and volatility clustering.
    Keywords: Asset pricing, heterogeneous agents, multiple investment scales, volatility clustering.
    JEL: G10 G14
    Date: 2010–04
  13. By: Francois Gourio (Boston University); Jianjun Miao (Boston University)
    Abstract: In this appendix, we present the details of the extended model with debt in our paper "Transitional Dynamics of Dividend and Capital Gains Tax Cuts." Section 1 presents the extended model and results. Section 2 presents the numerical algorithm to solve this model. Section 3 presents an extensiongure for the simulation conducted in Section 3 of our original paper.additional
    Date: 2010

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