nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒07‒24
eighteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Liquidity, Interbank Market, and Capital Formation By Tarishi Matsuoka
  2. The interaction of minimum wage and severance payments in a frictional labor market: theory and estimation By Carolina Silva Cassorla
  3. Global Climate Change and the Resurgence of Tropical Disease: An Economic Approach By Gollin, Douglas; Zimmermann, Christian
  4. Environmental Policy, Education and Growth with Finite Lifetime: the Role of Abatement Technology By Xavier Pautrel
  5. Environmental discounting in a small open economy with a renewable resource By Koichi Futagami; Yasuhiro Nakamoto
  6. The Private Memory of Aggregate Shocks By Costa, Carlos Eugênio da; Luz, Vitor F.
  7. Fiscal Rules for Commodity Exporters:Prudence and Procyclicality By Carlos Garcia; Jorge Restrepo; Evan Tanner
  8. The Macroeconomic Consequences of EMU: International Evidence from a DSGE Model By Jerger, Jürgen; Röhe, Oke
  9. Trends in U.S. hours and the labor wedge By Simona E. Cociuba; Alexander Ueberfeldt
  10. Financial globalization, financial frictions and optimal monetary policy By Ester Faia; Eleni Iliopulos
  11. Immigration, remittances and business cycles By Federico Mandelman; Andrei Zlate
  12. Labor Supply and Taxes: A Survey By Michael Keane
  13. News and sovereign default risk in small open economies By Ceyhun Bora Durdu; Ricardo Nunes; Horacio Sapriza
  14. Is more exchange rate intervention necessary in small open economies? The role of risk premium and commodity shocks By Carlos Garcia; Wildo Gonzalez
  15. Earnings, consumption and lifecycle choices By Costas Meghir; Luigi Pistaferri
  16. Growth accounting with misallocation: Or, doing less with more in Singapore By John Fernald; Brent Neiman
  17. Hybrid Inflation Targeting Regimes1 By Carlos Garcia; Jorge Restrepo; Scott Roger
  18. Measuring business cycles by saving for a rainy day By Mario J. Crucini; Mototsugu Shintani

  1. By: Tarishi Matsuoka (Graduate School of Economics, Kyoto University)
    Abstract: This paper presents a monetary model that links interbank markets to capital accumulation and growth. The purpose of this paper is to study how interbank markets affect real economic activities, and to find the monetary policy implications. The model shows that, in a stationary equilibrium, the economy with interbank markets attains higher capital stock than the economy without the markets, because of precautionary money savings. In addition, I find that inflationary policy is more desirable in the economy without well-functioning interbank markets.
    Keywords: overlapping generations, random relocation, inflation, interbank markets
    JEL: E42 E51 G21
    Date: 2010–07
  2. By: Carolina Silva Cassorla (Dpto. Fundamentos del Análisis Económico)
    Abstract: We introduce a minimum wage and severance payments in an equilibrium labor market model with search frictions. We analyze how these policies affect endogenous job creation and destruction decisions and, more generally, the general equilibrium allocation. We structurally estimate the model's parameters and, with the resulting sets of estimates, we perform a quantitative welfare analysis. We conclude that when the dispersion in wages found in the sample is low and the share that workers receive from the surplus their job generates is below a particular level, the maximum level of welfare can be attained using either any of the two policies by themselves or an appropriate combination. However, as dispersion in wages increases, the minimum wage, by itself, can no longer reach the economy's maximum level of welfare; and when it is high enough, no policy in isolation can attain the economy's maximum level of welfare, a combination is required.
    Keywords: Minimum wages, severance payments, matching models, Nash bargaining, welfare
    JEL: C51 J38 J41 J65
    Date: 2010–06
  3. By: Gollin, Douglas (Williams College); Zimmermann, Christian (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 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° C. 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 models, climate change, tropical diseases, incomplete markets
    JEL: I1 O11 E13 E21 Q54
    Date: 2010–07
  4. By: Xavier Pautrel (Université de Nantes, Laboratoire d’Économie et de Management de Nantes (LEMNA), Institut d’Économie et de Management de Nantes - IAE)
    Abstract: This note shows that the assumptions about the abatement technology modify the impact of the environmental taxation (both the size and the “direction”) on the long-run growth driven by human capital accumulation à la Lucas (1988), when the source of pollution is private consumption and lifetime is finite. When the human capital’s share in the abatement services production is higher (respectively lower) than in the final output production, a higher environmental tax reduces (resp. increases) the allocation of human capital in production sectors (abatement service and final output) and boostes (resp. decreases) the BGP rate of growth. When abatement services are produced with the final output, the environmental taxation does not influence growth.
    Keywords: Growth, Environment, Overlapping Generations, Human capital, Finite Lifetime, Abatement
    JEL: Q5
    Date: 2010–06
  5. By: Koichi Futagami (Graduate School of Economics, Osaka University); Yasuhiro Nakamoto (Faculty of Economics, Kyushu Sangyo University)
    Abstract: We construct a small open economy model with a renewable resource. Households have an endogenous time preference rate that depends on the level of the renewable resource in the domestic economy. Although households know that the degree of own patience depends on its resource, we assume that households believe that they cannot control the motion of the aggregate renewable resource. This is because they think that their impact is negligible so that there exists an externality in the form of the patience of the households. Based on this framework, we analyze the dynamic character of the steady state and show that the equilibrium path may be indeterminate. We next examine the welfare effects of tax policies. Finally, we investigate socially optimal tax policies.
    Keywords: Endogenous time preference rate; Indeterminacy; Renewable resources; Optimal tax policy
    JEL: F41 H21 Q28
    Date: 2010–07
  6. By: Costa, Carlos Eugênio da; Luz, Vitor F.
    Abstract: We study constrained efficient aggregate risk sharing and its consequence for thebehavior of macro-aggregates in a dynamic Mirrlees’s (1971) setting. Privately observedidiosyncratic productivity shocks are assumed to be independent of i.i.d. publiclyobserved aggregate shocks. Yet, private allocations display memory with respectto past aggregate shocks, when idosyncratic shocks are also i.i.d.. Under a mild restrictionon the nature of optimal allocations the result extends to more persistentidiosyncratic shocks, for all but the limit at which idiosyncratic risk disappears, andthe model collapses to a pure heterogeneity repeated Mirrlees economy identical toWerning [2007]. When preferences are iso-elastic we show that an allocation is memorylessonly if it displays a strong form of separability with respect to aggregate shocks.Separability characterizes the pure heterogeneity limit as well as the general case withlog preferences. With less than full persistence and risk aversion different from unityboth memory and non-separability characterize optimal allocations. Exploiting thefact that non-separability is associated with state-varying labor wedges, we apply abusiness cycle accounting procedure (e.g. Chari et al. [2007]) to the aggregate datagenerated by the model. We show that, whenever risk aversion is great than one ourmodel produces efficient counter-cyclical labor wedges.
    Date: 2010–07–10
  7. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile); Evan Tanner (IMF Institute, International Monetary Fund, Washington D.C.-USA)
    Abstract: This paper compares welfare levels under alternative fiscal rules for small open, commodity exporter, economies whose fiscal income varies with the world commodity price (in a dynamic, stochastic, and general equilibrium setting). Between the extremes of a procyclical balanced budget policy and an acyclical spending rule, there is a continuum of rules. Thus, the best degree of spending stabilization is found. The acylical rule benefits households that do not enjoy access to capital markets by providing a financial cushion that they themselves cannot provide, boosting their mean consumption. However, households that enjoy full access to capital markets suffer under this rule, since the government reduces their role in smoothing consumption and accumulating assets.
    Keywords: Fiscal rules, welfare, small open economy, rule-of-thumb consumers
    JEL: E32 E61 E62 E63 F41
    Date: 2009–12
  8. By: Jerger, Jürgen; Röhe, Oke
    Abstract: In this paper, we estimate a New Keynesian DSGE model developed by Ireland (2003) on French, German and Spanish data with the aim to explore the macroeconomic consequences of EMU. In order to validate the results from the DSGE model, we amend this analysis by stability tests of monetary policy reaction functions for these countries. We find that (a) the DSGE structure is well suited for the characterization of key macroeconomic features of the three economies; (b) significant efficiency gains were realized in terms of lower adjustment cost of prices and the capital stock; (c) the behavior of monetary policy did not change in Germany, unlike in France and Spain. Specifically, the impact of inflation on interest rates increased considerably in the two latter countries.
    Keywords: DSGE; Monetary Policy; EMU
    JEL: E31 E32 E52
    Date: 2009–10–01
  9. By: Simona E. Cociuba; Alexander Ueberfeldt
    Abstract: From 1980 until 2007, U.S. average hours worked increased by thirteen percent, due to a large increase in female hours. At the same time, the U.S. labor wedge, measured as the discrepancy between a representative household's marginal rate of substitution between consumption and leisure and the marginal product of labor, declined substantially. We examine these trends in a model with heterogeneous households: married couples, single males and single females. Our quantitative analysis shows that the shrinking gender wage gaps and increasing labor income taxes observed in U.S. data are key determinants of hours and the labor wedge. Changes in our model's labor wedge are driven by distortionary taxes and non-distortionary factors, such as cross-sectional differences in households' labor supply and productivity. We conclude that the labor wedge measured from a representative household model partly reflects imperfect household aggregation.
    Keywords: Hours of labor ; Taxation ; Households - Economic aspects ; Labor supply ; Wages
    Date: 2010
  10. By: Ester Faia; Eleni Iliopulos
    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: Monetary policy ; Globalization ; International finance ; Foreign exchange rates ; Financial stability ; International trade
    Date: 2010
  11. By: Federico Mandelman; Andrei Zlate
    Abstract: We use data on border enforcement and macroeconomic indicators from the U.S. and Mexico to estimate a two-country business cycle model of labor migration and remittances. The model matches the cyclical dynamics of labor migration to the U.S. and documents how remittances to Mexico serve an insurance role to smooth consumption across the border. During expansions in the destination economy, immigration increases with the expected stream of future wage gains, but it is dampened by a sunk migration cost that reflects the intensity of border enforcement. During recessions, established migrants are deterred from returning to their country of origin, which places an additional downward pressure on the wage of native unskilled workers. Thus, migration barriers reduce the ability of the stock of immigrant labor to adjust during the cycle, enhancing the volatility of unskilled wages and remittances. We quantify the welfare implications of various immigration policies for the destination economy.
    Date: 2010
  12. By: Michael Keane (School of Finance and Economics, University of Technology, Sydney)
    Abstract: I survey the male and female labor supply literatures, focusing on implications for effects of wages and taxes. For males, I describe and contrast results from three basic types of model: static models (especially those that account for nonlinear taxes), life-cycle models with savings, and life-cycle models with both savings and human capital. For women, more important distinctions are whether models include fixed costs of work, and whether they treat demographics like fertility and marriage (and human capital) as exogenous or endogenous. The literature is characterized by considerable controversy over the responsiveness of labor supply to changes in wages and taxes. At least for males, it is fair to say that most economists believe labor supply elasticities are small. But a sizeable minority of studies that I examine obtain large values. Hence, there is no clear consensus on this point. In fact, a simple average of Hicks elasticities across all the studies I examine is 0.30. Several simulation studies have shown that such a value is large enough to generate large welfare costs of income taxation. For males, I conclude that two factors drive many of the differences in results across studies. One factor is use of direct vs. ratio wage measures, with studies that use the former tending to find larger elasticties. Another factor is the failure of most studies to account for human capital returns to work experience. I argue that this may lead to downward bias in elasticity estimates. In a model that includes human capital, I show how even modest elasticities – as conventionally measured – can be consistent with large welfare costs of taxation. For women, in contrast, it is fair to say that most studies find large labor supply elasticities, especially on the participation margin. In particular, I find that estimates of “long run†labor supply elasticities – by which I mean estimates that allow for dynamic effects of wages on fertility, marriage, education and work experience – are generally quite large.
    Date: 2010–07–01
  13. By: Ceyhun Bora Durdu; Ricardo Nunes; Horacio Sapriza
    Abstract: This paper builds a model of sovereign debt in which default risk, interest rates, and debt depend not only on current fundamentals but also on news about future fundamentals. News shocks affect equilibrium outcomes because they contain information about the future ability of the government to repay its debt. First, in the model with news shocks not all defaults occur in bad times, bringing the model closer to the data. Second, the news shocks help account for key differences between emerging markets and developed economies: as the precision of the news improves the model predicts lower variability of consumption, less countercyclical trade balance and interest rate spreads, as well as a higher level of debt more in line with the characteristics of developed economies. Finally, the model also captures the hump-shaped relationship between default rates and the precision of news obtained from the data.
    Date: 2010
  14. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Wildo Gonzalez (Banco Central de Chile)
    Abstract: We estimate how the monetary policy works in small open economies with inflation target. To do so, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of representative small open economies (including Australia, Chile, Colombia, Peru and New Zealand) presents strong differences due to shocks from the international financial markets (risk premium shocks, mainly) that explain mostly the variability of the real exchange rate, which has important reallocation effects in the short run. By using the allocations of the Ramsey problem as benchmark, this article shows that if the central banks in small open economies want to reduce the observed volatility of the inflation rate and the output gap, more exchange rate intervention is necessary in order to reduce the volatility produced by risk premium shocks.
    Keywords: Small open economies economy models; monetary policy rules; exchange rates; Bayesian econometrics, Risk premium shocks, Ramsey problem.
    JEL: C32 E52 F41
    Date: 2010–04
  15. By: Costas Meghir (Institute for Fiscal Studies and University College London); Luigi Pistaferri (Institute for Fiscal Studies and Stanford University)
    Abstract: <p><p>We discuss recent developments in the literature that studies how the dynamics of earnings and wages affect consumption choices over the life cycle. We start by analyzing the theoretical impact of income changes on consumption - highlighting the role of persistence, information, size and insurability of changes in economic resources. We next examine the empirical contributions, distinguishing between papers that use only income data and those that use both income and consumption data. The latter do this for two purposes. First, one can make explicit assumptions about the structure of credit and insurance markets and identify the income process or the information set of the individuals. Second, one can assume that the income process or the amount of information that consumers have are known and tests the implications of the theory. In general there is an identification issue that is only recently being addressed, with better data or better "experiments". We conclude with a discussion of the literature that endogenize people's earnings and therefore change the nature of risk faced by households.</p></p>
    Date: 2010–04
  16. By: John Fernald; Brent Neiman
    Abstract: We derive aggregate growth-accounting implications for a two-sector economy with heterogeneous capital subsidies and monopoly power. In this economy, measures of total factor productivity (TFP) growth in terms of quantities (the primal) and real factor prices (the dual) can diverge from each other as well as from true technology growth. These distortions potentially give rise to dynamic reallocation effects that imply that change in technology needs to be measured from the bottom up rather than the top down. We show an example, for Singapore, of how incomplete data can be used to obtain estimates of aggregate and sectoral technology growth as well as reallocation effects. We also apply our framework to reconcile divergent TFP estimates in Singapore and to resolve other empirical puzzles regarding Asian development.
    Keywords: Industrial productivity ; Productivity ; Technology ; Singapore
    Date: 2010
  17. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile); Scott Roger (IMF Institute, International Monetary Fund, Washington D.C.-USA)
    Abstract: This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank’s policy reaction function can improve macroeconomic performance. It is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exchange rate smoothing because of the perverse impact of exchange rate movements on activity.
    Keywords: Inflation targeting, monetary policy, exchange rate
    JEL: E42 E52 F41
    Date: 2009–12
  18. By: Mario J. Crucini; Mototsugu Shintani
    Abstract: We propose a simple saving-based measure of the cyclical component in GDP. The measure is motivated by the prediction that the representative consumer changes savings in response to temporary deviations of income from its stochastic trend, while satisfying a present-value budget constraint. To evaluate our procedure, we employ the bivariate error correction model of Cochrane (1994) to the member countries of the G-7 and Australia. Our estimates reveal, that to a close approximation, the stochastic trend component of GDP is consumption and the transitory component is the error correction term, which justifies the use of our saving-based measure.
    Keywords: Business cycles ; Saving and investment ; Gross domestic product ; Consumer behavior
    Date: 2010

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