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on Dynamic General Equilibrium |
| By: | Nutahara, Kengo |
| Abstract: | A news-driven business cycle is a positive comovement of consumption, output, labor, and investment from the news about the future. We show that nominal rigidities, especially sticky prices, can cause it in an estimated medium-scale DSGE economy. |
| Keywords: | nominal rigidities ; news-driven business cycles |
| JEL: | E32 E21 |
| Date: | 2010–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24112&r=dge |
| By: | Stefano Bosi (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Raouf Boucekkine (Department of economics and CORE - Université Catholique de Louvain); Thomas Seegmuller (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | Several contributions have already pointed out that initial wealth in- equalities do persist in the long run in the Ramsey model with heteroge- nous agents. We show that this result is not robust to the introduction of endogenous fertility. Our argument builds on the Barro-Becker (1989) seminal model extended to allow for heterogenous agents with dierent capital endowments. Strikingly enough, individual consumption levels, fertility rates and capital stocks are shown to be equalized after only one adjustment period. This property is shown to hold irrespective of the production sector specication. |
| Keywords: | endogenous fertility, heterogeneous households, optimal growth |
| Date: | 2010–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00503195_v1&r=dge |
| By: | Kozo Ueda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp)) |
| Abstract: | This paper constructs a two-country DSGE model to study the nature of the recent financial crisis and its effects that spread immediately throughout the world owing to the globalization of banking. In the model, financial intermediaries (FIs) enter into chained credit contracts at home and abroad, engaging in cross-border lending to entrepreneurs by undertaking cross-border borrowing from investors. The FIs as well as the entrepreneurs in two countries are credit constrained, so all of their net worths matter. Our model reveals that under FIs' globalization, adverse shocks that hit one country affect the other, yielding business cycle synchronization on both the real and financial sides. It also suggests that the FIs' globalization, net worth shock, and credit constraints are key to understanding the recent financial crisis. |
| Keywords: | Financial accelerator, financial intermediaries, correlation ( quantity) puzzle, business cycle synchronization, contagion, monetary policy |
| JEL: | E22 E32 E44 E52 F41 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-16&r=dge |
| By: | Alok Johri; Marc-Andre Letendre; Daqing Luo |
| Abstract: | A productivity shock leads to a large international transfer of capital and negative co-movement of investment in the typical two-country real business cycle model. Most recent models that attempt to reduce or remove this transfer produce unrealistically low investment volatility. We show that adding organizational capital to the technological environment of a relatively standard international business cycle model can ameliorate this problem. In addition we show that GHH preferences along with the above modification are sufficient to deliver positive cross-country correlations of consumption, hours, output and investment. |
| Keywords: | International RBC; learning by doing; organizational capital; cross-country correlations; investment |
| JEL: | F41 F21 E32 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2010-05&r=dge |
| By: | Hirano, Tomohiro; Yanagawa, Noriyuki |
| Abstract: | This paper analyzes the effects of bubbles in an infinitely-lived agent model of endogenous growth with financial frictions and heterogeneous agents. We provide a complete characterization on the relationship between financial frictions and the existence of bubbles. Our model predicts that if the degree of pledgeability is sufficiently high or sufficiently low, bubbles can not exist. They can only arise at an intermediate degree. This suggests that improving the financial market condition might enhance the possibility of bubbles. We also examine whether bubbles are growth-enhancing or growth-impairing in the long run. We show that when the degree of pledgeability is relatively low, bubbles boost long-run growth. On the other hand, when it is relatively high, bubbles lower long-run growth. Moreover, we examine the effects of the burst of bubbles, and show that the effects much depend on the degree of the pldgeability, i.e., the quality of financial system. |
| Keywords: | Asset Bubbles; Endogenous Growth; Financial Frictions |
| JEL: | E44 |
| Date: | 2010–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24085&r=dge |
| By: | Óscar Afonso (CEF.UP, OBEGEF, Faculdade de Economia, Universidade do Porto, Portugal); Pedro Neves (Faculdade de Economia, Universidade do Porto, Portugal); Maria Thompsom (NIPE, and Escola de Economia e Gestão da Universidade do Minho) |
| Abstract: | We examine the behavior 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: | J31 O31 O33 O47 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:382&r=dge |
| By: | Luisa Lambertini; Caterina Mendicino; Maria Tereza Punzi |
| Abstract: | This paper analyzes housing market boom-bust cycles driven by changes in households' expectations. We explore the role of expectations not only on productivity but on several other shocks that originate in the housing market, the credit market and the conduct of monetary policy. We find that, in the presence of nominal rigidities, expectations on both the conduct of monetary policy and future productivity can generate housing market boom-bust cycles in accordance with the empirical findings. Moreover, expectations of either a future reduction in the policy rate or a temporary increase in the central bank's inflation target that are not fulfilled generate a macroeconomic recession. Increased access to credit generates a boom-bust cycle in most variables only if it is expected to be reversed in the near future.<br> |
| JEL: | E32 E44 E52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201004&r=dge |
| By: | Naohisa Hirakata (Deputy Director and Economist, Research and Statistics Department, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp)); Nao Sudo (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp)); Kozo Ueda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp)) |
| Abstract: | Recent financial turmoil and existing empirical evidence suggest that adverse shocks to the financial intermediary (FI) sector cause substantial economic downturns. The quantitative significance of these shocks to the U.S. business cycle, however, has not received much attention up to now. To determine the importance of these shocks, we estimate a sticky-price dynamic stochastic general equilibrium model with what we describe as chained credit contracts. In this model, credit- constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. Using Bayesian estimation, we extract the shocks to the FIs' net worth. The shocks are cyclical, typically negative during a recession, such as the one that began in 2007. Their effects are persistent, lowering economic activity for several quarters after the recessionary trough. According to the variance decomposition, shocks to the FI sector are a main source of the spread variations, explaining 39% of the FIs' borrowing spread and 23% of the entrepreneurial borrowing spread. At the same time, these shocks play an important but not dominant role for investment, accounting for 15% of its variations. |
| Keywords: | Monetary Policy, Financial Accelerators, Financial Intermediaries, Chained Credit Contracts |
| JEL: | E31 E44 E52 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:10-e-13&r=dge |
| By: | Dixon, Huw (Cardiff Business School); Pourpourides, Panayiotis M. (Cardiff Business School) |
| Abstract: | We show a simple way to introduce monopolistic competition in a general equilibrium model where prices are fully flexible, the velocity of money is variable and cash-in-advance (CIA) constraints occasionally bind. We establish the conditions under which money has real effects and demonstrate that an equilibrium that occurs at a binding CIA constraint is welfare inferior to any equilibrium that occurs at a non-binding CIA constraint with the same level of technology. We argue that even though the probability of a binding CIA constraint can be increasing with money supply, under certain conditions, expansionary money supply is welfare improving. |
| Keywords: | general equilibrium; monopolistic competition |
| JEL: | D43 E31 E41 E51 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2010/6&r=dge |
| By: | Boris Hofmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gert Peersman (Ghent University, Sint-Pietersnieuwstraat 25, B-9000 Ghent, Belgium.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper explores time variation in the dynamic effects of technology shocks on U.S. output, prices, interest rates as well as real and nominal wages. The results indicate considerable time variation in U.S. wage dynamics that can be linked to the monetary policy regime. Before and after the "Great Inflation", nominal wages moved in the same direction as the (required) adjustment of real wages, and in the opposite direction of the price response. During the "Great Inflation", technology shocks in contrast triggered wage-price spirals, moving nominal wages and prices in the same direction at longer horizons, thus counteracting the required adjustment of real wages, amplifying the ultimate repercussions on prices and hence increasing inflation volatility. Using a standard DSGE model, we show that these stylized facts, in particular the estimated magnitudes, can only be explained by assuming a high degree of wage indexation in conjunction with a weak reaction of monetary policy to inflation during the "Great Inflation", and low indexation together with aggressive inflation stabilization of monetary policy before and after this period. This means that the monetary policy regime is not only captured by the parameters of the monetary policy rule, but importantly also by the degree of wage indexation and resultant second round effects in the labor market. Accordingly, the degree of wage indexation is not structural in the sense of Lucas (1976). JEL Classification: C32, E24, E31, E42, E52. |
| Keywords: | technology shocks, second-round effects, Great Inflation. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101230&r=dge |
| By: | Emine Boz; Enrique G. Mendoza |
| Abstract: | Uncertainty about the riskiness of new financial products was an important factor behind the U.S. credit crisis. We show that a boom-bust cycle in debt, asset prices and consumption characterizes the equilibrium dynamics of a model with a collateral constraint in which agents learn "by observation" the true riskiness of a new financial environment. Early realizations of states with high ability to leverage assets into debt turn agents optimistic about the persistence of a high-leverage regime. The model accounts for 69 percent of the household debt buildup and 53 percent of the rise in housing prices during 1997-2006, predicting a collapse in 2007. |
| Date: | 2010–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/164&r=dge |
| By: | Michael Kumhof; Kevin Clinton; Susanna Mursula; Douglas Laxton |
| Abstract: | The paper evaluates the costs and benefits of fiscal consolidation using simulations based on the IMFs global DSGE model GIMF. Over the longer run, well-targeted permanent reductions in budget deficits lead to a considerable increase in both the growth rate and the level of output. The gains may be enhanced by shifting some of the tax burden from incomes to consumption. In the short run, credibility plays a crucial role in determining the size of initial output loses. Global current account imbalances would be significantly reduced if budget consolidation was larger in countries with current account deficits. |
| Date: | 2010–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/163&r=dge |
| By: | D. Filiz Unsal; Gülçin Özkan |
| Abstract: | This paper develops a two-country DSGE model to investigate the transmission of a global financial crisis to a small open economy. We find that economies hit by a sudden stop arising from financial distress in the global economy are likely to face a more prolonged crisis than sudden stop episodes of domestic origin. Moreover, in contrast to the existing literature, our results suggest that the greater a country's trade integration with the rest of the world, the greater the response of its macroeconomic aggregates to a sudden stop of capital flows. |
| Date: | 2010–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/158&r=dge |
| By: | Gray, Elie (Toulouse Business School and Toulouse School of Economics (LERNA)); Grimaud, André (Toulouse School of Economics (IDEI, LERNA) and Toulouse Business School) |
| Abstract: | This paper exploits the formalization of a circular product differentiation model of Salop (1979) to propose an endogenous growth quality ladder model in which the knowledge inherent in a given sector can spread variously across the sectors of the economy, ranging from local to global influence. Accordingly, this affects the size of the pool of knowledge in which innovations draw themselves on in order to be produced. Therefore, the law of knowledge accumulation, and thus the growth rate of the economy, depend positively on the expected scope of diffusion of innovations, i.e. on the intensity of knowledge spillovers. This approach generalizes the endogenous growth theory as developed in the seminal models of Grossman & Helpman (1991) and Aghion & Howitt (1992), extending their analysis to the possibility of considering stochastic and partial knowledge spillovers. This framework allows us to mitigate the positive externality of knowledge and thus to apprehend the issue of the funding of research with more parsimony. We characterize the set of steady-state Schumpeterian equilibria as a function of the public tools. We provide an explanation for the fact that research effort can either be suboptimal or over-optimal, depending on the expected scope of knowledge. Accordingly, we find that the optimal public tool dedicated to foster R&D activity depends positively on it. |
| Keywords: | Schumpeterian growth, scope of diffusion of innovations, knowledge spillovers |
| JEL: | O30 O31 O41 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:22690&r=dge |
| By: | Gaël Giraud (Centre d'Economie de la Sorbonne - Paris School of Economics); Dimitrios P. Tsomocos (Saïd Business School University) |
| Abstract: | We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a "veil" and trade vanishes. Typically, there is a peicewise globally unique trade-ant-price curve both in real and in nominal variables. Money is not neutral, either in the short-run or long-run, and a localized version of the quantity theory of money holds in the short-run. An optimal money growth rate is derived, which enables monetary trade curves to converge towards Pareto optimal rest-points. Below this growth rate, the economy enters a (sub-optimal) liquidity trap where monetary policy is ineffective ; above this threshold inflation rises. Finally, market liquidity, measured through the speed of real trades, can be linked to gains-to-trade, households' expectations, and the quantity of circulating money. |
| Keywords: | Bank, money, price-quantity dynamics, inside money, outside money, rational expectations, liquidity, double auction, limit-price orders, inflation, bounded rationality. |
| JEL: | D50 D83 E12 E24 E30 E40 E41 E50 E58 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10061&r=dge |
| By: | José Ramón García; Valeri Sorolla |
| Abstract: | In this paper we match the static disequilibrium unemployment model without frictions in the labor market and monopolistic competition with an infinite horizon model of growth. We compare the wages set at the firm, sector and national (centralized) levels, their unemployment rates and growth of the economic variables, for the Cobb-Douglas production function, in order to see under wich conditions the inverse U hypothesis between unemployment and centralization of wage bargain is confirmed. We also analyze, in the three wage setting systems, the effect of an increase in the monopoly power on employment and growth. |
| Keywords: | Disequilibrium Unemployment, Monopolistic Competition, Growth, Wage Setting Systems. |
| JEL: | E24 O41 |
| Date: | 2010–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:839.10&r=dge |
| By: | Sandra Gomes; P. Jacquinot; M. Pisani |
| Abstract: | Building on the New Area Wide Model, we develop a 4-region macroeconomic model of the euro area and the world economy. The model (EAGLE, Euro Area and Global Economy model) is microfounded and designed for conducting quantitative policy analysis of macroeconomic interdependence across regions belonging to the euro area and between euro area regions and the world economy. Simulation analysis shows the transmission mechanism of region-specific or common shocks, originating in the euro area and abroad. |
| JEL: | C53 E32 E52 F47 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201006&r=dge |
| By: | Guillard, Michel; Sosa Navarro, Ramiro |
| Abstract: | The central question this paper seeks to answer is how monetary policy might affect the equilibrium behavior of default and sovereign risk premium. The paper is based on one-interest-rate model. Public debt becomes risky due to an active fiscal policy, as in Uribe (2006), reflecting the fiscal authority’s limited ability to control primary surplus. The insolvency problem is due to a string of bad luck (negative shocks affecting primary surplus). But in contrast to Uribe’s results, as the sovereign debt cost increases (which result from weak primary surplus), default becomes anticipated and reflected by a rising country risk premium and default probability. The default is defined as reneging on a contractual agreement and so the decision is set by the fiscal authority. However, conflicting objectives between fiscal and monetary authority play an important role in leading fiscal authority to default on its liabilities. The characteristic of the government policy needed to restore the equilibrium after the default is also analyzed. |
| Keywords: | Fiscal Imbalances; Inflation; Sovereign Risk; Default |
| JEL: | E52 E63 E61 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24075&r=dge |