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on Dynamic General Equilibrium |
| By: | Liu, Philip (International Monetary Fund); Mumtaz, Haroon (Bank of England) |
| Abstract: | This paper carries out a systematic investigation into the possibility of structural shifts in the UK economy using a Markov-switching dynamic stochastic general equilibrium (DSGE) model. We find strong evidence for shifts in the structural parameters of several equations of the DSGE model. In addition, our results indicate that the volatility of structural shocks has also changed over time. However, a version of the model that allows for a change in the coefficients of the Taylor rule and shock volatilities provides the best model fit. Estimates from the selected DSGE model suggest that the mid-1970s were associated with a regime characterised by a smaller reaction by the monetary authorities to inflation developments. |
| Keywords: | Markov switching; DSGE; Bayesian estimation |
| JEL: | E23 E32 |
| Date: | 2010–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0397&r=dge |
| By: | Federico RAVENNA (IEA, HEC Montréal); Carl E. WALSH |
| Abstract: | We explore the distortions in business cycle models arising from inefficiencies in price setting and in the search process matching firms to unemployed workers, and the implications of these distortions for monetary policy. To this end, we characterize the tax instruments that would implement the first best equilibrium allocations and then examine the trade-offs faced by monetary policy when these tax instruments are unavailable. Our findings are that the welfare cost of search inefficiency can be large, but the incentive for policy to deviate from the inefficient flexible-price allocation is in general small. Sizable welfare gains are available if the steady state of the economy is inefficient, and these gains do not depend on the existence of an inefficient dispersion of wages. Finally, the gains from deviating from price stability are larger in economies with more volatile labor flows, as in the U.S. |
| JEL: | E52 E58 J64 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:1001&r=dge |
| By: | Kamber, Gunes (Reserve Bank of New Zealand); Millard, Stephen (Bank of England) |
| Abstract: | This paper aims to contribute to our understanding of inflation dynamics in the United Kingdom by estimating two dynamic stochastic general equilibrium models and assessing the role of nominal and real rigidities within them. We first obtain an empirical representation of the monetary transmission mechanism in the United Kingdom and then estimate the models by minimising the difference between this representation and its model equivalents. We find that both models can explain the data reasonably well without relying on undue amounts of price and wage stickiness. |
| Keywords: | Minimum distance estimation; DSGE models; Nominal and real rigidities |
| JEL: | E31 E52 |
| Date: | 2010–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0396&r=dge |
| By: | Jorgensen, Ole Hagen; Jensen, Svend E. Hougaard |
| Abstract: | Using a stochastic general equilibrium model with overlapping generations, this paper studies a policy rule for the retirement age aiming at offsetting the effects on the supply of labor following fertility changes. The authors find that the retirement age should increase more than proportionally to the direct fall in labor supply caused by a fall in fertility. The robustness of this result is checked against alternative model specifications and parameter values. The efficacy of the policy rule depends crucially on the link between the preference for leisure and the response of the intensive margin of labor supply to changes in the statutory retirement age. The model has subsequently been calibrated for Brazil by Jorgensen (2010), in the context of the Brazil Aging Study. |
| Keywords: | Labor Markets,Labor Policies,Pensions&Retirement Systems,Economic Theory&Research,Population Policies |
| Date: | 2010–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5382&r=dge |
| By: | Danthine, Jean-Pierre (Swiss National Bank); Kurmann, André (Université du Québec à Montréal) |
| Abstract: | We develop a reciprocity-based model of wage determination and incorporate it into a modern dynamic general equilibrium framework. We estimate the model and find that, among potential determinants of wages, rent-sharing (between workers and firms) and wage entitlement (based on wages earned in the past) are important to fit the dynamic responses of output, wages and inflation to various exogenous shocks. Aggregate employment conditions (measuring workers’ outside option), on the other hand, are found to play only a negligible role for wage setting. These results are broadly consistent with micro-studies on reciprocity in labor relations but contrast with traditional efficiency wage models which emphasize aggregate labor market variables as the main determinant of wage setting. |
| Keywords: | Efficiency Wages; Reciprocity; Estimated DSGE Models |
| JEL: | E24 E31 E32 E52 J50 |
| Date: | 2010–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2010_010&r=dge |
| By: | Giorgio Motta; Patrizio Tirelli |
| Abstract: | Christiano et al. (2005) have shown that a standard medium-sized DSGE model can successfully replicate VAR IRFs to a money supply shock. This important result vanishes under limited asset market partic- ipation. Further, even a moderate fraction of constrained consumers is su¢ cient to dampen the real interest rate reaction to inflation, thereby causeing instability. The introduction of a simple fiscal automatic sta- bilizer restores stability and improves the dynamic performance of the model. |
| Keywords: | Rule of Thumb Consumers, DSGE, Determinacy, Limited Asset, Market Participation |
| JEL: | E52 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:193&r=dge |
| By: | Tomohiro Hirano (Financial Research and Training Center, Financial Services Agency, The Japanese Government); Noriyuki Yanagawa (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper analyzes the effects of bubbles in an in.nitely-lived agent model of endogenous growth with .nancial frictions and heterogeneous agents. We provide a complete characterization on the relationship between .nancial 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. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2010cf752&r=dge |
| By: | Marcin Kolasa (National Bank of Poland, Economic Institute, ul. Swietokrzyska 11/21, 00-919 Warsaw and Warsaw School of Economics, Department of Applied and Theoretical Economics, Al. Niepodleglosci 162, 02-554 Warsaw, Poland.) |
| Abstract: | This paper uses the EAGLE, a multi-country dynamic general equilibrium model, to illustrate dynamic adjustments in a small open economy undergoing real convergence. We consider the effects of productivity catch-up and misperceptions about future productivity developments. Our results indicate that even if real convergence takes the form of a gradual process, the dynamic responses of key macrovariables can be far from smooth. We also find that overly optimistic expectations about productivity shifts can generate sizable boom-bust cycles and so be relevant in accounting for cyclical deviations from a sustainable real convergence path. Our comparisons across alternative monetary regimes reveal that a flexible exchange rate helps to smooth real convergence processes and misperceptions associated with tradable sector productivity, while the opposite usually holds true for scenarios based on nontradable sector developments. JEL Classification: D58, E32, F41. |
| Keywords: | Real convergence, Boom-bust cycles, Dynamic general equilibrium models. |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101231&r=dge |
| By: | Galí, Jordi (CREI and Universitat Pompeu Fabra); van Rens, Thijs (CREI and Universitat Pompeu Fabra) |
| Abstract: | We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity has vanished, (ii) the relative volatility of employment has risen, and (iii) the relative (and absolute) volatility of the real wage has risen. We propose an explanation for all three changes that is based on a common source: a decline in labor market frictions. We develop a simple model with labor market frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the reduction in frictions may also have contributed to the observed decline in output volatility. |
| Keywords: | wage rigidities, labor market frictions, labor hoarding, effort choice |
| JEL: | E24 E32 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5099&r=dge |
| By: | Ordóñez, Javier (Universitat Jaume I de Castelló); Sala, Hector (Universitat Autònoma de Barcelona); Silva, José I. (University of Girona) |
| Abstract: | We examine the impact of real oil price shocks on labor market flows in the U.S. We first use smooth transition regression (STR) models to investigate to what extent oil prices can be considered as a driving force of labor market fluctuations. Then we develop and calibrate a modified version of Pissarides' (2000) model with energy costs, which we simulate in response to shocks mimicking the behavior of the actual oil price shocks. We find that (i) these shocks are an important driving force of job market flows; (ii) the job finding probability is the main transmission mechanism of such shocks; and (iii) they bring a new amplification mechanism for the volatility and should thus be seen as complementary of labor productivity shocks. Overall we conclude that shocks in oil prices cannot be neglected in explaining cyclical labor adjustments in the U.S. |
| Keywords: | oil prices, unemployment, vacancies, business fluctuations |
| JEL: | E22 E32 J63 J64 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5096&r=dge |
| By: | Mark Weder |
| Abstract: | Two dynamic general equilibrium economies compete in explain?ing the United States'interwar business cycles. Despite the demand driven contender's slight advantages, the results remain too close to call a clear winner. |
| Keywords: | Great Depression, Dynamic General Equilibrium. |
| JEL: | E32 N12 |
| Date: | 2010–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1013&r=dge |
| By: | Javier Ordoñez (Departament d'Economia, Universitat Jaume I de Castelló); Hector Sala Lorda (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona); Jose I. Silva (Departament d'Economia, Universitat de Girona) |
| Abstract: | We examine the impact of real oil price shocks on labor market flows in the U.S. We first use smooth transition regression (STR) models to investigate to what extent oil prices can be considered as a driving force of labor market fluctuations. Then we develop and calibrate a modified version of Pissarides’ (2000) model with energy costs, which we simulate in response to shocks mimicking the behavior of the actual oil price shocks. We find that (i) these shocks are an important driving force of job market flows; (ii) the job finding probability is the main transmission mechanism of such shocks; and (iii) they bring a new amplification mechanism for the volatility and should thus be seen as complementary of labor productivity shocks. Overall we conclude that shocks in oil prices cannot be neglected in explaining cyclical labor adjustments in the U.S. |
| Keywords: | Oil Prices, Unemployment, Vacancies, Business Fluctuations. |
| JEL: | E22 E32 J63 J64 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea1005&r=dge |
| By: | Zuzana Brixiova; Balázs Égert |
| Abstract: | The transition paths from plan to market have varied markedly across countries. Central and Eastern European and the Baltic countries, which opted for a fast and profound transformation of their institutions, rapidly narrowed the productivity gap with advanced economies. In contrast, in countries of the Commonwealth of Independent States, which embarked on reforms later and contented with less depth, the productivity gap remains substantial. While the literature has focused mainly on empirical studies, this paper develops a dynamic search model of the firm start-ups that is consistent with the above trends. The model shows that an enabling institutional set up stimulates start-ups of highly productive firms at an earlier stage of transition, underscoring the importance of reforms. The role of the state sector as an employer during transition rises in countries where reforming institutions is particularly costly.<P>Institutions, start-ups et productivité au cours de la période de transition<BR>On a pu constater des passages bien différents d’un système planifié vers un système de marché dans l’ex-bloc soviétique. Les pays de l’Europe centrale et orientale et les pays Baltes ont opté pour une rapide et profonde transformation de leurs institutions et ont réussi à diminuer leur retard en termes de productivité par rapport aux pays industrialisés. En revanche, les réformes étaient mises en place plus lentement et étaient moins complètes dans les pays de la Communauté des États indépendants où les écart de productivité restent importants. La littérature existante étudie ce phénomène empiriquement. Cette étude présente un modèle de recherche dynamique qui est à même de répliquer la dynamique décrit ci-dessus. Le modèle démontre l’importance des institutions favorables à la création de nouvelles entreprises de productivité élevée au début de la transition, ce qui confirme l’importance des réformes. Le rôle du secteur public en tant qu’employeur devient plus important en période de transition dans les pays où la mise en place des réformes institutionnelles est particulièrement coûteuse. |
| Keywords: | productivity, transition, Start-ups, dynamic search model, business climate, productivité, transition, Start-ups, modèle de recherche dynamique, climat commercial |
| JEL: | C61 O14 O43 O57 |
| Date: | 2010–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:773-en&r=dge |
| By: | Sami Alpanda (Amherst College); Uluc Aysun (University of Connecticut) |
| Abstract: | The literature typically finds that the development of financial markets has decreased the ability of central banks to affect the real economy. This paper shows that this negative relationship does not hold for the balance sheet channel of monetary transmission and bank globalization -- one aspect of financial development. The reason is that global banks are more sensitive to borrowers' leverage. By affecting this leverage, monetary policy has a larger impact on global banks' lending and aggregate economic activity. We use bank-level, Call Report data to obtain this disparity between more and less global banks. We then use this data in the estimation of a general equilibrium model and find that the balance sheet channel of monetary policy operates mainly through more global banks. |
| Keywords: | balance sheet channel, bank globalization, financial accelerator |
| JEL: | E44 F31 F41 O16 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2010-20&r=dge |