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on Dynamic General Equilibrium |
| By: | Duarte Bom, P.R.; Heijdra, B.J.; Ligthart, J.E. (Tilburg University, Center for Economic Research) |
| Abstract: | The paper studies the dynamic output effects of public infrastructure investment in a small open economy. We develop an overlapping generations model that includes a production externality of public capital and a wealth effect on labor supply. Public capital enters the firm's production function under various technological scenarios. We show that if factors of production are gross complements and public capital is Solow neutral, which is the empirically plausible case, the long-run output multiplier falls short of its Hicks-neutral value. The way in which public capital augments factor productivity crucially affects the dynamics of private capital and net foreign assets, but yields qualitatively similar output dynamics. In contrast to conventional results obtained from hysteretic models, we find non-monotonic output dynamics of a public investment impulse in the non-hysteretic model. Schmitt-Grohe and Uribe's (2003) finding of identical impulse responses across the two model types is thus not robust to the inclusion of spillovers of public capital. |
| Keywords: | Infrastructure capital;public investment;fiscal policy;output multipliers;transitional dynamics;technology |
| JEL: | E62 F41 H54 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201058&r=dge |
| 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: | global imbalances, collateral constraints, monetary regimes |
| JEL: | E52 F1 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1639&r=dge |
| By: | Christopher Reicher |
| Abstract: | The Diamond-Mortensen-Pissarides search and matching model is the workhorse of labor macro, but it has difficulty in simultaneously matching the cyclical behavior of job loss and vacancies when taken to the data. By completely ignoring frictions in job creation and focusing instead on firm-level heterogeneity, one can match the cyclical behavior of job flows and vacancies relatively well. In particular, one can generate a Beveridge Curve which looks much like the real Beveridge Curve, and one can replicate the approximately equal contributions of job creation and destruction to the cycle. Focusing on heterogeneity rather than on hiring costs seems to give an improved picture of hiring activity over the cycle |
| JEL: | J61 J21 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1636&r=dge |
| By: | Ligthart, J.E.; Meijden, G.C. van der (Tilburg University, Center for Economic Research) |
| Abstract: | The paper studies the revenue, efficiency, and distributional implications of a simple strategy of offsetting tariff reductions with increases in destination-based consumption taxes so as to leave consumer prices unchanged. We employ a dynamic micro-founded macroeconomic model of a small open developing economy, which features an informal sector that cannot be taxed, a formal agricultural sector, and an import-substitution sector. The reform strategy increases government revenue, imports, exports, and the informal sector. In contrast to Emran and Stiglitz (2005), who ignore the dynamic effects of taxes and tariffs on factor markets, we find an efficiency gain, which is unevenly distributed. Existing generations benefit more than future generations, who (depending on pre-existing tax and tariff rates and the informal sector size) even may become worse off. |
| Keywords: | Tariff reform;consumption tax reform;informal sector;home production;transitional dynamics;overlapping generations;second-best outcome |
| JEL: | E26 F11 F13 H20 H26 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201061&r=dge |
| By: | Paul Levine |
| Abstract: | The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies.This papers describes this trans formation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. |
| Keywords: | structureduncertainty,DSGEmodels,robustness,Bayesian estimation,interest-raterules |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2761&r=dge |
| By: | Luigi Paciello (EIEF) |
| Abstract: | The speed of inflation adjustment to aggregate technology shocks is substantially larger than to monetary policy shocks. Prices adjust very quickly to technology shocks, while they only respond sluggishly to monetary policy shocks. This evidence is hard to reconcile with existing models of stickiness in prices. I show that the difference in the speed of price adjustment to the two types of shocks arises naturally in a model where price setting firms optimally decide what to pay attention to, subject to a constraint on information flows. In my model, firms pay more attention to technology shocks than to monetary policy shocks when the former affects profits more than the latter. Furthermore, strategic complementarities in price setting generate complementarities in the optimal allocation of attention. Therefore, each firm has an incentive to acquire more information on the variables that the other firms are, on average, more informed about. These complementarities induce a powerful amplification mechanism of the difference in the speed with which prices respond to technology shocks and to monetary policy shocks. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:0816&r=dge |
| By: | Jordi Galí; Thijs van Rens |
| 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: | labor hoarding, labor market frictions, wage rigidities, effort choice |
| JEL: | E24 E32 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1641&r=dge |
| By: | Gilles Saint Paul |
| Abstract: | In this paper, we analyze the extent to which market forces create an incentive for cloning human beings. We show that a market for cloning arises if a large enough fraction of the clone’s income can be appropriated by its model. Only people with the highest ability are cloned, while people at the bottom of the distribution of income specialize in surrogacy. In the short run, cloning reduces inequality. In the long run, it creates a perfectly egalitarian society where all workers have a top ability if fertility is uncorrelated with ability and if the distribution of ability among sexually produced children is the same as among their parents. In such a society, cloning has disappeared. If the distribution of genes, rather than abilities, is preserved by sexual reproduction, then cloning eliminates ability-reducing genes but does not necessarily eliminate inequality; nor does it disappear in the long run. Finally, if fertility is negatively correlated with ability, in the long run a reproductive caste of bottom ability people coexist with a cloned, worker caste of top ability agents, while intermediate ability types have disappeared. [IZA Discussion Paper No. 231] |
| Keywords: | Human capital, income distribution, human cloning, overlapping generations, intergenerational mobility |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2767&r=dge |
| By: | Kumar, Saten; Pacheco, Gail |
| Abstract: | Lifting the long run growth rate is, arguably, the pursuit of every economy. What should Kenya do to enhance its long run growth rate? This paper attempts to answer this question by examining the determinants of total factor productivity (TFP) in Kenya. We utilized the theoretical insights from the Solow (1956) growth model and its extension by Mankiw, Romer and Weil (1992) and followed Senhadji’s (2000) growth accounting procedure. We find that growth in Kenya, until the 1990s was mainly due to factor accumulation. Since then, TFP has made a small contribution to growth. Our findings imply that while variables like overseas development aid, foreign direct investment and progress of financial sector improves TFP, trade openness is the key determinant. Consequently, policy makers should focus on policies that improve trade openness if long run growth rate is to be raised. |
| Keywords: | Solow model; growth accounting; total factor productivity |
| JEL: | O10 O15 |
| Date: | 2010–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24338&r=dge |
| By: | Färnstrand Damsgaard, Erika (Research Institute of Industrial Economics (IFN)) |
| Abstract: | How should the world economy adapt to the increased demand for exhaustible resources from countries like China and India? To address that issue, this paper presents a dynamic model of the world economy with two technologies for production; a resource technology which uses an exhaustible resource as an input and an alternative technology, which does not. I find that both the time path of resource extraction and the adoption of the alternative technology depend on the optimal allocation of capital across the technologies, and the size of the capital stock in relation to the resource stock. In particular, if the capital stock is small, only the resource technology is used initally, and the alternative technology is adopted with a delay. Next, the model is calibrated to analyze the e¤ects of industrialization of developing countries on the extraction of oil and technology choice for energy production. As a result of industrialization, resource extraction increases and the alternative technology is adopted earlier. |
| Keywords: | Exhaustible resources; Technological change |
| JEL: | Q30 Q40 |
| Date: | 2010–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0844&r=dge |
| By: | Ikefuji, M.; Laeven, R.J.A.; Magnus, J.R.; Muris, C.H.M. (Tilburg University, Center for Economic Research) |
| Abstract: | We introduce an accurate, easily implementable, and fast algorithm to compute optimal decisions in discrete-time long-horizon welfaremaximizing problems. The algorithm is useful when interest is only in the decisions up to period T, where T is small. It relies on a flexible parametrization of the relationship between state variables and optimal total time-discounted welfare through scrap value functions. We demonstrate that this relationship depends on the boundedness, half-boundedness, or unboundedness of the utility function, and on whether a state variable increases or decreases welfare. We propose functional forms for this relationship for large classes of utility functions and explain how to identify the parameters. |
| Keywords: | Scrap value function;Dynamic optimization;Computation;Short horizon. |
| JEL: | C61 C63 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201077&r=dge |