nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒08‒28
thirteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. DSGE Model Validation in a Bayesian Framework: an Assessment By Paccagnini, Alessia
  2. OLG fife cycle model transition paths: alternate model forecast method By Evans, Richard W.; Phillips, Kerk L.
  3. The Political Economy of Social Security and Public Goods Provision in a Borrowing-constrained Economy By Ryo Arawatari; Tetsuo Ono
  4. Liquidity Transformation and Bank Capital Requirements By Hajime Tomura
  5. Laffer Strikes Again: Dynamic Scoring of Capital Taxes By Strulik, Holger; Trimborn, Timo
  6. The Cyclical Volatility of Labor Markets under Frictional Financial Markets By Petrosky-Nadeau, Nicolas; Wasmer, Etienne
  7. Assessing the Parfit's Repugnant Conclusion within a canonical endogenous growth set-up By Raouf Boucekkine; Giorgio Fabbri
  8. Trade Theorems with Search Unemployment By Yu Sheng; Xinpeng Xu
  9. Non-linear DSGE Models and The Central Difference Kalman Filter By Martin M. Andreasen
  10. Information and Industry Dynamics By Emin M. Dinlersoz; Mehmet Yorukoglu
  11. Can Cross-Border Financial Markets Create Endogenously Good Collateral in a Crisis? By Makoto Saito; Shiba Suzuki; Tomoaki Yamada
  12. The Occupation, Marriage, and Fertility Choices of Women: A Life-Cycle Model By Bing Ma
  13. Firing Tax vs. Severance Payment - An Unequal Comparison By Dennis Wesselbaum

  1. By: Paccagnini, Alessia
    Abstract: This paper presents the concept of Model Validation applied to a Dynamic Stochastic General equilibrium Model (DSGE). The main problem discussed is the approximation of the statistical representation for a DSGE model when not all endogenous variables are observable. MonteCarlo experiments in artificial world are implemented to assess this problem by using the DSGE-VAR. Two Data Generating Processes are compared: a forward-looking and a backward-looking model. These experiments are followed by an empirical analysis with real world data for the US economy.
    Keywords: Bayesian Analysis; DSGE Models; Vector Autoregressions; MonteCarlo experiments
    JEL: C32 C15 C01 C11
    Date: 2010–05–01
  2. By: Evans, Richard W.; Phillips, Kerk L.
    Abstract: The overlapping generations (OLG) model is an important framework for analyzing any type of question in which age cohorts are affected differently by exogenous shocks. However, as the dimensions and degree of heterogeneity in these models increase, the computational burden imposed by rational expectations solution methods for non-stationary equilibrium transition paths increases exponentially. As a result, these models have been limited in the scope of their use to a restricted set of applications and a relatively small group of researchers. In addition to providing a detailed description of the benchmark rational expectations computational method, this paper presents an alternative method for solving for nonstationary equilibrium transition paths in OLG life cycle models that is new to this class of model. We find that our alternate model forecast method reduces computation time to 15 percent of the benchmark time path iteration computation time, and the approximation error is less than 1 percent.
    Keywords: Computable General Equilibrium Models; Heterogeneous Agents; Overlapping Generations Model; Distribution of Savings
    JEL: D31 C68 C63 D91
    Date: 2010–08–20
  3. By: Ryo Arawatari (Faculty of Economics, Shinshu University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper introduces an overlapping-generations model with earnings hetero- geneity and borrowing constraints. The labor income tax and the allocation of tax revenue across social security and forward intergenerational public goods are determined in a bidimensional majoritarian voting game played by successive gen- erations. The political equilibrium is characterized by an ends-against-the-middle equilibrium where low- and high-income individuals form a coalition in favor of a low tax rate and less social security while middle-income individuals favor a high tax rate and greater social security. Government spending then shifts from social security to public goods provision if higher wage inequality is associated with the borrowing constraint and a low interest-rate elasticity of consumption.
    Keywords: Borrowing constraint; Social security; Public goods provision; Ends- against-the-middle equilibrium; Wage inequality
    JEL: H41 H55 D72
    Date: 2009–11
  4. By: Hajime Tomura
    Abstract: This paper presents a dynamic general equilibrium model where asymmetric information about asset quality leads to asset illiquidity. Banking arises endogenously in this environment as banks can pool illiquid assets to average out their idiosyncratic qualities and issue liquid liabilities backed by pooled assets whose total quality is public information. Moreover, the liquidity mismatch in banks' balance sheets leads to endogenous bank capital (outside equity) requirements for preventing bank runs. The model indicates that banking has both positive and negative effects on long-run economic growth and that business-cycle dynamics of asset prices, asset illiquidity and bank capital requirements are interconnected.
    Keywords: Financial stability; Financial system regulation and policies
    JEL: E44 G21 D82
    Date: 2010
  5. By: Strulik, Holger; Trimborn, Timo
    Abstract: We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70-90 percent and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3 to 1.2 percent after abolishment of the tax.
    Keywords: corporate taxation, capital gains, tax allowances, revenue estimation, Laffer curve, dynamic scoring
    JEL: E60 H20 O40
    Date: 2010–07
  6. By: Petrosky-Nadeau, Nicolas (Carnegie Mellon University); Wasmer, Etienne (Sciences Po, Paris)
    Abstract: Financial frictions are known to raise the volatility of economies to shocks (e.g. Bernanke and Gertler 1989). We follow this line of research to the labor literature concerned by the volatility of labor market outcomes to productivity shocks initiated by Shimer (2005): in an economy with search on credit and labor markets, a financial multiplier raises the elasticity of labor market tightness to productivity shocks. This multiplier increases with total financial costs and is minimized under a credit market Hosios-Pissarides rule. Using a flexible calibration method based on small perturbations, we find the parameter values to match the US share of the financial sector. Those values are far away from Hosios and lead to a financial accelerator of about 3.6 (exogenous wages) to 4.5 (endogenous wages). Both match Shimer (2005)'s elasticity of labor market tightness to productivity shocks. Financial frictions are thus an alternative to the "small labor surplus" assumption in Hagedorn and Manovskii (2008): we keep the value of wages over productivity below 0.78. We conclude that financial frictions are a good candidate to solve the volatility puzzle and rejoin Pissarides (2009) in arguing that hiring costs must be partly non-proportional to congestion in the labor market, which is the case of financial costs.
    Keywords: search, financial imperfections, Shimer puzzle, macroeconomic volatility
    JEL: E44 J60
    Date: 2010–08
  7. By: Raouf Boucekkine; Giorgio Fabbri
    Abstract: Parfit's Repugnant Conclusion stipulates that under total utilitar- ianism, it might be optimal to choose increasing population size while consumption per capita goes to zero. We evaluate this claim within a canonical AK model with endogenous fertility and a reduced form re- lationship between demographic growth and economic growth. While in the traditional linear dilution model, the Parfit Repugnant Conclu- sion can never occur for realistic values of intertemporal substitution, we show that it occurs when population growth is linked to economic growth via an inverted U-shaped relationship. Finally, we find moving from the Benthamite to the Millian social welfare function may not only cause optimal population size to go up and consumption to go down, it may also favor the realization of the Repugnant Conclusion.
    Keywords: Parfit's Repugnant Conclusion, AK models, endogenous fertility, intertemporal altruism
    JEL: O41 I20 J10
    Date: 2010–07
  8. By: Yu Sheng; Xinpeng Xu
    Abstract: We revisit the Heckscher-Ohlin-Samuelson model in the presence of labor market frictions à la Mortensen-Pissarides. Relaxing the assumption of the oneworker-one-firm matching rule, we show that the Stolper-Samuelson theorem and the Rybczynski theorem may not hold in specific circumstances. We also demonstrate that the Factor Price Equalization theorem is only valid for capital and unemployed labor across countries, but not for employed labor. In equilibrium, trade patterns are determined by countries’ factor endowments and relative factor intensities in sectors (independent of factor intensities in production). Finally, our results suggest an additional explanation for the “missing trade” phenomenon.
    JEL: F16 J64
    Date: 2010–08
  9. By: Martin M. Andreasen (Bank of England and CREATES)
    Abstract: This paper introduces a Quasi Maximum Likelihood (QML) approach based on the Cen- tral Difference Kalman Filter (CDKF) to estimate non-linear DSGE models with potentially non-Gaussian shocks. We argue that this estimator can be expected to be consistent and asymptotically normal for DSGE models solved up to third order. A Monte Carlo study shows that this QML estimator is basically unbiased and normally distributed infi?nite samples for DSGE models solved using a second order or a third order approximation. These results hold even when structural shocks are Gaussian, Laplace distributed, or display stochastic volatility.
    Keywords: Non-linear filtering, Non-Gaussian shocks, Quasi Maximum Likelihood, Stochastic volatility, Third order perturbation.
    JEL: C13 C15 E10 E32
    Date: 2010–07–20
  10. By: Emin M. Dinlersoz; Mehmet Yorukoglu
    Abstract: This paper develops a dynamic industry model in which firms compete to acquire customers over time by disseminating information about themselves under the presence of random shocks to their efficiency. The properties of the model’s stationary equilibrium are related to empirical regularities on firm and industry dynamics. As an application of the model, the effects of a decline in the cost of information dissemination on firm and industry dynamics are explored.
    Keywords: Information, industry dynamics, entry and exit, firm growth
    JEL: D80 L11 L16 M37
    Date: 2010–08
  11. By: Makoto Saito (Professor, Faculty of Economics, Hitotsubashi University, 2-1, Naka, Kunitachi, Tokyo, 186-8601, Japan, phone: +81-42- 580-8807, fax: +81-42-580-8882 (E-mail:; Shiba Suzuki (Assistant Professor, Faculty of Economics, Meisei University); Tomoaki Yamada (Associate Professor, School of Commerce, Meiji University)
    Abstract: In this paper, we explore whether markets can create endogenously good collateral in a crisis by analyzing a simple exchange economy where a country-specific catastrophic shock is shared between two countries. To see this possibility, we examine whether the equilibrium achieved by the time-0 complete markets with solvency constraints can be recovered in the dynamically complete markets with collateral constraints. This paper demonstrates that it is possible to recover the time-0 equilibrium outcome in a sequential manner when pricing errors occur randomly in evaluating Lucas trees at a catastrophic event. Such stochastic components may be interpreted as a policy initiative to create good collateral and yield constrained efficient outcomes at crisis periods.
    Keywords: Solvency Constraints, Collateral Constraints, Dynamic Optimal Contract, Catastrophic Shocks
    JEL: F34 G12 G15
    Date: 2010–08
  12. By: Bing Ma (UMBC)
    Abstract: An extensive literature in labor economics recognizes that the life-cycle labor force participation of a woman is highly associated with her family choices. There is, however, virtually no study going further to incorporate female occupational choices. This paper attempts to fill this gap in labor supply literature by examining the interrelatedness of occupation, marital status and fertility choices of women over the life cycle. A discrete choice dynamic utility maximization model is constructed to investigate how relevant determinants influence a woman’s career and family path and how these decisions interplay with each other. Using longitudinal data on women from the 1979 youth cohort of the National Longitudinal Survey of Youth, I estimate my model through the maximum likelihood estimation method in a dynamic programming fashion which takes into account the uncertainties from random arrivals of job opportunities, unexpected failure of birth control and temporary shocks to family earnings. The estimation results of structural parameters indicate that women’s lifecycle patterns of occupation, marriage and contraceptive behaviors vary significantly with their observable characteristics such as age, education, ability, race, and the presence of young children.
    Keywords: Human Capital; Occupational Choice; Life Cycle Model; Marriage; Fertility.
    JEL: J24 D91 J12 J13
    Date: 2010–07–15
  13. By: Dennis Wesselbaum
    Abstract: Empirical evidence indicates that lay-off costs consist of two elements, namely firing costs and severance payments. This paper investigates business cycle and steady state effects of firing costs and severance payments and discusses the differences. We find that severance payments imply a lower volatility of key labor market variables compared with firing costs. Persistently increasing those costs, reduces the welfare in the model economy but increases employment. The reason for the different performance is the impact on the wage and the additional stimulus caused by severance payments. The social planner therefore faces a trade-off in the design of employment protection. Furthermore, the design of lay-off costs also has strong implications for the design of other elements of employment protection
    Keywords: Firing Costs, Severance Payments, Welfare
    JEL: D61 E24 E32
    Date: 2010–08

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