nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒09‒03
fourteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Business cycles in the equilibrium model of labor market search and self-insurance By Makoto Nakajima
  2. Payroll Taxes, Social Insurance and Business Cycles By Michael C. Burda; Mark Weder
  3. Tax buyouts By Marco Del Negro; Fabrizio Perri; Fabiano Schivardi
  4. Monetary policy in an uncertain world: Probability models and the design of robust monetary rules. By Levine, Paul
  5. Distortionary taxation, international business cycles and real wage: explaining some puzzling facts By Francois Langot; Coralia Quintero-Rojas
  6. Altruism, Education Subsidy and Growth By Mauricio Armellini; Parantap Basu
  7. Persistence Endogeneity Via Adjustment Costs: An Assessment based on Bayesian Estimations By Sebastian Sienknecht
  8. Inventories in ToTEM By Oleksiy Kryvtsov; Yang Zhang
  9. A note on identification patterns in DSGE models By Michal Andrle
  10. Structural models of the labour market and the impact and design of tax policies. By Shephard, A.J.
  11. Solving the Multi-Country Real Business Cycle Model Using Ergodic Set Methods By Serguei Maliar; Lilia Maliar; Kenneth L. Judd
  12. Why Do Household Portfolio Shares Rise in Wealth? By Jessica A. Wachter; Motohiro Yogo
  13. Habit-based Asset Pricing with Limited Participation Consumption By Christian Bach; Stig Vinther Møller
  14. Innovation and Environmental Policy: Clean vs. Dirty Technical Change By Cunha-e-Sa, Maria Antonieta; Leitao, Alexandra; Reis, Ana Balcao

  1. By: Makoto Nakajima
    Abstract: The author introduces risk-averse preferences, labor-leisure choice, capital, individual productivity shocks, and market incompleteness to the standard Mortensen-Pissarides model of search and matching and explore the model's cyclical properties. There are four main findings. First and foremost, the baseline model can generate the observed large volatility of unemployment and vacancies with a realistic replacement ratio of the unemployment insurance benefits of 64 percent. Second, labor-leisure choice plays a crucial role in generating the large volatilities; additional utility from leisure when unemployed makes the value of unemployment close to the value of employment, which is crucial in generating a strong amplification, even with the moderate replacement ratio. Besides, it contributes to the amplification through an adjustment in the intensive margin of labor supply. Third, the borrowing constraint or uninsured individual productivity shocks do not significantly affect the cyclical properties of unemployment and vacancies: Most workers are well insured only with self-insurance. Fourth, the model better replicates the business cycle properties of the U.S. economy, thanks to the co-existence of adjustments in the intensive and extensive margins of labor supply and the stronger amplification.
    Keywords: Employment (Economic theory) ; Business cycles
    Date: 2010
  2. By: Michael C. Burda (Humboldt University Berlin); Mark Weder (School of Economics, University of Adelaide)
    Abstract: Payroll taxes represent a major distortionary in uence of governments on labor markets. This paper examines the role of payroll taxation and the social safety net for cyclical uctuations in a nonmonetary economy with labor market frictions and unemployment insurance, when the latter is only imperfectly related to search effort. A balanced social insurance budget renders gross wages more rigid over the cycle and, as a result, strengthens the modelÂ’s endogenous propagation mechanism. For conventional calibrations, the model generates a negatively sloped Beveridge curve as well as substantial volatility and persistence of vacancies and unemployment.
    Keywords: business cycles, labor markets, payroll taxes, unemployment, consumption-tightness puzzle
    JEL: E24 J64 E32
    Date: 2010–08
  3. By: Marco Del Negro; Fabrizio Perri; Fabiano Schivardi
    Abstract: The paper studies a fiscal policy instrument that can reduce fiscal distortions, without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each individual citizen, whereby the citizen can choose to pay a fixed price up front in exchange for a given reduction in her tax rate for a prespecified period of time. We consider a dynamic overlapping-generations economy, calibrated to match several features of the U.S. income and wealth distribution, and show that, under simple pricing, the introduction of the buyout is revenue neutral and at the same time can benefit a significant fraction of the population and lead to sizable increases in labor supply, income, consumption, and welfare.
    Keywords: Fiscal policy ; Taxation ; Contracts
    Date: 2010
  4. By: Levine, Paul (University of Surrey)
    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 transformation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. In particular by treating DSGE models estimated by Bayesian-Maximum-Likelihood methods I argue that they can be considered as probability models in the sense described by Sims (2007) and be used for risk-assessment and policy design. This is true for any one model, but with a range of models on offer it is possible also to design interest rate rules that are simple and robust across the rival models and across the distribution of parameter estimates for each of these rivals as in Levine et al. (2008). After making models better in a number of important dimensions, a possible road ahead is to consider rival models as being distinguished by the model of expectations. This would avoid becoming `a prisoner of a single system' at least with respect to expectations formation where, as I argue, there is relatively less consensus on the appropriate modelling strategy.
    Keywords: Structured uncertainty, DSGE models, Robustness, Bayesian estimation, Interest-rate rules
    JEL: E52 E37 E58
    Date: 2010–07
  5. By: Francois Langot (GAINS-TEPP (Université du Maine)); Coralia Quintero-Rojas (Department of Economics and Finance, Universidad de Guanajuato)
    Abstract: In this paper, we show that fluctuations in distortive taxes can account for most puzzling features of the U.S. economy. Namely, the observed real wage rigidity, the international correlation of investment and labor inputs, and the so-called quantity puzzle (according to which cross-country correlation of outputs is higher than the one of consumptions). This is done in a two-country search and matching model with fairly standard separable preferences, extended to include a tax/benefit system.
    Keywords: Distortive taxes, real wage rigidity, international business cycles, search, matching
    JEL: E32 E62 H24 J41
    Date: 2010–08
  6. By: Mauricio Armellini; Parantap Basu
    Abstract: An optimal education subsidy formula is derived using an overlapping generations model with parental altruism. The model predicts that public education subsidy is greater in economies with lesser parental altruism because a benevolent government has to compensate for the shortfall in private education spending of less altruistic parents with a finite life. On the other hand, growth is higher in economies with greater parental altruism. Cross-country regressions using the World Values Survey for altruism lend support to our model predictions. The model provides insights about the reasons for higher education subsidy in richer countries.
    Keywords: Altrusim, Education Subsidy, Human Capital, Growth.
    JEL: D9
    Date: 2010–08–21
  7. By: Sebastian Sienknecht (School of Economics and Business Administration, Friedrich Schiller University Jena)
    Abstract: This paper estimates a dynamic stochastic general equilibrium (DSGE) model for the European Monetary Union by using Bayesian techniques. A salient feature of the model is an extension of the typically postulated quadratic cost structure for the monopolistic choice of price variables. As shown in Sienknecht (2010a), the enlargement of the original formulation by Rotemberg (1983) and Hairault and Portier (1993) leads to structurally more sophisticated inflation schedules than in the staggering environment by Calvo (1983) with rule-of-thumb setters. In particular, a desired lagged inflation term always arises toghether with a two-period-ahead expectational expression. The two terms are directly linked by a novel structural parameter. We confront the relationships obtained by Sienknecht (2010a) against European data and compare their data description performance against the widespread extension of the Calvo setting with rule-of-thumb behavior.
    Keywords: Bayesian, Simulation, Indexation, Model Comparison
    JEL: C11 C15 E31 E32
    Date: 2010–08–24
  8. By: Oleksiy Kryvtsov; Yang Zhang
    Abstract: ToTEM – the Bank of Canada’s principal projection and policy-analysis model for the Canadian economy – is extended to include inventories. In the model, firms accumulate inventories of finished goods for their role in facilitating the demand for goods. The model is successful in matching procyclical and volatile inventory investment behaviour. The authors show that the convex cost of stock adjustment is key to the model’s ability to match the inventory data quantitatively.
    Keywords: Economic models; Business fluctuations and cycles
    JEL: E31 E32
    Date: 2010
  9. By: Michal Andrle (Czech National Bank, Monetary and Statistics Dept., Macroeconomic Forecasting Division.)
    Abstract: This paper comments on selected aspects of identification issues of DSGE models. It suggests the singular value decomposition (SVD) as a useful tool for detecting local weak and non- identification. This decomposition is useful for checking rank conditions of identification, identification strength, and it also offers parameter space ‘identification patterns’. With respect to other methods of identification the singular value decomposition is particularly easy to apply and offers an intuitive interpretation. We suggest a simple algorithm for analyzing identification and an algorithm for finding a set of the most identifiable set of parameters. We also demonstrate that the use of bivariate and multiple correlation coefficients of parameters provides only limited check of identification problems. JEL Classification: F31, F41.
    Keywords: DSGE, identification, information matrix, rank, singular value decomposition.
    Date: 2010–08
  10. By: Shephard, A.J.
    Abstract: This dissertation is concerned with the estimation of structural models of the labour market and the application of these models in both evaluating policy reforms, and exploring their implications for taxation design. The programme that is at the centre of much of the empirical exploration in this thesis is the British Working Families’ Tax Credit (WFTC), which during its lifetime, provided the main form of in-work support for lower income families with children. The first chapter of this thesis estimates a discrete choice hours of work model using data from before and after the introduction of WFTC. To the extent that behavioural responses to tax reforms are informative about preferences, it uses the estimated model directly to explore problems related to the optimal design of the tax and transfer system. It derives new theoretical results and empirically explores the extent to which the tax authorities may wish to condition the tax schedule on age of children. Given the use of hours contingent payments in the UK tax credit system, it also investigates the desirability of including a measure of hours of work in the tax base. The second and third chapters of this thesis firstly develop the methodology, and then consider how our view of programmes such as WFTC is affected once the presence of labour market frictions and the importance of job search activity is acknowledged. In doing so, it greatly extends the empirical equilibrium job search literature. By introducing the monopsonistic behaviour of firms, it considers how these firms may optimally adjust their wages following the introduction of programmes which encourage work, such as WFTC. The equilibrium impact of the reform on a range of outcomes for both WFTC-eligible and non-eligible workers is assessed.
    Date: 2010–07–28
  11. By: Serguei Maliar; Lilia Maliar; Kenneth L. Judd
    Abstract: We use the stochastic simulation algorithm, described in Judd, Maliar and Maliar (2009), and the cluster-grid algorithm, developed in Judd, Maliar and Maliar (2010a), to solve a collection of multi-country real business cycle models. The following ingredients help us reduce the cost in high-dimensional problems: an endogenous grid enclosing the ergodic set, linear approximation methods, fixed-point iteration and efficient integration methods, such as non-product monomial rules and Monte Carlo integration combined with regression. We show that high accuracy in intratemporal choice is crucial for the overall accuracy of solutions and offer two approaches, precomputation and iteration-on-allocation, that can solve for intratemporal choice both accurately and quickly. We also implement a hybrid solution algorithm that combines the perturbation and accurate intratemporal-choice methods.
    JEL: C63 C68
    Date: 2010–08
  12. By: Jessica A. Wachter; Motohiro Yogo
    Abstract: We develop a life-cycle consumption and portfolio choice model in which households have nonhomothetic utility over two types of goods, basic and luxury. We calibrate the model to match the cross-sectional and life-cycle variation in the basic expenditure share in the Consumer Expenditure Survey. The model explains the degree to which the portfolio share in risky assets rises in wealth in the cross-section of households in the Survey of Consumer Finances. For a given household, the portfolio share can fall in response to an increase in wealth, even though the model implies decreasing relative risk aversion.
    JEL: D11 D12 G11
    Date: 2010–08
  13. By: Christian Bach (School of Economics and Management and CREATES); Stig Vinther Møller (Finance Research Group, Aarhus School of Business and CREATES)
    Abstract: We calibrate and estimate a consumption-based asset pricing model with habit formation using limited participation consumption data. Based on survey data of a representative sample of American households, we distinguish between assetholder and non-assetholder consumption, as well as the standard aggregate consumption series commonly used in the CCAPM literature. We show that assetholder consumption outperforms non-assetholder and aggregate consumption data in explaining bond returns, bond yields, and the volatility of bond yields. We further show that the high volatility of assetholder consumption enables the model to explain the equity premium puzzle and the risk-free rate puzzle simultaneously for a reasonable value of relative risk aversion.
    Keywords: CCAPM, Limited participation consumption data, Habit formation, Real term structure, Risk premium, GMM estimation
    JEL: C32 G12
    Date: 2010–06–16
  14. By: Cunha-e-Sa, Maria Antonieta; Leitao, Alexandra; Reis, Ana Balcao
    Abstract: We study a two sector endogenous growth model with environmental quality with two goods and two factors of production, one clean and one dirty. Technological change creates clean or dirty innovations. We compare the laissez-faire equilibrium and the social optimum and study first- and second-best policies. Optimal policy encourages research toward clean technologies. In a second-best world, we claim that a portfolio that includes a tax on the polluting good combined with optimal innovation subsidy policies is less costly than increasing the price of the polluting good alone. Moreover, a discriminating innovation subsidy policy is preferable to a non-discriminating one. JEL codes: H23; O3; O41
    Date: 2010

This nep-dge issue is ©2010 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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