nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒09‒18
23 papers chosen by
Christian Zimmermann
University of Connecticut

  1. The Welfare Consequences of Monetary Policy and the Role of the Labor Market: a Tax Interpretation By Federico Ravenna; Carl E. Walsh
  2. Government expenditures and unemployment: A DSGE perspective By Mayer, Eric; Moyen, Stéphane; Stähler, Nikolai
  3. The Role of Consumption-Labor Complementarity as a Source of Macroeconomic Instability By Gliksberg, Baruch
  4. Asset Bubbles, Endogenous Growth, and Financial Frictions By Tomohiro Hirano; Noriyuki Yanagawa
  5. Optimal monetary policy when asset markets are incomplete By Richard Anton Braun; Tomoyuki Nakajima
  6. Can Second-Generation Endogenous Growth Models Explain The Productivity Trends and Knowledge Production In the Asian Miracle Economies? By James B. Ang; Jakob B. Madsen
  7. Optimal Policy Restrictions on Observable Outcomes By Federico Ravenna
  8. Pollution Abatement as a Source of Stabilisation and Long-Run Growth By Theodore Palivos; Dimitrios varvarigos
  9. Consolidated-Budget Rules and Macroeconomic Stability with Income-Tax and Finance Constraints By Gliksberg, Baruch
  10. The impact of migration on origin countries: a numerical analysis By Luca Marchiori; Patrice Pieretti; Benteng Zou
  11. The High Sensitivity of Employment to Agency Costs: The Relevance of Wage Rigidity By Atanas Hristov
  12. Business cycle fluctuations and learning-by-doing externalities in a one-sector model By d'Albis, Hippolyte; Augeraud-Véron, Emmanuelle; Venditti, Alain
  13. Does Bargaining Matter in the Small Firm Matching Model? By L'Haridon, Olivier; Malherbet, Franck; Pérez-Duarte, Sébastien
  14. The Impact of Inflation Targeting: Testing the Good Luck Hypothesis By Federico Ravenna
  15. Optimal Intermediation Under Aggregate Consumption Uncertainty By Ioannis Lazopoulos
  16. An Incentive Theory of Matching. By Brown, Alessio J. G.; Merkl, Christian; Snower, Dennis J.
  17. Intertemporal Equilibria with Knightian Uncertainty By Rose-Anne Dana; Frank Riedel
  18. Global analysis of the growth and cycles of multi-sector economies with constant returns: A turnpike approach By Takahashi, Harutaka
  19. Nonlinear effect of corruption, uncertainty, and growth By Ratbek, Ratbek
  20. An Unbalanced Multi-industry Growth Model with Constant Returns: A Turnpike Approach By Takahashi, Harutaka
  21. Deciphering The Hindu Growth Epic By Peter E Robertson
  22. Concave Consumption Function under Borrowing Constraints By Suen, Richard M. H.
  23. A Theory of Firm Decline By Gian Luca Clementi; Thomas F. Cooley; Sonia B. Di Giannatale

  1. By: Federico Ravenna; 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 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.
    Keywords: Optimal monetary policy, search inefficiency, job vacancies, unemployment
    JEL: E52 E58 J64
    Date: 2010
  2. By: Mayer, Eric; Moyen, Stéphane; Stähler, Nikolai
    Abstract: In a New Keynesian DSGE model with labor market frictions and liquidityconstrained consumers aggregate unemployment is likely to increase due to a non-persistent government spending shock. Furthermore, the group of asset-holding households reacts very differently from the group of liquidityconstrained consumers implying that the unemployment rate is likely to decrease for asset-holding households, while it increases among liquidityconstrained consumers. The main driver of our results is the marginal utility of consumption which moves in opposite directions for the two types. Regarding the model's parameters, we find that the size of the fiscal (unemployment) multiplier increases with i) highly sticky prices, ii) high degrees of risk aversion, iii) low convexity in labor disutility iv) high replacement rates, and v) debt-financed expenditures. --
    Keywords: Search and matching,government spending shocks,unemployment.
    JEL: E32 J64 E62
    Date: 2010
  3. By: Gliksberg, Baruch
    Abstract: The equilibrium ramification of a balanced budget rule are scrutinized in a one sector growth model augmented with investment frictions and a non-separable utility function in consumption and leisure. Edgeworth-complementarity between consumption and labor is formulated so as to generate a positive co-movement of consumption, output, and hours worked, as found in the data. Calibration of the model to the U.S. economy provides evidence that a balanced budget rule with a Taylor type monetary policy induce determinate equilibria.
    Keywords: Fiscal-Monetary policy; Non-Separable Utility; Consumption-Labor Complementarity; Endogenous Labor; Stabilization; Determinacy; Investment;
    JEL: E62 C63 E52 E61 E4 C62
    Date: 2010–06
  4. By: Tomohiro Hirano (Financial Research and Training Center, Financial Services Agency,); Noriyuki Yanagawa (Faculty of Economics, University of Tokyo)
    Abstract: This paper analyzes the effects of bubbles in an infitely-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.
    Date: 2010–07
  5. By: Richard Anton Braun (Faculty of Economics, University of Tokyo); Tomoyuki Nakajima (Institute of Economic Research, Kyoto University)
    Abstract: This paper considers the properties of an optimal monetary policy when households are subject to countercyclical uninsured income shocks. We develop a tractable incompletemarkets model with Calvo price setting. Incomplete markets creates a new distortion and that distortion is large in the sense that the welfare cost of business cycles is large in our model. Nevertheless, the optimal monetary policy is very similar to the optimal policy that emerges in the representative agent framework and calls for nearly complete stabilization of the price-level.
    Date: 2009–10
  6. By: James B. Ang; Jakob B. Madsen
    Abstract: Using data for six Asian miracle economies over the period from 1953 to 2006, this paper examines the extent to which growth has been driven by R&D and tests which second-generation endogenous growth model is most consistent with the data. The results give strong support to Schumpeterian growth theory but only limited support to semi-endogenous growth theory. Furthermore, it is shown that R&D has played a key role for growth in the Asian miracle economies.
    Keywords: Schumpeterian growth; semi-endogenous growth; Asian growth miracle
    JEL: O30 O40
    Date: 2010–05
  7. By: Federico Ravenna
    Abstract: We study the restrictions implied by optimal policy DSGE models for the volatility of observable endogenous variables. Our approach uses a parametric family of singular models to discriminate which volatility sample outcomes have zero probability of being generated by an optimal policy. Thus the set of volatility outcomes generated by the model is not of measure zero even if there are no random deviations from optimal policymaking. This methodology is applied to a new Keynesian business cycle model widely used in the optimal monetary policy literature, and its implications for the assessment of US monetary policy performance over the 1984-2005 period are discussed.
    Keywords: Optimal monetary policy, business cycle, DSGE model, policy performance
    JEL: E30
    Date: 2010
  8. By: Theodore Palivos (Department of Economics, University of Macedonia); Dimitrios varvarigos (Department of Economics, University of Leicester)
    Abstract: In a two-period overlapping generations model with production, we consider the damaging impact of environmental degradation on health and, consequently, life expectancy. The government’s involvement on policies of environmental preservation proves crucial for both the economy’s short-term dynamics and its long-term prospects. Particularly, an active policy of pollution abatement emerges as an important engine of long-run economic growth. Furthermore, by eliminating the occurrence of limit cycles, pollution abatement is also a powerful source of stabilisation.
    Keywords: Growth, Cycles, Enviromental quality, Pollution Abatement.
    JEL: Q41 Q56
    Date: 2010–09
  9. By: Gliksberg, Baruch
    Abstract: In some Business-Cycle models a fiscal policy that sets income taxes counter cyclically can cause macroeconomic instability by giving rise to multiple equilibria and as a result to fluctuations caused by self fulfilling expectations. This paper shows that consolidated budget rules with endogenous income-tax rates can be stabilizing if they exhibit monetary dominance, where monetary policy manages expectations by implementing an active interest rate rule. This result is robust for plausible degrees of externalities in production. The size of the government, however, plays a key role in the degree of activeness that the monetary authority should exhibit in order to stabilize the economy. If government spending are not too large relative to private consumption, a neutral monetary policy [such that the real rate of interest is constant in and off the steady state] is also stabilizing
    Keywords: Fiscal Policy; Capital-Income Tax; Monetary Policy; Macroeconomic Stabilization; Finance Constraint; Arbitrage Channel; Investment-Based Channel; Consumption-Based Channel;
    JEL: E0 E62 E61
    Date: 2010–07
  10. By: Luca Marchiori (CREA, University of Luxembourg); Patrice Pieretti (CREA, University of Luxembourg); Benteng Zou (CREA, University of Luxembourg)
    Abstract: The focus of this article is on the impact of high-skilled emigration on fertility and human capital of a sending country within an overlapping generations model where parents choose to finance higher education to a certain number of their children. We assume that high- and low-skilled children emigrate with a certain probability when they reach adulthood and that they send remittances to their parents back home. The model shows that an increase in the intensity of the brain drain induces parents to provide more higher education to their children and to raise less low-skilled children. The impact on fertility and on human capital formation however remains unclear. This is why we run numerical simulations by calibrating our model to a developing country like the Philippines. The calibration results show in particular, that increased brain drain lowers fertility and boosts long-run human capital formation in the sending country.
    Keywords: Simulation method, migration, fertility
    JEL: C63 F22 J13
    Date: 2010
  11. By: Atanas Hristov
    Abstract: This paper studies the interaction of financing constraints and labor market imperfections on the labor market and economic activity. My analysis builds on the agency cost framework of Carlstrom and Fuerst [1998. Agency costs and business cycles. Economic Theory, 12(3):583-597]. The aim of this article is to show that financing constraints can substantially amplify and propagate total factor productivity shocks in cyclical labor market dynamics. I find that under the Nash bargaining solution financing constraints increase substantially the volatility of wages, and in turn, amplification for the labor variables falls short of the observed volatilities in the data. Atop of this, the comovement between output and labor share is counterfactual. However, there is substantial scope for any type of wage rigidity and financing constraints to reinforce each other, and to generate the observed volatilities in the labor market, moreover, to produce a wide range of comovements between output and labor share.
    Keywords: Credit and search frictions, Labor market, Unemployment
    JEL: E24 E32 J64 G24
    Date: 2010–09
  12. By: d'Albis, Hippolyte; Augeraud-Véron, Emmanuelle; Venditti, Alain
    Date: 2010–07
  13. By: L'Haridon, Olivier (HEC Paris); Malherbet, Franck (University of Rouen); Pérez-Duarte, Sébastien (European Central Bank)
    Abstract: In this article, we use a stylized model of the labor market to investigate the effects of three alternative and well-known bargaining solutions. We apply the Nash, the Egalitarian and the Kalai-Smorodinsky bargaining solutions in the small firm’s matching model of unemployment. To the best of our knowledge, this is the first attempt that has been made to implement and systematically compare these solutions in search-matching economies. Our results are twofold. First from the theoretical/methodological viewpoint, we extend a somewhat flexible search-matching economy to alternative bargaining solutions. In particular, we prove that the Egalitarian and the Kalai-Smorodinsky solutions are easily implementable and mathematically tractable within search-matching economies. Second, our results show that even though the traditional results of bargaining theory apply in this context, they are generally qualitatively different and quantitatively weaker than expected. This is of particular relevance in comparison with the results established in the earlier literature.
    Keywords: search and matching models, bargaining theory, Nash, Egalitarian, Kalai-Smorodinsky
    JEL: C71 C78 J20 J60
    Date: 2010–09
  14. By: Federico Ravenna
    Abstract: Over the last twenty years the level and volatility of inflation decreased across industrial countries. The inflation stabilization can be explained by a shift in monetary policy or by a lucky period of low volatility in business cycle shocks. To test the “luck hypothesis” we examine the inflation experience of Canada, one of the earliest and most successful adopters of an inflation targeting monetary policy. We Kalman-filter the historical structural shocks consistent with an estimated DSGE model. The estimated shocks are used to build counterfactual histories. Ex-ante the model predicts inflation volatility to more than halve under inflation targeting. But conditional on the shocks, we show that the luck hypothesis can explain with a high probability Canada’s low inflation volatility since the early 1990s. Any inflation stabilization induced by the shift in policy is accounted for the most part by the impact on expectations. Counterfactuals built neglecting expectations would prove the inflation targeting policy irrelevant.
    Keywords: Business cycle shocks, Kalman filter, Credibility, Inflation targeting
    JEL: E42 E52 E58
    Date: 2010
  15. By: Ioannis Lazopoulos (University of Surrey)
    Abstract: The paper develops a banking framework where a welfare comparison is made between non-tradable demand deposit and equity contracts. Contrary to the existing literature that relies heavily on smooth preferences assumption to justify the liquidity insurance superiority of the ‘run-prone’ debt contracts over the ‘run-free’ equity contracts, the paper shows that when aggregate consumption uncertainty is introduced, the welfare dominance of deposit contracts emerges for a simpler preference structure as deposit contracts offer more risk-sharing opportunities. The model illustrates that such uncertainty creates a high dispersion between the allocations that can be attained by trading in the secondary market, and therefore the equity contract provides ex ante less risk-sharing to risk-averse consumers than a tailored-made debt contract.
    Keywords: financial intermediation, aggregate uncertainty, deposit contracts, equity contracts.
    JEL: G21 D81 D82
    Date: 2010–09
  16. By: Brown, Alessio J. G.; Merkl, Christian; Snower, Dennis J.
    Abstract: This paper examines the labour market matching process by distinguishing its two component stages: the contact stage, in which job searchers make contact with employers and the selection stage, in which they decide whether to match. We construct a theoretical model explaining two-sided selection through microeconomic incentives. Firms face adjustment costs in responding to heterogeneous variations in the characteristics of workers and jobs. Matches and separations are described through firms' job offer and firing decisions and workers' job acceptance and quit decisions. Our calibrated model for the U.S. can account for important empirical regularities that the conventional matching model cannot.
    Keywords: Matching; incentives; adjustment costs; unemployment; employment; quits; firing; job offers; job acceptance;
    Date: 2010
  17. By: Rose-Anne Dana (CEREMADE, UMR CNRS 7534, Université Paris IX Dauphine); Frank Riedel (Institute of Mathematical Economics, Bielefeld University)
    Abstract: We study a dynamic and infinite-dimensional model with Knightian uncertainty modeled by incomplete multiple prior preferences. In interior efficient allocations, agents share a common risk-adjusted prior and use the same subjective interest rate. Interior efficient allocations and equilibria coincide with those of economies with subjective expected utility and priors from the agents' multiple prior sets. We show that the set of equilibria with inertia contains the equilibria of the economy with variational preferences anchored at the initial endowments. A case study in an economy without aggregate uncertainty shows that risk is fully insured, while uncertainty can remain fully uninsured. Pessimistic agents with Gilboa-Schmeidler's max-min preferences would fully insure risk and uncertainty.
    Keywords: Knightian Uncertainty, Ambiguity, Incomplete Preferences, General Equilibrium Theory, No Trade
    JEL: D51 D81 D91
    Date: 2010–09
  18. By: Takahashi, Harutaka
    Abstract: In Section 1, we explain the neoclassical optimal growth model, which includes multi capital goods, and is derived from neoclassical production functions; the transformations to the reduced model are also explained. Section 2 pertains to the explanation of the methods for proving the consumption turnpike theorem demonstrated by Scheinkman (1976) and McKenzie (1983). Also, the case in which the essentials of the von Neumann-McKenzie facet, which plays an important role in the next part, became a two-sector model and is explained using figures. In Section 3, we postulate a two-sector neoclassical optimal growth model, and the optimal path behavior in the vicinity of the optimal steady state path (modified golden rule path) are classified using the characteristics of von Neumann-McKenzie facet. Also, we will use these results to prove, based on a weaker hypothesis, that the theorem that the optimal path local stability and the optimal path attained by Benhabib and Nishimura(1985)becomes a two-term periodic solution. In Section 4, the generalization of the global asymptotic stability conclusion achieved with two divisions into a case that includes two or more types of capital goods. In Addendum, the important fundamental principles used in the main text will be defined, and a number of theorems will be proved.
    Keywords: multi-sector model; turnpike theory; optimal growth; the Neumann-McKednzie facet
    JEL: O41 D24 O21
    Date: 2010–06
  19. By: Ratbek, Ratbek
    Abstract: Corruption in the public sector is manifested both in collusive and noncollusive forms. Collusive corruption erodes tax compliance and leads to higher tax evasion. Noncollusive corruption stems from abuse of the public position by corrupt public officials to extort bribes from the private agents, thus, reduces their income. Importantly, in both types of interaction with the public sector the private agents are bound to face uncertainty with respect to their disposable incomes, as neither bribes paid nor gains from tax evasion are deterministic. To analyze effects of corruption by accounting for the uncertainty caused by it, a stochastic dynamic growth model is considered. The model also incorporates possibility of nonlinear impact of corruption on production, which implies that corruption deteriorates the growth potential by preventing producers to enter high productive sectors. Most importantly, it is demonstrated that the rise of corruption, by increasing uncertainty, exerts adverse effects on capital accumulation, thus leads to lower growth rates. Hence, this paper resolves the theoretical ambiguity with regards to the overall growth effect of corruption obtained in previous studies.
    Keywords: Corruption; uncertainty; growth
    JEL: D91 E26 H26
    Date: 2010–08–19
  20. By: Takahashi, Harutaka
    Abstract: Recent industry-based empirical studies among countries demonstrate that individual industry's per capita capital stock and output grow at industry's own steady state growth rate. The industry growth rate is highly correlated to industry's technical progress measured by total factor productivity TFP) of the industry. Let us refer to this phenomenon as "unbalanced growth among industries." Very few research concerned with this phenomenon has been done yet. Some exceptions are Echevarria (1997), Kongsamut, Rebelo and Xie (2001), and Acemoglu and Guerrieri (2008) among others. However their models and analytical methods are different from mine. Applying the theoretical method developed by McKenzie and Scheinkman in turnpike theory, I now construct a multi-sector optimal growth model with a industry specific Hicks-neutral technical progress and show that each sector's per capita capital stock and output grow at the rate of the sector's technical progress.
    Keywords: multisector growth model;optimal growth; turnpike theory
    JEL: O41 O21 O12
    Date: 2010–08
  21. By: Peter E Robertson (UWA Business School, The University of Western Australia)
    Abstract: India’s investment rate has increased fourfold since 1950 and is now nearly 40% of GDP. Many studies have suggested that this rising investment rate is the most significant component of India’s growth acceleration. I assess these hypotheses using the neoclassical growth model decomposition method. Unlike other methods based on this model, such as Hall and Jones (QJE 1999), the method used in this paper does not rely on the assumption of steady state. I find that the rise in investment rates since the 1970s explains only 30% of India’s growth over that period. I conclude that, notwithstanding the high investment rates, the main source of India’s growth acceleration is the modest upward trend in productivity growth since the 1970s.
    Keywords: Economic Growth, India, Growth Accounting, Investment, Productivity
    Date: 2010
  22. By: Suen, Richard M. H.
    Abstract: This paper analyzes the optimal consumption behavior of a consumer who faces uninsurable labor income risk and borrowing constraints. In particular, it provides conditions under which the decision rule for consumption is a concave function of existing assets. The current study presents two main findings. First, it is shown that the consumption function is concave if the period utility function is drawn from the HARA class and has either strictly positive or zero third derivative. Second, it is shown that the same result can be obtained for certain period utility functions that are not in the HARA class.
    Keywords: Consumption function; borrowing constraints; precautionary saving
    JEL: D91 E21
    Date: 2010–08
  23. By: Gian Luca Clementi; Thomas F. Cooley; Sonia B. Di Giannatale
    Date: 2010–09–03

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