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on Dynamic General Equilibrium |
| By: | Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, IZA - Institute for the Study of Labor); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Mans, CEPREMAP - Centre pour la recherche économique et ses applications); Sophie Osotimehin (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique) |
| Abstract: | We investigate the welfare cost of business cycles implied by matching frictions. First, using the reduced-form of the matching model, we show that job finding rate fluctuations generate intrinsically a non-linear effect on unemployment: positive shocks reduce unemployment less than negative shocks increase it. For the observed process of the job finding rate in the US economy, this intrinsic asymmetry increases average unemployment, which leads to substantial business cycles costs. Moreover, the structural matching model embeds other non-linearities, which alter the average job finding rate and consequently the welfare cost of business cycles. Our theory suggests to subsidizing employment in order to dampen the impact of the job finding rate fluctuations on welfare. |
| Keywords: | Business cycle costs; Unemployment dynamics; Matching |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00516832_v1&r=dge |
| By: | Koichi Futagami; Takeo Hori; Ryoji Ohdoi (Asian Development Bank Institute) |
| Abstract: | In this paper, we examine the effects of introducing constraints on government borrowing using a continuous-time overlapping generations model of a small open economy. We consider government placing constraints on the amount of government bonds outstanding by establishing an upper limit, or target level, for the ratio of government bonds to gross domestic product. We first show that there exist multiple steady states in the model small open economy. One is a steady state with high growth, the other a steady state with low growth. We next examine how changes in the target level for bonds affect economic growth rates at the steady states. If the economy has a positive amount of asset holdings, we obtain the following results. When the government runs budget surpluses, an increase in the target level for government bonds reduces the growth rate of the low-growth economy, but raises the growth rate of the high-growth economy. However, when the government runs budget deficits, an increase in the target level for government bonds raises the growth rate of the low-growth economy, but reduces the growth rate of the high-growth economy. If the economy has a negative amount of asset holdings, the results are ambiguous. |
| Keywords: | continuous-time overlapping generations model, government bonds, steady-state model |
| JEL: | E00 E21 E40 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2263&r=dge |
| By: | Bornukova, Kateryna |
| Abstract: | In the U.S. economy hours and productivity are negatively correlated, and volatility of hours is two times higher than volatility of productivity. In the standard one shock RBC model hours are positively correlated with productivity, and hours are two times less volatile than productivity. This paper is an attempt to replicate the co-movement of hours and productivity observed in the post-war U.S. data using one shock model. I explore the real business cycles in the model with two-person household and home production.} The model economy has a representative household of two agents. Agents allocate their time among leisure, work on the market and home production. There is a fixed cost of working on the market, and agents may choose not to work. The fluctuations in the model are driven by aggregate technology shock. I calibrate the model to U.S. data, solve and simulate it. I find that in the model hours are 2 times more volatile than productivity, and that hours and productivity are negatively correlated. The model replicates well the co-movement of hours and productivity observed in the U.S. data. |
| Keywords: | Computable General Equilibrium; Business Cycles; Home Production; Labor Supply |
| JEL: | E32 E24 J22 |
| Date: | 2009–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25113&r=dge |
| By: | Partha Sen; Emily T. Cremers |
| Abstract: | This paper examines the effects of international income transfers on welfare and capital accumulation in a one-sector overlapping generations model. It is shown that a strong form of the transfer paradox-- in which the donor country experiences a welfare gain while the recipient country experiences a welfare loss—may occur both in and out of steady state. In addition, it is shown that a weak form of the transfer paradox—where either the donor or recipient (but not both) experience paradoxical welfare effects—may characterize all segments of the transition path not already characterized by the strong transfer paradox. The results are explained by the effects of transfers on world capital accumulation and the world interest rate, which imply secondary intertemporal welfare effects large enough to dominate the initial effects of the income transfer. [Working Paper No. 159] |
| Keywords: | Transfer problem, transfer paradox, dynamics, one-sector overlapping generations model |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2851&r=dge |
| By: | Olivier Coibion (Department of Economics, College of William and Mary); Yuriy Gorodnichenko (Department of Economics, University of California, Berkeley) |
| Abstract: | We consider a dynamic stochastic general equilibrium (DSGE) model in which firms follow one of four price-setting regimes: sticky prices, sticky-information, rule-of-thumb, or fullinformation flexible prices. The parameters of the model, including the fractions of each type of firm, are estimated by matching the moments of the observed variables of the model to those found in the data. We find that sticky-price firms and sticky-information firms jointly account for over 80% of firms in the model. We compare the performance of our hybrid model to pure sticky-price and sticky-information models along various dimensions, including monetary policy implications. |
| Keywords: | Heterogeneity, Price-setting, DSGE |
| JEL: | E3 E5 |
| Date: | 2010–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:cwm:wpaper:93&r=dge |
| By: | Guo, Jang-Ting; Sirbu, Anca-Ioana; Suen, Richard M. H. |
| Abstract: | Eusepi (2009, International Journal of Economic Theory 5, pp. 9-23) analytically finds that a one-sector real business cycle model may exhibit positive co-movement between consumption and investment when the equilibrium wage-hours locus is positively-sloped and steeper than the household's labor supply curve. However, we show that this condition does not imply expectations-driven business cycles will emerge in Eusepi's model. Specifically, a positive news shock about future productivity improvement leads to an aggregate recession whereby output, employment, consumption and investment all fall in the announcement period. |
| Keywords: | Expectations-Driven Business Cycles; Production Externalities. |
| JEL: | E32 C62 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24989&r=dge |
| By: | Torben M. Andersen (School of Economics and Management, Aarhus University, Denmark); Michael Svarer (School of Economics and Management, Aarhus University, Denmark) |
| Abstract: | The consequences of business cycle contingencies in unemployment insurance systems are considered in a search-matching model allowing for shifts between "good" and "bad" states of nature. We show that not only is there an insurance argument for such contingencies, but there may also be an incentive argument. Since benefits may be less distortionary in a recession than a boom, it follows that counter-cyclical benefits reduce average distortions compared to state independent benefits. We show that optimal (utilitarian) benefits are counter-cyclical and may reduce the structural (average) unemployment rate, although the variability of unemployment may increase. |
| Keywords: | Unemployment benefits, business cycle, insurance, incentives |
| JEL: | J6 H3 |
| Date: | 2010–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2010-16&r=dge |
| By: | Eric French; Christopher Taber |
| Abstract: | This chapter discusses identification of common selection models of the labor market. We start with the classic Roy model and show how it can be identified with exclusion restrictions. We then extend the argument to the generalized Roy model, treatment effect models, duration models, search models, and dynamic discrete choice models. In all cases, key ingredients for identification are exclusion restrictions and support conditions. |
| Keywords: | Labor market |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2010-08&r=dge |
| By: | Christoph Braun |
| Abstract: | This paper studies a Ramsey optimal taxation model with human capital in an infi nite-horizon setting. Contrary to Jones, Manuelli, and Rossi (1997), the human capital production function does not include the current stock of human capital as a production factor. As a result, the return to human capital, namely labor income, does not vanish in equilibrium. In a stationary state, the household underinvests in human capital relative to the fi rst best, i.e., education is distorted. Human capital is eff ectively taxed. The optimal tax scheme prescribes making the cost of education not fully tax-deductible. |
| Keywords: | Optimal taxation; human capital; Ramsey approach |
| JEL: | H21 I28 J24 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0202&r=dge |
| By: | Patrick A. Pintus; Yi Wen |
| Abstract: | Investment booms and asset "bubbles" are often the consequence of heavily leveraged borrowing and speculations of persistent growth in asset demand. We show theoretically that dynamic interactions between leveraged borrowing and persistent asset demand can generate a multiplier-accelerator mechanism that transforms a one-time technological innovation into large and long-lasting boom-bust cycles. The predictions are consistent with the basic features of investment booms and the consequent asset-market crashes led by excessive credit expansion. |
| Keywords: | Asset pricing ; Credit |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-027&r=dge |
| By: | Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, IZA - Institute for the Study of Labor); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Mans, CEPREMAP - Centre pour la recherche économique et ses applications); Thepthida Sopraseuth (GAINS-TEPP - Université du Mans) |
| Abstract: | This paper presents a theoretical foundation and empirical evidence in favor of the view that the retirement age decision impacts on the employment of older workers before this age. Countries with a retirement age at 60 are indeed characterized by lower employment rates for workers aged 55-59. Based on the French Labor Force Survey, we show that the likelihood of employment is significantly affected by the distance from retirement, in addition to age and other relevant variables. We then extend McCall's (1970) job search model by explicitly integrating life-cycle features and the retirement decision. Using simulations, we show that the distance effect in conjunction with the generosity of unemployment benefits for older workers explains the low rate of employment just before the eligibility retirement age. Finally, we show that implementing actuarially-fair schemes, not only extends the retirement age, but also encourages a more intensive job-search by older unemployed workers. |
| Keywords: | Job Search, Older Workers, Retirement |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00517107_v1&r=dge |
| By: | Jaime Casassus; Diego Ceballos |
| Abstract: | We use a general equilibrium model of a monetary economy to understand the economics behind the correlation between in nation and oil futures returns. Oil is used as both, an input to the production of capital and as a consumption good. We estimate our model using maximum likelihood with the following datasets: crude oil futures prices, nominal interest rates, in nation rates and money supply growth rates. We nd that some of the positive correlation found in empirical studies is due to the fact that oil is in the consumption basket; however, this accounts only for a minor part of it. There exist other important sources of correlation related to monetary shocks and output shocks. In particular, we nd that the correlation is extremely sensitive to the reaction of the central bank to output shocks, while the reaction to in nation changes is less signi cant. Our estimates suggest that the monetary authority overreacts to output shocks by increasing the money supply in a more than necessary amount, generating a signi cant source of positive correlation. From a practical perspective, We nd that it is a good strategy to use as a hedge, the futures whose maturity is closer to the hedging horizon. This is particularly true for short-term hedging. |
| Keywords: | Correlation structure, inflation, futures, hedging, oil, monetary policy |
| JEL: | E31 G13 Q31 E44 E52 E23 D51 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:373&r=dge |
| By: | Moraga-Gonzalez, Jose L. (IESE Business School); Sandor, Zsolt (University of Groningen); Wildenbees, Matthijs R. (Kelly School of Business) |
| Abstract: | We generalize the model of Burdett and Judd (1983) to the case where an arbitrary finite number of firms sells a homogeneous good to buyers who have heterogeneous search costs. We show that a price dispersed symmetric Nash equilibrium always exists. Numerical results show that the behavior of prices with respect to the number of firms hinges upon the shape of the search cost distribution: when search costs are relatively concentrated (dispersed), entry of firms leads to higher (lower) average prices. |
| Keywords: | nonsequential search; oligopoly; arbitrary search cost distributions; |
| JEL: | C72 D43 |
| Date: | 2010–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0869&r=dge |