nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒10‒02
eleven papers chosen by
Christian Zimmermann
University of Connecticut

  1. A macroeconomic model for the evaluation of labor market reforms By Krebs, Tom; Scheffel, Martin
  2. The Environment and Directed Technical Change By Daron Acemoglu; Philippe Aghion; Leonardo Bursztyn; David Hemous
  3. On welfare criteria and optimality in an endogenous growth model By DEL REY, Elena; LOPEZ-GARCIA, Miguel ANgel
  4. Non-Smooth Dynamics and Multiple Equilibria in a Cournt-Ramsey Model with Endogenous Markups By Paulo Brito; Luís Costa; Huw Dixon
  5. Mortality, family and lifestyles By Grégory Ponthière
  6. Entrepreneurship and the Hidden Economy: An Extended Matching Model By Pugno, Maurizio; Lisi, Gaetano
  7. Labor-Market Heterogeneity, Aggregation, and the Lucas Critique By Yongsung Chang; Sun-Bin Kim; Frank Schorfheide
  8. Managing Credit Booms and Busts: A Pigouvian Taxation Approach By Olivier Jeanne; Anton Korinek
  9. Scope of Innovations, Knowledge Spillovers and Growth By Gray, Elie; Grimaud, André
  10. Sudden Stops, Output Drops, and Credit Collapses By Jihad Dagher
  11. Experience and Worker Flows By Gorry, Aspen

  1. By: Krebs, Tom; Scheffel, Martin
    Abstract: We develop a tractable macroeconomic model with employment risk and labor market search in order evaluate the effects of labor market reform on unemployment, growth, and welfare. The model has a large number of risk-averse households who can invest in risk-free physical capital and risky human capital. Unemployed households receive unemployment benefits and decide how much search effort to exert. We present a theoretical characterization result that facilitates the computation of equilibria substantially. We calibrate the model to German data and use the calibrated model economy to simulate the macroeconomic effects of the German labor market reforms of 2005 and 2006 (Hartz Reforms). We find that the 2005-reform had large employment effects: the equilibrium unemployment rate has been reduced by approximately 1.1 percentage points from 7.5 to 6.4 percent. Moreover, the drop in unemployment has led to substantial output gains. Finally, employed and short-term unemployed households experienced significant welfare gains, whereas the long-term unemployed have lost in welfare terms. The effects of the 2006-reform are qualitatively similar, but quantitatively much smaller. We also show that the social welfare maximizing replacement rate is lower than the current (post-reform) replacement rate in Germany. However, implementing the optimal unemployment benefit system generates only small welfare gains. --
    Keywords: dynamic general equilibrium,heterogenous agents,human capital,labor market search,unemployment insurance,German labor market reform
    JEL: E24 E60 J64 J65
    Date: 2010
  2. By: Daron Acemoglu (Massachusetts Institute of Technology and Canadian Institute for Advanced Research); Philippe Aghion (Harvard University, Stockholm School of Economics and Canadian Institute for Advanced Research); Leonardo Bursztyn (Harvard University); David Hemous (Harvard University)
    Abstract: This paper introduces endogenous and directed technical change in a growth model with environmental constraints. A unique final good is produced by combining inputs from two sectors. One of these sectors uses "dirty" machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both “carbon taxes” and research subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth.
    Keywords: Environment, Exhaustible Resources, Directed Technological Change, Innovation
    Date: 2010–07
  3. By: DEL REY, Elena (Universitat de Girona, Spain); LOPEZ-GARCIA, Miguel ANgel (Universitat Autonoma de Barcelona, Spain)
    Abstract: In this paper we explore the consequences for optimality of a social planner adopting two different welfare criteria. The framework of analysis is an OLG model with physical and human capital. We first show that, when the SWF is a discounted sum of individual utilities defined over consumption per unit of natural labour, the precise cardinalization of the individual utility function becomes crucial for the characterization of the social optimum. Also, decentralizing the social optimum requires an education subsidy. In contrast, when the SWF is a discounted sum of individual utilities defined over consumption per unit of efficient labour, the precise cardinalization of preferences becomes irrelevant. More strikingly, along the optimal growth path, education should be taxed.
    Keywords: endogenous growth, human capital, intergenerational transfers, education policy
    JEL: D90 H21 H52 H55
    Date: 2010–05–01
  4. By: Paulo Brito; Luís Costa; Huw Dixon
    Abstract: We consider a Ramsey model with a continuum of Cournotian industries where free entry generates an endogenous markup. The model produces two different regimes, monopoly and oligopoly, resulting in non-smooth dynamics. We analyze the global dynamics of the model, demonstrating the model may exhibit heteroclinic orbits connecting multiple equilibria. Small transitory changes in parameters can lead to large permanent effects and there can be a Rostovian poverty trap separating a low-capital and high-markup equilibrium from a high-capital low-markup equilibrium. The paper applies recent results from applied mathematics for non-smooth dynamic systems.
    Keywords: Endogenous markups, Non-smooth dynamics, Discontinuity induced bifurcations, Heteroclinic orbits.
    JEL: C62 D43 E32
    Date: 2010–09
  5. By: Grégory Ponthière
    Abstract: While there is a large empirical literature on the intergenerational transmission of health and survival outcomes in relation to lifestyles, little theoretical work exists on the long-run prevalence of (un)healthy lifestyles induced by mortality patterns. To examine that issue, this paper develops an overlapping generations model where a healthy lifestyle and an unhealthy lifestyle are transmitted vertically or obliquely across generations. It is shown that there must exist a locally stable heterogeneous equilibrium involving a majority of healthy agents, as a result of the larger parental gains from socialization efforts under a higher life expectancy. Wealso examine the robustness of our results to the introduction of parental altruistic concerns for children's health and of asymmetric socialization costs.
    Date: 2010
  6. By: Pugno, Maurizio; Lisi, Gaetano
    Abstract: This paper develops a labour market matching model in order to address the problem of the persistence of the hidden sector and of its regional concentration, as in Italy and in the enlarged Europe. The main novel features of the model are that entrepreneurial ability affects job productivity, and that regular firms receive negative externalities from the hidden sector, which may capture the pressure typically exerted by corruption and organized crime, and positive externalities from the other regular firms. At least one interior equilibrium emerges, thus providing an explanation for the so-called “shadow puzzle”, with the possibility that tougher monitoring may reduce both the hidden sector and unemployment. If externalities are non-linear, two equilibria may emerge, thus accounting for regional dualism. The “better” equilibrium is in fact characterised by a smaller hidden sector, higher levels of overall productivity, output, entrepreneurial ability used, extra-profits, relative wages, and more favourable externalities.
    Keywords: entrepreneurship; hidden economy; shadow economy; underground economy; multiple equilibria; matching models
    JEL: J63 J64 J24 E26 L26 J23
    Date: 2010–05–20
  7. By: Yongsung Chang (University of Rochester); Sun-Bin Kim (Department of Economics, Korea University); Frank Schorfheide (Department of Economics, University of Pennsylvania)
    Abstract: This paper assesses biases in policy predictions due to the lack of invariance of “structural†parameters in representative-agent models. We simulate data under various fiscal policy regimes from a heterogeneous-agents economy with incomplete asset markets and indivisible labor supply. Imperfect aggregation manifests itself through preference shocks in the estimated representative-agent model. Preference and technology parameter estimates are not invariant with respect to policy changes. As a result, the bias in the representative-agent model’s policy predictions is large compared to the length of predictive intervals that reflect parameter uncertainty.
    Keywords: Aggregation; Fiscal Policy; Heterogeneous Agents Economy; Lucas Critique; Representative Agent Models.
    Date: 2010–09
  8. By: Olivier Jeanne (Peterson Institute for International Economics); Anton Korinek
    Abstract: We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We show that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare. We calibrate the model with reference to (1) the US small and medium-sized enterprise sector and (2) the household sector and find the optimal tax to be countercyclical in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.
    Keywords: boom-bust cycles, financial crises, systemic externalities, macroprudential regulation, precautionary savings
    JEL: E44 G38
    Date: 2010–09
  9. By: Gray, Elie (Toulouse Business School and Toulouse School of Economics (LERNA)); Grimaud, André (Toulouse School of Economics (IDEI, LERNA) and Toulouse Business School)
    Abstract: This paper exploits the formalization of a circular product differentiation model of Salop (1979) to propose an endogenous growth quality ladder model in which the knowledge inherent in a given sector can spread variously across the sectors of the economy, ranging from local to global influence. Accordingly, this affects the size of the pool of knowledge in which innovations draw themselves on in order to be produced. Therefore, the law of knowledge accumulation, and thus the growth rate of the economy, depend positively on the expected scope of diffusion of innovations, i.e. on the intensity of knowledge spillovers. This approach generalizes the endogenous growth theory as developed in the seminal models of Grossman & Helpman (1991) and Aghion & Howitt (1992), extending their analysis to the possibility of considering stochastic and partial knowledge spillovers. This framework allows us to mitigate the positive externality of knowledge and thus to apprehend the issue of the funding of research with more parsimony. We characterize the set of steady-state Schumpeterian equilibria as a function of the public tools. We provide an explanation for the fact that research effort can either be suboptimal or over-optimal, depending on the expected scope of knowledge. Accordingly, we find that the optimal public tool dedicated to foster R&D activity depends positively on it.
    Keywords: Schumpeterian growth, scope of diffusion of innovations, knowledge spillovers
    JEL: O30 O31 O41
    Date: 2010–03
  10. By: Jihad Dagher
    Abstract: This paper proposes a tractable Sudden Stop model to explain the main patterns in firm level data in a sample of Southeast Asian firms during the Asian crisis. The model, which features trend shocks and financial frictions, is able to generate the main patterns observed in the sample during and following the Asian crisis, including the ensuing credit-less recovery, which are also patterns broadly shared by most Sudden Stop episodes as documented in Calvo et al. (2006). The model also proposes a novel explanation as to why small firms experience steeper declines than their larger peers as documented in this paper. This size effect is generated under the assumption that small firms are growth firms, to which there is support in the data. Trend shocks when combined with financial frictions in this model also generate strong leverage effects in line with what is observed in the sample, and with other observations from the literature.
    Keywords: Stock prices , Southeast Asia , Borrowing , Financial crisis , External shocks , Capital flows , Credit , Current account ,
    Date: 2010–07–29
  11. By: Gorry, Aspen
    Abstract: This paper extends the literature on learning in labor markets by parameterizing the amount of learning that transfers across jobs. Previous models have assumed that learning is either job specific as in Jovanovic (1979) or perfectly transferable across jobs as in Gibbons et al. (2005). By allowing some but not all learning to be transferred, this model generates novel predictions of a decline in job finding rates with age and a decline in the variance of wages with experience that are consistent with observed worker outcomes.
    Keywords: Job finding rate; job separation rate; experience; wage volatility
    JEL: E24 J31 J64
    Date: 2010–07–07

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