nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒10‒23
thirty papers chosen by
Christian Zimmermann
University of Connecticut

  1. Fertility and PAYG pensions in the overlapping generations model By Fanti, Luciano; Gori, Luca
  2. On economic growth and minimum wages By Fanti, Luciano; Gori, Luca
  3. Estimation of an open economy DSGE model for Romania. Do nominal and real frictions matter? By Veaceslav Grigoras
  4. Business Cycle Implications of Internal Consumption Habit for New Keynesian Models By Takashi Kano; James M. Nason
  5. Inflation, Human Capital and Tobin's q By Parantap Basu; Max Gillman; Joseph Pearlman
  6. Housing Investment: What Makes It so Volatile? Theory and Evidence from OECD Countries By Quoc Hung Nguyen
  7. Habits and Endogenous Investment Fluctuations By Been-Lon Chen; Yu-Shan Hsu; Kazuo Mino
  8. Pollution Abatement as a Source of Stabilisation and Long-Run Growth By Theodore Palivos; Dimitrios Varvarigos
  9. Working Effort and Endogenous Job Separations in Search Equilibrium By Anna Zaharieva (Chizhova)
  10. Financial Development, Technological Change in Emerging Countries and Global Imbalances By Benhima Kenza
  11. Hysteresis in Dynamic General Equilibrium Models with Cash-in-Advance Constraints By Kazuya Kamiya; Takashi Shimizu
  12. Transfers and the Terms of Trade in an Overlapping Generations Model By Emily T. Cremers; Partha Sen
  13. Global policy at the zero lower bound in a large-scale DSGE model By Sandra Gomes; Pascal Jacquinot; Ricardo Mestre; João Sousa
  14. Risk Sharing and Employee Motivation in Competitive Search Equilibrium By Anna Zaharieva (Chizhova)
  15. On Population Structure and Marriage Dynamics By Giolito, Eugenio P.
  16. Fiscal Policy in a Tractable Liquidity-Constrained Economy By Challe, E.; Ragot, X.
  17. Anti-Money Laundry regulation and Crime: A two-period model of money-in-the-utility-function By Fanta, F; Mohsin, H
  18. Disaggregating Real Exchange Rate Dynamics: A Structural Approach By P. JACOB
  19. Temporary Layoffs with Incomplete Worker Attachment in Search Equilibrium By Anna Zaharieva (Chizhova)
  20. Does bargaining matter in the small firm's matching Mmodel? By L'Haridon, Olivier; Malherbet, Franck; Pérez-Duarte, Sébastien
  21. Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides: Markets with search costs By Committee, Nobel Prize
  22. Endogenous Credit Cycles By Chao Gu; Randall Wright
  23. Business Cycle Persistence in Developing Countries: How Successful is a DSGE Model with a Vertical Production Chain and Sticky Prices? By Rachel Male
  24. Did Tax Policies mitigate US Business Cycles? By Jimborean, R.; Ferroni, F.
  25. Managing Credit Booms and Busts: A Pigouvian Taxation Approach By Jeanne, O. Prof.Dr.; Korinek, A.
  26. A Tale of Two Growth Engines: The Interactive Effects of Monetary Policy and Intellectual Property Rights By Angus C. Chu; Ching-Chong Lai; Chih-Hsing Liao
  27. R\&D-based Growth in the Post-modern Era By Strulik, Holger; Prettner, Klaus; Prskawetz, Alexia
  28. Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides: Markets with Search Frictions By Committee, Nobel Prize
  29. Winners and Losers in House Markets By Nobuhiro Kiyotaki; Alexander Michaelides; Kalin Nikolov
  30. Macroeconomic Effects of China’s Fiscal Stimulus By Pietro Cova; Massimiliano Pisani; Alessandro Rebucci

  1. By: Fanti, Luciano; Gori, Luca
    Abstract: This article analyses how long-run pay-as-you-go public pensions react to a change in fertility in the basic overlapping generations model of neoclassical growth. While it would seem well established both in the academic and political debates that the decline in fertility represents a “demographic time bomb” for the sustainability of public pensions, it is shown that a falling birth rate need not necessarily cause long-run pension benefit to fall.
    Keywords: Fertility; PAYG pensions; OLG model
    JEL: O41 J26
    Date: 2010–10–11
  2. By: Fanti, Luciano; Gori, Luca
    Abstract: We offer an analysis of the existence of a positive relationship between minimum wages and economic growth in a simple one-sector overlapping generations economy where the usual Romer-typed knowledge spill-over mechanism in production represents the engine of endogenous growth, in the case of both homogeneous and heterogeneous (i.e., skilled and unskilled) labour. Assuming also the existence of unemployment benefits financed with consumption taxes not conditioned on age at a balanced budget, it is shown that minimum wages may stimulate economic growth and welfare despite the unemployment occurrence. Moreover, a growth-maximising minimum wage can exist. A straightforward message, therefore, is that a combination of minimum wage and unemployment benefit policies can appropriately be used to promote balanced growth and welfare.
    Keywords: Endogenous growth; Minimum wage; Unemployment; OLG model
    JEL: O41 J60 H24
    Date: 2010–10–12
  3. By: Veaceslav Grigoras
    Abstract: In this paper we use a medium scale open economy DSGE model developed by Adolfson et al. (2005). Besides authors’ observables we include also one extra observable series (CPI) in the model. Some of the parameters will be calibrated as to match sample’s mean or common values found in literature and others will be etimated on Romania’s data with the help of Bayesian techniques. Next, we specify some alternative scenarios where nominal or real rigidities will be ”turned off” and we asses their importance for the data generating process (with the help of marginal log likelihood).
    Keywords: DSGE
    Date: 2010–10
  4. By: Takashi Kano; James M. Nason
    Abstract: This paper studies the implications of internal consumption habit for new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian Monte Carlo methods are employed to evaluate NKDSGE model fit. Simulation experiments show that consumption habit often improves the ability of NKDSGE models to match output and consumption growth spectra. Nonetheless, the fit of NKDSGE models with consumption habit is susceptible to the source of the nominal rigidity, to spectra identified by permanent productivity shocks, to the frequencies used for evaluation, and to the choice of monetary policy rule. These vulnerabilities suggest that NKDSGE model specification is fragile.
    JEL: E10 E20 E32
    Date: 2010–10
  5. By: Parantap Basu (Durham University); Max Gillman (Institute of Economics - Hungarian Academy of Sciences, Cardiff University); Joseph Pearlman (London Metropolitan University)
    Abstract: A less well-known empirical finding for the US and UK is a pronounced low frequency negative relationship between inflation and Tobin's q; a normalized market price of capital. This stylized fact is explained within a dynamic stochastic general equilibrium model using three key features: (i) a Lucas and Prescott (1971) physical capital adjustment cost with a rising marginal cost of investment, (ii) production of human capital with endogenous growth and (iii) an inflation tax cash-in-advance economy. The baseline endogenous growth model matches the US inflation and q long term correlation, while comparable exogenous growth are unable to do this, and it outperforms the exogenous growth models in explaining business cycle volatilities of q and of stock returns.
    Keywords: Low frequency, Tobin's q; inflation tax, endogenous growth
    JEL: E31 E44 G12
    Date: 2010–09
  6. By: Quoc Hung Nguyen (Institute of Developing Economies and Hong Kong Institute for Monetary Research)
    Abstract: This paper explains how mortgage market liberalization can introduce greater volatility in the housing market. It begins by documenting two stylized facts for OECD countries that models with perfect credit markets fail to explain: (i) housing investment is about five times as volatile as output and (ii) housing investment tends to be more volatile in economies with more liberalized mortgage markets. The paper then develops a DSGE model where households face a credit constraint and housing is used as collateral. This housing collateral constraint creates a link between the housing market and borrowing capacity, a link that amplifies the response of housing demand to shocks and becomes stronger with more mortgage market liberalization. Finally, calibrated models with a housing collateral constraint explain about 90 percent of housing investment volatility in the UK economy.
    Keywords: Housing Investment, Collateral Constraint, Mortgage Markets
    JEL: E22 E32 F34 F41
    Date: 2010–09
  7. By: Been-Lon Chen (Institute of Economics, Academia Sinica); Yu-Shan Hsu (Department of Economics, National Chung Cheng University); Kazuo Mino (Institute of Economic Research, Kyoto University)
    Abstract: This paper envisages whether an external habit effect can produce indeterminate equilibrium paths thereby generating endogenous investment fluctuations. In an otherwise standard optimal growth model with leisure, we find that an external habit effect can cause endogenous investment fluctuations if there is a proper habit effect together with a proper intertemporal elasticity of substitution. In a calibrated version of the model, we find that endogenous investment fluctuations are plausible when the habit effect is negative with the "catching up with the Joneses"effect.
    Keywords: catching up with the Joneses, habit, indeterminacy, one-sector growth model
    JEL: E21 E32
    Date: 2010–10
  8. By: Theodore Palivos; Dimitrios Varvarigos
    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; Environmental quality; Pollution abatement
    JEL: O41 Q56
    Date: 2010–10
  9. By: Anna Zaharieva (Chizhova) (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper considers job separations in a search model with labour market matching and moral hazard. Both workers and firms value productive matches and take actions to increase match stability: firms offer a share of match surplus to provide workers with correct incentives and workers take hidden actions (effort) negatively affecting the match separation rate. Heterogeneous productivity draws combined with the moral hazard problem give rise to match-specific endogenous separation rates. Additionally a counteraction of two effects - match stability and match scarcity - explains an observed asymmetric shape of a wage probability density function with a unique interior mode on the support.
    Keywords: Matching, separation rate, job stability, effort, wage density
    JEL: J31 J63 J64 M52
    Date: 2010–10–11
  10. By: Benhima Kenza
    Abstract: The paper shows that in a general equilibrium model with two countries, characterized by different levels of financial development, and two technologies, one more productive and more financially demanding than the other, the following stylized facts can be replicated: 1) the persistent US current account deficits since the beginning of the 90's; 2) growth of output per worker in developing countries in relative terms with the US during the same period; 3) relative capital accumulation and 4) TFP growth in these countries, also relative to the US. The more productive technology takes more time to implement and is subject to liquidity shocks, while the less productive one, along with external bond assets, can be used as a hoard to finance those liquidity shocks. As a result, after financial globalization, if the emerging economy is capital scarce and if its financial market is sufficiently incomplete, it experiences an increase in net foreign assets that coincides with a fall in the less productive investment and a rise in the more productive one. Convergence towards the steady state implies then both a better allocation of capital that generates endogenous aggregate TFP gains and a rise in aggregate investment that translates into higher growth.
    Keywords: growth; capital flows; credit constraints; financial globalization; technological change
    JEL: F36 F43 O16 O33
    Date: 2010–10
  11. By: Kazuya Kamiya (The University of Technology Sydney); Takashi Shimizu (Kansai University)
    Abstract: In this paper, we investigate equilibrium cycles in dynamic general equilibrium models with cash-in-advance constraints. Our findings are two-fold. First, in such models, if an equilibrium cycle exists, then there also exists a continuum of equilibrium cycles in its neighborhood. Second, the limit cycle, to which a dynamic path converges, varies continuously according to the initial distribution of the money holdings. Thus, temporary shocks that affect the initial distribution have permanent effects in such models; that is, such models exhibit hysteresis. Furthermore, we also explore the logic behind the results.
    Date: 2010–10
  12. By: Emily T. Cremers; Partha Sen
    Abstract: This paper explores the steady state welfare implications of permanent transfers in a two-country, two-sector overlapping generations model. At the golden rule and with Walrasian stability, we demonstrate that the change in the (static) terms of trade always works in favor of a transfer paradox. The conditions under which the transfer paradox is obtained are independent of factor intensity rankings and also whether the donor or recipient has the higher savings propensity. In contrast, conditions under which a change in the intertemporal terms of trade delivers a Pareto-improving transfer depend upon both of the above and also on the initial position of the world capital-labor ratio relative to the golden rule. [Working Paper No. 138]
    Keywords: Transfer paradox, Pareto-improving transfers, two-sector overlapping generations model
    Date: 2010
  13. By: Sandra Gomes (Bank of Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisboa, Portugal.); Pascal Jacquinot (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ricardo Mestre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); João Sousa (Bank of Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisboa, Portugal.)
    Abstract: The purpose of this paper is to analyse whether fiscal policies can alleviate the effects of the zero lower bound (ZLB) on interest rates and if they should be coordinated internationally. The analysis is carried out using EAGLE, a DSGE model of the global economy. We consider that the fiscal shocks are temporary and that fiscal policy retains full credibility at all times. In this setup we find significant non-linearities in a ZLB situation that amplify the effects of fiscal shocks compared to the non-ZLB case. International coordination is helpful but does not play a major role in the results. JEL Classification: E40, E62, E63, F42.
    Keywords: Zero Lower Bound, Fiscal Multipliers, Monetary Policy, DSGE models.
    Date: 2010–10
  14. By: Anna Zaharieva (Chizhova) (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper incorporates a classical moral hazard problem with unobserved worker effort and bonus payments into a competitive search equilibrium environment with risk averse workers. The resulting framework permits an analysis of the effects of labour market competition and search frictions on individual contract setting. The paper demonstrates that the classical model of moral hazard with an ex-post wage setting regime may underestimate the optimal values of wages and bonus payments in competitive labour markets. The baseline model is extended to account for employer heterogeneity with respect to capital endowments. In the extended model, wage competition between employers serves as a source of positive correlation between wages and bonus payments reported in a number of empirical studies.
    Keywords: Effort, bonus, risk aversion, competitive search, equilibrium efficiency
    JEL: J33 J64 M52
    Date: 2010–10–11
  15. By: Giolito, Eugenio P. (Universidad Carlos III de Madrid)
    Abstract: I develop an equilibrium, two-sided search model of marriage with endogenous population growth to study the interaction between fertility, the age structure of the population and the age at first marriage of men and women. Within a simple two-period overlapping generation model I show that, given an increase of the desired number of children, age at marriage is affected through two different channels. First, as population growth increases, the age structure of the population produces a thicker market for young people, inducing early marriages. The second channel comes from differential fecundity: if the desired number of children is not feasible for older women, women tend to marry younger and men older, with single men outnumbering single women in equilibrium. Using an extended version of the model to a finite number of periods and fertility data, I show that two mechanisms described above may have acted as persistence mechanisms after the U.S “baby boom”. I show that demographic transitional dynamics after the baby boom may account for approximately a 23% of the increase in men's age of marriage between 1985 and 2009, albeit the impact on women's age is small.
    Keywords: marriage, population structure, search
    JEL: J12 D83
    Date: 2010–09
  16. By: Challe, E.; Ragot, X.
    Abstract: In this paper, we analyse the effects of transitory fiscal expansions when public debt is used as liquidity by the private sector. Aggregate shocks are introduced into a tractable flexible-price, incomplete-market economy where heterogenous, infinitely-lived agents face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations. Debt-financed increases in public spending facilitate self insurance by bond holders and may crowd in private consumption. The implied higher stock of liquidity also loosens the borrowing constraints faced by firms, thereby raising labour demand and possibly the real wage. Whether private consumption and wages actually rise or fall ultimately depends on the relative strengths of the liquidity and wealth effects that arise following the shock. The expansionary effects of tax cuts are also discussed. Classification-JEL: E21; E62.
    Keywords: Borrowing constraints; Public Debt; Fiscal Policy Shocks.
    Date: 2010
  17. By: Fanta, F; Mohsin, H
    Abstract: The paper presents a two period model with two types of money i.e. dirty and cleans (legal) money in utility function. Clean money is earned from working in legal sector and dirty from illegal sector. Our two-two period model reveals that an increase in labor wage in legal sector unambiguously decease the labor hours allocated for illegal sector by increasing the opportunity cost for illegal activities. However, the crime-reducing impact of anti-money laundry regulation and the probability of the agent to be caught require both parameters should be above some threshold. This finding is extension to the existing literature. This threshold is a function of the marginal rate of substitution of ‘dirty’ money for consumption and the responsiveness of illegal income to the policy parameter. Higher threshold implies the need for tougher anti-money laundry regime. Therefore, the marginal rate of substitution between ‘dirty’ money and consumption, and the elasticity of illegal income to the policy parameter are the key in the formulation of anti money laundering policy.
    Keywords: Money laundry; crime; money in utility function; money
    JEL: C61 E26
    Date: 2010–08
  18. By: P. JACOB
    Abstract: This paper employs a small open economy DSGE model, estimated over 1986- 2009, to decompose the dynamic influence of domestic and international prices on the Canada-US real exchange rate. While the real exchange rate mimics the dynamic behavior of the relative price of non-tradables in terms of tradables in response to a non-tradable sector-specific disturbance, the purely tradable component dominates in the case of other shocks, irrespective of their structural origin. Variance decom- positions reveal that the sources of the movements in the tradable component lie in unsystematic deviations from uncovered interest parity as well as import price mark-up shocks. Consequently, these disturbances are far more potent than internal tradable or non-tradable sector-specific disturbances in driving real exchange rate .fluctuations.
    Keywords: New Open Economy Macroeconomics, Non-Tradables, Real Exchange Rate, Bayesian Inference, DSGE Estimation
    JEL: C11 F41
    Date: 2010–07
  19. By: Anna Zaharieva (Chizhova) (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper revisits the no-attachment assumption in job search models with random productivity fluctuations and Nash-bargaining. Both workers and firms value the option to remain in attachment: firms profit from a reduced hiring cost, while workers gain from a higher reservation wage when bargaining with a new employer. Ex-post differentiation of workers into attached and unattached unemployed produces endogenous binary wage dispersion. The decentralized equilibrium with a Hosios value of the bargaining power is no longer constrained efficient: when changing attachment workers impose a negative externality on their former employer originating from a loss of the recall option. This inefficiency tends to produce excessive job creation. The paper also investigates returns to job mobility in Germany and shows that being recalled to the previous employer as opposed to the new job is associated with about 8% lower probability of wage improvement.
    Keywords: Search equilibrium, temporary layoff, constrained efficiency, wage dispersion
    JEL: J23 J31 J63 M51
    Date: 2010–10–11
  20. By: L'Haridon, Olivier; Malherbet, Franck; Pérez-Duarte, Sébastien
    Abstract: In this article, the authors use a stylized model of the labor market to investigate the effects of three alternative and well-known bargaining solutions. They apply the Nash, the Egalitarian and the Kalai-Smorodinsky bargaining solutions in the small firm’s matching model of unemployment. To the best of their knowledge, this is the first attempt that has been made to implement and systematically compare these solutions in search matching economies. Their results are twofold. First from the theoretical/methodological viewpoint, they extend a somewhat flexible search matching economy to alternative bargaining solutions. In particular, they prove that the Egalitarian and the Kalai -Smorodinsky solutions are easily implementable and mathematically tractable within search-matching economies. Second, their 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: 2010–09–07
  21. By: Committee, Nobel Prize (Nobel Prize Committee)
    Abstract: Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year’s Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.
    Keywords: Search frictions;
    JEL: E24 J64
    Date: 2010–10–11
  22. By: Chao Gu (Department of Economics, University of Missouri-Columbia); Randall Wright
    Abstract: We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.
    Keywords: sunspot credit, commitment, dynamics, cycles.
    JEL: E2
    Date: 2010–10–11
  23. By: Rachel Male (Queen Mary, University of London)
    Abstract: It is well documented that business cycles of developed countries are characterised by persistent output fluctuations, and this has been the subject of much theoretical interest. However, the case for developing countries has been somewhat neglected in the literature. This paper addresses this imbalance, revealing that whilst both developed and developing countries exhibit persistent output fluctuations, there is a significant positive relationship between output persistence and level of economic development. This relationship was successfully modelled using a vertical production chain DSGE model (Huang and Liu, 2001). This model lends itself to such an analysis, as by altering the number of production stages (N) it is possible to represent economies at different levels of development. However, calibration of low input-output (γ) parameter values for the US and UK effectively inhibited the model from generating enough persistence to match that observed in these countries. Nonetheless, after abstracting from the US and UK results, there was found to be a strong significant positive relationship between the magnitude of output persistence generated by the model and economic development. A final very significant finding of this analysis is that the model overestimates output persistence in high inflation countries and underestimates output persistence in low inflation countries. This has important implications not only for this model, but also for any economist attempting to construct a business cycle model capable of replicating the observed patterns of output persistence.
    Keywords: Output persistence, Vertical production chain, Staggered price contracts, Economic development, Inflation
    JEL: E31 E32 E52
    Date: 2010–10
  24. By: Jimborean, R.; Ferroni, F.
    Abstract: I study whether US Tax Policies affected economic volatility during the post World War II period. I employ a Real Business Cycle model with distorting taxation on household income and tax rules, and assume that taxes respond to the cyclical conditions of the economy. I estimate the deep parameters of the model using Bayesian techniques. My findings are; (a) fiscal policies display a strong countercyclical behavior, (b) help to reduce the cyclical and raw volatility of GDP, consumption, investment when the government can issue debt, and (c) unexpected changes in tax policies do not affect the volatility of the macroeconomic variables.
    Keywords: Fiscal Policy and Business Cycles, Bayesian Methods.
    JEL: E32 E62 C11 C22
    Date: 2010
  25. By: Jeanne, O. Prof.Dr.; Korinek, A. (Tilburg University, Center for Economic Research)
    Abstract: We study a dynamic model in which the interaction between debt ac- cumulation and asset prices magni…es credit booms and busts. We find that borrowers do not internalize these feedback e¤ects and therefore suf- fer 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 by reference to (i) the US small and medium-sized enterprise sector and (ii) the household sector, and …nd the optimal tax to be countercycli- cal 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;…nancial crises;systemic externalities;macro-prudential regulation;precautionary savings
    JEL: E44 G38
    Date: 2010
  26. By: Angus C. Chu (Shanghai University of Finance and Economics, China); Ching-Chong Lai (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chih-Hsing Liao (National Chengchi University)
    Abstract: How do intellectual property rights that determine the market power of firms influence the effects of monetary policy on economic growth and social welfare? To analyze this question, we develop a monetary R&D-based growth model with elastic labor supply. We find that monetary expansion reduces growth and welfare through a decrease in labor supply that reduces R&D; furthermore, a larger market power of firms strengthens these effects of monetary policy in the R&D model. In contrast, increasing the market power of firms dampens the effects of monetary policy in the AK model. In other words, the market power of firms has surprisingly opposite implications on the growth and welfare effects of monetary policy under the two growth engines (i.e., innovation versus capital accumulation). Finally, we simulate the transition dynamics of the R&D-based growth model to compute the complete welfare changes from reducing inflation.
    Keywords: economic growth, inflation, monetary policy, patent policy, R&D
    JEL: O30 O40 E41
    Date: 2010–10
  27. By: Strulik, Holger; Prettner, Klaus; Prskawetz, Alexia
    Abstract: Conventional R\&D-based growth theory suggests that productivity growth is positively correlated with population size or population growth, an implication which is hard to see in the data. Here we integrate microfounded fertility and schooling into an otherwise standard R\&D-based growth model. We then show how a Beckerian child quality-quantity trade-off explains why higher growth of productivity and income per capita are associated with lower population growth. The medium-run prospects for future economic growth - when fertility is going to be below replacement level in virtually all fully developed countries - are thus much better than predicted by conventional R\&D-based growth theory.
    Keywords: endogenous growth, R\&D, declining population, fertility, schooling, human capital, post-modern society, post-transitional fertility
    JEL: J13 J24 O10 O30 O40
    Date: 2010–10
  28. By: Committee, Nobel Prize (Nobel Prize Committee)
    Abstract: Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009 compiled by the Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences
    Keywords: Search frictions;
    JEL: E24 J64
    Date: 2010–10–11
  29. By: Nobuhiro Kiyotaki (Princeton University); Alexander Michaelides (Central Bank of Cyprus and London School of Economics); Kalin Nikolov (Bank of England and London School of Economics)
    Abstract: This paper is a quantitatively-oriented theoretical study of the interaction between housing prices, aggregate production, and household behavior over a lifetime. We develop a life-cycle model of a production economy in which land and capital are used to build residential and commercial real estates. We find that, in an economy where the share of land in the value of real estates is large, housing prices react more to an exogenous change in expected productivity or the world interest rate, causing a large redistribution between net buyers and net sellers of houses. Changing financing constraints, however, has limited effects on housing prices.
    Keywords: Real estates, land, housing prices, life cycle, collateral constraints
    JEL: E20 G10 R20 R30
    Date: 2010–07
  30. By: Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
    Abstract: This paper analyzes the macroeconomic impact of China’s 2009-2010 fiscal stimulus package by simulating a dynamic general equilibrium multi-country model of the world economy, showing that the effects on China’s economic activity are sizeable: absent fiscal stimulus China’s GDP would be 2.6 and 0.6 percentage points lower in 2009 and 2010, respectively. The effects are stronger under a US dollar peg because of the imported loose monetary policy stance from the United States. Higher Chinese aggregate demand stimulates higher (gross and net) imports from other regions, in particular from Japan and the rest of the world, and, only to a lesser extent, from the United States and the euro area. However, the overall GDP impact of the Chinese stimulus on the rest of the world is limited. These results warn that a fiscal policydriven increase in China’s domestic aggregate demand associated with a more flexible exchange rate regime have only a limited potential to contribute to an orderly resolution of global trade and financial imbalances.
    Keywords: Fiscal stimulus, Financial crisis
    JEL: E62 F41 F42 H30 H63
    Date: 2010–10

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.