nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒12‒04
fourteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. What Can an Open-Economy DSGE Model Tell Us about Hong Kong’s Housing Market? By Michael, Funke; Michael, Paetz
  2. Fiscal Policy and the Labour Market: The Effects of Public Sector Employment and Wages By Gomes, Pedro Maia
  3. On Fiscal Multipliers: Estimates from a Medium Scale DSGE Model By Sarah Zubairy
  4. Interactions between Private and Public Sector Wages By Afonso, António; Gomes, Pedro Maia
  5. Risky Mortgages in a DSGE Model By Chiara Forlati; Luisa Lambertini
  6. A General Equilibrium Evaluation of the Employment Service By Miana Plesca
  7. Formal Education and Public Knowledge By Maurizio Iacopetta
  8. Longevity, Growth and Intergenerational Equity - The Deterministic Case By Torben M. Andersen; Marias H. Gestsson
  9. Inflation, Price Dispersion and Market Integration through the Lens of a Monetary Search Model By Sascha S. Becker; Dieter Nautz
  10. Asia's Post-Global Financial Crisis Adjustment: A Model-Based Dynamic Scenario Analysis By Kawai, Masahiro; Zhai, Fan
  11. Why crises happen - nonstationary macroeconomics By Davidson, James; Meenagh, David; Minford, Patrick; Wickens, Michael
  12. Mortgage choices and housing speculation By Gadi Barlevy; Jonas D. M. Fisher
  13. Capital Misallocation and Aggregate Factor Productivity By Costas Azariadis; Leo Kaas
  14. Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies By Olivier Charlot; Franck Malherbet; Cristina Terra

  1. By: Michael, Funke (BOFIT); Michael, Paetz (BOFIT)
    Abstract: This paper develops an open-economy DSGE model with a housing-market sector and a borrowing constraint. Contrary to standard conventions, domestic households are allowed to invest in foreign housing and vice versa. Using Bayesian methods, the model is applied to data for Hong Kong. The results show that Hong Kong’s housing market is quite open to foreign investment, and perhaps more significantly, that variations in the loan-to-value ratio and housing preference shocks largely explain business cycle volatility.
    Keywords: DSGE models; housing; open economy; Hong Kong
    JEL: D91 E21 E44 F41
    Date: 2010–11–22
  2. By: Gomes, Pedro Maia (Universidad Carlos III de Madrid)
    Abstract: I build a dynamic stochastic general equilibrium model with search and matching frictions and two sectors in order to study the labour market effects of public sector employment and wages. Public sector wages plays an important role in achieving the efficient allocation. High wages induce too many unemployed to queue for public sector jobs, while if they are low, the government faces recruitment problems. The optimal steady-state wage premium depends mainly on the labour market friction parameters. In response to technology shocks, it is optimal to have procyclical public sector wages. Deviations from the optimal policy can increase the volatility of unemployment significantly. Public sector wage and employment shocks have mixed effects on unemployment. A wage shock raises the unemployment rate, while a reduction in the separations lowers it. Hiring more people can increase or decrease the unemployment rate. All shocks raise the wage and crowd out employment in the private sector. In the empirical part, I employ Bayesian methods to estimate the parameters of the model for the United States. I find that the direct search mechanism between the two sectors is an important element to explain business cycle fluctuations of the labour market variables.
    Keywords: public sector employment, public sector wages, unemployment, fiscal shocks
    JEL: E24 E32 E62 J31 J45
    Date: 2010–11
  3. By: Sarah Zubairy
    Abstract: This paper contributes to the debate on fiscal multipliers, in the context of a structural model. I estimate a micro-founded dynamic stochastic general equilibrium model, that features a rich fiscal policy block and a transmission mechanism for government spending shocks, using Bayesian techniques for US data. I find the multiplier for government spending to be 1.12, and the maximum impact is when the spending shock hits the economy. In addition, the estimated model predicts a positive but small response of private consumption to increased government spending. The multipliers for labor and capital tax on impact are 0.13 and 0.33, respectively. The effects of tax cuts, on the other hand, take time to build, and exceed the stimulative effects of higher spending at horizons of 12-20 quarters. The expansionary effects of tax cuts are primarily driven by the response of investment. I carry out several counterfactual exercises to show how alternative financing methods and expected monetary policy have consequences for the size of fiscal multipliers. I also simulate the impact of the American Recovery and Reinvestment Act of 2009 in the estimated model.
    Keywords: Fiscal policy; Economic models
    JEL: C11 E32 E62 H30
    Date: 2010
  4. By: Afonso, António (European Central Bank); Gomes, Pedro Maia (Universidad Carlos III de Madrid)
    Abstract: We examine the interactions between public and private sector wages per employee in OECD countries. The growth of public sector wages and of public sector employment positively affects the growth of private sector wages. Moreover, total factor productivity, the unemployment rate and the degree of urbanisation are also important determinants of private sector wage growth. With respect to public sector wage growth, we find that it is influenced by fiscal conditions in addition to private sector wages. We then set up a dynamic labour market equilibrium model with two sectors, search and matching frictions and exogenous growth to understand the interaction mechanisms. The model is quantitative consistent with the main estimation findings.
    Keywords: public sector wages, private sector wages, employment, fiscal policy
    JEL: E24 E62 H50
    Date: 2010–11
  5. By: Chiara Forlati (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland); Luisa Lambertini (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)
    Abstract: This paper develops a DSGE model with housing, risky mortgages and endogenous default. Housing investment is subject to idiosyncratic risk and some mortgages are defaulted in equilibrium. An unanticipated increase in the standard deviation of housing investment produces a credit crunch where delinquencies and mortgage interest rates increase, lending is curtailed, and aggregate demand for non-durable goods falls. The economy experiences a recession as a consequence of the credit crunch. The paper compares economies that differ only in the riskiness of housing investment. Economies with lower risk are characterized by lower steady-state mortgage default rates and higher loan-to-value and leverage ratios. The macroeconomic effects of an unanticipated increase in housing investment risk are amplified in high-leverage economies. Monetary policy plays an important role in the transmission of housing investment risk, as inertial interest rate rules generate deeper output contractions.
    Keywords: Housing, Mortgage default, Mortgage Risk
    JEL: E32 E44 R31
    Date: 2010–11
  6. By: Miana Plesca (Department of Economics, University of Guelph; The Rimini Centre for Economic Analysis (RCEA))
    Abstract: This paper provides a general equilibrium evaluation of the Employment Service, also known as the Public Labor Exchange (PLX), a national program which facilitates meetings between job seekers and vacancies. The paper departs from the partial equilibrium framework of previous evaluations by constructing a dynamic general equilibrium matching model with the PLX as one search channel, and the other search channel comprising all other search methods. The PLX is a directed search channel in the sense that searchers are matched by skill levels. The model is calibrated to the U.S. PLX and to the U.S. labor market and is used to compute general and partial equilibrium impacts of the PLX. The findings are that (i) the partial equilibrium impacts are consistent with the empirical literature, but different from the general equilibrium ones; (ii) the standard assumption in the evaluation literature, that outcomes for agents who do not participate in a program are not directly affected by the program, does not hold for the PLX; (iii) the heterogeneity across and within worker skill levels plays an important role when computing aggregate impacts; and, (iv) equilibrium adjustments are driven by employers who post are high-skill vacancies when both search channels operate.
    Keywords: Search Models, Program Evaluation, Public Employment Service, PLX, General Equilibrium Impacts, Partial Equilibrium Impacts
    JEL: J63 J64 J68 E24
    Date: 2010–01
  7. By: Maurizio Iacopetta (Observatoire Français des Conjonctures Économiques)
    Abstract: In this paper, I examine the transitional dynamics of an economy populated by individuals who split their time between acquiring a formal education, producing final goods, and innovating. The paper has two objectives: (i) uncovering the macroeconomic circumstances that favored the rise of formal education; (ii) to reconcile the remarkable growth of the education sector with the constancy of other key macroeconomic variables, such as the interest rate, the consumption-output ratio, and the growth rate of per capita income (Kaldor facts). The transitional dynamics of human capital growth models, such as Lucas (1988), would attribute the arrival of education to the diminishing marginal productivity of physical capital. Conversely, the model proposed here suggests that it is the rate of learning that catches up with the rate of return on physical capital. As technical knowledge expands, the rate of return on education increases, and this induces individuals to stay longer in school. The model's transitional paths are matched with long run U.S. educational and economic data.
    Keywords: Public Knowledge, Learning Rate, Transitional Dynamics, Calibration. JEL codes: J24, N30, O33.
    Date: 2010–11
  8. By: Torben M. Andersen (School of Economics and Management, Aarhus University, Denmark); Marias H. Gestsson (Central Bank of Iceland)
    Abstract: Challenges raised by ageing (increasing longevity) have prompted policy debates featuring policy proposals justified by reference to some notion of intergenerational equity. However, very different policies ranging from pre-savings to indexation of retirement ages have been justified in this way. We develop an overlapping generations model in continuous time which encompasses different generations with different mortality rates and thus longevity. Allowing for both trend increases in longevity and productivity, we address the issue of intergenerational equity under a utilitarian criterion when future generations are better off in terms of both material and non-material well being. Increases in productivity and longevity are shown to have very different implications for intergenerational distribution.
    Keywords: OLG models, demographics, longevity, taxes, transfers, retirement age, dependency ratio, healthy ageing, decentralization
    JEL: J11
    Date: 2010–11–29
  9. By: Sascha S. Becker; Dieter Nautz
    Abstract: Monetary search theory implies that the real effects of inflation via its impact on price dispersion depend on the level of search costs and, thus, on the level of market integration. For less integrated markets, the inflation-price dispersion nexus is predicted to be asymmetrically V-shaped which results in an optimal inflation rate above zero. For highly integrated markets with low search costs, however, the impact of inflation on price dispersion should only be small. Using price data of the European Union member states, this paper is the first that tests and confirms these predictions of monetary search theory.
    Keywords: Inflation, Relative price variability, Monetary search, Market integration
    JEL: C23 D40 E31 F40
    Date: 2010–11
  10. By: Kawai, Masahiro (Asian Development Bank Institute); Zhai, Fan (Asian Development Bank Institute)
    Abstract: Using a dynamic global general equilibrium model, the paper assesses the short- and medium-term impacts of the global financial crisis on Asian economies and the implications of post-crisis adjustment in emerging East Asia (EEA) for the world economy. The analysis suggests that EEA is unlikely to be severely damaged permanently by the global financial crisis, and a worldwide fiscal stimulus could play an important role in stabilizing the global economy in crisis. EEA’s efforts at strengthening regional demand, in conjunction with adopting a more flexible exchange rate regime, will promote more balanced regional growth and facilitate an orderly global rebalancing. However, despite the growing size of EEA in the global economy, the region’s growth rebalancing has only modest spillover effects on the rest of the world. EEA can contribute to global growth, but it alone cannot become the sole engine driving post-crisis growth in the world economy.
    Keywords: Computable general equilibrium model; global financial crisis; Easst Asia; emerging
    JEL: C68 E62 F32 F47
    Date: 2010–11–23
  11. By: Davidson, James; Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School)
    Abstract: A Real Business Cycle model of the UK is developed to account for the behaviour of UK nonstationary macro data. The model is tested by the method of indirect inference, bootstrapping the errors to generate 95% confidence limits for a VECM representation of the data; we find the model can explain the behaviour of main variables (GDP, real exchange rate, real interest rate) but not that of detailed GDP components. We use the model to explain how `crisis' and `euphoria' are endemic in capitalist behaviour due to nonstationarity; and we draw some policy lessons.
    Keywords: Nonstationarity; Productivity; Real Business Cycle; Bootstrap; Indirect Inference; Banking Crisis; Banking Regulation
    JEL: E32 F32 F41
    Date: 2010–11
  12. By: Gadi Barlevy; Jonas D. M. Fisher
    Abstract: We describe a rational expectations model in which speculative bubbles in house prices can emerge. Within this model both speculators and their lenders use interest-only mortgages (IOs) rather than traditional mortgages when there is a bubble. Absent a bubble, there is no tendency for IOs to be used. These insights are used to assess the extent to which house prices in US cities were driven by speculative bubbles over the period 2000-2008. We find that IOs were used sparingly in cities where elastic housing supply precludes speculation from arising. In cities with inelastic supply, where speculation is possible, there was heavy use of IOs, but only in cities that had boom-bust cycles. Peak IO usage predicts rapid appreciations that cannot be explained by standard correlates and this variable is more robustly correlated with rapid appreciations than other mortgage characteristics, including sub-prime, securitization and leverage. Where IOs were popular, their use does not appear to have been a response to houses becoming more expensive. Indeed, their use anticipated future appreciation. Finally, consistent with the reason why lenders prefer IOs, these mortgages are more likely to be repaid earlier or foreclose. Combined with our model, this evidence suggests that speculative bubbles were an important factor driving prices in cities with boom-bust cycles.>
    Keywords: Mortgage loans ; Mortgage-backed securities ; Housing - Prices
    Date: 2010
  13. By: Costas Azariadis (Department of Economics, Washington University, St. Louis MO, USA; The Rimini Centre for Economic Analysis (RCEA), Rimini, Italy); Leo Kaas (Department of Economics, University of Konstanz, Konstanz, Germany)
    Keywords: D90, E32, O47
    Date: 2010–01
  14. By: Olivier Charlot; Franck Malherbet; Cristina Terra
    Abstract: This paper studies the impact of product and labor market regulations on the number and size of firms in the formal and informal sectors, as well as on relative wages, relative size of the two sectors and overall unemployment. We show that entry costs in the formal sector tend to make informal firms smaller and more numerous than informal firms, i.e., such costs render the informal sector relatively more competitive. Furthermore, it is possible to reduce informality without increasing unemployment or reducing workers’ wage by reducing entry costs in the formal sector rather than reducing labor market regulations. We also highlight a number of externalities stemming from labor and product market imperfections, allowing the size of those distortions to differ across sectors. We show that, while the so-called overhiring externality takes place in both sectors, this translates into a smaller relative size of the informal sector.
    Keywords: Informality, product and labor, market imperfections, firm size
    JEL: E24 E26 J60 L16 O1
    Date: 2010

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