nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒12‒18
seventeen papers chosen by
Christian Zimmermann
University of Connecticut

  1. The Underground Economy in a Matching Model of Endogenous Growth By Gaetano Lisi; Maurizio Pugno
  2. Labor-market Volatility in a Matching Model with Worker Heterogeneity and Endogenous Separations By Andri Chassamboulli
  3. Trade Liberalization and Labor Market Dynamics By Rafael Dix-Carneiro
  4. Baby Busts and Baby Booms: The Fertility Response to Shocks in Dynastic Models By Larry E. Jones; Alice Schoonbroodt
  5. House prices, sales, and time on the market : a search-theoretic framework By Antonia Díaz; Belén Jerez
  6. Défiscalisation des heures supplémentaires: une perspective d'équilibre général. By Matheron, J.
  7. Capital Taxation During the U.S. Great Depression By Ellen R. McGrattan
  8. “Give me your Tired, your Poor,” so I can Prosper: Immigration in Search Equilibrium By Andri Chassamboulli; Theodore Palivos
  9. Why don't people pay attention? Endogenous Sticky Information in a DSGE Model By Lena Dräger
  10. Mirrlees meets Laibson: Optimal Income Taxation with Bounded Rationality By Matteo Bassi
  11. Asia’s Post-Global Financial Crisis Adjustment: A Model-Based Dynamic Scenario Analysis By Masahiro Kawai; Fan Zhai
  12. Longevity, Growth and Intergenerational Equity - The Deterministic Case By Torben M. Andersen; Marias H. Gestsson
  13. Sectoral Effects of Tax Reforms in an Open Economy By Olivier Cardi; Romain Restout
  14. Habit Formation and Fiscal Transmission in Open Economies By Olivier Cardi; Gernot J. Muller
  15. On gender and growth : the role of intergenerational health externalities and women's occupational constraints By Agenor, Pierre-Richard; Canuto, Otaviano; da Silva, Luiz Pereira
  16. House prices, sales, and time on the market : a search-theoretic framework (Supplementary material) By Antonia Díaz; Belén Jerez
  17. Optimal Aging and Death By Carl-Johan Dalgaard; Holger Strulik

  1. By: Gaetano Lisi (University of Cassino); Maurizio Pugno (University of Cassino)
    Abstract: A matching model will explain both unemployment and economic growth by considering the underground sector. Three problems can thus be simultaneously accounted for: (i) the persistence of underground economy, (ii) the ambiguous relationships between underground employment and unemployment, and (iii) between growth and unemployment. The key assumptions adopted are that entrepreneurial ability is heterogeneous across individuals; skill accumulation determines productivity growth in the regular sector and a positive externality on the underground sector; job-seekers choose whether or not to invest in education and skill depending on the expected wages in the two sectors. The conclusions are that the least able entrepreneurs set up underground firms, employ unskilled labour, and do not contribute to growth. Underground employment alleviates unemployment only if the monitoring rate is sufficiently low. Policies for entrepreneurship and monitoring would help both economic growth and employment.
    Keywords: entrepreneurship, underground economy, shadow economy, unemployment, human capital, endogenous growth, search and matching models
    JEL: E26 J23 J24 J63 J64 L26 O40
    Date: 2010–12–12
  2. By: Andri Chassamboulli
    Abstract: Recessions are times when the quality of the unemployment pool is lower, because entry into unemployment is biased in favor of low-productivity workers. I develop a search and matching model with worker heterogeneity and endogenous separations that has this feature. I show that in a recession a compositional shift in unemployment towards low-productivity workers, due an increase in job separations, lowers the matching effectiveness of searching firms, thereby causing their average recruiting cost to rise. This acts to further depress vacancy creation in a recession. In contrast to most models that allow for endogenous separations, this model generates a realistic Beveridge curve correlation.
    Keywords: search and matching, endogenous separations, worker heterogeneity, un-employment, vacancies volatility
    Date: 2010–12
  3. By: Rafael Dix-Carneiro (Princeton University)
    Abstract: This paper studies trade-induced transitional dynamics by estimating a structural dynamic equilibrium model of the labor market. The model features a multi-sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector-specific experience and costly switching of sectors. The estimation employs a large panel of workers constructed from Brazilian matched employer-employee data. The model’s estimates yield high average costs of mobility that are very dispersed across the population. In addition, sector-specific experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model as a laboratory for counterfactual experiments, this paper finds that: (1) there is a large labor market response following trade liberalization but the transition may take several years; (2) potential aggregate welfare gains are significantly mitigated due to the slow adjustment; (3) trade-induced welfare effects are very heterogeneous across the population; (4) retraining workers initially employed in the adversely affected sector may reduce losses incurred by these workers and increase aggregate welfare; (5) a moving subsidy that covers costs of mobility is more promising for compensating losers, although at the expense of higher welfare adjustment costs. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of physical capital.
    Keywords: Trade Liberalization, Labor Market Dynamics, Adjustment Costs, Worker Heterogeneity, Structural Econometric Models
    JEL: C01 J00 J21 F16
    Date: 2010–11
  4. By: Larry E. Jones; Alice Schoonbroodt
    Abstract: Economic demographers have long analyzed fertility cycles. This paper builds a foundation for these cycles in a model of fertility choice with dynastic altruism and aggregate shocks. It is shown that under reasonable parameter values, fertility is pro-cyclical and that, following a shock, fertility continues to cycle endogenously as subsequent cohorts enter retirement. Quantitatively, in the model, the Great Depression generates a large baby bust -- between 38% and 63% of that seen in the U.S. in the 1930s -- which is subsequently followed by a baby boom -- between 53% and 92% of that seen in the U.S. in the 1950s.
    JEL: E13 J11 J13 O11
    Date: 2010–12
  5. By: Antonia Díaz; Belén Jerez
    Abstract: We build a search model of the housing market which captures the illiquidity of housing assets. In this model, households experience idiosyncratic shocks over time which affect how much they value their residence (e.g. the location of their job could change). When hit by a shock, households become mismatched and seek to buy a new home. Yet they take time to locate an appropriate housing unit and to sell their current home. Competitive forces are present in the housing market since, by posting lower prices, sellers increase the average number of buyer visits they get and sell their property faster. We characterize a stationary equilibrium for a fixed housing stock. We then calibrate a stochastic version of the model to reproduce selected aggregate statistics of the U.S. economy. The model is consistent with the high volatility of prices, sales and average time on the market, the positive correlation of prices and sales, and the negative correlation of prices and average time on the market observed in the data. This is not the case when we consider the perfectly competitive version of the model
    Keywords: House prices, Sales, Time on the market, Search frictions, Competitive search
    JEL: R31 D83 D40
    Date: 2010–10
  6. By: Matheron, J.
    Abstract: This paper characterizes the short- and long-run effects of overtime de-taxation. A dynamic general equilibrium with overtime hours is first developed and calibrated to French data. A fiscal shock consisting of a complete de-taxation of overtime hours is then implemented in the model. Several fiscal scenarios are considered, depending on the pace of public debt and depending on whether consumption taxes or lump-sum taxes are adjusted. In each case, the welfare gains of the fiscal reform are computed. Overtime de-taxation is found to have very limited aggregate effects on output and the labor supply. It also generates a small welfare gain or even a welfare loss, depending on the on the fiscal scenario.
    Keywords: Overtime de-taxation, general equilibrium
    JEL: E13 E62 E65
    Date: 2010
  7. By: Ellen R. McGrattan
    Abstract: Previous studies of the U.S. Great Depression find that increased taxation contributed little to either the dramatic downturn or the slow recovery. These studies include only one type of capital taxation: a business profits tax. The contribution is much greater when the analysis includes other types of capital taxes. A general equilibrium model extended to include taxes on dividends, property, capital stock, and excess and undistributed profits predicts patterns of output, investment, and hours worked more like those in the 1930s than found in earlier studies. The greatest effects come from the increased tax on corporate dividends.
    JEL: E13 E32 H25
    Date: 2010–12
  8. By: Andri Chassamboulli; Theodore Palivos
    Abstract: We analyze the impact of immigration on the host country within a search and matching model that allows for skill heterogeneity, endogenous skill acquisition, differential search cost between immigrants and natives, capital-skill complementarity and different degree of substitutability between unskilled natives and immigrants. Within such a framework, we find that although immigration raises the overall welfare, it may have distributional effects. Specifically, skilled workers gain in terms of both employment and wages. Unskilled workers, on the other hand, gain in terms of employment but may lose in terms of wages. Nevertheless, in one version of the model, where unskilled workers and immigrants are imperfect substitutes, we find that even the unskilled wage may rise. These results accommodate conflicting empirical findings.
    Keywords: Search, Unemployment, Immigration, Skill-heterogeneity
    Date: 2010–12
  9. By: Lena Dräger (University of Hamburg, Deutchland, and KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Building on the models of sticky information, we endogenize the probability of obtaining new information by introducing a switching mechanism allowing agents to choose between costly rational expectations and costless expectations under sticky information. Thereby, the share of agents with rational expectations becomes endogenous and time-varying. While central results of sticky information models are retained, we find that the share of rational expectations is positively correlated with the variance of the variable forecasted, providing a link to models of near-rationality. Output expectations in our model are generally more rational than inflation expectations, but the share of rational inflation expectations increases with a rising variance of the interest rate. With regard to optimal monetary policy, we find that the Taylor principle provides a necessary and sufficient condition for the determinacy of the model. However, output and inflation stability are optimized if the central bank does not react too strongly to inflation, but rather also targets the output gap with a relatively large coefficient in the Taylor rule.
    Keywords: Endogenous sticky information, heterogeneous expectations, DSGE models
    JEL: E31 E52 E61
    Date: 2010–07
  10. By: Matteo Bassi (Università di Salerno and CSEF)
    Abstract: This paper studies an optimal taxation problem in a dynamic economy inhabited by individuals who differ in productivity (as in Kocherlakota, 2006) and in the short-term discount factor. We determine incentive compatible Pareto optimal allocations in a multidimensional screening model where individuals have to report truthfully their types. Moreover, we characterize the optimal non linear tax on capital and labor income that implements such allocations in a competitive equilibrium. Two forms of bounded rationality are considered: in the first one, some individuals discount future payoffs at a higher rate than others (myopia). In this application, the planner respects consumers' sovereignty, and maximizes a Paretian social welfare function. In the second application, some individuals are time inconsistent: they systematically change future plans and regret ex-post for the lack of commitment power. We show that the marginal tax on capital income implementing the optimal allocation consists of several elements, which combine incentive compatibility and bounded rationality considerations. The resulting optimal tax is a decreasing function of both the fraction of short-sighted individuals and the intensity of myopia/hyperbolic discounting. Our results are not driven by the paternalistic behavior of the planner, but by the incentive/self control problem and the necessity of providing the right incentive to high productive, far-sighted individuals. However, when the planner would like to push hyperbolic individuals toward the right consumption/saving path, we show that the optimal marginal tax includes also a paternalistic component that further decrease the optimal tax compared to the case with only exponential agents.
    Keywords: Dynamic Optimal taxation, Saving, Capital accumulation, Time Inconsistency, Myopia, Minimal Paternalism, Multidimensional Screening
    JEL: A21 H21
    Date: 2010–12–06
  11. By: Masahiro Kawai; Fan Zhai (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: dynamic global general equilibrium model, global financial crisis, Asia, emerging East Asia
    JEL: C68 E62 F32 F47
    Date: 2010
  12. By: Torben M. Andersen; Marias H. Gestsson
    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 trend increases in both 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.
    Date: 2010–10
  13. By: Olivier Cardi (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Panthéon-Assas - Paris II, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Romain Restout (Université Catholique de Louvain, IRES - UCL)
    Abstract: We use a neoclassical open economy model with traded and non traded goods to investigate the sectoral effects of three tax reforms: i) two revenue-neutral shifting the tax burden from labor to consumption taxes and ii) one labor tax restructuring keeping the marginal tax wedge constant. Regardless of its type, a tax reform crowds-in both consumption and investment and raises employment. Whereas tax reforms have a small impact on GDP, they exert substantial effects on sectoral outputs which move in opposite direction in the short-run. The sensitivity analysis reveals that raising the elasticity of labor supply or reducing the tradable content in consumption expenditure amplifies the heterogeneity in sectoral output responses. Finally, allowing for the markup to depend on the number of competitors, we find that a substantial share of sectoral output variations can be attributed to the change in the markup triggered by firm entry.
    Keywords: Non Traded Goods; Employment; Current Account; Tax Reform.
    Date: 2010–12–08
  14. By: Olivier Cardi (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Panthéon-Assas - Paris II, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Gernot J. Muller (University of Bonn, Department of Economics - Bonn Universität - University of Bonn)
    Abstract: In this paper we analyze the ability of an open economy version of the neoclassical model to account for the time-series evidence on fiscal policy transmission. In a first step, we identify government spending shocks within a vector autoregression model. We find that i) government spending increases output and induces a simultaneous decline of investment and the current account, but does not affect consumption; ii) the responses of output and investment are smaller in more open economies, while current account deficits tend to be larger. We find the predictions of the model to be broadly in line with the evidence, once we allow for habit formation in consumption. Specifically, habits are crucial for government spending to induce a simultaneous decline in investment and the current account.
    Keywords: Investment; Current Account; Habit Formation; Fiscal Policy.
    Date: 2010–12–08
  15. By: Agenor, Pierre-Richard; Canuto, Otaviano; da Silva, Luiz Pereira
    Abstract: This paper studies the growth effects of externalities associated with intergenerational health transmission, health persistence, and women's occupational constraints-- with particular emphasis on the role of access to infrastructure. The first part provides a review of the evidence on these issues. The second and third parts present an overlapping generations model of endogenous growth that captures these interactions, and characterize its properties. The model is then used to perform several gender-based or gender-related experiments -- a reduction in the cost of child rearing, improved wage equality in the market place, and better access to infrastructure. The last part draws together the implications of the analysis for promoting the role of women in growth strategies.
    Keywords: Health Monitoring&Evaluation,Population Policies,Gender and Health,Gender and Law,Rural Development Knowledge&Information Systems
    Date: 2010–12–01
  16. By: Antonia Díaz; Belén Jerez
    Abstract: In this document we present additional results for our main paper. First, we prove some properties of the steady state of our benchmark economy. Then, we present an alternative calibration
    Keywords: House prices, Sales, Time on the market, Search frictions, Competitive search
    JEL: R31 D83 D40
    Date: 2010–11
  17. By: Carl-Johan Dalgaard; Holger Strulik
    Abstract: This study introduces physiological aging into a simple model of optimal in- tertemporal consumption. In this endeavor we draw on the natural science literature on aging. According to the purposed theory, the speed of the aging process and the time of death are endogenously determined by optimal health investments. At the same time, physiological aspects of the aging process influence optimal savings and health investment. We calibrate the model for the average US male in 2000 and proceed to show that the calibrated model accounts well for the cross-country link between labor productivity and life expectancy in the same year (\the Preston curve"); cross-country income dierences can explain dierences in life expectancy at age 20 of up to a decade. Moreover, techno- logical change in health care of about 1.1% per year can account for the observed shift in the Preston curve between 1980 and 2000.K
    Keywords: Aging, Longevity, Health Investments, Savings, Preston Curve
    Date: 2010–07

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.