nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒12‒23
thirteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. An Estimated DSGE Model of the Indian Economy By Vasco J. Gabriel; Paul Levine; Joseph Pearlman; Bo Yang
  2. A Floating versus Managed Exchange Rate Regime in a DSGE Model of India By Nicoletta Batini; Vasco J. Gabriel; Paul Levine; Joseph Pearlman
  3. Optimal taxation and constrained inefficiency in an infinite-horizon economy with incomplete markets By Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
  4. Property Rights and Efficiency in OLG Models With Endogenous Fertility By Schoonbroodt, Alice; Tertilt, Michele
  5. Shocking stuff: technology, hours, and factor substitution By Cristiano Cantore; Miguel A. León-Ledesma; Peter McAdam; Alpo Willman
  6. Loose commitment in medium-scale macroeconomic models: Theory and an application By Davide Debortoli; Junior Maih; Ricardo Nunes
  7. Demographic-economic equilibria when the age at motherhood is endogenous By Katheline Schubert; Emmanuelle Augeraud-Véron; Hippolyte D'Albis
  8. The Effectiveness of Government Debt for Demand Management: Sensitivity to Monetary Policy Rules By Guido Ascari; Neil Rankin
  9. Crecimiento económico: enfoques y modelos. Capítulo 5 - Teoría del crecimiento endógeno By Félix Jiménez 
  10. Discrimination in the Equilibrium Search Model with Wage-Tenure Contracts By FANG Zheng and Chris SAKELLARIOU; FANG Zheng; Chris SAKELLARIOU
  11. Which Parameters Drive Approximation Inaccuracies? By Sebastian Sienknecht
  12. Adoption Technology Targets and Knowledge Dynamics: Consequences for Long-Run Prospects By Verónica Mies
  13. Openness and optimal monetary policy By Giovanni Lombardo; Federico Ravenna

  1. By: Vasco J. Gabriel (Department of Economics, University of Surrey and Universidade do Minho - NIPE); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University); Bo Yang (University of Surrey and London Metropolitan University)
    Abstract: We develop a closed-economy DSGE model of the Indian economy and estimate it by Bayesian Maximum Likelihood methods using Dynare. We build up in stages to a model with a number of features important for emerging economies in general and the Indian economy in particular: a large proportion of credit-constrained consumers, a financial accelerator facing domestic firms seeking to finance their investment, and an informal sector. The simulation properties of the estimated model are examined under a generalized inflation targeting Taylor-type interest rate rule with forward and backward-looking components. We find that, in terms of model posterior probabilities and standard moments criteria, inclusion of the above financial frictions and an informal sector significantly improves the model fit.
    Keywords: Indian economy, DSGE model, Bayesian estimation, monetary interest rate rules, financial frictions.
    JEL: E52 E37 E58
    Date: 2010
  2. By: Nicoletta Batini (IMF and University of Surrey); Vasco J. Gabriel (Department of Economics, University of Surrey and Universidade do Minho - NIPE); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University)
    Abstract: We first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as a Taylor-type interest rate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. We find that the imposition of a low exchange rate volatility is only achieved at a significant welfare loss if the policymaker is restricted to a simple domestic inflation plus exchange rate targeting rule. If on the other hand the policymaker can implement a complex optimal rule then an almost fixed exchange rate can be achieved at a relatively small welfare cost. This finding suggests that future research should examine alternative simple rules that mimic the fully optimal rule more closely.
    Keywords: DSGE model, Indian economy, monetary interest rate rules, floating versus managed exchange rate, financial frictions
    JEL: E52 E37 E58
    Date: 2010
  3. By: Piero Gottardi (European University Institute); Atsushi Kajii (Institute of Economic Research, Kyoto University); Tomoyuki Nakajima (Institute of Economic Research, Kyoto University)
    Abstract: How should capital and labor be taxed when individuals' labor income is subject to unin- surable idiosyncratic risks? To address this question, we develop a tractable infinite horizon model with incomplete markets and consider a dynamic optimal taxation problem with linear taxes on the wage and interest income. We derive two general principles for public policy in such an environment: (i) providing an insurance for the idiosyncratic income risks; and (ii) allocating tax burdens efficiently over time. The first principle calls for taxing the labor income. The second principle clarifies when accumulating government debt is welfare improving, and also when the tax rate on physical capital needs to be strictly positive in the long run. We also calibrate our model to the U.S. economy and find that the presence of idiosyncratic income risks significantly affects the optimal tax rates and the optimal amount of the government debt.
    Keywords: incomplete markets; constrained inefficiency; optimal taxation; Ramsey equilibrium.
    JEL: D52 D60 D90 E20 E62 H21 O40
    Date: 2010–12
  4. By: Schoonbroodt, Alice; Tertilt, Michele
    Abstract: Is there an economic rationale for pronatalist policies? We propose and analyze a particular market failure that leads to inefficiently low fertility in equilibrium. The friction is caused by the lack of ownership of children: if parents have no claim on their children’s income, the private benefit from producing a child can be smaller than the social benefit. We analyze an overlapping-generations model with fertility choice and parental altruism. Ownership is modeled as a minimum constraint on transfers from parents to children. Using the efficiency concepts proposed in Golosov, Jones, and Tertilt (2007), we find that whenever the transfer floor is binding, fertility choices are inefficient. Second, we show that the usual conditions for efficiency are not sufficient in this context. Third, in contrast to settings with exogenous fertility, a PAYG social security system cannot be used to implement efficient allocations. To achieve an efficient outcome, government transfers need to be tied to fertility choice. <br><br> Keywords; Overlapping generations, Fertility, Efficiency <br><br> JEL Classification: D6, E1, H55, J13
    Date: 2010–12–01
  5. By: Cristiano Cantore (Department of Economics, University of Surrey, Surrey GU2 7XH, UK.); Miguel A. León-Ledesma (Department of Economics, University of Kent, Kent CT2 7NP, UK.); Peter McAdam (European Central Bank, Research Dept., Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Alpo Willman (European Central Bank, Research Dept., Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The reaction of hours worked to technology shocks represents a key controversy between RBC and New Keynesian explanations of the business cycle. It sparked a large empirical literature with contrasting results. We demonstrate that, with a more general and data coherent supply and production framework (“normalized” factor-augmenting CES technology), both models can plausibly generate impacts of either sign. We develop analytical expressions to establish the threshold between positive and negative contemporaneous correlations for both models. These will crucially depend on the factor-augmentation nature of the shock, the elasticity of factor substitution, the capital income share, and the reaction of consumption. The impact of technology on hours can thus hardly be taken as evidence in support of any particular business-cycle model. Our results are also important as: i) we introduce the concept of normalization for DSGE models and, ii) they may help interpret possible time-variation in technology and hours correlations over time. JEL Classification: E32, E23, E25.
    Keywords: Technology Shocks, HoursWorked, RBC and NK models, Normalization, Factor Substitution, Factor Bias.
    Date: 2010–12
  6. By: Davide Debortoli (UC San Diego); Junior Maih (Norges Bank (Central Bank of Norway)); Ricardo Nunes (Federal Reserve Board)
    Abstract: This paper proposes a method and a toolkit for solving optimal policy with imperfect commitment in linear quadratic models. As opposed to the existing literature, our method can be employed in medium- and large-scale models typically used in monetary policy. We apply our method to the Smets and Wouters (2007) model, where we show that imperfect commitment has relevant implications for the interest rate setting, the sources of business cycle fluctuations, and welfare.
    Keywords: Commitment, Discretion, Linear-Quadratic
    JEL: E58 E61
    Date: 2010–12–06
  7. By: Katheline Schubert (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Emmanuelle Augeraud-Véron (MIA - Mathématiques, Image et Applications - Université de La Rochelle : EA3165); Hippolyte D'Albis (Toulouse School of Economics - Toulouse School of Economics, LERNA - Economie des Ressources Naturelles - INRA : UR1081 - CEA : DPG - Université des Sciences Sociales - Toulouse I)
    Abstract: In this article, we study the joint dynamics of the demography and the economy. We explore how economic conditions affect fertility choices, and in return how the population growth rate affects both financial and labor markets. Our main contribution is to consider a realistic demographic setup that allows characterizing the age at which individuals decide to give birth to their children. In such a framework, we aim at studying the existence of an equilibrium. We notably prove there exists a monetary steady state if the average age of consumers is greater than the average age of producers.
    Keywords: Demographic economics; fertility choices; monetary equilibrium
    Date: 2010–12–13
  8. By: Guido Ascari; Neil Rankin
    Abstract: We construct a staggered-price dynamic general equilibrium model with overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make an increase in government debt, with associated changes in lump-sum taxation, effective in raising short-run output. However we find this is very sensitive to the monetary policy rule. A permanent increase in debt under a basic Taylor Rule does not raise output. To make debt effective we need either a temporary nominal interest rate peg; or inertia in the rule; or an exogenous money supply policy; or to make the debt increase temporary.
    Keywords: staggered prices, overlapping generations, government debt, fiscal policy effectiveness, monetary policy rules
    JEL: E62 E63
    Date: 2010–12
  9. By: Félix Jiménez  (Departamento de Economía- Pontificia Universidad Católica del Perú)
    Abstract: In order to explain growth in per capita output, an exogenous technical change is introduced into the neoclassical models. The new growth theory emerges as a critical to this explanation and considers that technical change is an endogenous result. Hence, the new theory abandons the neoclassical production function and the decreasing marginal returns to capital. The first section of this chapter explains in more detail the emergence of the endogenous growth theory. In the second and third sections, we present the theories of endogenous growth of first and second generation. In the fourth section, we analyze the main theoretic tools used by the endogenous growth models: constant or increasing returns to scale, the introduction of education, job training and human capital, the development of new technologies, innovation and institutions. Finally, the fifth section revises the economic policy implications.
    Date: 2010
  10. By: FANG Zheng and Chris SAKELLARIOU; FANG Zheng (Division of Economics, Nanyang Technological University, Singapore, 639798); Chris SAKELLARIOU (Division of Economics, Nanyang Technological University, Singapore, 639798)
    Abstract: We extend the Burdett and Coles (2003) search model with wage-tenure contracts to two types of workers and firms and derive the equilibrium earnings distributions for both types of workers, by means of which we succeed in predicting many stylized facts found in empirics. For example, we find that at the same wage level, majority workers almost always experience a faster wage increase than the minority workers; minority workers have a higher unemployment rate; discriminating firms make lower profit than non-discriminating firms and offers to minority workers by non-discriminating firms are consistently superior to those provided by discriminating firms etc. Besides, we find a similar result to the classical discrimination theory that the average wage of the majority workers, though higher in most cases, can be smaller than their counterpart’s wage when the fraction of discriminating firms is small and the degree of recruiting discrimination and disutility are mild. We also show that in a special case of CRRA utility function with the coefficient of relative risk aversion approaching infinity, our model degenerates to Bowlus and Eckstein (2002).
    Keywords: discrimination, wage gap, equilibrium search, wage-tenure
    Date: 2010–04
  11. By: Sebastian Sienknecht (Department of Economics, Friedrich-Schiller-University Jena)
    Abstract: This paper identifies parameters responsible for welfare reversals when the basic New Keynesian model is approximated. In our setting, a reversal occurs when the Ramsey policy under timeless perspective commitment ceases to be dominant against the Taylor rule after approximating the model. We find that the parameters involved are the degree of persistence in the autoregressive shock process and the labor elasticity of real output.
    Keywords: Optimal Monetary policy, Approximations, Welfare Analysis, Timeless Perspective
    JEL: E30 E52 E61
    Date: 2010–12–16
  12. By: Verónica Mies
    Abstract: When targeting frontier technologies, less developed economies usually face obstacles to achieve high growth in the long run, because of their low level of knowledge relative to the adoption technology target. If the intensity in which the adoption activity uses knowledge is high, then the less developed economy may end up trapped in a low growth equilibrium. We show that in this case it is beneficial to target less advanced technologies, which helps to compensate the scarcity of knowledge during the transition. Nevertheless, polarization is possible. If knowledge intensity in the adoption activity is low, then possessing a low stock of knowledge allows targeting the technology frontier even in a poor R&D environment. In this case, all economies achieve a high growth equilibrium in which only income level differences persist in the long run.
    Keywords: R&D, adoption, innovation, growth, development, transitional dynamics.
    JEL: O30 O33 O40
    Date: 2010
  13. By: Giovanni Lombardo (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Federico Ravenna (HEC Montreal.)
    Abstract: We show that the composition of imports has important implications for the optimal volatility of the exchange rate. Using input-output data for 25 countries we document substantial differences in the import and non-tradable content of final demand components, and in the role played by imported inputs in domestic production. We build a business cycle model of a small open economy to discuss how the problem of the optimizing policy-maker changes endogenously as the composition of imports and of final demand is altered. Contrary to models where steady state trade openness is entirely characterized by home bias, we find that trade openness is a very poor proxy of the welfare impact of alternative monetary policies. Finally, we quantify the loss from an exchange rate peg relative to the Ramsey policy conditional on the composition of imports, using parameter values that are estimated from OECD input-output tables data. We find that the main determinant of the losses is the share of non-traded goods in final demand. JEL Classification: E52, E31, F02, F41.
    Keywords: International Trade, Exchange Rate Regimes, Non-tradable Goods, Optimal Policy.
    Date: 2010–12

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