nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒01‒30
eighteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Fertility Choices, Human Capital Accumulation, and Endogenous Volatility By Dimitrios Varvarigos
  2. Endogenous Fertility in a Growth Model with Public and Private Health Expenditures By Dimitrios Varvarigos; Intan Zanariah Zakaria
  3. An Estimated DSGE Model of the Indian Economy By Vasco Gabriel; Paul Levine; Joseph Pearlman; Bo Yang
  4. "Life-Cycle Labor Search with Stochastic Match Quality" By Julen Esteban-Pretel; Junichi Fujimoto
  5. Credit Risk Transfers and the Macroeconomy By Ester Faia
  6. Applications and Interviews: A Structural Analysis of Two-Sided Simultaneous Search By Wolthoff, Ronald
  7. A unified theory of structural change By Chris Papageorgiou; Fidel Pérez Sebastián; María Dolores Guilló Fuentes
  8. The Implementation of Scenarios using DSGE Models By Igor Vetlov; Ricardo Mourinho Felix; Laure Frey; Tibor Hledik; Zoltan Jakab; Niki Papadopoulou; Lukas Reiss; Martin Schneider
  9. Nonlinear dynamics in an OLG growth model with young and old age labour supply: the role of public health expenditure By Gori, Luca; Sodini, Mauro
  10. Tax Morale, Entrepreneurship, and the Irregular Economy By Gaetano Lisi; Maurizio Pugno
  11. Adverse Selection and Liquidity Distortion in Decentralized Markets By Briana Chang
  12. A Neoclassical Growth Model with Public Spending By Oliviero Carboni; G. Medda
  13. Cultural Transmission, Discrimination and Peer Effects By Sáez-Martí, Maria; Zenou, Yves
  14. More Jobs for University Graduates: Some Policy Options for Tunisia. By Marouani, Mohamed Ali
  15. Asymmetric Shocks, Long-term Bonds and Sovereign Default By Zhu, Junjun; Xie, Shiyu
  16. Corruption, taxation and economic growth: theory and evidence By Gbewopo Attila
  17. Lucas on the relationship between theory and ideology By De Vroey, Michel
  18. The development of non-monetary means of payment By Minzyuk, Larysa

  1. By: Dimitrios Varvarigos
    Abstract: In a three-period overlapping generations model, I show that different combinations of preference and technological parameters can lead to different patterns on the joint evolution of human capital and (endogenous) fertility choices. These patterns may include threshold effects and multiple equilibria as well as endogenous fluctuations. In the latter case, fertility is procyclical. Contrary to existing analyses, endogenous economic fluctuations emerge only when the substitution effects (rather than the income effects) dominate. I also show that the elasticity of intertemporal substitution may be an additional factor determining whether the economy can sustain a positive growth rate in the long-run.
    Keywords: Fertility; Human capital; Cycles
    JEL: J13 O41
    Date: 2010–11
  2. By: Dimitrios Varvarigos; Intan Zanariah Zakaria
    Abstract: We build an overlapping generations model with endogenous fertility choices as well as public and private expenditures on health. We find that the complementary effect of public health services on private health expenditures can provide an additional explanation behind a salient feature of demographic transition; that is, the fertility decline along the process of economic growth.
    Keywords: Fertility; Economic growth; Health expenditures
    JEL: J13 O41
    Date: 2010–11
  3. By: Vasco Gabriel (University of Surrey); 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: 2010–09
  4. By: Julen Esteban-Pretel (National Graduate Institute for Policy Studies); Junichi Fujimoto (Faculty of Economics, University of Tokyo)
    Abstract: Unemployment, job nding, and job separation rates exhibit patterns of decline as worker age increases in the U.S. We build and numerically simulate a search and matching model of the labor market that incorporates a life-cycle structure to account for these empirical facts. The model features random match quality, which, with positive probability, is not revealed until production takes place. We show that the model, calibrated to U.S. data, is able to reproduce the empirical patterns of unem- ployment and job transition rates over the entire life-cycle. Both decreasing distance to retirement as a worker ages, and ex ante unknown match quality, are essential in delivering these results. We then explore, both analytically and numerically, the eciency implications of the model.
    Date: 2011–01
  5. By: Ester Faia
    Abstract: The recent financial crisis has highlighted the limits of the “originate to distribute“ model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and in.ation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk
    Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare
    JEL: E3 E5 G3
    Date: 2011–01
  6. By: Wolthoff, Ronald (University of Toronto)
    Abstract: A large part of the literature on frictional matching in the labor market assumes bilateral meetings between workers and firms. This ignores the frictions that arise when workers and firms meet in a multilateral way and cannot coordinate their application and hiring decisions. I analyze the magnitude of these frictions. For this purpose, I present an equilibrium search model of the labor market with an endogenous number of contacts between workers and firms. Workers contact firms by applying to vacancies, whereas firms contact applicants by interviewing them. Sending more applications and interviewing more applicants are both costly activities but increase the probability to match. In equilibrium, contract dispersion arises endogenously and workers spread their applications over the different types of contracts. Estimation of the model on the Employment Opportunities Pilot Projects data set provides values for the fundamental parameters of the model, including the cost of an application, the cost of an interview, and the value of non-market time. These estimates are used to determine the loss in social surplus compared to a Walrasian world. Frictions on the worker and the firm side each cause approximately half of the 4.7% loss. There is a potential role for activating labor market policies, because I show that for the estimated parameter values welfare is improved if unemployed workers increase their search intensity.
    Keywords: labor, search, recruitment, frictions, efficiency
    JEL: J64 J31 E24 D83
    Date: 2010–12
  7. By: Chris Papageorgiou (Louisiana State University); Fidel Pérez Sebastián (Universidad de Alicante); María Dolores Guilló Fuentes (Universidad de Alicante)
    Abstract: This paper uses dynamic general equilibrium and computational methods, inspired by the multi-sector growth model structure in Stephen Turnovsky’s previous and more recent work, to develop a theory that unifies two of the traditional explanations of structural change: sector-biased technical change and non-homothetic preferences. More specifically, we build a multisector overlapping generations growth model with endogenous technical-change and non-homothetic preferences based on an expanding-variety setup with two different R&D technologies; one for agriculture, and another for non-agriculture. Results give additional support to the biased technical-change hypothesis as an important determinant of the structural transformation. The paper also explores where this bias might come from. Our findings suggest that production-side specific factors, such as asymmetries in cross-sector knowledge spillovers could be behind it, and therefore be important to fully explain the process of structural change.
    Keywords: multi-sector growth model, structural change, agriculture and non-agriculture, R&D, directed innovation, hon-homothetic preferences.
    JEL: O13 O14 O41
    Date: 2010–01
  8. By: Igor Vetlov (Bank of Lithuania); Ricardo Mourinho Felix; Laure Frey; Tibor Hledik; Zoltan Jakab; Niki Papadopoulou (Central Bank of Cyprus); Lukas Reiss; Martin Schneider
    Abstract: The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for conducting scenario analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations. As a result, they appear less prone to the Lucas critique than traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the design of a broad range of scenarios and can tackle a large range of issues, while at the same time offering an appealing structural interpretation of the scenario specification and simulation results. This paper provides illustrations of some of the modelling issues that often arise when implementing scenarios using DSGE models in the context of projection exercises or policy analysis. These issues reflect the sensitivity of DSGE model-based analysis to scenario assumptions, which in more traditional models are apparently less critical, such as, for example, scenario event anticipation and duration, as well as treatment of monetary and fiscal policy rules.
    Keywords: Business fluctuations, monetary policy, fiscal policy, forecasting and simulation
    JEL: E32 E52 E62 E37
    Date: 2010–12
  9. By: Gori, Luca; Sodini, Mauro
    Abstract: This paper analyses the dynamics of a two-dimensional overlapping generations model with young and old age labour supply. It is shown that the public provision of health investments, which, in turn, affects the demand for material consumption, may represent a source of local indeterminacy, nonlinear dynamics and multiplicity of equilibria. Furthermore, global indeterminacy may also occur because of the co-existence of two attractors with tangled basins of attraction.
    Keywords: Chaos; Labour supply; OLG model; Public health expenditure
    JEL: C68 O41 I18 J22 C62
    Date: 2011–01–17
  10. By: Gaetano Lisi (University of Cassino); Maurizio Pugno (University of Cassino)
    Abstract: This paper incorporates tax morale into a search and matching model of equilibrium unemployment, with on-the-job search, extended to both the irregular sector and entrepreneurship. Tax morale is modelled as a social norm for tax compliance which renders evasion costly. The moral cost of tax evasion (the strength of the social norm) is negatively related to the fraction of entrepreneurs that evades taxes. Precisely, if the relationship is nonlinear, multiple equilibria may emerge, thus accounting for differences in-between regions and countries in the size of the irregular sector. The "good" equilibrium is in fact characterised, with respect to the "bad" one, by a smaller irregular sector and a stronger tax morale.
    Keywords: tax morale; tax evasion; entrepreneurship; job search; irregular economy; shadow economy
    JEL: A13 E26 H26 J24 J64 L26 K42 O17
    Date: 2011–01–18
  11. By: Briana Chang
    Abstract: Why do some markets remain liquid even when there is a positive gain from trade? In order to understand the real determinants of market liquidity in decentralized markets, we are going to analyze this question in a competitive market setting when both search frictions and adverse selection play roles. In a dynamic environment with heterogeneous sellers and buyers, we investigate the role of market frictions and how adverse selection leads to the distortion of equilibrium market liquidity. The resulting friction therefore prohibits resources from reallocating efficiently. In the application of capital reallocation, we further show that this trading friction can generate significant economic fluctuations.
    Keywords: Liquidity; Search frictions, Adverse selection; Uncertainty; Capital Reallocation JEL Classification Numbers: D82, G1
    Date: 2010–11–02
  12. By: Oliviero Carboni; G. Medda
    Abstract: This paper analyses the effect of public expenditures in the context of a modified Solow model of capital accumulation with optimising agents. The model identifies optimal government size and optimal composition of public expenditures which maximize the rate of growth in the dynamics to the steady state and maximize the long run level of per capita income. Different allocations of public resources lead to different growth rates in the transitional dynamics depending on their elasticity. However effects from fiscal policy are only temporary and disappear in the steady state. Finally we argue that neglecting the non- linear nature of the relationship between government spending and growth may lead empirical studies to biased results.
    Keywords: neoclassical and augmented growth models; fiscal policy; public spending composition.
    JEL: E13 E62 H20 H50 O40
    Date: 2010
  13. By: Sáez-Martí, Maria (University of Zurich); Zenou, Yves (Department of Economics, Stockholm University and Research Institute of Industrial Economics)
    Abstract: Workers can have good or bad work habits. These traits are transmitted from one generation to the next through a learning and imitation process which depends on parents’ investment on the trait and the social environment where children live. We show that, if a high enough proportion of employers have taste-based prejudices against minority workers, their prejudices are always self-fulfilled in steady state. Affirmative Action improves the welfare of minorities whereas integration is beneficial to minority workers but detrimental to workers from the majority group. If Affirmative Action quotas are high enough or integration is strong enough, employers’ negative stereotypes cannot be sustained in steady-state.
    Keywords: Ghetto culture; overlapping generations; rational expectations; multiple equilibria; peer effects
    JEL: J15 J71
    Date: 2011–01–24
  14. By: Marouani, Mohamed Ali
    Abstract: La combinaison de facteurs démographiques et de progrès dans l’éducation a entraîné une hausse significative du chômage des diplômés dans la région MENA. L’article fournit une analyse de type coût-efficacité de politiques alternatives d’mploi à l’aide d’un modèle d’équilibre général dynamique Le modèle permet une détermination endogène du niveau de chômage à l’aide d’un modèle multisectoriel de salaires d’efficience. Le principal résultat est qu’une subvention salariale ciblée su les secteurs intensifs en main-d’œuvre qualifiée est plus efficace que des réductions d’impôts ou des subventions à l’investissement. Cependant ces subventions salariales ne sont pas suffisantes pou réduire significativement le niveau du chômage. D’autres options doivent être considérées.
    Abstract: The combination of demographic factors and an increase in education has caused a significant rise of university graduates’ unemployment in the MENA region. The article provides a prospective cost- effectiveness analysis of the impact of alternative labor market policies using a dynamic general equilibrium model. The model allows for an endogenous determination of unemployment through a multisectoral efficiency wage setting mechanism. The main finding is that a wage subsidy targeted at highly skilled intensive sectors is more effective than tax reductions or investment subsidies. However, wage subsidies are not enough to reduce significantly unemployment. Other policy options need to be considered.
    Keywords: Tunisie; Tunisia; Afrique du Nord et Moyen Orient; modèle d’équilibre general dynamiques; chômage; main-d’oeuvre qualifiée; politiques de l’emploi; Employment policies; skilled workers; unemployment; dynamic general equilibrium models; Middle East and North Africa;
    JEL: J68 J24 C68
    Date: 2010
  15. By: Zhu, Junjun; Xie, Shiyu
    Abstract: We present a sovereign default model with asymmetric shocks and long-term bonds, and solve the model using discrete state dynamic programming. As result, our model matches the Argentinean economy over period 1993Q1-2001Q4 quite well. We show that our model can match high default frequency, high debt/output ratio and other cyclical features, such as countercyclical interest rate and trade balance in emerging countries. Moreover, with asymmetric shocks we are able to match high sovereign spread level and low spread volatility simultaneously in one model, which is till now not well solved. As another contribution of our paper, we propose a simulation-based approach to approximate transition function of output shocks between finite states, which is an indispensable step in discrete state dynamic programming. Comparing to Tauchen’s method, our approach is very flexible in transforming various econometric models to finite state transition function, so that our approach can be widely used in simulating different kinds of discrete state shocks.
    Keywords: Sovereign Default; Asymmetric Shocks; Transition Function; Long-term Bonds
    JEL: F34 E44
    Date: 2011–01–18
  16. By: Gbewopo Attila (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: In this paper, we analyze the interaction between corruption, taxation and economic growth. Our contributions are twofold. Theoretically, in an endogenous growth model, we introduce corruption in two different ways: corruption in the public expenditure and corruption in the public revenue. We show two opposing effects. Under certain conditions, corruption can affect growth rate positively but it can also exert a negative effect via fiscal revenue. Not only does it tend to make the tax rate, which maximizes the long run growth rate sub-optimal, but it can also create distortions that can lead to excessive tax rates harmful to growth. The empirical analyses are based on non parametric estimates as well as econometric investigations. Our results support the assumption of a non linear relationship between public resources and growth. Interactions between public resources and institutional variables evidence the following the results: (i) the more countries are corrupt the stronger the negative effects of taxation on the growth (ii) Once the negative effects of corruption are accounted
    Keywords: corruption;taxation;growth;developing countries
    Date: 2011–01–17
  17. By: De Vroey, Michel
    Abstract: This paper concerns a neglected aspect of Lucas's work: his methodological writings, published and unpublished. Particular attention is paid to his views on the relationship between theory and ideology. I start by setting out Lucas's non-standard conception of theory: to him, a theory and a model are the same thing. I also explore the different facets and implications of this conception. In the next two sections, I debate whether Lucas adheres to two methodological principles that I dub the 'non-interference' precept (the proposition that ideological viewpoints should not influence theory), and the 'non-exploitation' precept (that the models' conclusions should not be transposed into policy recommendations, in so far as these conclusions are built into the models' premises). The last part of the paper contains my assessment of Lucas's ideas. First, I bring out the extent to which Lucas departs from the view held by most specialized methodologists. Second, I wonder whether the new classical revolution resulted from a political agenda. Third and finally, I claim that the tensions characterizing Lucas's conception of theory follow from his having one foot in the neo-Walrasian and the other in the Marshallian-Friedmanian universe. --
    Keywords: Lucas,new classical macroeconomics,methodology
    JEL: B22 B30 B31 B41
    Date: 2010
  18. By: Minzyuk, Larysa
    Abstract: This paper develops a model to investigate the private enforcement of non-monetary inter-firm payments in Russia during the 1990s. Since acceptability of means of payment can have a self-reinforcing nature, the dominance of non-monetary means of payment over money in Russia might have been a result of the driving forces of the demonetiziation equilibrium. We propose a very simple search model to explore acceptability of means of payment different from legal tender - fiat money, commodity money, and trade credit. In each case, we show that monetization through the proposed means of payment is always a possible trade pattern.
    Keywords: privately created means of payment; fiat money; commodity money; reputations; Russia
    JEL: D83 E00
    Date: 2010

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