nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒02‒19
fifteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Monetary policy shocks in a DSGE model with a shadow banking system By Fabio Verona; Manuel M. F. Martins; Inês Drumond
  2. Efficient Firm Dynamics in a Frictional Labor Market By Leo Kaas; Philipp Kircher
  3. Estimation and evaluation of DSGE models: progress and challenges By Frank Schorfheide
  4. An Application of Business Cycle Accounting with Misspecified Wedges By NUTAHARA Kengo; INABA Masaru
  5. On-the-job search in urban areas By Keisuke Kawata; Yasuhiro Sato
  6. Time Variation in U.S. Wage Dynamics By B. HOFMANN; G. PEERSMAN; R. STRAUB
  7. Eductive stability in real business cycle models By George W. Evans; Roger Guesnerie; Bruce Mcgough
  8. Mortality, family and lifestyles By Grégory Ponthière
  9. Intergenerational transmission of skills during childhood and optimal public policy By Casarico, Alessandra; Micheletto, Luca; Sommacal, Alessandro
  10. The Baby Boom, Baby Busts, and Grandmothers By Orman, Cuneyt; Goksel, Turkmen; Gurdal, Mehmet Y
  11. Cross-sectional consumption-based asset pricing: The importance of consumption timing and the inclusion of severe crises By Tom Engsted; Stig V. Møller
  12. Job search theory and the slippery slope framework: an attempt to integration By Gaetano Lisi
  13. Counterfeit Quality and Verification in a Monetary Exchange By Ben Fung; Enchuan Shao
  14. Economic Growth and The Quality of Human Capital By Laabas, Belkacem; Weshah, Razzak
  15. Making sense of China’s excessive foreign reserves By Yi Wen

  1. By: Fabio Verona (Universidade do Porto, Faculdade de Economia and CEF.UP); Manuel M. F. Martins (Universidade do Porto, Faculdade de Economia and CEF.UP); Inês Drumond (Universidade do Porto, Faculdade de Economia and CEF.UP, and GPEARI-MFAP)
    Abstract: This paper is motivated by the recent financial crisis and addresses whether a “too low for too long” interest rate policy may generate a boom-bust cycle. We suggest a model in which a microfounded shadow banking sector is included in an otherwise state-of-the-art DSGE model. When faced with perverse incentives, financial intermediaries within the shadow banking sector can divert a fraction of stockholders’ profits for their own benefits and extend credit at a discounted rate. The model predicts that long periods of accommodative monetary policy do create the preconditions for, but do not cause per se, a boom-bust cycle. Rather, it is the combination of a persistent monetary ease with microeconomic distortions in the financial system that causes a boom-bust.
    Keywords: monetary policy; DSGE model; shadow banking system; boom-bust
    JEL: E32 E44 E52 G24
    Date: 2011–02
  2. By: Leo Kaas (Department of Economics, University of Konstanz, Germany); Philipp Kircher (Department of Economics, London School of Economics and University of Pennsylvania, USA)
    Abstract: The introduction of firm size into labor search models raises the question how wages are set when average and marginal product differ. We develop and analyze an alternative to the existing bargaining framework: Firms compete for labor by publicly posting long-term contracts. In such a competitive search setting, firms achieve faster growth not only by posting more vacancies, but also by offering higher lifetime wages that attract more workers which allows to fill vacancies with higher probability, consistent with empirical regularities.The model also captures several other observations about firm size, job flows, and pay. In contrast to bargaining models, efficiency obtains on all margins of job creation and destruction, both with idiosyncratic and aggregate shocks. The planner solution allows a tractable characterization which is useful for computational applications.
    Keywords: Labor market search, multi-worker firms, job creation and job destruction
    JEL: E24 J64 L11
    Date: 2011–01–20
  3. By: Frank Schorfheide
    Abstract: Estimated dynamic stochastic equilibrium (DSGE) models are now widely used for empirical research in macroeconomics as well as for quantitative policy analysis and forecasting at central banks around the world. This paper reviews recent advances in the estimation and evaluation of DSGE models, discusses current challenges, and provides avenues for future research.
    Keywords: Econometric models ; Stochastic analysis
    Date: 2011
  4. By: NUTAHARA Kengo; INABA Masaru
    Abstract: The premise of business cycle accounting (BCA) is that the prototype model with time-varying wedges can replicate allocations generated by a large class of models with frictions: the so called equivalence results. However, some recent papers show that the equivalence results do not hold in many models under the conventional VAR(1) assumption for wedges. In order to assess the empirical usefulness of BCA, we apply BCA to a widely used medium-scale DSGE economy, where the equivalence results do not hold. Based on our experiments, the difference between the measured and true wedges is quantitatively quite small and BCA can capture the business cycle implications of wedges almost correctly.
    Date: 2011–02
  5. By: Keisuke Kawata (Graduate School of Economics, Osaka University); Yasuhiro Sato (Graduate School of Economics, Osaka University)
    Abstract: This study develops an on-the-job search model involving spatial structure. In this model, workers are either employed and commuting frequently to a central business district (CBD) or unemployed and commuting less frequently to the CBD to search for a job. When an unemployed worker succeeds in off-the-job search, the quality of the job match is determined stochastically: a good match yields high-productivity whereas a bad match yields low-productivity. Although a high-productivity worker does not search for a new job, a lowproductivity worker decides whether to conduct an on-the-job search, which would require additional commuting to the CBD. Analysis of this model demonstrates that in equilibrium, the relocation path of workers corresponds to their career path, while welfare analysis demonstrates that such a spatial structure distorts firmsf decision regarding the posting of vacancies.
    Keywords: City structure; On-the-job search; Unemployment; Efficiency; Relocation and career paths;
    JEL: J64 R14 R23
    Date: 2011–03
    Abstract: This paper explores time variation in the dynamic effects of technology shocks on U.S. output, prices, interest rates as well as real and nominal wages. The results indicate considerable time variation in U.S. wage dynamics that can be linked to the monetary policy regime. Before and after the "Great Inflation", nominal wages moved in the same direction as the (required) adjustment of real wages, and in the opposite direction of the price response. During the "Great Inflation", technology shocks in contrast triggered wage-price spirals, moving nominal wages and prices in the same direction at longer horizons, thus counteracting the required adjustment of real wages, amplifying the ultimate repercussions on prices and hence increasing inflation volatility. Using a standard DSGE model, we show that these stylized facts, in particular the estimated magnitudes, can only be explained by assuming a high degree of wage indexation in conjunction with a weak reaction of monetary policy to inflation during the "Great Inflation", and low indexation together with aggressive inflation stabilization of monetary policy before and after this period. This means that the monetary policy regime is not only captured by the parameters of the monetary policy rule, but importantly also by the degree of wage indexation and resultant second round effects in the labor market. Accordingly, the degree of wage indexation is not structural in the sense of Lucas (1976).
    Keywords: technology shocks, second-round effects, Great Inflation
    JEL: C32 E24 E31 E42 E52
    Date: 2010–11
  7. By: George W. Evans (Université d'Oregon - University of Oregon, University of St. Andrews - University of St. Andrews); Roger Guesnerie (CDF - Collège de France - Collège de France, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Bruce Mcgough (Oregon State University - Oregon State University)
    Abstract: We re-examine issues of coordination in the standard RBC model. Can the unique rational expectations equilibrium be “educed” by rational agents who contemplate the possibility of small deviations from equilibrium? Surprisingly, we find that coordination along this line cannot be expected. Rational agents anticipating small but possibly persistent deviations have to face the existence of retroactions that necessarily invalidate any initial tentative “common knowledge” of the future. This "impossibility" theorem for eductive learning is not fully overcome when adaptive learning is incorporated into the framework.
    Keywords: standard RBC model ; coordination
    Date: 2010–12
  8. By: Grégory Ponthière (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: While there is a large empirical literature on the intergenerational transmission of health and survival outcomes in relation to lifestyles, little theoretical work exists on the long-run prevalence of (un)healthy lifestyles induced by mortality patterns. To examine that issue, this paper develops an overlapping generations model where a healthy lifestyle and an unhealthy lifestyle are transmitted vertically or obliquely across generations. It is shown that there must exist a locally stable heterogeneous equilibrium involving a majority of healthy agents, as a result of the larger parental gains from socialization efforts under a higher life expectancy. Wealso examine the robustness of our results to the introduction of parental altruistic concerns for children's health and of asymmetric socialization costs.
    Keywords: altruism ; family ; lifestyle ; longevity ; socialization
    Date: 2010–09
  9. By: Casarico, Alessandra (Bocconi University); Micheletto, Luca (Uppsala Center for Fiscal Studies); Sommacal, Alessandro (Faculty of Economics, University of Verona)
    Abstract: The paper characterizes the optimal tax policy and the optimal quality of day care services in a OLG model with warm-glow altruism where parental choices over child care arrangements affect the probability that the child becomes a high-skilled adult in a type-specific way. With respect to previous contributions, optimal tax formulas include type-specific Pigouvian terms which correct for the intergenerational externality in human capital accumulation. Our numerical simulations suggest that a public policy that disregards the effects of parental time on children's human capital entails a welfare loss that ranges from 0:2% to 5:7% of aggregate consumption.
    Keywords: optimal taxation; day care quality; intergenerational transmission of skills; early childhood environment; warm-glow
    JEL: H21 H23 J13 J22 J24
    Date: 2011–02–04
  10. By: Orman, Cuneyt; Goksel, Turkmen; Gurdal, Mehmet Y
    Abstract: Studies in family economics and anthropology suggest that grandmothers are a highly valuable source of childcare assistance. As such, availability of grandmothers affects the cost of having children, and hence fertility decisions of young parents. In this paper, we develop a simple model to assess the fertility implications of the fluctuations in both output (as argued by demographers) and grandmother-availability induced child-care costs over the period 1920-1970. Model does a good job of mimicking the bust-boom-bust pattern during this period. When the child-care cost channel is shut down, the model’s performance weakens significantly; in particular, it fails to capture the bust in the 1960’s altogether.
    Keywords: fertility; baby boom; baby bust; female labor-force participation; grandmother availability
    JEL: J13 J20
    Date: 2011–01
  11. By: Tom Engsted (School of Economics and Management, Aarhus University and CREATES); Stig V. Møller (Finance Research Group, Aarhus School of Business, Aarhus University and CREATES)
    Abstract: By using a beginning-of-period timing convention for consumption, and by including the Great Depression years in the analysis, we show that on annual data from 1926 to 2009 a standard contemporaneous consumption risk model goes a long way in explaining the size and value premiums in cross-sectional data that include both the Fama-French portfolios and industry portfolios. A long run consumption risk variant of the model also produces a high cross-sectional fit. In addition, the equity premium puzzle is significantly reduced in the models. We argue that in evaluating consumption based models, it is important to include both boom and crises periods, i.e. periods with severe consumption declines as well as periods with strong growth, and that the standard post-war data sample may not be well suited in this respect.
    Keywords: Consumption-based model, long-run risk, the Great Depression, beginning-of-period timing convention, equity premium puzzle, Fama-French and industry portfolios, size and value premiums, GMM, cross-sectional R2.
    JEL: G12
    Date: 2011–02–03
  12. By: Gaetano Lisi (University of Cassino)
    Abstract: Recently, attempts have been made to formalize the assumptions of the ‘slippery slope’ framework about the effects of trust (in) and power (of) tax authorities on tax compliance. In this sense, the proposed theoretical work introduces the basic insights of the ‘slippery slope’ framework into the benchmark macroeconomic model of the labour market with tax evasion. The key result of this integration is the following: with the right mix of policy tools of deterrence and trust in tax authorities, a reduction in tax evasion may increase labour market tightness and decrease unemployment.
    Keywords: tax evasion, tax compliance, power and trust, job search theory
    JEL: H26 J64 K42
    Date: 2011–02–06
  13. By: Ben Fung; Enchuan Shao
    Abstract: Recent studies on counterfeiting in a monetary search framework show that counterfeiting does not occur in a monetary equilibrium. These findings are inconsistent with the observation that counterfeiting of bank notes has been a serious problem in some countries. In this paper, we show that counterfeiting can exist as an equilibrium outcome in a model in which money is not perfectly recognizable and thus can be counterfeited. A competitive search environment is employed in which sellers post offers and buyers direct their search based on posted offers. When sellers are uninformed about the quality of the money, their offers are pooling and thus buyers can extract rents by using counterfeit money. In this case, counterfeit notes can coexist with genuine notes under certain conditions. We also explicitly model the interaction between sellers' verification decisions and counterfeiters' choices of counterfeit quality. This allows us to better understand how policies can affect counterfeiting.
    Keywords: Bank notes
    JEL: D82 D83 E42 E50
    Date: 2011
  14. By: Laabas, Belkacem; Weshah, Razzak
    Abstract: We calibrate an endogenous growth model to study the effect of the quality of human capital on productivity growth in a sample of thirty developed and developing countries for the period 1980 to 2007. We measure quality of human capital by relative cognitive skills. These are country scores in mathematics and science reported in Trends in International Mathematics and Science (TIMMS). The correlation between the relative quality of human capital and productivity growth is evident in the data for the developed countries. And, cross-country differences in the quality of human capital for a number of developed countries are highly positively associated with cross-country differences in productivity growth. The picture is significantly different for the developing countries in our sample.
    Keywords: quality of human capital; economic growth
    JEL: I20 J24 O40 E10
    Date: 2011–02–08
  15. By: Yi Wen
    Abstract: Large uninsured risk, severe borrowing constraints, and rapid income growth can create excessively high household saving rates and large current account surpluses for emerging economies. Therefore, the massive foreign-reserve buildups by China are not necessarily the intended outcome of any government policies or an undervalued home currency, but instead a natural consequence of the country’s rapid economic growth in conjunction with an inefficient financial system (or lack of timely financial reform). A tractable growth model of precautionary saving is provided to quantitatively explain China’s extraordinary path of trade surplus and foreign-reserve accumulation in recent decades. Ironically, the analysis suggests that without a well-developed domestic financial market, the value of the renminbi (RMB) may significantly depreciate, instead of appreciate, once the Chinese government abandons the linked exchange rate and the massive amount of precautionary savings of Chinese households are unleashed toward international financial markets to search for better returns.
    Keywords: International trade ; Balance of trade - China ; International finance
    Date: 2011

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