nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒03‒05
thirteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Wage rigidities in an estimated DSGE model of the UK labour market By Faccini, Renato; Millard, Stephen; Zanetti, Francesco
  2. Efficiency in a Model of Labor Selection By Sanjay Chugh; Christian Merkl
  3. Output Dynamics, Technology, and Public Investment By Pedro R. D. Bom; Ben J. Heijdra; Jenny Ligthart
  4. Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010 By Juergen Jung; Chung Tran
  5. On the Welfare Costs of Misspecified Monetary Policy Objectives By Avouyi-Dovi, S.; Sahuc, J-G.
  6. Cultural preference on fertility and the long-run growth effects of intellectual property rights By Chu, Angus C.; Cozzi, Guido
  7. Banks, oligopolistic competition, and the business cycle: A new financial accelerator approach By Totzek, Alexander
  8. The demand for income tax progressivity in the growth model By Daniel R. Carroll
  9. The Dark Side of Fiscal Stimulus By Strulik, Holger; Trimborn, Timo
  10. Life-Cycle Consumption: Can Single Agent Models Get it Right? By Bick, Alexander; Choi, Sekyu
  11. Outsourcing with Heterogeneous Firms By Sasan Bakhtiari
  12. Means-Tested Age Pension and Homeownership: Is There a Link? By Sang-Wook (Stanley) Cho; Renuka Sane
  13. “Fire Sales” in housing market: is the house-searching process similar to a theme park visit? By Leung, Charles Ka Yui; Zhang, Jun

  1. By: Faccini, Renato (Bank of England); Millard, Stephen (Bank of England); Zanetti, Francesco (Bank of England)
    Abstract: We estimate a New Keynesian model with matching frictions and nominal wage rigidities on UK data. We are able to identify important structural parameters, recover the unobservable shocks that have affected the UK economy since 1971 and study the transmission mechanism. With matching frictions, wage rigidities have limited effect on inflation dynamics, despite improving the empirical performance of the model. The reason is that with matching frictions, marginal costs depend on unit labour costs and on an additional component related to search costs. Wage rigidities affect both components in opposite ways leaving marginal costs and inflation virtually unaffected.
    Keywords: DSGE models; Bayesian estimation; labour market search; unemployment
    JEL: E24 E32 E52 J64
    Date: 2011–02–21
  2. By: Sanjay Chugh; Christian Merkl
    Abstract: We characterize efficient allocations and business cycle fluctuations in a labor selection model. Due to forward-looking hiring and labor supply decisions, efficiency entails both static and intertemporal margins. We develop welfare-relevant measures of marginal rates of transformation and efficiency along each margin that nest their counterparts in frictionless labor markets. In a calibrated version of the model, efficient fluctuations feature highly volatile unemployment and job-finding rates, in line with empirical evidence. We show analytically in a simplified version of the model that volatility arises from selection effects, rather than general equilibrium effects. We also develop sufficient conditions on wages, which are independent of the wage-determination process, that decentralize efficient allocations. Unlike the Hosios condition for matching models, there is no simple restriction on Nash bargaining that guarantees that Nash wages can support efficient allocations. Cyclical fluctuations in the Nash-bargaining economy display even larger amplification of productivity shocks into labor market outcomes than in the efficient economy, without extreme assumptions about bargaining shares, inflexibility of wages, or the size of surpluses that govern labor demand. The results establish normative and positive foundations for DSGE labor selection models
    Keywords: labor market frictions, efficiency, amplification, selection
    JEL: E24 E32 J20
    Date: 2011–02
  3. By: Pedro R. D. Bom (Tilburg University); Ben J. Heijdra (University of Groningen, IHS-Vienna, Netspar, and CESifo); Jenny Ligthart (Department of Economics and CentER, Tilburg, University)
    Abstract: The paper studies the dynamic output effects of public infrastructure investment in a small open economy. We develop an overlapping generations model that includes a production externality of public capital and a wealth e ect on labor supply. Public capital enters the rm's production function under various technological scenarios. We show that if factors of production are gross complements and public capital is Solow neutral, which is the empirically plausible case, the long-run output multiplier falls short of its Hicks-neutral value. The way in which public capital augments factor productivity crucially a ects the dynamics of private capital and net foreign assets, but yields qualitatively similar output dynamics. In contrast to conventional results obtained from hysteretic models, we nd non-monotonic output dynamics of a public investment impulse in the non-hysteretic model. Schmitt-Grohe and Uribe's (2003) nding of identical impulse responses across the two model types is thus not robust to the inclusion of spillovers of public capital.
    Keywords: infrastructure capital, public investment, fiscal policy, output multipliers, transitional dynamics, technology
    Date: 2010–06–01
  4. By: Juergen Jung (Department of Economics, Towson University); Chung Tran (School of Economics, University of New South Wales)
    Abstract: In this paper we develop a stochastic dynamic general equilibrium overlapping generations (OLG) model with endogenous health capital to study the macroeconomic effects of the Affordable Care Act of March 2010 also known as the Obama health care reform. We find that the insurance mandate enforced with fines and premium subsidies successfully reduces adverse selection in private health insurance markets and subsequently leads to almost universal coverage of the working age population. On other hand, spending on health care services increases by almost 6 percent due to moral hazard of the newly insured. Notably, this increase in health spending is partly financed by the larger pool of insured individuals and by government spending. In order to finance the subsidies the government needs to either introduce a 2.7 percent payroll tax on individuals with incomes over $200,000, increase the consumption tax rate by about 1.1 percent, or cut government spending about 1 percent of GDP. A stable outcome across all simulated policies is that the reform triggers increases in health capital, decreases in labor supply, and decreases in the capital stock due to crowding out effects and tax distortions. As a consequence steady state output decreases by up to 2 percent. Overall, we find that the reform is socially beneficial as welfare gains are observed for most generations along the transition path to the new long run equilibrium.
    Keywords: Affordable Care Act 2010; Endogenous Health Capital; Life-Cycle Health Spending and Financing; Dynamic Stochastic General Equilibrium
    JEL: H51 I18 I38 E21 E62
    Date: 2010–12
  5. By: Avouyi-Dovi, S.; Sahuc, J-G.
    Abstract: This paper quantifies the effects on welfare of misspecified monetary policy objectives in a stylized DSGE model. We show that using inappropriate objectives generates relatively large welfare costs. When expressed in terms of ‘consumption equivalent’ units, these costs correspond to permanent decreases in steady-state consumption of up to two percent. The latter are generated by both the inappropriate choice of weights and the omission of variables. In particular, it is costly to assume an interest-rate smoothing incentive for central bankers when it is not socially optimal to do so. Finally, a parameter uncertainty decomposition indicates that uncertainty about the properties of markup shocks gives rise to the largest welfare costs.
    Keywords: Welfare ; Monetary policy objectives ; DSGE model ; Bayesian econometrics.
    JEL: C11 C32 E58
    Date: 2011
  6. By: Chu, Angus C.; Cozzi, Guido
    Abstract: How does patent policy affect long-run economic growth through the population growth rate? To analyze this question, we develop an R&D-based growth model with endogenous fertility. In recent vintages of R&D-based growth models in which scale effects are absent, the long-run growth rate depends on the population growth rate that is assumed to be exogenous. In this study, we develop a semi-endogenous-growth version of the quality-ladder model with endogenous fertility and human-capital accumulation to analyze an unexplored interaction between intellectual property rights, endogenous fertility and economic growth. We find that strengthening patent protection has a surprisingly negative effect on technological progress in the long run through endogenous fertility. Furthermore, a stronger cultural preference on fertility tends to magnify this negative effect of patent policy on long-run growth.
    Keywords: economic growth; endogenous fertility; patent policy
    JEL: O34 O31 O40
    Date: 2011–02
  7. By: Totzek, Alexander
    Abstract: In the last two decades a body of literature highlights the role of financial frictions for explaining the development of key macroeconomic variables. Moreover, the financial crisis 2007-2009 again sheds light on the importance of this topic. In this paper, we contribute to the literature by simultaneously explaining two empirical observations. First, mark-ups on the loan market react counter-cyclical. Second, the number of banks operating in the economy significantly co-moves with GDP. Therefore, we develop a DSGE model which incorporates an oligopolistic banking sector with endogenous bank entry. The resulting model generates significant accelerating effects which are even larger than those obtained in the famous financial accelerator model of Bernanke et al. [Bernanke, B., Gertler, M., Gilchrist, S., 1999. The financial accelerator in a quantitative business cycle framework. In: Handbook of Macroeconomics. North-Holland, Amsterdam] and performs remarkable well when comparing the generated second moments of real and financial variables with those observed in the data. --
    Keywords: Oligopolistic competition,Bank entry,Financial accelerator
    JEL: E44 E32
    Date: 2011
  8. By: Daniel R. Carroll
    Abstract: This paper examines the degree of income tax progressivity chosen through a simple majority vote in a model with savings. Households have permanent differences with respect to their labor productivity and their discount factors. The government has limited commitment to future policy, so voting is repeated every period. Because the model features mobility within the wealth distribution, the median voter is determined endogenously. In a numerical experiment, the model is initialized to the 1992 U.S. joint distribution of income and wealth as well as several statistics of the federal income tax distribution. Support for a high degree of progressivity is widespread. In the long run, households that vote for lower progressivity have high labor productivity and/or very high wealth. A movement towards greater progressivity increases aggregate capital and income, but it effects only a small decrease in long-run income and wealth inequality.
    Keywords: Income tax ; Taxation ; Income distribution ; Wealth
    Date: 2011
  9. By: Strulik, Holger; Trimborn, Timo
    Abstract: The output multiplier turns negative before a deficit spending program expires. We show the generality of this unpleasant finding for the standard real business cycle model. We then calibrate an extended model for the US and demonstrate how fiscal stimulus slows down economic recovery from recession in the medium-run. We discuss the slowdown from recovery w.r.t.\ alternative assumptions about the size and persistence of the initial shock (severity of the recession), the assumed power of the impact multiplier, and the scale and duration of the stimulus program. We also show that results are quantitatively very similar independent from whether a recession was caused by an efficiency wedge (input-financing frictions) or a labor wedge (labor market frictions). Capital stock and output are always below their laissez-faire level of recovery when fiscal stimulus expires.
    Keywords: fiscal stimulus, government spending, output multiplier, economic recovery
    JEL: E60 H30 H50 O40
    Date: 2011–02
  10. By: Bick, Alexander; Choi, Sekyu
    Abstract: In the quantitative macro literature, single agent models are heavily used to explain "per-adult equivalent" household data. In this paper, we study differences between consumption predictions from a single agent model and "adult equivalent" consumption predictions from a model where household size evolves deterministically over the life-cycle and affects individual preferences for consumption. Using a theoretical model we prove that, under mild conditions, these predictions are different. In particular, the single household model cannot explain patterns in life-cycle consumption profiles (the so called 'humps'), nor cross sectional inequality in consumption originating from the second model, even after controlling for household size using equivalence scales. Through a quantitative exercise, we then document that differences in predictions can be substantial: total (per-adult equivalent) consumption over the life-cycle can be up to 5% different, depending on the specific parameterization. We find a similar number for total cross sectional inequality.
    Keywords: Consumption; Life-Cycle Models; Households
    JEL: J10 D12 D91 E21
    Date: 2011–02
  11. By: Sasan Bakhtiari (School of Economics, The University of New South Wales)
    Abstract: A general framework for the study of outsourcing is introduced that incorporates dynamics and heterogeneity among both upstream and downstream producers to mimic an exit approach (Hirschman, 1970) to building vertical relations. The environment is one of search friction and incomplete contracts, where final-good producers require a specialized input and, upon matching with a supplier, can only contract the quantity of input. The results imply an assorted matching between producers and suppliers, so that more productive producers pair with more productive suppliers in the long run. It is shown that most efficient producers have some propensity to outsource, but only when there is a thick enough density of highly productive suppliers. Average employment in this model might increase or decrease with outsourcing, which is an observed pattern in the data. Some other diversities in plant-level behavior are also present in the results.
    Keywords: Outsourcing; Productivity; Heterogeneity; Search Friction; Incomplete Contracts; Exit Strategy
    JEL: D21 D23 L21 L24
    Date: 2011–01
  12. By: Sang-Wook (Stanley) Cho (School of Economics, The University of New South Wales); Renuka Sane (School of Economics, The University of New South Wales)
    Abstract: Several targeted welfare programs across the world have made owner-occupied housing exempt from the means test, such as the Supplementary Social Income (SSI) in the US and the age pension scheme in Australia. Relatively little is known about the impact of such exemption on household portfolio choice. We study the case of the Australian age pension scheme, and argue that current uncapped exemption may lead to distortionary incentives for very high levels of housing wealth to be sheltered from the means test. We set up a quantitative lifecycle framework, with business and housing investment, borrowing constraints, and wealth inequality, that is able to match a number of key features in the Australian economy. We find that abolishing the current exemption of owner-occupied housing in the assets test increases aggregate output, capital accumulation, and welfare, while lowering housing investment and homeownership. However, removing such distortions, however, does not necessarily imply that all households would be better off. The lowering of other taxes to maintain fiscal balance would result in households at the top of the wealth distribution experiencing a large welfare loss, however the majority of the population would benefit.
    Keywords: means-tested age pension; homeownership; lifecycle model; portfolio choice
    JEL: D31 E21 E62 H3 H55
    Date: 2011–01
  13. By: Leung, Charles Ka Yui; Zhang, Jun
    Abstract: Three striking empirical regularities have been repeatedly reported: the positive correlation between housing prices and trading volume, between housing price and the time-on-the-market (TOM), and the existence of price dispersion. This short paper provides perhaps the first unifying framework which mimics these phenomena in a simple competitive search framework. In the equilibrium, sellers with heterogeneous waiting cost and buyers are endogenously segregated into different submarkets, each with distinct market tightness and prices. With endogenous search effort, our model also reproduces the well-documented price-volume correlation. Directions for future research are also discussed.
    Keywords: housing market; competitive search; price dispersion; trading volume; time on the market
    JEL: E30 D83 R21
    Date: 2011

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