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on Dynamic General Equilibrium |
| By: | Jaime Alonso-Carrera; Jordi Caballé; Xavier Raurich |
| Abstract: | We analyze the transitional dynamics of a model with heterogeneous consumption goods. In this model, convergence is driven by two different forces: the typical diminishing returns to capital and the sectoral change inducing the variation in relative prices. We show that this second force affects the growth rate if the two consumption goods are not Edgeworth independent and if these two goods are pro- duced with technologies exhibiting different capital intensities. Because the afore- mentioned dynamic sectoral change arises only under heterogeneous consumption goods, the transitional dynamics of this model exhibits striking differences with the growth model with a single consumption good. We also show that these differences in the transitional dynamics can give raise to large discrepancies in the welfare cost of shocks between the economy with a unique consumption good and the economy with multiple consumption goods. |
| Keywords: | multi-sector growth models, transitional dynamics, consumption growth. |
| JEL: | O41 O47 |
| Date: | 2011–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:869.11&r=dge |
| By: | Andrew Glover; Jonathan Heathcote; Dirk Krueger; José-Víctor Ríos-Rull |
| Abstract: | In this paper we construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across different household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages, as observed in the data. Asset price declines hurt the old, who rely on asset sales to finance consumption, but benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline more than twice as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is approximately welfare-neutral for households in the 20-29 age group, but translates into a large welfare loss of around 10% of lifetime consumption for households aged 70 and over. |
| JEL: | D31 D58 D91 E21 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16924&r=dge |
| By: | Olivier CARDI (Université Panthéon-Assas ERMES Ecole Polytechnique); Romain RESTOUT (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate both the aggregate and the sectoral effects of temporary fiscal shocks. One central finding is that both sectoral capital intensities and labor supply elasticity matter in determining the response of key economic variables. In particular, the model can produce a drop in investment and in the current account, in line with empirical evidence, only if the traded sector is more capital intensive than the non-traded sector, and labor is supplied elastically. Irrespective of sectoral capital intensities, a fiscal shock raises the relative size of the non-traded sector substantially in the short-run. Additionally, allowing for the markup to depend on the number of competitors, the two-sector model can produce the real exchange rate depreciation found in the data. Finally, markup variations triggered by firm entry modify substantially the response of the real wage and the sectoral composition of GDP in the short-run. |
| Keywords: | Non-traded Goods; Fiscal Shocks; Investment; Current Account |
| JEL: | F41 E62 E22 F32 |
| Date: | 2011–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2011006&r=dge |
| By: | Xianwen Shi; Aloysius Siow |
| Abstract: | In frictional matching markets with heterogeneous buyers and sellers, sellers incur discrete showing costs to show goods to buyers who incur discrete inspection costs to assess the suitability of the goods on offer. This paper studies how brokers can help reduce these costs by managing the level and mix of goods in their inventory. We find that intermediaries emerge and improve social welfare when there is sufficient heterogeneity in the types of goods and preferences. Our analysis highlights how learning and inventory management enable search intermediaries to internalize information externalities generated in unintermediated private search. |
| Keywords: | Search, Intermediation, Brokers, Housing Markets |
| JEL: | D83 D82 |
| Date: | 2011–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-426&r=dge |
| By: | Moreno-Galbis, Eva |
| Abstract: | This paper seeks to gain insights on the relationship between growth and unemployment when considering heterogeneous agents in terms of skills. We allow for the possibility of training for unskilled employed workers and for the possibility of human capital depreciation for skilled unemployed workers. These features are introduced in an endogenous job destruction framework µa la Mortensen and Pissarides (1998). We show that, when growth accelerates, a larger share of unskilled workers gets trained, increasing the incentives of ¯rms to update the job-speci¯c technology, rather than destroying it. The positive impact of growth on the employment rate is then magni¯ed and the predicting ability of the model to reproduce the sensibility of employment with respect to growth too. When calibrated, the model manages to reproduce the aggregate capitalization e®ect estimated on the basis of OECD data. Fur- thermore, whereas for skilled and unskilled workers getting trained growth yields a reduction in the unemployment rates, for unskilled workers not getting trained growth fosters a rise in the unemployment rates. |
| Keywords: | TFP growth; Unemployment; Training, Human Capital Depreciation; Capitalization; Creative Destruction Effect |
| JEL: | J23 J24 O33 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:docweb:1022&r=dge |
| By: | Long Xin; Pelloni Alessandra |
| Abstract: | We consider the optimal factor income taxation in a standard R&D model with technical change represented by an increase in the variety of intermediate goods. Redistributing the tax burden from labour to capital will increase the employment rate in equilibrium. This has opposite effects on two distortions in the model, one due to monopoly power, the second to the incomplete appropriability of the bene?ts of inventions. Their relative momentum determines the sign of the welfare effect. We show that, for parameter values consistent with available estimates, taxing capital more heavily than labour can be welfare increasing. |
| Keywords: | Capital income taxes, R&D, growth effect, welfare Effect |
| JEL: | E62 H21 O41 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0071&r=dge |
| By: | Javier Andrés (University of Valencia, Spain); José Emilio Boscá (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain) |
| Abstract: | The co-movements of labor productivity with output, total hours, vacancies and unemployment have changed since the mid 1980s. This paper offers an explanation for the sharp break in the fluctuations of labor market variables based on endogenous labor supply decisions following the mortgage market deregulation. We set up a search model with efficient bargaining and financial frictions, in which impatient borrowers can take an amount of credit that cannot exceed a proportion of the expected value of their real estate holdings. When borrowers’ equity requirements are low, the impact of a positive technology shock on the marginal utility of consumption is strengthened, which in turn results in lower hours per worker and higher wages in the bargaining process. This shift in labor supply discourages firms from opening vacancies, reducing the impact of the shock on employment. We simulate the effects of a continuous increase in both the loan-to-value ratio and the share of borrowers in total population. Our exercise shows that the response of labor market variables might have been substantially affected by the increase in household leverage in the US in the last twenty years. |
| Keywords: | business cycle, labor market, borrowing restrictions |
| JEL: | E24 E32 E44 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:iei:wpaper:1102&r=dge |
| By: | Heid, Frank; Krüger, Ulrich |
| Abstract: | Critics claim that capital requirements can exacerbate credit cycles by restricting lending in an economic downturn. The introduction of Basel 2, in particular, has led to concerns that risksensitive capital charges are highly correlated with the business cycle. The Basel Committee is contemplating a revision of the Basel Accord by introducing counter-cyclical capital buffers. Others claim that capital buffers are already large enough to absorb fluctuations in credit risk. We address the question of the pro-cyclical effects of capital requirements in a general framework which takes into account banks' potential adjustment strategies. We develop a dynamic model of bank lending behavior and simulate different regulatory frameworks and macroeconomic scenarios. In particular, we address two related questions in our simulation study: How do business fluctuations affect capital requirements and bank lending? To what extent does the capital buffer absorb fluctuations in the level of mimimum required capital? -- |
| Keywords: | Minimum capital requirements,regulatory capital,capital buffer,cyclical lending,pro-cyclicality |
| JEL: | C61 E32 E44 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:201103&r=dge |
| By: | Jordi Caballé; Judith Panadés |
| Abstract: | This paper analyzes the behavior of the tax revenue to output ratio over the busi- ness cycle. In order to replicate the empirical evidence, we develop a simple model combining the standard Ak growth model with the tax evasion phenomenon. When individuals conceal part of their true income from the tax authority, they face the risk of being audited and hence of paying the corresponding fine. Under the empiri- cally plausible assumptions that the intertemporal elasticity of substitution exhibits a sufficiently small value and that productivity shocks are serially correlated, we show that the elasticity of government revenue with respect to output is larger than one, which agrees with the empirical evidence. This result holds even if the tax system displays flat tax rates. We extend the previous setup to generate larger fiscal deficits when the economy experiences a recession. |
| Keywords: | Tax evasion, Technology shocks, Growth |
| JEL: | H23 H26 O41 |
| Date: | 2011–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:870.11&r=dge |
| By: | Chu, Angus C.; Lai, Ching-Chong; Liao, Chih-Hsing |
| Abstract: | How do intellectual property rights that determine the market power of firms influence the effects of monetary policy on economic growth and social welfare? To analyze this question, we develop a monetary R&D-based growth model with elastic labor supply. We find that monetary expansion reduces growth and welfare through a decrease in labor supply that reduces R&D. Furthermore, a larger market power of firms strengthens these effects of monetary policy in the R&D model. In contrast, increasing the market power of firms dampens the growth and welfare effects of monetary policy in the AK model. Therefore, the market power of firms has drastically different implications on the welfare cost of inflation under the two growth engines (i.e., innovation versus capital accumulation). We also calibrate the two models using data in the US and the Euro Area to quantitatively evaluate and compare the welfare cost of inflation in the two economies. Finally, we simulate transition dynamics of the R&D model in order to compute the complete welfare changes from reducing inflation. |
| Keywords: | economic growth; inflation; monetary policy; patent policy; R&D |
| JEL: | O30 O40 E41 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30105&r=dge |
| By: | Paolo Angelini (Banca d'Italia); Stefano Neri (Banca d'Italia); Fabio Panetta (Banca d'Italia) |
| Abstract: | We use a dynamic general equilibrium model featuring a banking sector to assess the interaction between macroprudential policy and monetary policy. We find that in “normal” times (when the economic cycle is driven by supply shocks) macroprudential policy generates only modest benefits for macroeconomic stability over a “monetary-policy-only” world. And lack of cooperation between the macroprudential authority and the central bank may even result in conflicting policies, hence suboptimal results. The benefits of introducing macroprudential policy tend to be sizeable when financial or housing market shocks, which affect the supply of loans, are important drivers of economic dynamics. In these cases a cooperative central bank will “lend a hand” to the macroprudential authority, working for broader objectives than just price stability in order to improve overall economic stability. |
| Keywords: | macroprudential policy, monetary policy, capital requirements |
| JEL: | E44 E58 E61 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_801_11&r=dge |