nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒04‒23
25 papers chosen by
Christian Zimmermann
University of Connecticut

  1. FiMod - a DSGE model for fiscal policy simulations By Stähler, Nikolai; Thomas, Carlos
  2. Macroeconomic implications of downward wage rigidities By Mirko Abbritti; Stephan Fahr
  3. Long-run growth expectations and 'global imbalances' By Hoffmann, Mathias; Krause, Michael; Laubach, Thomas
  4. Firm dynamics, job turnover, and wage distributions in an open economy By A. Kerem Coşar; Nezih Guner; James Tybout
  5. Corruption, Fertility, and Human Capital By Panagiotis Arsenis; Dimitrios Varvarigos
  6. Revisiting Overborrowing and its Policy Implications By Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
  7. Seigniorage and Distortionary Taxation in a Model with Heterogeneous Agents and Idiosyncratic Uncertainty By Sofía Bauducco
  8. The implications of dynamic financial frictions for DSGE models By Uluc Aysun
  9. A Monetary Theory with Non-Degenerate Distributions By Guido Menzio; Shouyong Shi; Hongfei Sun
  10. Optimal Redistributive Taxation with Both Labor Supply and Labor Demand Responses By Jacquet, Laurence; Lehmann, Etienne; Van der Linden, Bruno
  11. An Estimated (Closed Economy) Dynamic Stochastic General Equilibrium Model for the Philippines: Are There Credibility Gains from Committing to an Inflation Targeting Rule? By Majuca, Ruperto P.
  12. Unequal longevities and lifestyles transmission By Grégory Ponthière
  13. On Identification of Bayesian DSGE Models By Koop, Gary; Pesaran, Hashem; Smith, Ron P.
  14. Firm Dynamics in News Driven Business Cycle: The Role of Endogenous Survival Rate By Xu, Zhiwei; Fan, Haichao
  15. A Monte Carlo Analysis of the VAR-Based Indirect Inference Estimation of DSGE Models By David Dubois
  16. Portfolio Allocation and International Risk Sharing By Gianluca Benigno; Hande Küçük-Tuger
  17. The Financial Accelerator Under Learning and The Role of Monetary Policy By Rodrigo Caputo; Juan Pablo Medina; Claudio Soto.
  18. Consumption Smoothing and Portfolio Rebalancing: The Effects of Adjustment Costs By Yosef Bonaparte; Russell Cooper; Guozhong Zhu
  19. Cyclical risk aversion, precautionary saving and monetary policy By De Paoli, Bianca; Zabczyk, Pawel
  20. Ramsey Policies in a Small Open Economy with Sticky Prices and Capital By Stéphane Auray; Beatriz de Blas; Aurélien Eyquem
  21. Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment By Sandra Gomes; Pascal Jacquinot; Matthias Mohr; Massimiliano Pisani
  22. Exchange Rates and Global Rebalancing By Eichengreen, Barry; Rua, Gisela
  23. Trade Liberalization and Firm Dynamics By Ariel Burstein; Marc J. Melitz
  24. Existence of Arrow-Debreu Equilibrium with Generalized Stochastic Differential Utility By Patrick Beißner
  25. Descomposición Histórica de Choques del Tipo de Cambio Real en Colombia: un Enfoque DSGE By Luis Alejandro Lee P; Angélica María Quiroga E.

  1. By: Stähler, Nikolai; Thomas, Carlos
    Abstract: This paper develops a medium-scale dynamic, stochastic, general equilibrium (DSGE) model for fiscal policy simulations. Relative to existingmodels of this type, our model incorporates a two-country monetary union structure, which makes it well suited to simulate fiscal measures by relatively large countries in a currency area. We also provide a notable degree of disaggregation on the government expenditures side, by explicitly distinguishing between (productivity-enhancing) public investment, public purchases and the public sector wage bill. Finally, we consider a labor market characterized by search and matching frictions, which allows to analyze the response of equilibrium unemployment to fiscal measures. In order to illustrate some of its applications, and motivated by recent policy debate in the Euro Area, we calibrate the model to Spain and the rest of the area and simulate a number of fiscal consolidation scenarios. We find that, in terms of output and employment losses, fiscal consolidation is the least damaging when achieved by reducing the public sector wage bill, whereas it is most damaging when carried out by cutting public investment. --
    Keywords: General Equilibrium,Fiscal Policy Simulations,Labor Market Search
    JEL: E24 E32 E62 H20 H50
    Date: 2011
  2. By: Mirko Abbritti (Universidad de Navarra.); Stephan Fahr (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Growth of wages, unemployment, employment and vacancies exhibit strong asymmetries between expansionary and contractionary phases. In this paper we analyze to what degree downward wage rigidities in the bargaining process affect other variables of the economy. We introduce asymmetric wage adjustment costs in a New-Keynesian DSGE model with search and matching frictions in the labor market. We find that the presence of downward wage rigidities strongly improves the fit of the model to the skewness of variables and the relative length of expansionary and contractionary phases even when detrending the data. Due to the asymmetry, wages increase more easily in expansions, which limits vacancy posting and employment creation, similar to the flexible wage case. During contractions nominal wages decrease slowly, shifting the main burden of adjustment to employment and hours worked. The asymmetry also explains the differing transmission of positive and negative demand shocks from wages to inflation. Downward wage rigidities help explaining the asymmetric business cycle of many OECD countries where long and smooth expansions with low growth rates are followed by sharp but short recessions with large negative growth rates. JEL Classification: E31, E52, C61.
    Keywords: labor market, unemployment, downward wage rigidity, asymmetric adjustment costs, non—linear dynamics.
    Date: 2011–04
  3. By: Hoffmann, Mathias; Krause, Michael; Laubach, Thomas
    Abstract: This paper examines to what extent the build-up of 'global imbalances' since the mid-1990s can be explained in a purely real open-economy DSGE model in which agents' perceptions of long-run growth are based on filtering observed changes in productivity. We show that long-run growth estimates based on filtering U.S. productivity data comove strongly with long-horizon survey expectations. By simulating the model in which agents filter data on U.S. productivity growth, we closely match the U.S. current account evolution. Moreover, with household preferences that control the wealth effect on labor supply, we can generate output movements in line with the data. --
    Keywords: open economy DSGE models,trend growth,Kalman filter,real-time data,news and business cycles,current account
    JEL: F32 E32 D83
    Date: 2011
  4. By: A. Kerem Coşar (The University of Chicago Booth School of Business); Nezih Guner (ICREA-MOVE, Universitat Autònoma de Barcelona and Barcelona GSE); James Tybout (Pennsylvania State University and NBER)
    Abstract: This paper explores the effects of tariffs, trade costs, and firing costs on firm dynamics and labor markets outcomes. The analysis is based on a general equilibrium model with labor market search frictions, wage bargaining, firing costs, firm-specific productivity shocks, and endogenous entry/exit decisions. Firing costs reduce firms' profits and discourage them from quickly adjusting their employment levels in response to idiosyncratic shocks. Tariffs and other trade costs reduce rents for efficient firms and increase rents for inefficient firms, as in Melitz (2003). These well-known effects interact with idiosyncratic productivity shocks and with scale economies in hiring costs to determine the equilibrium size distribution of firms, entry/exit rates, job turnover rates, rate of informality, and cross-firm wage distributions.
    Date: 2011–04–12
  5. By: Panagiotis Arsenis; Dimitrios Varvarigos
    Abstract: We build an overlapping generations model in which reproductive households face a child quantity/child quality trade-off and bureaucrats are delegated with the task of delivering public services that support the accumulation of human capital. By integrating the theoretical analyses of endogenous growth, corruption and fertility choices, we offer a novel mechanism on the driving forces behind demographic transition. In particular, we attribute it to the endogenous change in the incidence of bureaucratic corruption that occurs at different stages of an economy?s transition towards higher economic development.
    Keywords: Corruption; Demographic transition; Human capital; Economic growth
    JEL: D73 H52 J13 O41
    Date: 2011–04
  6. By: Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
    Abstract: This paper analyzes quantitatively the extent to which there is overborrowing (i.e., inefficient borrowing) in a business cycle model for emerging market economies with production and an occasionally binding credit constraint. The main finding of the analysis is that overborrowing is not a robust feature of this class of model economies: it depends on the structure of the economy and its parametrization. Specifically, we find underborrowing in a production economy with our baseline calibration, but overborrowing with more impatient agents and more volatile shocks. Endowment economies display overborrowing regardless of parameter values, but they do not allow for policy intervention when the constraint binds (in crisis times). Quantitatively, the welfare gains from implementing the constrained efficient allocation are always larger near crisis times than in normal< ones. In production economies, they are one order of magnitude larger than in endowment economies both in crisis and normal times. This suggests that the scope for economy-wide macroprudential policy interventions (e.g. prudential taxation of capital flows and capital controls) is weak in this class of models.
    Date: 2010–06
  7. By: Sofía Bauducco
    Abstract: In this paper we study the optimal monetary and fiscal policy mix in a model in which agents are subject to idiosyncratic uninsurable shocks to their labor productivity. We identify two main effects of anticipated inflation absent in representative agent frameworks. First, inflation stimulates saving for precautionary reasons. Hence, a higher level of anticipated inflation implies a higher capital stock in steady state, which translates into higher wages and lower taxes on labor income. This benefits poor, less productive agents. Second, inflation acts as a regressive consumption tax, which favors rich and productive agents. We calibrate our model economy to the U.S. economy and compute the optimal policy mix. We find that, for a utilitarian government, the Friedman rule is optimal even when we allow for the presence of heterogeneity and uninsurable idiosyncratic risk. Although the aggregate welfare costs of inflation are small, individual costs and benefits are large. Net winners from inflation are poor, less productive agents, while middle-class and rich households are always net losers.
    Date: 2011–02
  8. By: Uluc Aysun (University of Connecticut)
    Abstract: This paper shows that when financial frictions are dynamically modeled, broader inferences can be drawn from DSGE models with asymmetric information costs. By embedding a partial equilibrium framework of bankruptcy proceedings in a dynamic New Keynesian model I find, for example, that financial liberalization episodes are only effective in countries with an efficient judicial system. More generally, I find that the response of output to various shocks depends on the duration of bankruptcy proceedings. These relationships, however, are not strictly unidirectional. The responses to adverse shocks are amplified (mitigated) when the shocks also generate an increase (a decrease) in real interest rates and an increase (decrease) in the stock of bankruptcy cases. I find empirical support for one prediction of the model by investigating macroeconomic and foreclosure data from U.S. states; monetary policy is more effective in states that have longer foreclosure proceedings.
    Keywords: Foreclosure, DSGE, financial frictions, court efficiency.
    JEL: C63 E44 E52
    Date: 2011–04
  9. By: Guido Menzio (Department of Economics, University of Pennsylvania); Shouyong Shi (Department of Economics, University of Toronto); Hongfei Sun (Department of Economics, Queens University)
    Abstract: Dispersion of money balances among individuals is the basis for a range of policies but it has been abstracted from in monetary theory for tractability reasons. In this paper, we fill in this gap by constructing a tractable search model of money with a non-degenerate distribution of money holdings. We assume search to be directed in the sense that buyers know the terms of trade before visiting particular sellers. Directed search makes the monetary steady state block recursive in the sense that individuals’ policy functions, value functions and the market tightness function are all independent of the distribution of individuals over money balances, although the distribution affects the aggregate activity by itself. Block recursivity enables us to characterize the equilibrium analytically. By adapting lattice-theoretic techniques, we characterize individuals’ policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists. Moreover, we provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate and analyze the properties of this distribution.
    Keywords: Money; Distribution; Search; Lattice-Theoretic
    JEL: E00 E4 C6
    Date: 2011–03–11
  10. By: Jacquet, Laurence (Norwegian School of Economics and Business Administration); Lehmann, Etienne (CREST-INSEE); Van der Linden, Bruno (IRES, Université catholique de Louvain)
    Abstract: This paper characterizes the optimal redistributive tax schedule in a matching unemployment framework with endogenous (voluntary) nonparticipation and (involuntary) unemployment. The optimal employment tax rate is given by an inverse employment elasticity rule. This rule depends on the global response of the employment rate, which depends not only on the participation (labor supply) responses, but also on the vacancy posting (labor demand) responses and on the product of these two types of responses. For plausible parameters, our matching environment induces much lower employment tax rates than the usual competitive participation model.
    Keywords: optimal taxation, labor market frictions, unemployment
    JEL: D82 H21 J64
    Date: 2011–04
  11. By: Majuca, Ruperto P.
    Abstract: <p>We use Bayesian methods to estimate a medium-scale closed economy dynamic stochastic general equilibrium (DSGE) model for the Philippine economy. Bayesian model selection techniques indicate that among the frictions introduced in the model, the investment adjustment costs, habit formation, and the price and wage rigidity features are important in capturing the dynamics of the data, while the variable capital utilization, fixed costs, and the price and wage indexation features are not important.</p> <p>We find that the Philippine macroeconomy is characterized by more instability than the U.S. economy. An analysis of the several subperiods in Philippine economic history also reveals some quantitative evidence that risk aversion increases during crisis periods. Also, we find that the inflation targeting (IT) era is associated with a more stable economy: the standard deviations of the technology shock, the risk-premium shock, and the investment-specific technology shock have significantly lower variability than the pre-IT era, with the last two shocks being reduced by a factor of 5.6 and 2.3, respectively. The IT era is also associated with lower risk aversion. We also find that the adoption of inflation targeting is associated with interest rate smoothing in the monetary reaction function. With a more inertial reaction function, the Bangko Sentral ng Pilipinas (BSP) had achieved greater credibility and consequently, it was able to manage the expectations of forward-looking economic actors, and thereby achieved greater responses of the goal variables to the policy rates, even if the size of interest rates changes are smaller.</p> <p>However, we also find that BSP`s conduct of monetary policy appears to be more procyclical than countercyclical, particularly during the Asian financial crisis, and the recent global financial and economic crisis.</p>
    Keywords: new Keynesian model, Bayesian estimation
    Date: 2011
  12. By: Grégory Ponthière (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, 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)
    Abstract: Whereas studies on the optimal taxation under endogenous longevity assume a fixed heterogeneity of lifestyles, this paper considers the optimal tax policy in an economy where unequal longevities are the unintended outcome of differences in lifestyles, and where lifestyles are transmitted across generations. For that purpose, we develop a three-period OLG model where the population, who ignores the negative impact of excessive work on longevity, is partitioned in two groups with different tastes for leisure, and follows an adaptation/imitation process à la Bisin and Verdier (2001). The optimal short-run and long-run Pigouvian taxes on wages are shown to differ, because the latter correct agents'myopia, but also internalize intergenerational externalities due to the socialization process.
    Keywords: longevity ; OLG model ; lifestyle ; socialization ; intergenerational externalities ; Pigouvian taxes
    Date: 2011–04–14
  13. By: Koop, Gary (University of Strathclyde); Pesaran, Hashem (University of Cambridge); Smith, Ron P. (Birkbeck College, University of London)
    Abstract: In recent years there has been increasing concern about the identification of parameters in dynamic stochastic general equilibrium (DSGE) models. Given the structure of DSGE models it may be difficult to determine whether a parameter is identified. For the researcher using Bayesian methods, a lack of identification may not be evident since the posterior of a parameter of interest may differ from its prior even if the parameter is unidentified. We show that this can be the case even if the priors assumed on the structural parameters are independent. We suggest two Bayesian identification indicators that do not suffer from this difficulty and are relatively easy to compute. The first applies to DSGE models where the parameters can be partitioned into those that are known to be identified and the rest where it is not known whether they are identified. In such cases the marginal posterior of an unidentified parameter will equal the posterior expectation of the prior for that parameter conditional on the identified parameters. The second indicator is more generally applicable and considers the rate at which the posterior precision gets updated as the sample size (T) is increased. For identified parameters the posterior precision rises with T, whilst for an unidentified parameter its posterior precision may be updated but its rate of update will be slower than T. This result assumes that the identified parameters are -consistent, but similar differential rates of updates for identified and unidentified parameters can be established in the case of super consistent estimators. These results are illustrated by means of simple DSGE models.
    Keywords: Bayesian identification, DSGE models, posterior updating, New Keynesian Phillips Curve
    JEL: C11 C15 E17
    Date: 2011–04
  14. By: Xu, Zhiwei; Fan, Haichao
    Abstract: Our structural VAR shows that the new business formation in U.S. data has similar positive co-movement pattern as common aggregate variables in response to a favorable anticipated shock about technology. However, incorporating …firm dynamics into Jaimovich and Rebelo's (Jaimovich and Rebelo, 2009, American Economic Review) model cannot explain our empirical fi…nding. Even worse, the model predicts an aggregate recession instead of a boom. Then, we show that this problem can be resolved with a minor modification by introducing endogenous survival rate of the new entrants.
    Keywords: Firm Dynamics; Aggregate Co-movement; Expectation Driven Business Cycle; News Shocks
    JEL: E32 E22
    Date: 2010–11
  15. By: David Dubois
    Abstract: In this paper we study estimation of DSGE models. More specifically, in the indirect inference framework, we analyze how critical is the choice of the reduced form model for estimation purposes. As it turns out, simple VAR parameters performs better than commonly used impulse response functions. This can be attributed to the fact that IRF worsen identification issues for models that are already plagued by that phenomenon.
    Date: 2011
  16. By: Gianluca Benigno; Hande Küçük-Tuger
    Abstract: Recent contributions have shown that it is possible to account for the so-called consumption-real exchange anomaly in models with goods market frictions where international asset trade is limited to a riskless bond. In this paper, we consider a more realistic international asset market structure and show that as soon as we depart from the single bond economy, we can no longer account for the consumption-real exchange anomaly. Our central result holds for a simple asset market structure in which two nominal bonds are traded across countries. We explore the role of demand shocks such as news shocks in generating meaningful market incompleteness. We show that only under specific settings news shocks can improve the performance of the model in matching the portfolio positions and consumption-real exchange rate correlations that we observe in the data.
    Keywords: Portfolio choice, incomplete financial markets, international risk sharing, consumption-real exchange rate anomaly
    JEL: F31 F41
    Date: 2011–04
  17. By: Rodrigo Caputo; Juan Pablo Medina; Claudio Soto.
    Abstract: Financial frictions have been shown to play an important role amplifying business cycles fluctuations. In this paper we show that the financial accelerator mechanism, analyzed by Bernanke, Gertler and Gilrchrist (1999), combined with adaptive learning can amplify business cycle fluctuations significantly as the balance sheet channel interacts with the presence of endogenous asset price “bubbles”. These large business cycle fluctuations are amplified in a non-linear way by the size of the shocks and by the degree of financial fragility in the economy determined by its leverage. Our preliminary results indicate that even in the presence of endogenous bubbles, responding aggressively to inflation reduces output and inflation volatility. If the central bank adjusts its policy instrument in response to asset price fluctuations, it may reduce output volatility and even inflation volatility in the short run. However, that monetary policy conduct leads to a surge in inflation several periods after the shocks. A policy that aggressively responds to changes in asset prices may marginally reduce output volatility with respect to a policy that reacts aggressively to inflation, but also at the cost of generating inflationary pressures.
    Date: 2010–09
  18. By: Yosef Bonaparte; Russell Cooper; Guozhong Zhu
    Abstract: This paper studies the dynamics of portfolio rebalancing and consumption smoothing in the presence of non-convex portfolio adjustment costs. The goal is to understand a household's response to income and return shocks. The model includes the choice of two assets: one riskless without adjustment costs and a second risky asset with adjustment costs. With these multiple assets, a household can buffer some income fluctuations through the asset without adjustment costs and engage in costly portfolio rebalancing less frequently. We estimate both preference parameters and portfolio adjustment costs. The estimates are used for evaluating consumption smoothing and portfolio adjustment in the face of income and return shocks.
    JEL: E21 G11
    Date: 2011–04
  19. By: De Paoli, Bianca (Bank of England); Zabczyk, Pawel (Bank of England)
    Abstract: This paper analyses the conduct of monetary policy in an environment in which cyclical swings in risk appetite affect households’ propensity to save. It uses a New Keynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive following positive shocks.
    Keywords: Precautionary saving; monetary policy; cyclical risk aversion; macro-finance; DSGE models.
    JEL: E32 G12
    Date: 2011–04–12
  20. By: Stéphane Auray (CNRS, THEMA, EQUIPPE, Universités Lille Nord de France (ULCO),Université de Sherbrooke (GREDI) and CIRPEE, Canada.); Beatriz de Blas (Universidad Autonoma de Madrid, Departamento de Analisis Economico, T. et H. Economico, Campus de Cantoblanco, 28049 Madrid, Spain.); Aurélien Eyquem (Université de Lyon, Lyon, F-69003, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: This paper analyzes jointly optimal fiscal and monetary policies in a small open economy with capital and sticky prices. We allow for trade in consumption goods under perfect international risk sharing. We consider balanced-budget fiscal policies where authorities use distortionary taxes on labor and capital together with monetary policy using the nominal interest rate. First, as long as a symmetric equilibrium is considered, the steady state in an open economy is isomorphic to that of a closed economy. Second, whereas sticky prices allocations are almost indistinguishable from flexible prices allocations, the open economydimension delivers results that are qualitatively similar to those of a closed economy but with significant quantitative changes. Fluctuations in terms of trade implied by complete international financial markets affect (i) consumption through changes in the consumption price index (CPI), (ii) hours through changes in the CPI-based real wage and (iii) capital accumulation through the relative price of capital goods. These wedges affect the volatility and persistence of optimal tax rates, and resulting allocations are quite different, as compared to a closed economy.
    Keywords: small open economy, Sticky prices, optimal monetary and fiscal policies
    JEL: E52 E62 E63 F41
    Date: 2011
  21. By: Sandra Gomes (Bank of Portugal, Economic Research Department, Av. Almirante Reis 71, 1150-012 Lisbon, Portugal.); Pascal Jacquinot (European Central Bank, Directorate General of Research, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Matthias Mohr (European Central Bank, Directorate General of Economics, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Massimiliano Pisani (Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy.)
    Abstract: We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, there are benefits from implementing unilateral structural reforms. A reduction of markup by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. As reforms are implemented gradually over a period of five years, output would smoothly reach its new long-run level in seven years. Second, cross-country coordination of reforms would add extra benefits to each region in the euro area, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. This is true in particular for a small and open economy such as Portugal. Specifically, in the long run German output would increase by 9.2 percent, Portuguese output by 8.6 percent. Third, cross-country coordination would make the macroeconomic performance of the different regions belonging to the euro area more homogeneous, both in terms of price competitiveness and real activity. Overall, our results suggest that reforms implemented apart by each country in the euro area produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects. JEL Classification: C53, E52, F47.
    Keywords: Economic policy, structural reforms, dynamic general equilibrium modeling, competition, markups, monetary policy.
    Date: 2011–04
  22. By: Eichengreen, Barry (Asian Development Bank Institute); Rua, Gisela (Asian Development Bank Institute)
    Abstract: This paper considers the general equilibrium relationship between exchange rates and global imbalances. It emphasizes that the exchange rate is not a primitive but an equilibrium price determined by the policy mix. It uses extensions of the two-country Obstfeld-Rogoff model to analyze the response of imbalances and real exchange rates to shocks. Finally, it analyzes the characteristics of episodes in which chronic current account surpluses (as opposed to deficits) come to an end.
    Keywords: global imbalances; exchange rates; current account; economic rebalancing; global rebalancing
    JEL: F00 F30 F40
    Date: 2011–04–13
  23. By: Ariel Burstein; Marc J. Melitz
    Abstract: In this paper, we analyze the transition dynamics associated with an economy's response to trade liberalization. We start by reviewing the recent literature that incorporates firm dynamics into models of international trade. We then build upon that literature to characterize the role of firm dynamics, export-market selection, firm-level innovation, and firms' expectations regarding the time path of liberalization in generating those transition dynamics following trade liberalization. These modeling ingredients generate substantial aggregate transition dynamics as they shift and shape the endogenous distribution of firms over time. Our results show how the responses of trade volumes, innovation, and aggregate output can vary greatly over time depending on those modeling ingredients. This has important consequences for many issues in international economics that rely on predictions for the effects of globalization over time on those key aggregate outcomes.
    JEL: F1 F4
    Date: 2011–04
  24. By: Patrick Beißner (Institute of Mathematical Economics, Bielefeld University)
    Abstract: This paper establishes, in the setting of Brownian information, a general equilibrium existence result under a stochastic differential formulation of intertemporal recursive utility. The present class of utility functionals is generated by a backward stochastic differential equation and incorporates preference for the local risk of the stochastic utility process. The setting contains models in which Knightian uncertainty is represented in the subjective and objective sense.
    Keywords: BSDE, GSDU, super-gradient, properness, general equilibrium, Knightian uncertainty
    Date: 2011–04
  25. By: Luis Alejandro Lee P; Angélica María Quiroga E.
    Abstract: El trabajo utiliza un modelo DSGE de ciclos reales con dos sectores productivos, uno transable y uno no transable, para realizar una descomposición histórica de choques del tipo de cambio real en Colombia en el período comprendido entre los años 2000 y 2009. Dicha descomposición estima el poder explicativo de choques estructurales en la tecnología y tasa de interés período a período, lo cual representa una ventaja frente a metodologías más tradicionales como la descomposición de varianza, la cual realiza el ejercicio como un promedio de todo el período de observación. Los resultados muestran que en promedio el modelo explica 55% del comportamiento del tipo de cambio real, teniendo que al principio y al final de la década el choque al tipo de interés fue el dominante, mientras en los años 2006, 2007 y 2008 lo fue el choque a la productividad transable.
    Date: 2010–06–30

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