nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒05‒07
sixteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Changing economic structures and impacts of shocks — evidence from a DSGE model for China By Mehrotra, Aaron; Nuutilainen, Riikka; Pääkkönen, Jenni
  2. Non-Existence of Steady State Equilibrium in the Neoclassical Growth Model with a Longevity Trend By Mikkel Nørlem Hermansen
  3. Non-Conventional Monetary Policies: QE and the DSGE literature By Evren Caglar; Jagjit S. Chadha; Jack Meaning; James Warren; Alex Waters
  4. Macro-prudential Policy on Liquidity: What does a DSGE Model tell us? By Jagjit S. Chadha; Luisa Corrado
  5. Rethinking the informal labour from an evolutionary point of view By Senses Dayangac, Renginar; Ozturk Goktuna, Bilge
  6. Organizational Capital and the International Co-movement of Investment By Alok Johri; Marc-Andre Letendre; Daqing Luo
  7. Growth, expectations and tariffs By Honkapohja , Seppo; Turunen, Arja H; Woodland, Alan D
  8. Capital Regulation, Monetary Policy and Financial Stability By Pierre-Richard Agénor; K. Alper; Luiz A. Pereira da Silva
  9. Real wage growth over the business cycle:contractual versus spot markets By Bellou, Andriana; Kaymak, Baris
  10. A decomposition of China's productivity through calibration of an endogenous growth model By Luckstead, Jeff; Choi, Seung Mo; Devadoss, Stephen; Mittelhammer, Ron C.
  11. Has the Government Lowered the Hours Worked? Evidence from Japan By Ko, Jun-Hyung
  12. Child Labour and Inequality By D'Alessandro, Simone; Fioroni, Tamara
  13. A simple model of aggregate pension expenditure By Angel de la Fuente
  14. Diversity and Technological Progress By Daron Acemoglu
  15. Rebalancing Growth in China: An International Perspective By Agnes Benassy-Quere; Benjamin Carton; Ludovic Gauvin
  16. Solving Models with Incomplete Markets and Aggregate Uncertainty Using the Krusell-Smith Algorithm: A Note on the Number and the Placement of Grid Points By Michal Horvath

  1. By: Mehrotra, Aaron (BOFIT); Nuutilainen, Riikka (BOFIT); Pääkkönen, Jenni (BOFIT)
    Abstract: We construct a small-scale dynamic stochastic general equilibrium (DSGE) model that features price rigidities, habit formation in consumption and costs in capital adjustment, and calibrate the model with data for the Chinese economy. Our interest centers on the impact of technology and monetary policy shocks for different structures of the Chinese economy. In particular, we evaluate how a rebalancing of the economy from investment-led to consumption-led growth would affect the economic dynamics after a shock occurs. Our findings suggest that a rebalancing would reduce the volatility of the real economy in the event of a technology shock, which provides support for policies aiming to increase the consumption share in China.
    Keywords: DSGE; rebalancing; monetary policy shocks; technology shocks; China
    JEL: E52 E60
    Date: 2011–04–28
  2. By: Mikkel Nørlem Hermansen (School of Economics and Management, Aarhus University, Denmark)
    Abstract: Longevity has been increasing in the developed countries for almost two centuries and further increases are expected in the future. In the neoclassical growth models the case of population growth driven by fertility is well-known, whereas the properties of population growth caused by persistently declining mortality rates have received little attention. Furthermore, the economic literature on the consequences of changing longevity has relied almost entirely on analysis applying a once and for all change in the survival probability. This paper raises concern about such an approach of comparison of steady state equilibrium when considering the empirically observed trend in longevity. We extend a standard continuous time overlapping generations model by a longevity trend and are thereby able to study the properties of mortality-driven population growth. This turns out to be exceedingly complicated to handle, and it is shown that in general no steady state equilibrium exists. Consequently analytical results and long run implications cannot be obtained in a setting with a realistic demographic setup.
    Keywords: Longevity, Population growth, Overlapping generations models, Steady state equilibrium, Existence
    JEL: J11 C62 O41 E13
    Date: 2011–04–18
  3. By: Evren Caglar; Jagjit S. Chadha; Jack Meaning; James Warren; Alex Waters
    Abstract: At the zero lower bound, the scale and scope of non-conventional monetary policies have become the key decision variables for monetary policy makers. In the UK, quantitative easing has involved the creation of a fund to purchase medium term dated government bonds with borrowed central bank reserves and so has increased the liquidity of the non-bank financial sector and temporarily eased the budget constraint of HMT. Some of these reserves have been used to increase the extent of capital held by banks and there have also been direct injections of capital into the banking system. We assess some of the issues arising from the three policies by using three separate DSGE models, which take seriously the role of financial frictions. We find that it is possible to correct the effects of a lower zero bound in DSGE models, by (i) offsetting the liquidity premium embedded in long term bonds and/or (ii) adopting countercyclical subsidies to bank capital able and/or (iii) the creation of central bank reserves that reduce the costs of loan supply. But the correct quantitative response and ongoing interaction with standard monetary policy remains an open question.
    Keywords: zero bound, open-market operations, quantitative easing
    JEL: E31 E40 E51
    Date: 2011–01
  4. By: Jagjit S. Chadha; Luisa Corrado
    Abstract: The financial crisis has led to the development of an active debate on the use of macro-prudential instruments for regulating the banking system, in particular for liquidity and capital holdings. Within the context of a micro-founded macroeconomic model, we allow commercial banks to choose their optimal mix of assets, apportioning these either to reserves or private sector loans. We examine the implications for quantities, relative non-financial and financial prices from standard macroeconomic shocks alongside shocks to the expected liquidity of banks and to the efficiency of the banking sector. We focus on the response by the monetary sector, in particular the optimal reserve-deposit ratio adopted by commercial banks over the business cycle. Overall we find some rationale for Basel III in providing commercial banks with an incentive to hold a greater stock of liquid assets, such as reserves, but also to provide incentives to increase the cyclical variation in reserves holdings as this acts to limit excessive procyclicality of lending to the private sector.
    Keywords: Liquidity, interest on reserves, policy instruments, Basel
    JEL: E31 E40 E51
    Date: 2011–04
  5. By: Senses Dayangac, Renginar (Galatasaray University Economic Research Center); Ozturk Goktuna, Bilge (Galatasaray University Economic Research Center)
    Abstract: The model presents the dynamics and the equilibrium of an overlapping generation economy when there is informal employment, a pension system and altruistic agents. The model inspires from stylised facts on developping and Euro-Mediteranean countries where family plays a central role in risk insurance. The rational is emphasised by lower costs compared to private and public insurance systems. Given an initial distribution of the informally employed individuals, the model captures the e¤ects of social security decisions and anticipated bequests on the preference of the agents for formal or informal employment. The impact of scal policies on the distribution of employment to formal and informal categories is analysed through the political competition. We show that opportunist behaviour would amplify the relative size of the informal employment.
    Keywords: Informal labour; Overlapping generations; Political competition
    Date: 2011–04–01
  6. By: Alok Johri; Marc-Andre Letendre; Daqing Luo
    Abstract: A recent literature explores the macroeconomic implications of organizational capital (OC) and especially its ability to resolve discrepancies between existing models and data. This paper contributes to the OC literature by studying the effect of OC on international investment flows in the context of a two-country real business cycle model. The presence of OC introduces novel considerations into agents' investment decisions since current investment and future productivity levels are positively linked. These new considerations help bring the model closer to the data. In response to a productivity shock in one country, investment increases in both countries, producing positive international co-movement in investment, a feature of the data that several IRBC models fail to produce.
    Keywords: international RBC, learning by doing, organizational capital, cross-country correlations, investment.
    JEL: F41 F21 E32
    Date: 2011–04
  7. By: Honkapohja , Seppo (Bank of Finland); Turunen, Arja H (University of New Orleans. Department of Economics and Finance); Woodland, Alan D (University of New South Wales)
    Abstract: We study a many-country endogenous growth model in which decisions about innovation and new investment are influenced by growth expectations. Adaptive learning dynamics determine the country-specific short-run transition paths. The countries differ in basic structural parameters and may impose tariffs on imports of capital goods. Numerical experiments illustrate the adjustment dynamics that follow the use of tariffs. We show that countries that limit trade in capital goods can experience dynamic gains both in growth and in utility and that such gains persist longer the larger the structural advantages of the region that applies tariffs. Substantial differences in levels of innovation, consumption, output and utility can appear, and asymmetries in economic outcomes that were present before trade restrictions are made more severe.
    Keywords: endogenous growth; expectations; learning; short-run dynamics; tariffs; complementary capital goods
    JEL: F15 F43
    Date: 2011–04–20
  8. By: Pierre-Richard Agénor; K. Alper; Luiz A. Pereira da Silva
    Abstract: This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic (financial) stability is defined in terms of the volatility of nominal income (real house prices). Numerical experiments show that even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of interest rate smoothing, and the stronger the policymaker’s concern with macroeconomic stability, the larger is the sensitivity of the regulatory rule to credit growth gaps.
    Date: 2011–04
  9. By: Bellou, Andriana; Kaymak, Baris
    Abstract: We study the wage growth of job stayers over the business cycle, and show that wage adjustments within a job spell display significant history dependence. This is at odds with the spot market model, which implies that the wage growth of a worker within a job spell depends solely on the change in the contemporaneous economic conditions. Instead, we find that workers hired during recessions, or those who experienced unfavorable economic conditions since they were hired, receive larger wage raises during expansions, and are subject to smaller wage cuts during downswings. The change in the contemporaneous conditions, on the other hand, is not a significant determinant of wage growth. Our findings are consistent with a model of implicit insurance contracts where neither the employer nor the worker can fully commit to the contract.
    Keywords: Business Cycles;Wage Rigidity; Implicit Contracts; Cyclical Selection
    JEL: E32 J31 J41
    Date: 2011
  10. By: Luckstead, Jeff; Choi, Seung Mo; Devadoss, Stephen; Mittelhammer, Ron C.
    Keywords: China, IST, human capital, International Development, o30,
    Date: 2011
  11. By: Ko, Jun-Hyung
    Abstract: Why does the hours worked show a decreasing pattern in the postwar Japanese economy? This paper answers this question in the background of the changing pattern of government spending and tax-imposing behaviors. We construct and simulate a standard optimal growth model with the following key features: various taxes and subsidies. Our main findings are as follows. First, we quantitatively find that the increasing pattern of taxes on labor income played a crucial role in influencing the declining pattern of hours worked in Japan. Second, consumption tax and subsidy have a limited role in explaining the labor supply because they cancel each other out. Third, pension benefit may influence the retirement of the people in their sixties but has a minor effect on the hours worked. Fourth, the legal reduction in the workweek length in 1990 can explain the low level of the hours worked since 1990. Fifth, subsistence consumption can account for the slope of hours worked but cannot explain the long-run level.
    Keywords: marginal tax rate; subsidy; hours worked; pension benefit
    JEL: E62 E32 E24
    Date: 2011–04
  12. By: D'Alessandro, Simone; Fioroni, Tamara
    Abstract: This paper focuses on the evolution of child labour, fertility and human capital in an economy with two production sectors and two types of workers endowed with two different levels of human capital. Adults allocate their time endowment between work and child rearing and choose the time allocation of children between schooling and work. The heterogeneity between low and high skilled workers allows for an endogenous analysis of inequality generated by child labour. We show that the persistence of child labour can be explained through the competition between children and low-skilled workers. This persistence, in turn, can easily induce an increase in the inequality and an average impoverishment within the country.
    Keywords: J13; J24; J82; K31
    JEL: J13
    Date: 2011–04–22
  13. By: Angel de la Fuente
    Abstract: This paper develops a simple model that can be used to analyze the long-term sustainability of the contributive pension system and the steady-state response of pension expenditure to changes in some key demographic and economic variables, in the characteristics of the average pensioner and in the parameters that describe how pensions are calculated in Spain as a function of workers' Social Security contribution histories.
    Keywords: pensions, sustainability, Spain
    JEL: H55
    Date: 2011–04–26
  14. By: Daron Acemoglu
    Abstract: This paper proposes a tractable model to study the equilibrium diversity of technological progress and shows that equilibrium technological progress may exhibit too little diversity (too much conformity), in particular, foregoing socially beneficial investments in “alternative” technologies that will be used at some point in the future. The presence of future innovations that will replace current innovations imply that social benefits from innovation are not fully internalized. As a consequence, the market favors technologies that generate current gains relative to those that will bear fruit in the future; current innovations in research lines that will be profitable in the future are discouraged because current innovations are typically followed by further innovations before they can be profitably marketed. A social planner would choose a more diverse research portfolio and would induce a higher growth rate than the equilibrium allocation. The diversity of researchers is a partial (imperfect) remedy against the misallocation induced by the market. Researchers with different interests, competences or ideas may choose non-profit maximizing and thus more diverse research portfolios, indirectly contributing to economic growth.
    JEL: C65 O30 O31 O33
    Date: 2011–04
  15. By: Agnes Benassy-Quere; Benjamin Carton; Ludovic Gauvin
    Abstract: Based on simulations of an original DGE model of the US, Chinese and Euro area economies with financial frictions and various monetary regimes, the paper shows that the contribution of China in global rebalancing should primarily rely on structural policies aiming at reducing aggregate savings in China. The role of the exchange-rate regime would be minor under standard monetary policies, although more important if monetary policies in advanced countries are constrained, as they are today. Finally, relying only on a change in China’s monetary regime (without structural reforms) could end up in delaying rather than accelerating the rebalancing, depending on China’s policy regarding accumulated reserves.
    Keywords: Global imbalances; exchange rate regimes; capital controls; China
    JEL: F32 F42 F47
    Date: 2011–03
  16. By: Michal Horvath
    Abstract: This paper shows that numerical solutions to models with incomplete markets and aggregate uncertainty obtained using the Krusell and Smith (1998) algorithm are sensitive to the parameterization of the grid in the aggregate asset holdings direction. Higher moments of the cross-sectional distribution of asset holdings can be particularly affected, which is important for welfare analysis. Using grids that are denser around the mean of the ergodic distribution of individual asset holdings can enhance the consistency of the results across parameterizations. The accuracy of the approximation to individual decision functions can be much improved this way.
    Keywords: Incomplete Markets, Aggregate Uncertainty, Heterogeneous agents, Simulations, Numerical Solutions.
    JEL: C6 C63 D52 E21
    Date: 2011–04

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