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on Dynamic General Equilibrium |
| By: | Alessia Campolmi (Central European University; Magyar Nemzeti Bank (central bank of Hungary)); Stefano Gnocchi (Universitat Autonoma de Barcelona) |
| Abstract: | In the present paper we examine how the introduction of endogenous participation in an otherwise standard DSGE model with matching frictions and nominal rigidities affects business cycle dynamics and monetary policy. The contribution of the paper is threefold: first, we show that the model provides a good fit for employment and unemployment volatility, as well as participation volatility and its correlation with output for US data. Second, we show that in such a model, and contrary to a model with exogenous participation, a monetary authority that becomes more aggressive in fighting inflation decreases the volatility of employment and unemployment. Finally, we show the role of search costs in shaping those results. |
| Keywords: | matching frictions, endogenous participation, monetary policy |
| JEL: | E24 E32 E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2011/4&r=dge |
| By: | Guido Menzio; Shouyong Shi |
| Abstract: | The paper develops a model of directed search on the job where transitions of workers between unemployment, employment and across employers are driven by heterogeneity in the quality of firm-worker matches. The equilibrium is such that the agents' value and policy functions are independent of the distribution of workers across employment states. Hence, the model can be solved outside of steady-state and used to measure the effect of cyclical productivity shocks on the labor market. Productivity shocks are found to generate large fluctuations in workers' transitions, unemployment and vacancies when matches are experience good, but not when matches are inspection goods. |
| Keywords: | Directed search; On the Job Search; Business Cycles; Unemployment |
| JEL: | E24 E32 J64 |
| Date: | 2011–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-437&r=dge |
| By: | Ladrón de Guevara, Antonio; Ortigueira, Salvador; Santos, Manuel S. |
| Abstract: | This paper presents an account of the dynamics of endogenous growth models with physical capital and human capital. We consider some important extensions of the basic framework of Lucas (1988) and Uzawa (1964), including physical capital in the human capital technology and leisure activities as an additional argument of agents' welfare. |
| Keywords: | Endogenous growth; Physical capital; Human capital; Long-term growth; Transitional dynamics; |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/2913&r=dge |
| By: | Croix, David de la; Licandro, Omar |
| Abstract: | In a competitive overlapping generation model, underutilization of labor and equipment can be due to the combination of irreversibility of human capital, physical capital and technology with idiosyncratic productivity shocks. Irreversibilities and uncertainty generate an inefficient allocation of resources among sectors, which takes the form of underemployment and underutilization of capacities at the aggregate level and affects the equilibrium path of capital. We provide examples in which this missallocation, called structural "mismatch," can be responsible, a.o., for an "inescapable poverty trap," or for periodic orbits generating endogenous fluctuations in underemployment. |
| Keywords: | Underemployment; Underutilization; Irreversibility; Poverty trap; Endogenous Fluctuations; |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/2970&r=dge |
| By: | Fernandez-Corugedo, Emilio (Bank of England); McMahon, Michael (University of warwick and Centre for Economic Performance, LSE); Millard, Stephen (Bank of England); Rachel, Lukasz (Bank of England) |
| Abstract: | In this paper we first document the behaviour of working capital over the business cycle stressing the large negative effect of the recent credit contraction on UK firms working capital positions. In order to understand the effects of working capital on macroeconomic variables, we solve and calibrate an otherwise standard flexibleprice DSGE model that introduces an explicit role for the components of working capital as well as a banking sector which intermediates credit. We find that financial intermediation shocks, similar to those experienced post-2007, have persistent negative effects on economic activity ; these effects are reinforced by reductions in trade credit. Our model admits a crucial role for monetary policy to offset such shocks. Key words: Working capital ; business cycle model ; spreads ; financial crisis. JEL classification: E20 ; E51 ; E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:959&r=dge |
| By: | Paul Gomme (Concordia University and CIREQ); Damba Lkhagvasuren (Concordia University and CIREQ) |
| Abstract: | Reasonably calibrated versions of the Diamond-Mortensen-Pissarides search and matching model of unemployment underpredict, by a wide margin, the volatility of vacancies, unemployment, and the vacancies-unemployment ratio - variables at the heart of this model. These shortcomings motivate two modifications to the Diamond-Mortensen-Pissarides model. First, wages are determined via competitive search (wage posting by firms along with directed search on the part of workers) rather than the usual Nash bargaining. This change is motivated by the fact that most unemployment variation in the U.S. is due to non-college educated individuals, and that wages of newly-hired non-college educated workers are predominantly set by wage posting. Second, workers are permitted to take direct action to affect the outcome of their labor market search through search effort. With these modifications in place, the benchmark model captures 70% of the standard deviation of unemployment and the vacancies-unemployment ratio, and almost 80% of the volatility of vacancies. A recalibration of the model that targets the variability of the vacancies-unemployment ratio results in reasonable parameters, and can account for almost all of the cyclical variability in unemployment and vacancies. |
| Keywords: | Variable Search Effort, Educational Differences in Unemployment Volatility, Endogenous Matching Technology, Time Use, Wage Posting, Competitive Search |
| JEL: | E24 E32 J63 J64 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:11003&r=dge |
| By: | Chang, Ming-Jen; Wang, Ping; Xie, Danyang |
| Abstract: | This paper studies the patterns and key determinants of staged economic development. We construct a two-sector dynamic general equilibrium model populated with one-period lived non-overlapping generations, featuring endogenous enhancement in modern technology and endogenous accumulation of labor skills and capital funds. We consider preference biases toward the traditional sector of necessities, capital barriers to the modern sector, and imperfect substitution between skilled and unskilled workers. By calibrating the model to t historic U.S. development, we fi nd that modern technologies, saving incentives and capital fundings are most important determinants of the takeoff time. By evaluating the process of economic development, we identify that saving incentives is most crucial for the speed of modernization. We also study how labor and capital allocations toward the modern industry respond to various preference, technology and institutional changes. We further establish that labor, capital and output are most responsive to the initial state of modern technologies but least responsive to the initial state of skills, along the dynamic transition path. |
| Keywords: | Economic takeoff and industrial transformation; endogenous skill and technological advancements; saving incentives; preference biases and capital barriers |
| JEL: | O41 O33 |
| Date: | 2011–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:31868&r=dge |
| By: | Jie Zhanga; Siew Ling Yew |
| Abstract: | In this paper we investigate long-run optimal social security and public health and their effects on fertility, longevity, capital intensity, output per worker and welfare in a dynastic model with altruistic bequests. Under empirically plausible conditions, social security and public health reduce fertility and raise longevity, capital intensity and output per worker. The effects of social security, except that on longevity, are stronger than those of public health. Numerically, they can improve welfare (better when they are used together than used separately). We also illustrate numerically that there exists a unique convergent solution in the dynamic system at the steady state. |
| Keywords: | Social security; Public health; Life expectancy; Fertility |
| JEL: | H55 J13 O41 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2011-07&r=dge |
| By: | T. BUYSE; F. HEYLEN; R. VAN DE KERCKHOVE |
| Abstract: | We study the effects of pension reform in a four-period OLG model for an open economy where hours worked by three active generations, education of the young, the retirement decision of older workers, and aggregate per capita growth, are all endogenous. Next to the characteristics of the pension system, our model assigns an important role to the composition of fiscal policy. We find that the model explains the facts remarkably well for many OECD countries.<br> Our simulation results prefer an intelligent pay-as-you-go pension system above a fully-funded private system. When it comes to promoting employment, human capital, growth, and welfare, positive effects in a PAYG system are the strongest when it includes a tight link between individual labor income (and contributions) and the pension, and when it attaches a high weight to labor income earned as an older worker to compute the pension assessment base. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:11/719&r=dge |
| By: | Jan Bonenkamp |
| Abstract: | <p>This paper explores the interaction between retirement flexibility and portfolio choice in an overlapping-generations model. We analyse this interaction both in a partial-equilibrium and general-equilibrium setting. </p><p>Retirement flexibility is often seen as a hedge against capital-market risks which justifies more risky asset portfolios. We show, however, that this positive relationship between risk taking and retirement flexibility is weakened and under some conditions even turned around, if not only capital-market risks but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk. Moreover, it turns out that general-equilibrium effects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure.</p><p>Key words: retirement (in) flexibility, portfolio allocation, risk, intratemporal substitution elasticity<br />JEL codes: E21, G11, J26<br /> </p> |
| JEL: | E21 G11 J26 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:182&r=dge |
| By: | Grey Gordon (Department of Economics, University of Pennsylvania) |
| Abstract: | Theoretical formulations of dynamic heterogeneous-agent economiestypically include a distribution as an aggregate state variable. This paperintroduces a method for computing equilibrium of these models by including a distribution directly as a state variable if it is finite-dimensional or a fine approximation of it if infinite-dimensional. The method accurately computes equilibrium in an extreme calibration of Huffman's (1987) overlapping-generations economy where quasi-aggregation, the accurate forecasting of prices using a small state space, fails to obtain. The method also accurately solves for equilibrium in a version of Krusell and Smith's (1998) economy wherein quasi-aggregation obtains but households face occasionally binding constraints. The method is demonstrated to be not only accurate but also feasible with equilibria for both economies being computed in under ten minutes in Matlab. Feasibility is achieved by using Smolyak's (1963) sparse-grid interpolation algorithm to limit the necessary number of gridpoints by many orders of magnitude relative to linear interpolation. Accuracy is achieved by using Smolyak's algorithm, which relies on smoothness, only for representing the distribution and not for other state variables such as individual asset holdings. |
| Keywords: | Numerical Solutions, Heterogeneous Agents, Projection Methods |
| JEL: | C63 C68 E21 |
| Date: | 2011–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-018&r=dge |
| By: | Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Neil Rankin (Department of Economics and Related Studies, University of York) |
| Abstract: | We construct a staggered-price dynamic general equilibrium model with overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make an increase in government debt, with associated changes in lumpsum taxation, effective in raising short-run output. However we find this is very sensitive to the monetary policy rule. A permanent increase in debt under a basic Taylor Rule does not raise output. To make debt effective we need either a temporary nominal interest rate peg; or inertia in the rule; or an exogenous money supply policy; or to make the debt increase temporary. |
| Keywords: | staggered prices, overlapping generations, government debt, fiscal policy effectiveness, monetary policy rules |
| JEL: | E62 E63 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:pav:wpaper:256&r=dge |
| By: | Gunes Kamber; Christoph Thoenissen |
| Abstract: | We examine the transmission mechanism of banking sector shocks in a two-country DSGE model. Assuming that the home country is small relative to the rest of world, we find that spillovers from foreign banking sector shocks are modest unless banks in the small country hold foreign banking assets. The correlation between home and foreign GDP rises with the exposure of the of the domestic banking sector to foreign bank assets. |
| Date: | 2011–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1108&r=dge |
| By: | Shouyong Shi |
| Abstract: | Equity price is cyclical and often leads the business cycle by one or two quarters. These observations lead to the hypothesis that shocks to equity market liquidity are an independent source of the business cycle. In this paper I construct a model to evaluate this hypothesis. The model is easy for aggregation and for the construction of the recursive competitive equilibrium. After calibrating the model to the US data, I find that a negative liquidity shock in the equity market can generate large drops in investment and output but, contrary to what one may conjecture, the shock generates an equity price boom. This response of equity price occurs as long as a negative liquidity shock tightens firms' financing constraints on investment. Thus, liquidity shocks to the equity market cannot be the primary driving force of the business cycle. For equity price to fall as it typically does in a recession, a negative liquidity shock must be accompanied or caused by other shocks that reduce the need for investment sufficiently and relax firms' financing constraints on investment. I illustrate that a strong negative productivity shock is a good candidate of such concurrent shocks. |
| Keywords: | Liquidity; Asset prices; Business cycle |
| JEL: | E32 E5 G1 |
| Date: | 2011–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-434&r=dge |
| By: | Christoph Görtz; John Tsoukalas |
| Abstract: | Recent evidence suggests that agents’ expectations may have played a role in several cycli¬cal episodes such as the U.S. "new economy" boom in the late 1990s, the real estate boom in Japan in the 1980s and the real estate boom in the U.S. which ended in 2008. One chal¬lenge in the expectations driven view of fluctuations has been to develop simple one sector models that can give rise to such fluctuations without a compromise on other dimensions. In this paper we propose a simple generalization of the Greenwood et al. (1988) one sec¬tor model and show it can generate fluctuations that arise as a result of agents difficulty to forecast productivity embodied in new capital. The two key assumptions in the model are: (1) the vintage view of capital productivity, whereby each successive vintage has (po¬tentially) different productivity and (2) agents’ imperfect information and learning about this productivity. The model is consistent with second and third moments from U.S. data. Simulations of the model suggest that, (a) noise amplifies fluctuations and (b) pure noise can trigger recessions that mimic in magnitude, duration and depth the typical post WW II U.S. recession. |
| Keywords: | News shocks, expectations, growth asymmetry, Bayesian learning, business cy¬cles. |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:11/06&r=dge |
| By: | Rojas, Juan A. |
| Abstract: | In this paper we use a large overlapping generations model with individuals that differ across age, productivity and native status to assess the effects on the pension system of different immigration quotas in the context of an aging population by computing how much should social security taxes be rised in order to pay for the pension burden in two model economies. The first one is the standard model pioneered by Auerbach and Kotlikoff (1987) where skilled and unskilled workers are perfect substitutes in the production process. In the second model economy, individuals with different skill levels are imperfect substitutes as in Canova and Ravn (1998). The main result of the paper is that half of the reduction of the social security tax rate associated with immigration in the standard model is lost when skilled and unskilled individual are imperfect substitutes. Consequently, the standard model with perfect substitution overestimates the ability of immigration inflows to sustain the pension system in Spain. |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/277&r=dge |
| By: | Andrea Ricci (ISFOL); Robert J Waldmann (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | This paper shows that the under-investment in firm financed training caused by hold up can justify the introduction of firing taxes in a laissez-faire economy with search frictions and risk neutral agents. More precisely we highlight two results. First, the introduction of a firing tax for newly hired workers combined with hiring subsidies, always acts as a Pareto improving policy. Second, with no hiring subsidies, the introduction of a firing tax for the newly hired always increase the welfare of employed while its impact on the welfare of unemployed depends on the returns to training. We also analyze the implications of such a policy if a minimum wage is binding for newly hired workers. |
| Keywords: | employment protection, training, hold-up, welfare |
| JEL: | J41 J63 J8 |
| Date: | 2011–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:197&r=dge |
| By: | Borowczyk Martins, Daniel (University of Bristol); Jolivet, Grégory (University of Bristol); Postel-Vinay, Fabien (University of Bristol) |
| Abstract: | We show that equilibrium matching models imply that standard estimates of the matching function elasticities are exposed to an endogeneity bias, which arises from the search behavior of agents on either side of the market. We offer an estimation method which, under certain assumptions, is immune from that bias. Application of our method to the estimation of a basic version of the matching function using aggregate U.S. data from the Job Openings and Labor Turnover Survey (JOLTS) suggests that the bias is quantitatively important. |
| Keywords: | matching function estimation, unemployment, vacancies, job finding |
| JEL: | J63 J64 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5807&r=dge |
| By: | Catalina Granda-Carvajal (University of Connecticut and Universidad de Antioquia) |
| Abstract: | Within the literature on business cycles featuring shadow economic activities, there is an approach based on the arguable premise that fluctuations in the official and unofficial sectors are negatively correlated. The present paper develops a real business cycle model that does not impose such an assumption. To do so, preferences are characterized so that regular and irregular labor are additively separable. Furthermore, leisure time is spent on both irregular work effort and non-market activities. Simulations are conducted to examine the performance of the model economy and to compare the resulting cyclical features with related empirical findings. In addition, computational experiments allow to analyze the effects of different tax structures, enforcement rates and tastes for irregular labor on the volatility and comovements of aggregate variables. These simulations and experiments overall offer a more comprehensive view of the cyclical implications of the shadow economy. |
| Keywords: | Underground economy, shadow economy, business cycles, dynamic stochastic general equilibrium models |
| JEL: | E26 E32 H26 O17 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2011-14&r=dge |
| By: | Fagnart, Jean-Francois; Licandro, Omar; Portier, Franck |
| Abstract: | In a stochastic dynamic general equilibrium framework, we introduce the concept of variable capacity utilization (as opposed to the concept of capital utilization). We consider an economy where imperfectly competitive firms use a putty-clay technology and decide on their productive capacity level under uncertainty. An idiosyncratic uncertainty about the exact position of the demand curve facedby each firm explains why sorne productive capacities may remain idle in the sequel and why individual capacity utilization rates differ across firms. The capacity underutilization at the aggregate level thus hides a diversity of microeconomic situations. The variability of the capacity utilization allows for a good description of sorne of the main stylized facts of the business cycle, propagates and magnifies aggregate technological shocks and generates endogenous persistence (Le., the output growth rate displays positive serial correlation). |
| Keywords: | Business Cycle; Capacity Utilization; Idiosyncratic shocks; Mark-ups; Propagation Mecanism; |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/3897&r=dge |
| By: | Nan-Kuang Chen (National Taiwan University and Hong Kong Institute for Monetary Research); Han-Liang Cheng (Chung-Hua Institution for Economic Research); Ching-Sheng Mao (National Taiwan University) |
| Abstract: | This paper investigates the transmission mechanism of mortgage premium to characterize the relationship between the housing market and the business cycle for the U.S. economy. The model matches the main features of the U.S. housing market and business cycles well. The mortgage premium is crucial for the amplification and propagation of the model to match the data. If the Federal Reserve had exercised pre-emptive monetary policy in 2002Q1, the counterfactual analysis suggests that a higher interest rate would have stabilized house price and housing investment volatilities, but would have taken a big toll on real GDP: its volatility remains approximately the same, but the level of GDP contracts dramatically. |
| Keywords: | Mortgage Premium, House Price, DSGE |
| JEL: | E3 E4 E5 G1 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:192011&r=dge |
| By: | Vipin Arora; Pedro Gomis-Porqueras |
| Abstract: | We show the importance of endogenous oil prices and production in the real business cycle framework. Endogenising these variables improves the model's predictions of business cycle statistics, oil related and non-oil related, relative to a situation where either is exogenous. This result is robust to the standard extensions (variable capacity utilisation and monopolistic competition) used in the literature. In particular, we first show that with either exogenous oil prices or production the standard real business cycle model and variants cannot match the oil-related and business cycle facts. In contrast, when both of these variables are endogenous, we can substantially improve the corresponding co-movements and slightly improve standard business cycle properties for consumption and investment. |
| Keywords: | Oil price, two regions, variable capacity utilization |
| JEL: | E37 F47 Q43 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2011-11&r=dge |
| By: | Huw Dixon; Engin Kara |
| Abstract: | We estimate and compare two models, the Generalized Taylor Economy (GTE) and the Multiple Calvo model (MC) that have been built to model the distributions of contract lengths observed in the data. We compare the performances of these models to those of the standard models such as the Calvo and its popular variant, using the ad hoc device of indexation. The estimations are made with Bayesian techniques for the US data. The results indicate that the data strongly favour the GTE. |
| Keywords: | DSGE models, Calvo, Taylor, price-setting |
| JEL: | E32 E52 E58 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:11/621&r=dge |
| By: | Osuna, Victoria |
| Abstract: | This paper proposes a model of job creation and destruction of the search and matching type. The model is able to replicate the magnitude and cyclical behavior of job creation, destruction and reallocation rates in a segmented labor market like the one in Spain. The motivation is the similarity in the cyclical behavior of US and Spanish job reallocation (JR) rates despite the differences in job security regulations. This behavior contrasts to what is observed in the rest of continental Europe, where JR is acyclical. The model, by introducing a segmented labor market, makes is plausible to obtain a countercyclical JR rate in a high firing cost economy. In addition, we quantify the effects of a 40 % reduction in the firing costs associated with permanent contracts. The main results are (i) negligible effects on permanent job destruction rates, (ii) significant effects on job creation and destruction (permanetltemporary) cyclical behavior, (iii) a 57 % increase in the job conversion rate from temporary into permanetjobs and a 12 % reduction in the temporary employment rate. |
| Keywords: | Reallocation; Firing costs; Bargaining; Matching; Search; |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/6163&r=dge |
| By: | Borowczyk-Martins, Daniel; Jolivet, Grégory; Postel-Vinay, Fabien |
| Abstract: | We show that equilibrium matching models imply that standard estimates of the matching function elasticities are exposed to an endogeneity bias, which arises from the search behavior of agents on either side of the market. We offer an estimation method which, under certain assumptions, is immune from that bias. Application of our method to the estimation of a basic version of the matching function using aggregate U.S. data from the Job Openings and Labor Turnover Survey (JOLTS) suggests that the bias is quantitatively important. |
| Keywords: | Job Finding; Matching Function Estimation; Unemployment; Vacancies |
| JEL: | J63 J64 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8471&r=dge |
| By: | Diamond, Peter A. (Massachusetts Institute of Technology); Mortensen, Dale T. (Northwestern University); Pissarides, Christopher A. (London School of Economics) |
| Abstract: | Interview with the 2010 Laureates in Economic Sciences Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides, 6 December 2010. The interviewer is Adam Smith, Editorial Director of Nobel Media. |
| Keywords: | Search frictions; |
| JEL: | E24 J64 |
| Date: | 2010–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2010_003&r=dge |
| By: | Alessia Campolmi (Central European University; Magyar Nemzeti Bank (central bank of Hungary)); Ester Faia (Goethe University Frankfurt; Kiel Institute for the World Economy (IfW); CEPREMAP); Roland Winkler (Goethe University Frankfurt; Kiel Institute for the World Economy (IfW)) |
| Abstract: | During the Great Recession following the recent financial crisis large fiscal stimuli were implemented to counteract labor market sclerosis. We explore the effectiveness of various fiscal packages in a matching model featuring inefficient unemployment and a rich fiscal sector employing distortionary taxation and government debt. Results show that only stimuli directed toward the labor market, such as hiring subsidies, deliver large multipliers. Those policies can, indeed, abate the congestion externality, pervasive in the labor market. Various robustness checks confirm the results. The results obtained in the calibrated model are also confirmed through Bayesian estimation. |
| Keywords: | fiscal calculus, taxation, matching frictions, bayesian estimation |
| JEL: | E62 E63 E24 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2011/5&r=dge |
| By: | Boldrin, Michele; Montes Alonso, Ana |
| Abstract: | In a world in which credit markets to finance investments in human capital are rare, the competitive equilibrium allocation generally cannot achieve either static or dynamic efficiency. When generations overlap, this inefficiency can be overcome by properly designed institutions. We study the working of two such institutions: Public Education and Public Pensions. We argue that, when established jointly, they implement an intergenerational dynamic game of taxes and transfers through which public education for the young and public pensions for the elderly support each other. Through the public financing of education, the young borrow from the middle age to invest in human capital. When employed, they pay back their debt by means of a social security tax on labor income. The proceedings of the latter are used to finance pension payments to the now elderly lenders. We also show that such intergenerational agreement can be supported as a sub game perfect equilibrium of, relatively straightforward, majority voting games. While the intertemporal allocation so obtained does not necessarily reach full dynamic efficiency it does so under certain restrictions and it always improves upon the laissez-faire allocation. We test the main predictions of our model by using micro and macro data from Spain. The results are surprisingly good. |
| Keywords: | Intergenerational contract; Efficiency; Human capital; Political equilibria; |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/6148&r=dge |
| By: | Robert E. Hall |
| Abstract: | General-equilibrium models for studying monetary influences in general and the zero lower bound on the nominal interest rate in particular contain implicit theories of unemployment. In some cases, the theory is explicit. When the nominal rate is above the level that clears the current market for output, the excess supply shows up as diminished output, lower employment, and higher unemployment. Quite separately, the Diamond-Mortensen-Pissarides model is a widely accepted and well-developed account of turnover, wage determination, and unemployment. The DMP model is a clashing theory of unemployment, in the sense that its determinants of unemployment do not include any variables that signal an excess supply of current output. In consequence, a general-equilibrium monetary model with a DMP labor market generally has no equilibrium. After demonstrating the clash in a minimal but adequate setting, I consider modifications of the DMP model that permit the complete model to have an equilibrium. No fully satisfactory modification has yet appeared. |
| JEL: | E12 E22 E32 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17179&r=dge |
| By: | Boldrin, Michele; Rustichini, Aldo |
| Abstract: | We model pay-as-you-go (PAYG) social sucurity systems as the outcome of majority voting within a standard OLG model with production and an exogenous population growth rateo At each point in time individuals work, save, consume and invest by taking the social security policy as given. The latter consists of a tax on current wages transferred to elderly people. When they vote, individuals have to make two choices: If they want to keep the committment made by the previous generation by paying the elderly the promised amount of benefits, and which amount they want paid to themselves next periodo We show that when the growth rate of population is high enough compared to the productivity of capital there exists an equilibrium where PAYG pensions are voted into existence and maintained. PAYG systems are kept even when everybody knows that they will surely be abondoned, and that some generation will pay and not be paid back. We characterize the steady state and dynamic properties of these equilibria and study their welfare properties. Equilibria achieved by voting are typically inefficient; however, they may be so due to overaccumulation, as well as, in other cases, due to under accumulation. On the other hand, the efficient steady states turn out to be dynamically unstable: so we are presenting an unpleasant alternative for policy making. |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/3903&r=dge |
| By: | Lizarazo, Sandra; Da-Rocha, Jose-Maria |
| Abstract: | In a context in which individuals might default on their debts and subsequently be excluded from credit markets, holding money helps agents smooth their consumption during periods in which they cannot borrow. Therefore holding money makes the punishment to default less severe. In this context, by affecting money demand, monetary policy can affect incentives to default; determining optimal monetary policy can then be thought of as equivalent to choosing the optimal default rate. Since each economy might have a different optimal default rate, each economy might have a different optimal monetary policy different from the Friedman rule. Specifically, we compare the US to Colombia, using a model with idiosyncratic labor income risk and fiat money. Given differences in enforcement of debt contracts, and differences in income variability and persistence, we find that high inflation is costlier for developing countries compared to developed countries. |
| Keywords: | Default; Inflation; Fiat Money; Friedman rule; Endogenous Borrowing Constraints; Precautionary Savings. |
| JEL: | E52 E44 E21 E41 |
| Date: | 2011–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:31931&r=dge |
| By: | Jerger, Jürgen; Röhe, Oke |
| Abstract: | We estimate a New Keynesian DSGE model on French, German and Spanish data. The main aim of this paper is to check for the respective sets of parameters that are stable over time, making use of the ESS procedure ( ”Estimate of Set of Stable parameters“) developed by Inoue and Rossi (2011). This new econometric technique allows to address the stability properties of each single parameter in a DSGE model separately. In the case of France and Germany our results point to structural breaks after the beginning of the second stage of EMU in the mid-nineties, while the estimates for Spain show a significant break just before the start of the third stage in 1998. Specifically, there are significant changes in monetary policy behavior for France and Spain, while monetary policy in Germany seems to be stable over time. |
| Keywords: | DSGE; EMU; Monetary Policy; Structural Breaks |
| JEL: | E31 E32 E52 |
| Date: | 2009–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:bay:rdwiwi:21427&r=dge |
| By: | M. Marzo; P. Zagaglia |
| Abstract: | The present paper introduces two bonds in a standard New-Keynesian model to study the role of segmentation in bond markets for the determinacy of rational expectations equilibria. We use a strongly-separable utility function to model ‘liquid’ bonds that provide transaction services for the purchase of consumption goods. ‘Illiquid’ bonds, instead, provide the standard services of store of value. We interpret liquid bonds as mimicking short-term instruments, and illiquid bonds to represent long-dated instruments. In this simple setting, the expectation hypothesis holds after log-linearizing the model and after pricing the bonds according to an affine scheme. We assume that monetary policy follows a standard Taylor rule. In this context, the inflation targeting parameter should be higher than one for determinacy of rational expectations equilibria to be achieved. We compute an analytical solution for the bond pricing kernel. We also show that the possibility of obtaining this analytical solution depends on the type of utility function. When utility is weakly separable between consumption and liquid bonds, the Taylor principle holds conditional to the output and inflation coefficients in the Taylor rule. Achieving solution determinacy requires constraining these coefficients within bounds that depend on the structural parameters of the model, like the intertemporal elasticity of consumption substitution. |
| JEL: | E43 E63 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp769&r=dge |
| By: | Maurice J. Roche (Department of Economics, Ryerson University, Toronto, Canada); Michael J. Moore (School of Management and Economics, The Queen's University of Belfast, Belfast, Northern Ireland) |
| Abstract: | We present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved. The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Habit persistence is modeled using Campbell Cochrane preferences with „deep? habits. By deep habits, we mean habits defined over goods rather than countries. The model is simulated using the artificial economy methodology. It offers a neo-classical explanation of the Meese-Rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting. Finally, the model naturally generates the negative slope in the standard forward market regression. |
| Keywords: | Exchange Rate Puzzles; Forward Foreign Exchange; Habit Persistence |
| JEL: | F31 F41 G12 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:rye:wpaper:wp001&r=dge |