nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒07‒21
eight papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Budgetary Policies in a DSGE Model with Finite Horizons By Barbara Annicchiarico; Nicola Giammaroli; Alessandro Piergallini
  2. Business Cycles in Emerging Markets: The Role of Durable Goods and Financial Frictions By Fernando Alvarez-Parra; Manuel Toledo; Luis Brandao Marques
  3. Longevity, Life-cycle Behavior and Pension Reform By Peter Haan; Victoria Prowse
  4. DSGE And Beyond – Computable And Constructive Challenges By K. Vela Velupillai
  5. Endogenous Growth, Monetary Shocks and Nominal Rigidities By Barbara Annicchiarico; Alessandra Pelloni; Lorenza Rossi
  6. Getting Normalization Right: Dealing with ‘Dimensional Constants’ in Macroeconomics By Cantore, Cristiano; Levine, Paul
  7. The Natalist Bias of Pollution Control By David de la Croix; Axel Gosseries
  8. Existence and Uniqueness of a Fixed Point for the Bellman Operator in Deterministic Dynamic Programming By Takashi Kamihigashi

  1. By: Barbara Annicchiarico (Faculty of Economics, University of Rome "Tor Vergata"); Nicola Giammaroli (International Monetary Fund); Alessandro Piergallini (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper presents a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite horizons. Our New Keynesian framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. The model predicts that fiscal expansions generate a tradeoff in output dynamics between short-term gains and medium-term losses. It is shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.
    Keywords: Fiscal Policy; Monetary Policy; Nominal Rigidities; Capital Accumulation;Finite Horizons; Simulations.
    JEL: E52 E58 E63
    Date: 2011–07–12
  2. By: Fernando Alvarez-Parra; Manuel Toledo; Luis Brandao Marques
    Abstract: This paper examines how durable goods and financial frictions shape the business cycle of a small open economy subject to shocks to trend and transitory shocks. In the data, nondurable consumption is not as volatile as income for both developed and emerging market economies. The simulation of the model implies that shocks to trend play a less important role than previously documented. Financial frictions improve the ability of the model to match some key business cycle properties of emerging economies. A countercyclical borrowing premium interacts with the nature of durable goods delivering highly volatile consumption and very countercyclical net exports.
    Keywords: Business cycles , Consumer goods , Economic models , Emerging markets , External shocks ,
    Date: 2011–06–07
  3. By: Peter Haan; Victoria Prowse
    Abstract: How can public pension systems be reformed to ensure fiscal stability in the face of increasing life expectancy? To address this pressing open question in public finance, we estimate a life-cycle model in which the optimal employment, retirement and consumption decisions of forward-looking individuals depend, inter alia, on life expectancy and the design of the public pension system. We calculate that, in the case of Germany, the fiscal consequences of the 6.4 year increase in age 65 life expectancy anticipated to occur over the 40 years that separate the 1942 and 1982 birth cohorts can be offset by either an increase of 4.43 years in the full pensionable age or a cut of 37.7% in the per-year value of public pension benefits. Of these two distinct policy approaches to coping with the fiscal consequences of improving longevity, increasing the full pensionable age generates the largest responses in labor supply and retirement behavior.
    Keywords: Life expectancy, Public Pension Reform, Retirement, Employment, Life-cycle models, Consumption, Tax and transfer system
    JEL: D91 J11 J22 J26 J64
    Date: 2011
  4. By: K. Vela Velupillai
    Abstract: The genesis and the path towards what has come to be called the DSGE model is traced, from its origins in the Arrow-Debreu General Equilibrium model (ADGE), via Scarf's Computable General Equilibrium model (CGE) and its applied version as Applied Computable General Equilibrium model (ACGE), to its ostensible dynamization as a Recursive Competitive Equilibrium (RCE). An outline of a similar nature, albeit very briefly, of the development and structure of Agent-Based Economics (ABE) is also included. It is shown that these transformations of the ADGE model are computably and constructively untenable. Suggestions for going 'beyond DSGE and ABE' are, then, outlined on the basis of a framework that is underpinned -from the outset- by computability and constructivity consideration
    Keywords: Computable General Equilibrium, Dynamic Stochastic General Equilibrium, Computability, Constructivity, Classical Behavioural Economics
    JEL: C02 C62 C68 D58 E61
    Date: 2011
  5. By: Barbara Annicchiarico (Department of Economics, University of Rome ‘Tor Vergata’); Alessandra Pelloni (Department of Economics, University of Rome ‘Tor Vergata’); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii) the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.
    Keywords: Growth, volatility, business cycle, monetary policy
    JEL: E32 E52 O42
    Date: 2010–08
  6. By: Cantore, Cristiano; Levine, Paul
    Abstract: We contribute to a recent literature on the normalization, calibration and estimation of CES production functions. The problem arises because CES ‘share’ parameters are not in fact shares, but depend on underlying dimensions - they are ‘dimensional constants’ in other words. It follows that such parameters cannot be calibrated, nor estimated unless the choice of units is made explicit. We use an RBC model to demonstrate two equivalent solutions. The standard one expresses the production function in deviation form about some reference point, usually the steady state of the model. Our alternative, ‘re-parametrization’, expresses dimensional constants in terms of a new dimensionless (share) parameter and all remaining dimensionless ones. We show that our ‘re-parametrization’ method is equivalent and arguably more straightforward than the standard normalization in deviation form. We then examine a similar problem of dimensional constants for CES utility functions in a two-sector model and in a small open economy model; then re-parametrization is the only solution to the problem, showing that our approach is in fact more general.
    Keywords: CES production function; normalization; CES utility function
    JEL: E23 E32 E37
    Date: 2011–07
  7. By: David de la Croix (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE)); Axel Gosseries (FNRS (Belgium) and UNIVERSITE CATHOLIQUE DE LOUVAIN, Hoover Chair)
    Abstract: For a given technology, two ways are available to achieve low polluting emissions: reducing production per capita or reducing population size. This paper insists on the tension between the former and the latter. Controlling pollution either through Pigovian taxes or through tradable quotas schemes encourages agents to shift away from production to tax free activities such as procreation and leisure. This natalist bias will deteriorate the environment further, entailing the need to impose ever more stringent pollution rights per person. However, this will in turn gradually impoverish the successive generations: population will tend to increase further and production per capita to decrease as the generations pass. One possible solution consists in capping population too.
    Keywords: Overlapping generations, Environmental Policy, Endogenous Fertility, Quantity - Quality Tradeoff, Population Control
    JEL: Q58 Q56 J13 O41
    Date: 2011–05–31
  8. By: Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: We study existence and uniqueness of a fixed point for the Bellman operator in deterministic dynamic programming. We show that removing many of the assumptions of the theorem on the Bellman operator recently shown by Martins-da-Rocha and Vailakis ("Existence and Uniqueness of a Fixed Point for Local Contractions," Econometrica 78, 1127-1141, 2010) does not affect its main conclusions concerning the existence and uniqueness of a fixed point. Under considerably weaker versions of the remaining assumptions, we also show that the value function can be computed by value iteration with an appropriate initial function.
    Date: 2011–07

This nep-dge issue is ©2011 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.