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on Dynamic General Equilibrium |
| By: | Ajello, Andrea |
| Abstract: | How important are financial friction shocks in business cycles fluctuations? To answer this question, I use micro data to quantify key features of US financial markets. I then construct a dynamic equilibrium model that is consistent with these features and fit the model to business cycle data using Bayesian methods. In my micro data analysis, I establish facts that may be of independent interest. For example, I find that a substantial 33% of firm investment is funded using financial markets. The dynamic model introduces price and wage rigidities and a financial intermediation shock into Kiyotaki and Moore (2008). According to the estimated model, the financial intermediation shock explains around 40% of GDP and 55% of investment volatility. The estimation assigns such a large role to the financial shock for two reasons: (i) the shock is closely related to the interest rate spread, and this spread is strongly countercyclical and (ii) according to the model, the response in consumption, investment, employment and asset prices to a financial shock resembles the behavior of these variables over the business cycle. |
| Keywords: | DSGE model; Bayesian estimation; Financial frictions; Financial Shocks; Great Recession |
| JEL: | D53 C68 B22 E44 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32447&r=dge |
| By: | Lena Dräger (University of Hamburg and ETH Zurich) |
| Abstract: | The DSGE model with endogenous and time-varying sticky information in Dräger (2010) is extended by allowing agents’ recursive choice between forecasts under rational or sticky information to affect the model solution. Dynamic equilibrium paths generate highly persistent series for output, inflation and the nominal interest rate. Agents choose predictors in a near-rational manner and we find that the share of agents with rational expectations reacts to the overall variability of aggregate variables. The model can generate hump-shaped responses of inflation and output to a monetary policy shock if the degree of inattentiveness is sufficiently high. Finally, feedback from agents’ degree of inattentiveness to the model solution affects the determinacy region of the model. The Taylor principle is then only a necessary condition for determinacy, and monetary policy should target the output gap as well in order to ensure a unique and stable solution. |
| Keywords: | Endogenous sticky information, heterogeneous expectations, DSGE models, persistence. |
| JEL: | E31 E37 E52 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:201103&r=dge |
| By: | Haan, Peter (DIW Berlin); Prowse, Victoria L. (Cornell University) |
| 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 4.34 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: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5858&r=dge |
| By: | Ruediger Bachmann; Jinhui Bai |
| Abstract: | What fraction of the business cycle volatility of government purchases is accounted for as endogenous reactions to overall macroeconomic conditions? We answer this question in the framework of a neoclassical representative household model where the provision of a public consumption good is decided upon endogenously and in a time-consistent fashion. A simple frictionless version of such a model with aggregate productivity as the sole driving force can explain almost all the volatility of U.S. non-defense government consumption expenditures. However, such a model fails to match other important features of the business cycle dynamics of public consumption, which comes out as not persistent enough and too synchronized with the cycle. We add implementation lags and implementation costs in the budgeting process to the model, plus taste shocks for public consumption relative to private consumption, and achieve a substantially better match to the data. All these ingredients are essential to improve the fit. Depending on the precise specification of the flow utility function over private consumption, public consumption and leisure, 25-40 percent of the variance of public consumption is driven by aggregate productivity shocks. |
| JEL: | E30 E32 E60 E62 H30 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17230&r=dge |
| By: | Adema, Y.; Bonenkamp, J.; Meijdam, A.C. (Tilburg University, Center for Economic Research) |
| Abstract: | 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. 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 fl exibility 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. |
| Keywords: | retirement (in)fl exibility;portfolio allocation;risk;intratemporal substitution elasticity |
| JEL: | E21 G11 J26 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011077&r=dge |
| By: | Stefano Bosi (THEMA - Université de Cergy-Pontoise); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics et VCREME) |
| Abstract: | In this paper, we study the existence of an intertemporal equilibrium in a Ramsey model with heterogenous discounting, elastic labor supply and borrowing constraints. Applying a fixed-point argument by Gale and Mas-Colell (1975), we prove the existence of an equilibrium in a truncated bounded economy. This equilibrium is also an equilibrium of any unbounded economy with the same fundamentals. Finally, we prove the existence of an equilibrium in an infinite-horizon economy as a limit of a sequence of truncated economies. On the one hand, our paper generalizes Becker et al. (1991) because of the elastic labor supply and, on the other hand, Bosi and Seegmuller (2010) because of a proof of global existence. Our methodology can be also applied to other Ramsey models with different market imperfections. |
| Keywords: | Existence of equilibrium, Ramsey model, heterogeneous agents, endogenous labor supply, borrowing constraint. |
| JEL: | C62 D31 D91 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:11045&r=dge |
| By: | Giovanni Melina (Department of Economics, Mathematics & Statistics, Birkbeck; University of Surrey); Stefania Villa (Department of Economics, Mathematics & Statistics, Birkbeck; University of Foggia) |
| Abstract: | This paper studies how fiscal policy affects credit market conditions. First, it conducts a FAVAR analysis showing that the credit spread responds negatively to an expansionary government spending shock, while consumption, investment, and lending increase. Second, it illustrates that these results are not mimicked by a DSGE model where the credit spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it demonstrates that introducing deep habits in private and government consumption makes the model able to replicate empirics. Sensitivity checks and extensions show that core results hold for a number of model calibrations and specifications. The presence of banks exploiting lending relationships generates a financial accelerator effect in the transmission of fiscal shocks. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1103&r=dge |
| By: | Zheng Liu; Pengfei Wang; Tao Zha |
| Abstract: | We argue that positive comovements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the comovements by incorporating two key features into a DSGE model: we introduce land as a collateral asset in firms' credit constraints, and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through the joint dynamics of land prices and business investment. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2011-11&r=dge |
| By: | Vitor M. Carvalho (CEF.UP, Faculdade de Economia do Porto, Universidade do Porto); Manuel M. F. Martins (CEF.UP, Faculdade de Economia do Porto, Universidade do Porto) |
| Abstract: | We develop a new-Keynesian DSGE model with an extended fiscal policy block to assess the conditions for expansionary fiscal consolidations. In addition to several taxes, we consider public employment expenditures and government spending, which may have different degrees of productivity. We calibrate the model for the Euro Area and use it to simulate alternative fiscal consolidations with changes in the budget composition. Among the main conclusions we find that: (i) if conducted with a cut in weaklyproductive spending and a symmetric increase in highly-productive spending, fiscal consolidations have expansionary effects on investment and output; (ii) if consolidation is pursued through a pure reduction in weaklyproductive public employment, the effects on output decrease with the degree of labor market competition and turn out to be positive under perfect competition. |
| Keywords: | fiscal policy, fiscal consolidation, new-Keynesian DSGE model |
| JEL: | E12 E62 H63 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:421&r=dge |
| By: | Chassamboulli, Andri; Palivos, Theodore |
| Abstract: | We analyze the impact of immigration on the host country within a search and matching model that allows for skill heterogeneity, endogenous skill acquisition, differential search cost between immigrants and natives, capital-skill complementarity and different degree of substitutability between unskilled natives and immigrants. Within such a framework, we find that although immigration raises the overall welfare,it may have distributional effects. Specifically, skilled workers gain in terms of both employment and wages. Unskilled workers, on the other hand, gain in terms of employment but may lose in terms of wages. Nevertheless, in one version of the model, where unskilled workers and immigrants are imperfect substitutes, we find that even the unskilled wage may rise. These results accommodate conflicting empirical findings. |
| Keywords: | Search; Unemployment; Immigration; Skill-heterogeneity |
| JEL: | F22 J61 J64 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32379&r=dge |
| By: | Raad, Rodrigo Jardim |
| Abstract: | This paper analyses general equilibrium models with finite heterogeneous agents having exogenous expectations on endogenous uncertainty. It is shown that there exists a recursive equilibrium with the state space consisting of the past aggregate portfolio distribution and the current state of the nature and that it implements the sequential equilibrium. We establish conditions under which the recursive equilibrium is continuous. Moreover, we use the continuous recursive relation of the aggregate variables to prove that if the economy has two types of agents, the one who commits persistent mistakes on the expectation rules of the future endogenous variables is driven out of the market by the others with correct anticipations of the variables, that is, the rational expectations agents. |
| Date: | 2011–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:715&r=dge |
| By: | Kaygusuz, Remzi |
| Abstract: | In the past decades, elimination of the pay-as-you-go system in U.S. has been extensively discussed and studied. Such an elimination would also eliminate the intra-cohort redistribution done by the following policies of social security. Due to spousal and survivor's benefit provisions, the system redistributes (mostly) to single-earner married households (not necessarily progressive). Retirement benefits are a concave function of past mean earnings. Hence, the system redistributes from high earners to low earners. Finally, the existence of a cap on social security taxable earnings makes the system regressive. This is the first paper that quantifies redistributive, labor supply, and welfare implications of these policies using a general equilibrium life-cycle model. Agents start out as permanently married or single and with education levels and wage profiles, where the latter depend both on education and gender. The household is the decision maker and decides on the labor supply of its member(s) and saving. The aggregate production function has as inputs capital and labor aggregated by efficiency. Elimination of these policies results in a 6.1% increase in married female labor force participation rate. The middle-income single-earner married households experience the largest welfare losses whereas the high-income two-earner households together with high-income single households experience the largest welfare gains. |
| Keywords: | Social Security; Two-earner households; Labor Force Participation |
| JEL: | E62 H55 H31 J12 |
| Date: | 2011–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32358&r=dge |
| By: | Chang, Chia-ling; Chen, Shu-heng |
| Abstract: | While DSGE models have been widely used by central banks for policy analysis, they seem to have been ineffective in calibrating the models for anticipating financial crises. To bring DSGE models closer to real situations, some of researchers have revised the traditional DSGE models. One of the modified DSGE models is the adaptive belief system model. In this framework, changes in sentiment can be expounded by a Boltzmann-Gibbs distribution, and in addition to externally caused fluctuations endogenous interactions are also considered. Methodologically, heuristic switching models are mesoscopic. For this reason, the social network structure is not described in the adaptive belief system models, even though the network structure is an important factor of interaction. The interaction behavior should ideally be based on some kind of social network structures. Today, the Boltzmann-Gibbs distribution is widely used in economic modeling. However, the question is whether the Boltzmann-Gibbs distribution can be directly applied, without considering the underlying social network structure more seriously. To this day, it seems that few scholars have discussed the relationship between social networks and the Boltzmann-Gibbs distribution. Therefore, this paper proposes a network based ant model and tries to compare the population dynamics in the Boltzmann-Gibbs model with different network structure models applied to stylized DSGE models. We find that both the Boltzmann-Gibbs model and the network-based ant model could generate herding behavior. However, it is difficult to envisage the population dynamics generated by the Boltzmann-Gibbs model and the network-based ant model having the same distribution, particularly in popular empirical network structures such as small world networks and scale-free networks. In addition, our simulation results further suggest that the population dynamics of the Boltzmann-Gibbs model and the circle network ant model can be considered with the same distribution under specific parameters settings. This finding is consistent with the study of thermodynamics, on which the Boltzmann-Gibbs distribution is based, namely, the local interaction. -- |
| Keywords: | DSGE model,network-based ant model,networks,Boltzmann-Gibbs distribution |
| JEL: | C63 D85 E12 E32 E37 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201125&r=dge |
| By: | Raissi, M. |
| Abstract: | Ravenna and Walsh (2010) develop a linear quadratic framework for optimal monetary policy analysis in a New Keynesian model featuring search and matching frictions and show that maximization of expected utility of the representative household is equivalent to minimizing a quadratic loss function that consists of inflation, and two appropriately defined gaps involving unemployment and labor market tightness. This paper generalizes their analysis, most importantly by relaxing the Hosios (1990) condition which eliminates the distortions resulting from labor market inefficiencies, such that the equilibrium level of unemployment under flexible prices would not necessarily be optimal. I take account of steady-state distortions using the methodology of Benigno and Woodford (2005) and derive a quadratic loss function that involves the same three terms, albeit with different relative weights and definitions for unemployment- and labor market tightness gaps. I evaluate the resulting loss function subject to a simple set of log-linearized equilibrium relationships and perform policy analysis. The key result of the paper is that search externalities give rise to an endogenous cost push term in the new Keynesian Phillips curve, suggesting a case against complete price stability as the only goal of monetary policy, because there is now a trade-off between stabilizing inflation and reducing inefficient unemployment fluctuations. Transitory movements of inflation in this environment helps job creation and hence prevents excessive volatility of unemployment. |
| JEL: | E52 E61 J64 |
| Date: | 2011–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1146&r=dge |
| By: | Jonathan A. Parker |
| Abstract: | We do not have a good measure of the effects of fiscal policy in a recession because the methods that we use to estimate the effects of fiscal policy — both those using the observed outcomes following different policies in aggregate data and those studying counterfactuals in fitted model economies -- almost entirely ignore the state of the economy and estimate 'the' government multiplier, which is presumably a weighted average of the one we care about — the multiplier in a recession — and one we care less about — the multiplier in an expansion. Notable exceptions to this general claim suggest this difference is potentially large. Our lack of knowledge stems significantly from the focus on linear dynamics: VARs and linearized (or close-to-linear) DSGEs. Our lack of knowledge also reflects a lack of data: deep recessions are few and nonlinearities hard to measure. The lack of statistical power in the estimation of nonlinear models using aggregate data can be addressed by exploiting estimates of partial-equilibrium responses in dissaggregated data. Microeconomic estimates of the partial-equilibrium causal effects of a policy can discipline the causal channels inherent in any DSGE model of the general equilibrium effects of policy. Microeconomic studies can also provide measures of the dependence of the effects of a policy on the states of different agents which is a key component of the dependence of the general-equilibrium effects of fiscal policy on the state of the economy. |
| JEL: | E17 E5 E62 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17240&r=dge |
| By: | Alessandro Cologni (Edison Trading, Edison S.p.A); Matteo Manera |
| Abstract: | Previous literature has suggested that different mechanisms of transmission of exogenous oil shocks are responsible for the negative effects on the economic performances of oil exporting countries. This paper aims at providing further evidence on the role of sectoral reallocation between private and public sectors in explaining the impact of shocks to oil revenues on the economic growth rates of major oil producing countries (namely the GCC - Gulf Corporation Council - countries). The effects of oil shocks and expansionary fiscal policy on the business cycle of oil producing countries are examined. The possibility to distinguish between various components of public sector spending policy (that is, purchases of consumption goods, investments in productive activities and compensation for public employees) is, in particular, allowed for. A real business cycle (RBC) model is calibrated to fit the data on an “average” oil producing country. Results from the simulation of the theoretical model suggest that the possibility that crowding-out effects of public over private investments can explain a large fraction of the negative effects of shocks to oil revenues on the private sector of the economy. In addition, since the growth in size of the public sector is unable to compensate for the reduction in size of the private sector, an increase in oil revenues has the effect to decrease total output. An expansionary fiscal policy is argued to have significant positive effects on private investments, employment and overall production. On the contrary, a shock to government consumption expenditure impacts negatively the level of public investment. As employment in the public sector increases significantly, public output responds positively to a shock in government consumption expenditure. Finally, an instantaneous negative effect on total investments and on the stock of capital in the economy is predicted. However, driven by the increase of the number of employees in the economy, total output expands. |
| Keywords: | Oil Shocks, Dutch Disease, Resource Curse and Real Business Cycle Modelling |
| JEL: | C61 E22 E62 Q48 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2011.55&r=dge |