nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒08‒09
nineteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. A model of longevity, human capital and growth By Oscar Iván AVILA MONTEALEGRE
  2. An estimated DSGE model of energy, costs and inflation in the United Kingdom By Millard, Stephen
  3. Countercyclical Markups and News-Driven Business Cycles By Oscar Pavlov; Mark Weder
  4. On the existence of a Ramsey equilibrium with endogenous labor supply and borrowing constraints By Stefano Bosi; Cuong Le Van
  5. Financial frictions and optimal monetary policy in an open economy By Marcin Kolasa; Giovanni Lombardo
  6. Optimal Fertility along the Lifecycle By Pierre Pestieau; Grégory Ponthière
  7. Optimal monetary policy in an operational medium-sized DSGE model By Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
  8. L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise. By Eleni Iliopulos; Thepthida Sopraseuth
  9. The Impacts of Structural Changes in the Labor Market: a Comparative Statics Analysis Using Heterogeneous-agent Framework By Carlos Miguel Silva; Ana Paula Ribeiro
  10. Consumer Misperceptions, Uncertain Fundamentals, and the Business Cycle By Patrick Hürtgen
  11. On the Growth and Stability E¡èects of Habit Formation and Durability in Consumption By Shu-Hua Chen
  12. Efficiency in a search and matching model with right-to-manage bargaining By Sunakawa, Takeki
  13. A Mechanism of Cyclical Volatility in the Vacancy-Unemployment Ratio: What Is the Source of Rigidity? By Harashima, Taiji
  14. Numerically stable and accurate stochastic simulation approaches for solving dynamic economic models By Kenneth Judd; Lilia Maliar; Serguei Maliar
  15. Sectoral shocks, reallocation frictions, and optimal government spending By Rodolfo E. Manuelli; Adrian Peralta-Alva
  16. A model of commodity money with minting and melting By Angela Redish; Warren E. Weber
  17. Impact of the business environment on output and productivity in Africa By Bah, El-hadj M.; Fang, Lei
  18. Determinants of credit to households in a life-cycle model By Michal Rubaszek; Dobromil Serwa
  19. Sticky wages in search and matching models in the short and long run By Christopher Reicher

    Abstract: Long run economic growth and its transitional dynamics are determined in a general equilibrium model of endogenous longevity, human capital and growth. Agents in overlapping generations survive safely for the first two periods of life and face an endogenous probability of surviving for a third period. Given this probability, each agent maximizes her expected lifetime utility choosing consumption, and the quantity of resources destined to her child’s education and health. Human capital accumulation depends on education and health expenditures and on parent’s human capital. The model produces two kinds of equilibriums, one with high life expectancy, human capital and GDP, and the other with low high life expectancy, human capital and GDP. These predictions accord with the empirical evidence on demographic transitions and development.
    Date: 2010–11–03
  2. By: Millard, Stephen (Bank of England)
    Abstract: In this paper, I estimate a dynamic stochastic general equilibrium (DSGE) model of the United Kingdom. The basic building blocks of the model are standard in the literature. The main complication is that there are three consumption goods: non-energy output, petrol and utilities; given relative prices and their overall wealth, consumers choose how much of each of these goods to consume in order to maximise their utility. Each of the consumption goods is produced according to a sector-specific production function and sticky prices in each sector imply sector-specific New Keynesian Phillips Curves. I show how this model, once estimated, could form a useful additional input within a policymaker’s ‘suite of models’ by considering its implications for the responses of various macroeconomic variables to different economic shocks and by decomposing recent movements of energy and non-energy output and inflation into the proportions caused by each of the shocks.
    Keywords: Dynamic stochastic general equilibrium model; Energy prices and inflation
    JEL: E13 E31
    Date: 2011–07–26
  3. By: Oscar Pavlov (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide)
    Abstract: The standard one-sector real business cycle model is unable to generate expectations-driven business cycles. The current paper shows that this conundrum can be solved by adding countercyclical markups and modest capital adjustment costs.
    Keywords: expectations-driven business cycles, markups
    JEL: E32
    Date: 2011–07
  4. By: Stefano Bosi (THEMA - THéorie Economique, Modélisation et Applications - université de Cergy-Pontoise); Cuong Le Van (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, University of Exeter Business School - University of Exeter Business School, VCREME - VanXuan Center of Research in Economics, Management and Environment)
    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.
    Date: 2011–07
  5. By: Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Giovanni Lombardo (European Central Bank)
    Abstract: A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement.
    Keywords: financial frictions, open economy, optimal monetary policy
    JEL: E52 E61 E44 F36 F41
    Date: 2011
  6. By: Pierre Pestieau (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 - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CREPP - Center of Research in Public Economics and Population Economics - Université de Liège, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain, CEPR - Center for Economic Policy Research - CEPR); Grégory Ponthière (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 - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, ENS - Ecole Normale Supérieure de Paris - Ecole Normale Supérieure de Paris - ENS Paris)
    Abstract: We explore the optimal fertility age-pattern in a four-period OLG economy with physical capital accumulation. For that purpose, we .rstly compare the dynamics of two closed economies, Early and Late Islands, which di¤er only in the timing of births. On Early Island, children are born from parents in young adulthood, whereas, on Late Island, children are born from parents in older adulthood. We show that, unlike on Early Island, there exists no stable stationary equilibrium on Late Island, which exhibits cyclical dynamics. We also characterize the social optimum in each economy, and show that Samuelson.s Serendipity Theorem still holds. Finally, we study the dynamics and social optimum of an economy with interior fertility rates during the reproduction period. It is shown that various fertility age-patterns are compatible with the social optimum, as long as these yield the optimal cohort growth rate. The Serendipity Theorem remains valid in that broader demographic environment.
    Keywords: childbearing ages ; early and late motherhoods ; fertility ; overlapping generations ; social optimum
    Date: 2011–07
  7. By: Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
    Abstract: We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports our view that the model parameters may be regarded as unaffected by the monetary policy specification. We discuss how monetary policy, and in particular the choice of output gap measure, affects the transmission of shocks. Finally, we use the model to assess the recent Great Recession in the world economy and how its impact on the economic development in Sweden depends on the conduct of monetary policy. This provides an illustration on how Rames incoporates large international spillover effects.
    Date: 2011
  8. By: Eleni Iliopulos (Centre d'Economie de la Sorbonne - Paris School of Economics et CEPREMAP); Thepthida Sopraseuth (GAINS-TEPP - Université du Maine et CEPREMAP)
    Abstract: In this paper, we review the macroeconomic literature on financial frictions and banking in a dynamic general equilibrium framework. Our work focuses first on the pioneer articles that have analyzed the amplification effects associated to the financial accelerator. We then shift our attention towards the recent literature that flourished in the aftermath of the financial crisis. Indeed, the crisis has challenged several assumptions and modeling tools that were commonly used in the DSGE literature. We thus review the main recent contributions that have tried to overcome the limits of old models.
    Keywords: Financial frictions, banking, monetary policy, business cycle.
    JEL: E3 E4 E5 G21
    Date: 2011–07
  9. By: Carlos Miguel Silva (Faculdade de Economia da Universidade do Porto and CEF.UP); Ana Paula Ribeiro (Faculdade de Economia da Universidade do Porto and CEF.UP)
    Abstract: In this paper we aim at analyzing the impacts on welfare and wealth and consumption distribution across different labor market structural features. In particular, we pursue a steady-state analysis to assess the impacts of unit vacancy costs, unemployment replacement ratio or the job destruction rate, when they are changed in order to promote a given reduction in the unemployment rate. We combine a labor market search and matching framework with unions, based on Mortensen and Pissarides (1994) with a heterogeneous-agent framework close to Imrohoroglu (1989) in a closed economy model. Such approach enables the joint assessment of macroeconomic welfare and inequality together with implications derived from institutional changes in labor market. Moreover, the transition matrix between worker's states is endogenous, fully derived from labor market conditions. Using feasible calibration to the Euro Area, we conclude that different institutional changes to promote unemployment reduction have non-neutral and differentiated effects on welfare and inequality. While changing unit vacancy costs and job destruction can be ranked, changes in the unemployment benefit replacement ration involve a trade-off between gains in welfare and in consumption/income distribution.
    Keywords: Labor market institutions, search and matching models, heterogeneous-agent models, welfare and inequality.
    JEL: E21 E24 E27 I30 J64
    Date: 2011–07
  10. By: Patrick Hürtgen
    Abstract: This paper explores the importance of shocks to consumer misperceptions, or "noise shocks", in a quantitative business cycle model. I embed imperfect information as in Lorenzoni (2009) into a new Keynesian model with price and wage rigidities. Agents learn about the components of labor productivity by only observing aggregate productivity and a noisy signal. Noise shocks lead to expectational errors about the true fundamentals triggering aggregate fluctuations. Estimating the model with Bayesian methods on US data shows that noise shocks contribute to 20 percent of consumption fluctuations at short horizons. Wage rigidity is pivotal for the importance of noise shocks.
    Keywords: Imperfect Information, Noise Shocks, Aggregate Fluctuations, Bayesian Estimation
    JEL: D83 E32
    Date: 2011–01
  11. By: Shu-Hua Chen (National Taipei Universityy)
    Abstract: This paper shows that a unique balanced growth monetary equilibrium exists in a transactions-based monetary endogenous growth model with habit formation or durability in consumption. An increase in the nominal money growth rate reduces the long-run output growth rate, wherein habit formation enforces the effectiveness of monetary policy while durability in consumption reduces it. We also show that while habit formation destabilizes the macroeconomy by making the balanced growth equilibrium to exhibit local indeterminacy, durability in consumption maintains saddle-path stability of the balanced growth equilibrium. We find that the mechanism through which habit formation and durability impose different effects on both the growth-e¡èect of money and the macroeconomic stabilizing properties is that they influence the elasticity of intertemporal substitution in consumption in opposite directions.
    Keywords: Habit formation, Durability, Superneutrality, Indeterminacy
    JEL: E21 E52 O42
    Date: 2011–07–30
  12. By: Sunakawa, Takeki
    Abstract: In a search and matching model with right-to-manage bargaining, matched workers and firms bargain over wages, given labor demand schedule of firms for hours worked per worker. Wages and hours worked per worker are determined as if they are determined in a competitive labor market with a distortion to wage markups. A positive inefficiency gap in the labor market diminishes workers' effective bargaining power relative to firms, because firms can adjust labor input and wage schedule via intensive margin. The Hosios condition does not necessarily hold even when workers' actual bargaining power is equal to unemployment elasticity of matches.
    Keywords: Labor market search; efficiency; right-to-manage bargaining
    JEL: J64 E60
    Date: 2011–07–30
  13. By: Harashima, Taiji
    Abstract: The conventional search and matching model has been criticized for its inability to explain large cyclical volatility in the vacancy-unemployment ratio without ad hoc assumptions of wage rigidity. This paper presents a mechanism of such volatility without assuming wage rigidity by showing that households can rationally select a Nash equilibrium consisting of strategies of choosing a Pareto inefficient transition path. This type of path is generated after a time preference shock and causes a persistently large amount of extra unutilized resources. The labor market is thereby distorted and becomes more cyclically volatile. Vacancy costs are particularly affected by this Nash equilibrium. Because this Pareto inefficient path proceeds “rigidly,” that is, the Pareto inefficiency diminishes gradually, an ingredient of rigidity is introduced into the economy, and the vacancy-unemployment ratio experiences large cyclical fluctuations.
    Keywords: Vacancy; Unemployment; Rigidity; Pareto efficiency; Nash equilibrium; Business cycles; Time preference
    JEL: D50 E32 E24 D91 J64
    Date: 2011–08–01
  14. By: Kenneth Judd (Hoover Institution); Lilia Maliar (Universidad de Alicante); Serguei Maliar (Universidad de Alicante)
    Abstract: We develop numerically stable and accurate stochastic simulation approaches for solving dynamic economic models. First, instead of standard least-squares methods, we examine a variety of alternatives, including least-squares methods using singular value decomposition and Tikhonov regularization, least-absolute deviations methods, and principal component regression method, all of which are numerically stable and can handle ill-conditioned problems. Second, instead of conventional Monte Carlo integration, we use accurate quadrature and monomial integration. We test our generalized stochastic simulation algorithm (GSSA) in three applications: the standard representative agent neoclassical growth model, a model with rare disasters and a multi-country models with hundreds of state variables. GSSA is simple to program, and MATLAB codes are provided.
    Keywords: Stochastic simulation; generalized stochastic simulation algorithm (GSSA), parameterized expectations algorithm (PEA); least absolute deviations (LAD); linear programming; regularization.
    JEL: C63 C68
    Date: 2011–07
  15. By: Rodolfo E. Manuelli; Adrian Peralta-Alva
    Abstract: What is the optimal policy response to a negative sectoral shock? How do frictions in goods and labor markets affect the nature and speed of the process of reallocating resources across alternative uses? Should government controlled inputs be allocated to compensate for frictions faced by the private sector or, rather, should they be deployed to complement private sector decisions? In this paper we make a first attempt to understand what features of an economy determine the answers to the previous questions. We study a model in which the drop in the private demand for structures frees up resources that can be used to produce government capital. For a reasonable calibration, we find that government spending increases in response to the drop in private demand, but that the size of the increase is inversely related to the level of frictions: the 1 larger the costs that the economy faces to reallocate resources (capital and labor) across sectors, the smaller the optimal level of government spending.
    Keywords: Government spending policy ; Capital ; Labor market
    Date: 2011
  16. By: Angela Redish; Warren E. Weber
    Abstract: We construct a random matching model of a monetary economy with commodity money in the form of potentially different types of silver coins that are distinguishable by the quantity of metal they contain. The quantity of silver in the economy is assumed to be fixed, but agents can mint and melt coins. Coins yield no utility, but can be traded. Uncoined silver yields direct utility to the holder. We find that optimal coin size increases with the probability of trade and with the stock of silver. We use these predictions of our model to analyze the coinage decisions of the monetary authorities in medieval Venice and England. Our model provides theoretical support for the view that decisions about coin sizes and types during the medieval period reflected a desire to improve the economic welfare of the general population, not just the desire for seigniorage revenue.
    Date: 2011
  17. By: Bah, El-hadj M.; Fang, Lei
    Abstract: We develop a general equilibrium model to assess the quantitative effects of the business environment, including regulation, crime, corruption, infrastructure and access to finance, on output and total factor productivity (TFP) for 30 Sub-Saharan African countries. The first four dimensions create inefficiencies at the firm level and are modeled as a tax on output. From the data, we find that on average firms in Africa lose a fifth of their sales due to those inefficiencies. On the other hand, poor access to credit affects the reallocation of resources across firms, capital formation and production scale. We find that the quantitative effects of these dimensions of the business environment are large, leading to decreases in output and TFP in the range of 40 to 77 percent and 18 to 44 percent respectively. Overall, they explain 67 percent of the variation in income per worker relative to the US.
    Keywords: Business environment, Investment Climate, African Development, Productivity, Credit Constraints
    JEL: O47 L23 O16
    Date: 2011–07–12
  18. By: Michal Rubaszek (National Bank of Poland, Economic Institute; Warsaw School of Economics); Dobromil Serwa (Narodowy Bank Polski; Warsaw School of Economics)
    Abstract: This paper applies a life-cycle model with individual income uncertainty to investigate the determinants of credit to households. We show that the value of household credit to GDP ratio depends on (i) the lending-deposit interest rate spread, (ii) individual income uncertainty, (iii) individual productivity persistence, and (iv) the generosity of the pension system. Subsequently, we provide empirical evidence for the predictions of the theoretical model on the basis of data for OECD and EU countries.
    Keywords: Household credit; life cycle economies; banking sector
    JEL: E21 E43 E51
    Date: 2011
  19. By: Christopher Reicher
    Abstract: This paper documents the short run and long run behavior of the search and matching model with staggered Nash wage bargaining. It turns out that there is a strong tradeoff inherent in assuming that previously bargained sticky wages apply to new hires. If sticky wages apply to new hires, then the staggered Nash bargaining model can generate realistic volatility in labor input, but it predicts a strong counterfactually negative long run relationship between inflation and unemployment. This finding is robust to including a microeconomically realistic degree of indexation of wages to inflation. The lack of a negative long run relationship between trend inflation and unemployment provides indirect evidence against the proposed mechanism that high inflation systematically makes new hiring more profitable by depressing the real wages of new hires
    Keywords: Sticky wages, staggered Nash bargaining, trend inflation, unemployment, search and matching
    JEL: E24 E25 J23 J31
    Date: 2011–07

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