nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒08‒15
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Sequential incompleteness and dynamic suboptimality in stochastic OLG economies with production By Orrego, Fabrizio
  2. Competitive Equilibria of Economies with a Continuum of Consumers and Aggregate Shocks By Jianjun Miao
  3. International Risk Cycles By François Gourio; Michael Siemer; Adrien Verdelhan
  4. Growth Shocks and Portfolio Flows By Eylem Ersal Kiziler
  5. Habit formation and sunspots in overlapping generations models By Orrego, Fabrizio
  6. On-the-Job Search and Precautionary Savings: Theory and Empirics of Earnings and Wealth Inequality By Jeremy Lise
  7. Volatility, Persistence and Nonlinearity of Simulated DSGE Real Exchange Rates By Yamin Ahmad; Ming Chien Lo; Olena Mykhaylova
  8. Optimal Capital Taxation and Consumer Uncertainty By Justin Svec
  9. Convergence and Distortions: the Czech Republic, Hungary and Poland between 1996–2009 By István Kónya
  10. Ambiguity, Learning, and Asset Returns By Nengjiu Ju; Jianjun Miao
  11. The Hedonic Price Function in a Matching Model of Housing Market By Lisi, Gaetano
  12. Cognitive Capital and Islands of Innovation: The Lucas Growth Model from a Regional Perspective By Andrea Caragliu; Peter Nijkamp
  13. L'intermédiation financière dans l'analyse macroéconomique : Le défi de la crise By Eleni Iliopulos; Thepthida Sopraseuth
  14. Approximate Equilibrium Asset Prices. By Weil, Philippe; Restoy, Fernando

  1. By: Orrego, Fabrizio (Carnegie Mellon University and Central Bank of Peru.)
    Abstract: I study a stochastic overlapping generations model with production and three-period- lived agents. Agents trade bonds and risky capital. Unlike the two-period model, I show that a stationary equilibrium in which prices and allocations depend solely on the aggregate capital stock and the current shock does not exist. The recursive equilibrium becomes the relevant equilibrium concept. For the recursive formulation of the model, markets are sequentially incomplete and hence I show that there is room for Pareto improvements in terms of intergenerational risk sharing. Finally, I examine whether the introduction of capital income taxation improves the allocation of risk.
    Keywords: Overlapping generations, uncertainty, capital income taxation.
    Date: 2011–08
  2. By: Jianjun Miao
    Abstract: This paper studies competitive equilibria of a production economy with aggregate productivity shocks. There is a continuum of consumers who face borrowing constraints and individual labor endowment shocks. The dynamic economy is described in terms of sequences of aggregate distributions. The existence of sequential competitive equilibria is proven and a recursive characterization is established. In particular, it is shown that for any sequential competitive equilibrium, there exists a payoff equivalent sequential competitive equilibrium that is generated by a suitably defined recursive equilibrium with state variables including continuation value.
    Keywords: competitive equilibrium, recursive equilibrium, aggregate distribution, heterogeneity, incomplete markets
    JEL: D50 D52 E20
    Date: 2011
  3. By: François Gourio; Michael Siemer; Adrien Verdelhan
    Abstract: Recent work in international finance suggests that the forward premium puzzle can be accounted for if (1) aggregate uncertainty is time-varying, and (2) countries have heterogeneous exposures to a world aggregate shock. We embed these features in a standard two-country real business cycle framework, and calibrate the model to match the differences between low and high interest rates countries. Unlike traditional real business cycle models, our model generates volatile exchange rates, a large currency forward premium, "excess comovement'' of asset prices relative to quantities, and an imperfect correlation between relative consumption growth and exchange rates. Our model implies, however, that high interest rate countries have smoother quantities, equity returns and interest rates than low interest rate countries, contrary to the data.
    JEL: E32 E44 F31 G12
    Date: 2011–08
  4. By: Eylem Ersal Kiziler (Department of Economics, University of Wisconsin - Whitewater)
    Abstract: This paper studies the cyclicality of portfolio flows under the presence of productivity growth rate shocks. Productivity growth rate shocks successfully replicate countercyclical net equity outflows and procyclical bond inflows for advanced countries, which couldn't be captured in a model with only level shocks. Similarly, for an emerging market economy, the model with growth rate shocks generates countercyclical net equity inflows and procyclical bond inflows in accordance with data. Following a growth rate shock, home agents experience a decrease both in equity inflows and outflows on impact. Inflows decrease due to sales of home equity to realize capital gains and outflows decrease due to initial dissaving to finance increases in consumption and investment. Equity inflows increase later, as home dividends rise. Equity outflows pick up also as wealthier home agents increase purchases of foreign assets to hedge against home productivity shocks.
    Keywords: Portfolio Flows, Productivity Growth Rate Shocks
    JEL: F36 F41 G11 G15
    Date: 2011–05
  5. By: Orrego, Fabrizio (Carnegie Mellon University and Central Bank of Peru.)
    Abstract: I introduce habit formation into an otherwise standard overlapping generations economy with pure exchange populated by three-period-lived agents. Habits are modeled in such a way that current consumption increases the marginal utility of future consumption. With logarithmic utility functions, I demonstrate that habit formation may give rise to stable monetary steady states in economies with hump-shaped endowment pro…les and reasonably high discount factors. Intuitively, habits imply adjacent complementarity in consumption, which in turn helps explain why income effects are sufficiently strong in spite of logarithmic utility. The longer horizon further strengthens the income effect. Finally, I use the bootstrap method to construct stationary sunspot equilibria for those economies in which the steady state is locally stable.
    Date: 2011–08
  6. By: Jeremy Lise (Institute for Fiscal Studies and University College London)
    Abstract: <p>I develop and estimate a model of the labor market in which precautionary savings interacts with labour market frictions to produce substantial inequality in wealth among ex ante identical workers. I show that a model of on-the-job search,in which workers are risk averse and markets are incomplete, provides a direct and intuitive link between the empirical earnings and wealth distributions. The </p><p>mechanism that generates the high degree of wealth inequality in the model is the dynamic of the "wage ladder" resulting from the search process. There is an important asymmetry between the incremental wage increases generated by on-thejob search (climbing the ladder) and the drop in income associated with job loss (falling off the ladder). The behavior of workers in low paying jobs is primarily governed by the expectation of wage growth, while the behavior of workers near the top of the distribution is driven by the possibility of job loss.</p>
    Date: 2011–08
  7. By: Yamin Ahmad (Department of Economics, University of Wisconsin - Whitewater); Ming Chien Lo (Department of Economics, St Cloud State University); Olena Mykhaylova (Department of Economics, University of Richmond)
    Abstract: This paper investigates the time series properties of real exchange rates series produced by DSGE models. We simulate a variety of new open economy DSGE models that incorporate features such as local currency pricing, home bias, non-traded goods and incomplete markets. We attempt to ascertain whether the dynamics of the real exchange rate in this class of models are consistent with those found in the time series literature using data from the current floating period. Although none of the basic specifications we consider match the volatility in the raw data, our findings suggest that home bias in consumption and non-traded goods are the key components of DSGE models that are able to generate persistent real exchange rates, comparable to that in the data. Moreover, we find that some of the structural micro-level nonlinearity embedded within DSGE models may be represented as macro-level nonlinearity in the form of a smooth transition autoregressive process, which has previously been found to pprsimoniously characterize the dynamics of real exchange rates in the time series literature.
    Keywords: Real Exchange Rate Dynamics, Nonlinear Dynamics, DSGE Modeling, Smooth Transition Estimation, Simulations
    JEL: F41
    Date: 2011–01
  8. By: Justin Svec (Department of Economics, College of the Holy Cross)
    Abstract: This paper analyzes the impact of consumer uncertainty on optimal fiscal policy in a model with capital. The consumers lack confidence about the probability model that characterizes the stochastic environment and so apply a max-min operator to their optimization problem. An altruistic fiscal authority does not face this Knightian uncertainty. It is shown analytically that the government, in responding to consumer uncertainty, no longer sets the expected capital tax rate exactly equal to zero, as is the case in the full-confidence benchmark model. However, our numerical results indicate that the government does not diverge far from this value. Even though the capital income tax rate is close to zero in expectation, consumer uncertainty leads the altruistic government to implement a more volatile capital tax rate across states. In doing so, the government relies more heavily on the capital tax and, consequently, less heavily on the labor income tax to finance the shock to public spending.
    Keywords: Robust control, uncertainty, taxes, capital, Ramsey problem
    JEL: E61 E62 H21
    Date: 2011–08
  9. By: István Kónya (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: The paper interprets the growth and convergence experience of three Central-Eastern European economies (the Czech Republic, Hungary, and Poland) through the lens of the stochastic neoclassical growth model. It adapts the methodology of Business Cycle Accounting (Chari, Kehoe and McGrattan 2007) to economies on a transition path. The paper uses the method to uncover distortions (‘wedges’) on the labor and capital markets, and then presents various comparisons and counterfactuals based on them. Results show that (i) capital and labor market distortions vary across the three economies, but they are well within the range of advanced economies; (ii) the Polish and Hungarian labor wedges are high, and the Czech labor wedge increases; (iii) the evolution of Hungarian wedges followed a different path than the evolution of Polish and Czech wedges, and (iv) realistic reductions in the capital and labor wedges would lead to significant output gains for Hungary and Poland.
    Keywords: convergence, distortions, Central-Eastern Europe, business cycle accounting
    JEL: E13 O11 O47
    Date: 2011
  10. By: Nengjiu Ju; Jianjun Miao
    Abstract: We propose a novel generalized recursive smooth ambiguity model which permits a three-way separation among risk aversion, ambiguity aversion, and intertemporal substitution. We apply this utility model to a consumption-based asset pricing model in which consumption and dividends follow hidden Markov regime-switching processes. Our calibrated model can match the mean equity premium, the mean risk-free rate, and the volatility of the equity premium observed in the data. In addition, our model can generate a variety of dynamic asset pricing phenomena, including the procyclical variation of price-dividend ratios, the countercyclical variation of equity premia and equity volatility, the leverage e?ect, and the mean reversion of excess returns. The key intuition is that an ambiguity averse agent behaves pessimistically by attaching more weight to the pricing kernel in bad times when his continuation values are low.
    Keywords: Ambiguity aversion, learning, asset pricing puzzles, model uncertainty, robustness, pessimism, regime switching
    JEL: D81 E44 G12
    Date: 2010–11
  11. By: Lisi, Gaetano
    Abstract: This paper develops a theoretical model in which the matching framework à la Pissarides (2000) extended to the housing market is integrated with the hedonic price theory. Market tightness and selling price collectively determine the long-run equilibrium of the economic system in which a seller can become a buyer, and vice versa. As a result, the house price depends not only on the housing characteristics but also on the market tensions and bargaining power of the parties. This integration allows to overcome a major drawback of the hedonic price theory, namely the assumption of perfect competition.
    Keywords: hedonic price theory; housing market; matching models
    JEL: J64 R21 R31
    Date: 2011–08–07
  12. By: Andrea Caragliu (Politecnico di Milano); Peter Nijkamp (VU University Amsterdam)
    Abstract: Knowledge triggers regional growth. Evidence suggests that skilled labour force concentrates in islands of innovation, determining an advantage for innovative regions and a challenge for lagging ones. We address the role of knowledge in shaping effective markets for skilled labour. Estimates are based on the Lucas (1988) model, with EVS and EUROSTAT data. The externality driving growth in the model is cognitive capital. Empirical tests show that a higher endowment of cognitive capital generates increasing returns to knowledge, favouring the emergence of islands of innovation; regions with a high endowment of cognitive capital attract knowledge spillovers from neighbours.
    Keywords: human capital; cognitive capital; knowledge spillovers; islands of innovation
    JEL: C21 E24 R11
    Date: 2011–08–09
  13. By: Eleni Iliopulos (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, CEPREMAP - Centre pour la recherche économique et ses applications); Thepthida Sopraseuth (CEPREMAP - Centre pour la recherche économique et ses applications, GAINS-TEPP - Université du Maine)
    Abstract: Dans cet article, nous proposons une revue de la littérature sur les frictions financières dans les modèles d'équilibre général intertemporels et stochastiques. Nous présentons en premier lieu les contributions pionnières qui ont analysé les effets d'amplification associés à l'accélérateur financier. Nous procédons ensuite à un examen de la littérature foisonnante apparue à la suite de la crise financière. Les contributions récentes visent à dépasser les limites des modèles fondateurs en proposant des modélisations plus fine de l'activité des intermédiaires financiers et de leur impact macroéconomique.
    Keywords: Frictions financières, intermédiaire financier, politique monétaire, fluctuations.
    Date: 2011–07
  14. By: Weil, Philippe (Centre de recherche en économie de Sciences Po); Restoy, Fernando
    Abstract: Arguing that total consumer wealth is unobservable, we invert the (approximate) consumption function to reconstruct, in a world with Kreps-Porteus generalized isoelastic preferences, i) the wealth that supports the agents’ observed consumption as an optimal outcome and ii) the rate of return on the consumers’ wealth portfolio. This allows us to (approximately) price assets solely as a function of their payoffs and of consumption — in both homoskedastic or heteroskedastic environments. We compare implied equilibrium returns on the wealth portfolio to observed stock market returns and gauge whether the stock market is a good proxy for unobserved aggregate wealth.
    Keywords: Asset pricing, Kreps-Porteus, Epstein-Zin-Weil preferences;
    JEL: G12 E21
    Date: 2011–01

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.
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