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on Dynamic General Equilibrium |
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Issue of 2011‒09‒16
seventeen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Muffasir Badshah (Department of Finance and Economcis, Qatar University, Doha Qatar); Paul Beaumont (Department of Economics, Florida State University); Anuj Srivastava (Department of Statistics, Florida State University) |
| Abstract: | This paper describes an accurate, fast and robust fixed point method for computing the stationary wealth distributions in macroeconomic models with a continuum of infinitely-lived households who face idiosyncratic shocks with aggregate certainty. The household wealth evolution is modeled as a mixture Markov process and the stationary wealth distributions are obtained using eigen structures of transition matrices by enforcing the conditions for the Perron-Frobenius theorem by adding a perturbation constant to the Markov transition matrix. This step is utilized repeatedly within a binary search algorithm to find the equilibrium state of the system. The algorithm suggests an efficient and reliable framework for studying dynamic stochastic general equilibrium models with heterogeneous agents. |
| Keywords: | Numerical solutions, Wealth distributions, Stationary equilibria, DSGE models |
| JEL: | C63 D52 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:fsu:wpaper:wp2011_08_02&r=dge |
| By: | David de la Croix; Olivier Pierrard; Henri R. Sneessens |
| Abstract: | This paper re-examines the effects of population aging and pension reforms in an OLG model with labor market frictions. The most important feature brought about by labor market frictions is the connection between the interest rate and the unemployment rate. Exogenous shocks (such as aging) leading to lower interest rates also imply lower equilibrium unemployment rates, because lower capital costs stimulate labor demand and induce firms to advertize more vacancies. These effects may be reinforced by increases in the participation rate of older workers, induced by the higher wage rates and the larger probability of finding a job. These results imply that neglecting labor market frictions and employment rate changes may seriously bias the evaluation of pension reforms when they have an impact on the equilibrium interest rate. |
| Keywords: | Overlapping Generations, Search Unemployment, Labor Force Participation, Aging, Pensions, Labor Market |
| JEL: | E24 H55 J26 J64 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp062&r=dge |
| By: | Klaus Prettner (Harvard Center for Population and Development Studies) |
| Abstract: | This article investigates the consequences of population aging for long-run economic growth perspectives. We introduce age specific heterogeneity of households into a model of research and development (R&D) based technological change. We show that the framework incorporates two standard specifications as special cases: endogenous growth models with scale eects and semi-endogenous growth models without scale effects. The introduction of an age structured population implies that aggregate laws of motion for capital and consumption have to be obtained by integrating over different cohorts. It is analytically shown that these laws of motion depend on the underlying demographic assumptions. Our results are that (i) increases in longevity have positive effects on per capita output growth, (ii) decreases in fertility have negative effects on per capita output growth, (iii) the longevity effect dominates the fertility eect in case of endogenous growth models and (iv) population aging fosters long-run growth in endogenous growth models, while the converse holds true in semiendogenous growth frameworks. |
| Keywords: | population aging, endogenous technological change, longrun economic growth |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:gdm:wpaper:7211&r=dge |
| By: | Liam Graham |
| Abstract: | Most DSGE models assume full information and model-consistent expectations. This paper relaxes both these assumptions in the context of the stochastic growth model with incomplete markets and heterogeneous agents. Households do not have direct knowledge of the structure of economy or the values of aggregate quanti?ties; instead they form expectations by learning from the prices in their market-consistent information sets. The economy converges quickly to an equilibrium which is similar to the equilibrium with model-consistent expectations and market-consistent information. Learning does not introduce strong dynamics at the aggre-gate level, though more interesting things happen at the household level. At least in the context of this model, assumptions about information seem important for aggregates; assumptions about the ability to form model-consistent expectations less so. |
| Keywords: | imperfect information; adaptive learning; dynamic general equilibrium; heterogeneity; expectations. |
| JEL: | D52 D84 E32 |
| Date: | 2011–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1113&r=dge |
| By: | Stefano Bosi (THEMA); Cuong Le Van (CNRS, CES, Exeter University, Paris School of Economics, 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 of 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 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 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:2411&r=dge |
| By: | Anton A. Cheremukhin |
| Abstract: | The original Mortensen-Pissarides model possesses two elements that are absent from the commonly used simplified version: the job destruction margin and training costs. I find that these two elements enable a model driven by a single aggregate shock to simultaneously explain most movements involving unemployment, vacancies, job destruction, job creation, the job finding rate and wages. The job destruction margin's role in propagating aggregate shocks is to create an additional pool of unemployed at the onset of a recession. The role of training costs is to explain the simultaneous decline in vacancies and slow response of job creation. |
| Keywords: | Unemployment ; Job creation ; Employment ; Business cycles |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1102&r=dge |
| By: | Luis E. Rojas |
| Abstract: | This paper derives a link between the forecasts of professional forecasters and a DSGE model. I show that the forecasts of a professional forecaster can be incorporated to the state space representation of the model by allowing the measurement error of the forecast and the structural shocks to be correlated. The parameters capturing this correlation are reduced form parameters that allow to address two issues i) How the forecasts of the professional forecaster can be exploited as a source of information for the estimation of the model and ii) How to characterize the deviations of the professional forecaster from an ideal complete information forecaster in terms of the shocks and the structure of the economy. |
| Date: | 2011–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:008945&r=dge |
| By: | Naohisa Hirakata; Nao Sudo; Kozo Ueda |
| Abstract: | The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17 percent of its variations. In particular, in the Great Recession, they are the key determinants of the investment declines, accounting for 36 percent of the variations. |
| Keywords: | Price levels ; Financial markets ; Monetary policy |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:86&r=dge |
| By: | Nicolo, G. De; Gamba, A.; Lucchetta, M. (Tilburg University, Center for Economic Research) |
| Abstract: | This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance and equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks' optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benifits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank effciency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements. |
| Keywords: | Capital requirements;liquidity requirements;taxation of liabilities. JEL Classifications |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011090&r=dge |
| By: | Kaplan, Greg; Violante, Giovanni L |
| Abstract: | A wide body of empirical evidence, based on randomized experiments, finds that 20-40 percent of fiscal stimulus payments (e.g. tax rebates) are spent on non-durable household consumption in the quarter that they are received. We develop a structural economic model to interpret this evidence. Our model integrates the classical Baumol-Tobin model of money demand into the workhorse incomplete-markets life-cycle economy. In this framework, households can hold two assets: a low-return liquid asset (e.g., cash, checking account) and a high-return illiquid asset (e.g., housing, retirement account) that carries a transaction cost. The optimal life-cycle pattern of wealth accumulation implies that many households are "wealthy hand-to-mouth": they hold little or no liquid wealth despite owning sizable quantities of illiquid assets. They therefore display large propensities to consume out of additional income. We document the existence of such households in data from the Survey of Consumer Finances. A version of the model parametrized to the 2001 tax rebate episode is able to generate consumption responses to fiscal stimulus payments that are in line with the data. |
| Keywords: | Consumption; Fiscal Stimulus Payments; Hand-to-Mouth; Liquidity |
| JEL: | D31 D91 E21 H31 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8562&r=dge |
| By: | Hakan Yilmazkuday |
| Abstract: | The effects of oil shocks on output volatility through international transport costs are investigated in an open-economy DSGE model. Two versions of the model, with and without international transport costs, are structurally estimated for the U.S. economy by a Bayesian approach for moving windows of ten years. For model selection, the posterior odds ratios of the two versions are compared for each ten-year window. The version with international transport costs is selected during periods of high volatility in crude oil prices. The contribution of international transport costs to the volatility of U.S. GDP has been estimated as high as 36 percent during periods of oil crises. |
| Keywords: | Monetary policy ; International trade |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:82&r=dge |
| By: | Wickens, Michael R. |
| Abstract: | This paper takes the view that a major contributing factor to the financial crisis of 2008 was a failure to correctly assess and price the risk of default. In order to analyse default risk in the macroeconomy, a simple general equilibrium model with banks and financial intermediation is constructed in which default-risk can be priced. It is shown how the credit spread can be attributed largely to the risk of default and how excess loan creation may emerge due different attitudes to risk by borrowers and lenders. The model can also be used to analyse systemic risk due to macroeconomic shocks which may be reduced by holding collateral. |
| Keywords: | Default; Financial crisis; Financial intermediation; Liquidity shortages; Risk |
| JEL: | E44 E51 G12 G21 G33 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8556&r=dge |
| By: | Emin Dinlersoz; Henry Hyatt; Sang Nguyen |
| Abstract: | This paper explores the evolution of wages along the life-cycle of U.S. manufacturing plants. Real wages start out low for new plants, and increase along with productivity as plants survive and age. As plants experience productivity decline and approach exit, real wages fall. However, for failing plants real wages do not fall as quickly as they rise in the case of new entrants. These empirical regularities are captured in a dynamic model of labor quality and quantity choice by plants subject to adjustment costs in wages and employment. The model’s parameters are estimated to assess the magnitude of adjustment costs and the degree of asymmetry in the cost of upward versus downward adjustments. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:11-24&r=dge |
| By: | Bilbiie, Florin Ovidiu; Straub, Roland |
| Abstract: | This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. We develop an otherwise standard sticky-price DSGE model, whereby at low enough asset market participation, standard aggregate demand logic is inverted: interest rate increases become expansionary. Thereby, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare, suggesting that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom suggests. We provide empirical evidence consistent with this hypothesis, and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Inflation and the Great Moderation. |
| Keywords: | aggregate demand; Bayesian estimation; Great Inflation; Great Moderation; limited asset markets participation; passive monetary policy rules; real (in)determinacy |
| JEL: | E31 E32 E44 E52 E58 E65 N12 N22 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8555&r=dge |
| By: | Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian |
| Abstract: | This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation. |
| Keywords: | Indexation (Economics) ; Financial markets |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1117&r=dge |
| By: | Tommaso Monacelli; Vincenzo Quadrini; Antonella Trigari |
| Abstract: | We study the importance of financial markets for (un)employment fluctuations in a model with searching and matching frictions where firms issue debt under limited enforcement. Higher debt allows employers to bargain lower wages which in turn increases the incentive to create jobs. The transmission mechanism of 'credit shocks' is fundamentally different from the typical credit channel and the model can explain why firms cut hiring after a credit contraction even if they have not shortage of funds for hiring workers. The theoretical predictions are consistent with the estimation of a structural VAR whose identifying restrictions are derived from the theoretical model. |
| JEL: | E24 E32 E44 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17389&r=dge |
| By: | Dubois, Pierre; Ligon, Ethan A. |
| Abstract: | Using data on individual consumption expenditures from a sample of farm households in the Philippines, we construct a direct test of the risk-sharing implications of the collective household model. We are able to contrast the efficient outcomes predicted by the collective household model with the outcomes we might expect in environments in which food consumption delivers not only utils, but also nutrients which affect future productivity. Finally, we are able to contrast each of these two models with a third, involving a hidden action problem within the household; in this case, the efficient provision of incentives implies that the consumption of each household member depends on their (stochastic) productivity. The efficiency conditions which characterize the within-household allocation of food under the collective household model are violated, as consumption shares respond to earnings shocks. If future productivity depends on current nutrition, then this can explain some but not all of the response, as it appears that the quality of current consumption depends on past earnings. This suggests that some actions taken by household members are private, giving rise to a moral hazard problem within the household |
| Keywords: | Agricultural and Resource Economics |
| Date: | 2011–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:agrebk:2221195&r=dge |