nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒09‒22
28 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Taxing capital is not a bad idea indeed: the role of human capital and labor-market frictions By Chen, Been-Lon; Chen, Hung-Ju; Wang, Ping
  2. The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the US and Europe By Alejandro Justiniano; Claudio Michelacci
  3. Firm Heterogeneity, Endogenous Entry, and the Business Cycle By Gianmarco I.P. Ottaviano
  4. Matching labor’s share in a search and matching model By Christopher Reicher
  5. Altruism, Education Subsidy and Growth By Mauricio Armellini; Parantap Basu
  6. Who pays for job training? By Anurag N Banerjee; Parantap Basu
  7. Age-Dependent Employment Protection By Arnaud Chéron; Jean-Olivier Hairault; François Langot
  8. Endogenous Entry, Product Variety, and Business Cycles By Bilbiie, Florin Ovidiu; Ghironi, Fabio; Melitz, Marc J
  9. The Political Economy of Sovereign Defaults By Eugenia Andreasen; Guido Sandleris; Alejandro Van Der Ghote
  10. The Natural Rate of Interest in a Small Open Economy By Fernando de Holanda Barbosa
  11. Inflation dynamics and labor market specifications: a Bayesian DSGE approach for Japan's economy By Ichiue, Hibiki; Kurozumi, Takushi; Sunakawa, Takeki
  12. Mortgage defaults By Juan Carlos Hatchondo; Leonardo Martinez; Juan M. Sánchez
  13. On the Inefficiency of Matching Models of Unemployment with Heterogeneous Workers and Jobs when Firms Rank their Applicants By Frédéric Gavrel, University of Caen Basse-Normandie, France - CREM-CNRS
  14. Evaluating interest rate rules in an estimated DSGE model By Vasco Cúrdia; Andrea Ferrero; Ging Cee Ng; Andrea Tambalotti
  15. R&D-based Growth in the Post-modern Era By Holger Strulik; Klaus Prettner; Alexia Prskawetz
  16. The Minimum Wage and Inequality - The Effects of Education and Technology By Zsófia L. Bárány
  17. Technical Appendix to "Demographic Change, Human Capital and Welfare" By Alexander Ludwig; Thomas Schelkle; Edgar Vogel
  18. Markups and the Welfare Cost of Business Cycles: A Reappraisal By Jean-Olivier Hairault; François Langot
  19. Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses By D. Filiz Unsal
  20. Making sense of China’s astronomical foreign reserves By Rodolfo E. Manuelli; Adrian Peralta-Alva
  21. Optimal auditing and insurance in a dynamic model of tax compliance By B. Ravikumar; Yuzhe Zhang
  22. Solow meets Marx: Economic growth and the emergence of social class By Heibø Modalsli, Jørgen
  23. The social cost of carbon on an optimal balanced growth path By Kögel, Tomas
  24. Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective By Michael P. Keane; Richard Rogerson
  25. Long-Term Care, Altruism and Socialization By Grégory Ponthière
  26. Distortions, Endogenous Managerial Skills and Productivity Differences By Bhattacharya, Dhritiman; Guner, Nezih; Ventura, Gustavo
  27. Sovereign Defaults and The Political Economy Of Market Reaccess By Mauro Alessandro; Guido Sandleris; Alejandro Van Der Ghote
  28. A new approach to the envelope theorem By Francesco Ruscitti

  1. By: Chen, Been-Lon; Chen, Hung-Ju; Wang, Ping
    Abstract: In a second-best optimal growth setup with only factor taxes as available instruments, is it optimal to fully replace capital by labor income taxation? The answer is generally positive based on Chamley, Judd, Lucas, and many follow-up studies. In the present paper, we revisit this important tax reform-related issue by developing a human capital-based endogenous growth framework with frictional labor search and matching. We allow each firm to create multiple vacancies and each worker to determine labor market participation endogenously. We consider a benevolent fiscal authority to finance direct transfers to households and unemployment compensation only by factor taxes. We then conduct dynamic tax incidence exercises using a model calibrated to the U.S. economy with a pre-existing 20% flat tax on both the capital and labor income. Our numerical results suggest that, due to a dominant channel via the interactions between the firm's vacancy creation and the worker's market participation, it is optimal to switch partly by a modest margin from capital to labor taxation in a benchmark economy where human capital formation depends on both the physical and human capital stocks. When the human capital accumulation process is independent of physical capital, the optimal tax mix features a slightly larger shift from capital to labor taxation; when we remove the extensive margin of the labor-leisure trade-off, such a shift is much larger. In either case, however, the optimal capital tax rate is far above zero.
    Keywords: Tax Incidence; Endogenous Human Capital Accumulation; Labor-Market Search and Matching Frictions
    JEL: E62 H22 O40 J20
    Date: 2011–08–30
  2. By: Alejandro Justiniano; Claudio Michelacci
    Abstract: We set-up a real business cycle model with search and matching frictions driven by several shocks, which nests full Nash Bargaining and wage rigidity as special cases and includes other transmission mechanisms suggested by the literature for the propagation and amplification of disturbances. The model is estimated using full information methods for two Anglo-Saxon countries (the US and the UK), two Continental European countries (France and Germany) and two Scandinavian countries (Norway and Sweden). We conduct inference with mixed frequency data, combining quarterly series for unemployment, vacancies, GDP, consumption, and investment, with annual data on unemployment flows. Parameters and shocks are estimated separately for each country, which can then vary in terms of search and hiring costs, workers' bargaining power, unemployment benefits levels, wage rigidity and the stochastic properties of disturbances. Overall, the structural model accounts reasonably well for differences in labor market dynamics observed between the two sides of the Atlantic and within Europe. Our estimates indicate that there is considerable cross-country variation in the contribution of technology shocks to the cyclical fluctuations of the labor market. Technology shocks alone replicate remarkably well the volatility in vacancies, unemployment and finding probabilities observed in US, with mixed success in Europe. In contrast, matching shocks and job destruction shocks play a larger role in most European countries relative to the US.
    JEL: E0 E24
    Date: 2011–09
  3. By: Gianmarco I.P. Ottaviano
    Abstract: This paper investigates the role that the entry and exit of heterogeneous firms plays in shaping aggregate fluctuations in economic activity. In so doing, it develops a dynamic stochastic general equilibrium model in which procyclical entry and countercyclical exit along a real business cycle lead to endogenous cyclical movements in average firm productivity. These movements stem from a composition effect due to the reallocation of market shares among firms with different levels of efficiency and affect the propagation of exogenous technological shocks. Numerical analysis suggests that existing models with representative firms may overstate the actual role of procyclical entry and exit in imperfectly competitive markets as a propagation mechanism of exogenous technology shocks. The reason is that procyclical entry and countercyclical exit disproportionately involve less efficiency firms whose impact on aggregate economic activity is hampered by their smaller size.
    JEL: E20 E32 L11 L16
    Date: 2011–09
  4. By: Christopher Reicher
    Abstract: I evaluate the degree to which different wage-setting mechanisms in labor market search models can fit the aggregate facts on labor’s share. I find that staggered bargaining in nominal wages best allows the model to plausibly match the negative relationship between labor’s share and lagged productivity growth and inflation. I also evaluate the role of labor’s bargaining weight—a low bargaining weight seems plausible but by itself, it cannot generate the patterns observed in the data. Adding a standard sticky-price mechanism to the model actually degrades the match between the model and the data—in the data, labor’s share is countercyclical, while it is procyclical in the sticky-price model. Theory and data both agree that wage stickiness is relevant at the micro and macro levels
    Keywords: Sticky wages, sticky prices, staggered Nash bargaining, inflation, productivity, search and matching, labor’s share
    JEL: E24 E25 J23 J31
    Date: 2011–09
  5. By: Mauricio Armellini (Durham Business School); Parantap Basu (Durham Business School)
    Abstract: An optimal education subsidy formula is derived using an overlapping generations model with parental altruism. The model predicts that public education subsidy is greater in economies with lesser parental altruism because a benevolent government has to compensate for the shortfall in private education spending of less altruistic parents with a finite life. On the other hand, growth is higher in economies with greater parental altruism. Cross-country regressions using the World Values Survey for altruism lend support to our model predictions. The model provides insights about the reasons for higher education subsidy in richer countries.
    Date: 2011–01–01
  6. By: Anurag N Banerjee (Durham Business School); Parantap Basu (Durham Business School)
    Abstract: An optimal education subsidy formula is derived using an overlapping generations model with parental altruism. The model predicts that public education subsidy is greater in economies with lesser parental altruism because a benevolent government has to compensate for the shortfall in private education spending of less altruistic parents with a finite life. On the other hand, growth is higher in economies with greater parental altruism. Cross-country regressions using the World Values Survey for altruism lend support to our model predictions. The model provides insights about the reasons for higher education subsidy in richer countries.
    Date: 2011–02–16
  7. By: Arnaud Chéron (GAINS - Université du Maine); Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, IZA - Institute for the Study of Labor); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Mans, CEPREMAP - Centre pour la recherche économique et ses applications)
    Abstract: This paper examines the age-related design of firing taxes by extending the theory of job creation and job destruction to account for a finite working life-time. We first argue that the potential employment gains related to employment protection are high for older workers, as they are magnified by the proximity to retirement. But higher firing taxes for these workers increase job destruction rates for the younger generations. Furthermore, from a normative standpoint, when firms cannot ex-ante age-direct their search, the impact of each generation of unemployed workers on the average return on vacancies makes the internalization of the search costs for the other generations imperfect through the ex-post Nash bargaining process. We show that the first best age-profile of firing taxes is typically hump-shaped, partially in contradiction with existing policies in some European countries. Taking into account the fact that the human capital of older workers is more specific than general tends to exacerbate these results.
    Date: 2011–09–14
  8. By: Bilbiie, Florin Ovidiu; Ghironi, Fabio; Melitz, Marc J
    Abstract: This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers and products over the business cycle. Economic expansions induce higher entry rates by prospective entrants subject to irreversible investment costs. The sluggish response of the number of producers (due to sunk entry costs and a time-to-build lag) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The return to investment (corresponding to the creation of new productive units) determines household saving decisions, producer entry, and the allocation of labor across sectors. The model performs at least as well as the benchmark real business cycle model with respect to the implied second-moment properties of key macroeconomic aggregates. In addition, our framework jointly predicts procyclical product variety and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can simultaneously reproduce most of the variance of GDP, hours worked, and total investment found in the data.
    Keywords: business cycle propagation; entry; markups; product creation; profits; variety
    JEL: E20 E32
    Date: 2011–09
  9. By: Eugenia Andreasen; Guido Sandleris; Alejandro Van Der Ghote
    Abstract: In times of crises, sovereign debt repayment typically depends on the implementation of fiscal programs. In order to implement these programs, governments usually need to garner some political support. The literature of sovereign defaults has not paid attention to the presence of political constraints, assuming instead, that governments have always unlimited access to the resources of the economy to repay their debts. In this paper, we analyze how the presence of political constraints affects sovereign governments´ borrowing and default decisions. We do so in a standard DSGE model with endogeneous default risk where we introduce two novel features: heterogeneous agents in the domestic private sector and a requirement that the government obtains some of their support to implement a fiscal program needed to repay the debt. In this framework, we show that there can be different types of sovereign default events. Default can arise because the government is unwilling to repay, in the best tradition of the sovereign debt literature, but also due to insufficient political support even if a benevolent government would prefer to repay.We calibrate the model to the Argentine economy and show that, once political constraints are taken into account, the matching with the data of standard sovereign debt models is weaker than previously understood.
    Date: 2011
  10. By: Fernando de Holanda Barbosa
    Abstract: The goal of this paper is two-fold. Firstly, this paper shows that the natural rate of interest in a small open economy, with access to the world capital markets, is equal to the international real rate of interest. We show this property by using the infinitely-lived overlapping generations model and we use this model to analyze both fixed and flexible exchange rate regimes. Secondly, this paper also shows that the empirical implausibility hypothesis embedded in the infinitely-lived representative-agent model, with complete asset markets, turns this framework not appropriate for a small open economy.
    Keywords: Small open economy; Natural rate of interest; Complete and incomplete asset markets
    JEL: F41
    Date: 2011
  11. By: Ichiue, Hibiki; Kurozumi, Takushi; Sunakawa, Takeki
    Abstract: Which labor market specification is better able to describe inflation dynamics, a widely-used sticky wage model or a recently-investigated labor market search model? Using a Bayesian likelihood approach, we estimate these two models with Japan’s data. This paper shows that the labor market search model is superior to the sticky wage model in terms of both marginal likelihood and out-of-sample forecast performance, particularly regarding inflation. The labor market search model is better able to replicate the cross-correlation among inflation, real wages, and output in the data. Moreover, in this model, real marginal cost is determined by both hiring cost and unit labor cost that varies with employment fluctuations, which gives rise to a high contemporaneous correlation between inflation and real marginal cost as represented in the New Keynesian Phillips curve.
    Keywords: Inflation dynamics; Marginal cost; Labor market search; Extensive margin; Bayesian estimation
    JEL: E32 E24 E37
    Date: 2011–09
  12. By: Juan Carlos Hatchondo; Leonardo Martinez; Juan M. Sánchez
    Abstract: We incorporate house price risk and mortgages into a standard incomplete market (SIM) model. We calibrate the model to match U.S. data and we show that the model also ac- counts for non-targeted features of the data such as the distribution of down payments, the life-cycle profile of home ownership, and the mortgage default rate. In addition, we show that the average coefficients that measure the agents' ability to self-insure against income shocks are similar to those of a SIM model without housing (as presented by Kaplan and Violante, 2010). However, incorporating housing increases the values of these coefficient for younger agents, which narrows the gap between the SIM model's implications and the data. The response of consumption to house price shocks is minimal. We also study the effects of default prevention policies. Introducing a minimum down payment requirement of 15% reduces defaults on mortgages by 30%, reduces the home ownership rate up to only 0.2 percentage points (if the aggregate house price level does not adjust), and may cause house prices to decline up to 0.7% (if home ownership does not adjust). Garnishing defaulters' income in excess of 43% of median consumption for one year produces a similar decline in defaults; but, since it reduces the median equilibrium down payment from 19% to 9%, it boosts home ownership up to 4.3 percentage points (if the aggregate house price level does not adjust) and may increase house prices up to 16.1% (if home ownership does not adjust). The introduction of minimum down payments or income garnishment benefit a majority of the population.
    Keywords: Mortgage loans ; Default (Finance)
    Date: 2011
  13. By: Frédéric Gavrel, University of Caen Basse-Normandie, France - CREM-CNRS
    Abstract: In a circular matching model, firms rank their applicants and pick the best suited one. Job creation appears to lower the average output. As firms do not internalize this effect, jobs are too many in the laissez-faire equilibrium under the Hosios condition. Due to similar externalities firms' search intensities are too strong whereas workers' search intensities are too weak.
    Keywords: Matching, Differentiation of skills, Applicant ranking, Labor market, efficiency
    JEL: D8 J6
    Date: 2011–02
  14. By: Vasco Cúrdia; Andrea Ferrero; Ging Cee Ng; Andrea Tambalotti
    Abstract: The empirical DSGE (dynamic stochastic general equilibrium) literature pays surprisingly little attention to the behavior of the monetary authority. Alternative policy rule specifications abound, but their relative merit is rarely discussed. We contribute to filling this gap by comparing the fit of a large set of interest rate rules (fifty-five in total), which we estimate within a simple New Keynesian model. We find that specifications in which monetary policy responds to inflation and to deviations of output from its efficient level—the one that would prevail in the absence of distortions—have the worst fit within the set we consider. Policies that respond to measures of the output gap based on statistical filters perform better, but the best-fitting rules are those that also track the evolution of the model-consistent efficient real interest rate.
    Date: 2011
  15. By: Holger Strulik; Klaus Prettner (Harvard Center for Population and Development Studies); Alexia Prskawetz (Vienna Institute of Demography)
    Abstract: Conventional R&D-based growth theory suggests that productivity growth is positively correlated with population size or population growth, an implication which is hard to see in the data. Here we integrate R&D-based growth into a unified growth setup with micro-founded fertility and schooling behavior. We then show how a Beckerian child quality-quantity trade-off explains why higher growth of productivity and income per capita are associated with lower population growth. The medium-run prospects for future economic growth - when fertility is going to be below replacement level in virtually all developed countries - are thus much better than predicted by conventional R&D-based growth theory.
    Keywords: R&D, unified growth theory, declining population, fertility, schooling, human capital, post-modern society.
    Date: 2011–08
  16. By: Zsófia L. Bárány
    Abstract: While there has been intense debate in the empirical literature about the effects of minimum wages on inequality in the US, its general equilibrium effects have been given little attention. In order to quantify the full effects of a decreasing minimum wage on inequality, I build a dynamic general equilibrium model, based on a two-sector growth model where the supply of high-skilled workers and the direction of technical change are endogenous. I find that a permanent reduction in the minimum wage leads to an expansion of low-skilled employment, which increases the incentives to acquire skills, thus changing the composition and size of high-skilled employment. These permanent changes in the supply of labour alter the investment flow into R&D, thereby decreasing the skill-bias of technology. The reduction in the minimum wage has spill-over effects on the entire distribution, affecting upper-tail inequality. Through a calibration exercise, I find that a 30 percent reduction in the real value of the minimum wage, as in the early 1980s, accounts for 15 percent of the subsequent rise in the skill premium, 18.5 percent of the increase in overall inequality, 45 percent of the increase in inequality in the bottom half, and 7 percent of the rise in inequality at the top half of the wage distribution.
    Keywords: Minimum wage, education, technology, wage inequality
    JEL: E24 E65 J31
    Date: 2011–09
  17. By: Alexander Ludwig (Universität zu Köln); Thomas Schelkle (London School of Economics); Edgar Vogel (Universität Mannheim)
    Abstract: This appendix of our paper, "Demographic Change, Human Capital and Welfare", contains further material that could not be included in the paper due to space limitations. It is organized as follows. Section A contains the formal equilibrium definition. Section B provides more results on the fit of our model to observed life-cycle profiles of hours and wages, the implied labor-supply elasticities of our model, additional results on predicted aggregate variables during the demographic transition as well as the associated welfare effects and a sensitivity analysis. Our population model is explained in Section C. Details on our computational procedures can be found in Section D.
    Keywords: Population aging; Human capital; Rate of return; Distribution of welfare
    JEL: C68 E17 E25 J11 J24
    Date: 2011
  18. By: Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, IZA - Institute for the Study of Labor); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Mans, CEPREMAP - Centre pour la recherche économique et ses applications)
    Abstract: Gali et al. (2007) have recently shown quantitatively that fluctuations in the efficiency of resource allocation do not generate sizable welfare costs. In their economy, which is distorted by monopolistic competition in the steady state, we show that they underestimate the welfare cost of these fluctuations by ignoring the negative effect of aggregate volatility on average consumption and leisure. As monopolistic suppliers, both firms and workers aim to preserve their expected markups; the interaction between aggregate fluctuations and price-setting behavior results in average consumption and employment levels that are lower than their counterparts in the flexible-price economy. This level effect increases the efficiency cost of business cycles. It is all the more sizable with the degree of inefficiency in the steady state, lower labor-supply elasticities, and when prices instead of wages are rigid.
    Keywords: Business cycle costs; inefficiency gap; New-Keynesian Macroeconomics
    Date: 2011–09–14
  19. By: D. Filiz Unsal
    Abstract: The resumption of capital flows to emerging market economies since mid 2009 has posed two sets of interrelated challenges for policymakers: (i) to prevent capital flows from exacerbating overheating pressures and consequent inflation, and (ii) to minimize the risk that prolonged periods of easy financing conditions will undermine financial stability. While conventional monetary policy maintains its role in counteracting the former, there are doubts that it is sufficient to guard against the risks of financial instability. In this context, there have been increased calls for the development of macroprudential measures, with an explicit focus on systemwide financial risks. Against this background, this paper analyses the interplay between monetary policy and macroprudential regulations in an open economy DSGE model with nominal and real frictions. The key result is that macroprudential measures can usefully complement monetary policy. Even under the "optimal policy," which calls for a rather aggressive monetary policy reaction to inflation, introducing macroprudential measures is found to be welfare improving. Broad macroprudential measures are shown to be more effective than those that discriminate against foreign liabilities (prudential capital controls). However, these measures are not a substitute for an appropriate moneraty policy reaction. Moreover, macroprudential measures are less useful in helping economic stability under a technology shock.
    Keywords: Capital controls , Capital flows , Capital goods , Capital inflows , Corporate sector , Economic models , Emerging markets , Financial stability , Monetary policy ,
    Date: 2011–08–08
  20. By: Rodolfo E. Manuelli; Adrian Peralta-Alva
    Abstract: The current global-imbalance literature (which explains why capital flows from poor to rich countries) cannot explain China’s foreign asset positions because capital cannot flow out of China under capital controls. A related but deeper puzzle that this literature fails to address is China’s high saving rate despite an astonishingly rapid income growth rate. This paper argues that understanding China’s massive foreign reserves must start with a basic trade model (e.g., Melitz, 2003) in which a growing trade volume is driven by an elastic labor supply and rapid productivity growth. Imbalanced trade will then emerge if there exist uninsured risks (which remain constant as the economy grows) and exporters are borrowing constrained. In this case, fast growth can lead to excessively high saving rates and trade surpluses. Thus, a modified Melitz model featuring rapid productivity growth, elastic labor supply, and incomplete markets can qualitatively and quantitatively explain China’s massive (and "passive") accumulation of low-yield foreign reserves. The simple infinite-horizon model is hence consistent with the stylized fact that high saving is the consequence of high growth instead of the opposite (Modigliani and Cao, 2004), which the permanent income theory and global-imbalance literature fail to predict.
    Keywords: China ; Saving and investment - China
    Date: 2011
  21. By: B. Ravikumar; Yuzhe Zhang
    Abstract: We study the optimal auditing of a taxpayer’s income in a dynamic principal- agent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state. A low-income taxpayer who transits to high income can underreport his true income and evade his taxes. With a constant absolute risk-aversion utility function and a costly and imperfect auditing technology, we show that the optimal auditing mechanism in our model consists of cycles. Within each cycle, a low-income taxpayer is initially unaudited, but if the duration of low-income reports exceeds a threshold, then the auditing probability becomes positive. That is, the tax authority guarantees that the taxpayer will not be audited until the threshold duration is reached. We also find that auditing becomes less frequent if the auditing cost is higher or if the variance of income is lower.
    Keywords: Tax auditing ; Taxation
    Date: 2011
  22. By: Heibø Modalsli, Jørgen (Dept. of Economics, University of Oslo)
    Abstract: This paper reconciles neoclassical models of economic growth ("Solow") with the formation of social classes during economic transition ("Marx"). An environment with missing capital markets and no labor divisibility is shown to lead to a steady state with no aggregate inefficiencies, but a very polarized wealth distribution. When capital cannot be rented, people must choose between self-production, potentially including hiring workers, and wage employment. As the first path is more profitable for the rich than the poor, inequality increases. The model is calibrated to illustrate polarization and increasing inequality in early modern Europe, starting from a continuous pre-industrial wealth distribution. During the early industrializing period, when labor markets operate and capital markets do not, inequality increases and a distinct working class emerges. Even if capital markets later improve, the polarization is persistent. The mechanism also has relevance for modern developing countries, where capital market access is limited. If a substantial amount of capital is needed in order to earn the market return, the poor have few incentives to save.
    Keywords: Inequality; polarization; social class; economic growth; capital market frictions
    JEL: E21 G32 O11 O43
    Date: 2011–09–14
  23. By: Kögel, Tomas
    Abstract: This paper derives analytically the growth rate of the social cost of carbon (SSC) on an optimal balanced growth path. More specifically, the paper examines a deterministic Ramsey model of optimal economic growth with carbon emissions. In this model, restrictions on technology and preferences are imposed that guarantee optimal balanced growth, i.e., that guarantee an optimal path with constant and positive economic growth and a constant stock of carbon in the atmosphere. The paper exploits these restrictions to show that the growth rate of the SCC on the optimal balanced growth path is negative, provided the elasticity of marginal utility of consumption with respect to consumption is larger than or equal to one. There seems to be consensus in the literature that this latter requirement is fulfilled in reality. --
    Keywords: Climate change,sustainability,social cost of carbon
    JEL: D61 Q54
    Date: 2011
  24. By: Michael P. Keane; Richard Rogerson
    Abstract: The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, especially the optimal design of tax policies. This paper surveys recent work that uses structural models and micro data to evaluate the size of this response. Whereas the earlier literature on this issue often concluded that aggregate labor supply elasticities were small, recent work has identified three key reasons that the aggregate elasticity may be quite large. First, earlier estimates abstracted from several key features, including human capital accumulation, leading to estimates that are dramatically negatively biased. Second, failure to understand that aggregate labor supply adjustments can occur along both the hours per worker and employment margins has led economists to misinterpret the implications of previous estimates for aggregate labor supply. Third, structural estimation of responses along the extensive (i.e., employment) margin are typically quite large.
    JEL: E24 J22
    Date: 2011–09
  25. By: 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)
    Abstract: The public provision of long-term care (LTC) can replace family-provided LTC when adults are not sufficiently altruistic towards their elderly parents. But State intervention can also modify the transmission of values and reduce the long-run prevalence of family altruism in the population. That evolutionary effect questions the desirability of the LTC public provision. To characterize the optimal LTC policy, we develop a three-period OLG model where the population is divided into altruistic and non-altruistic agents, and where the transmission of (non) altruism takes place through a socialization process à la Bisin and Verdier (2001). The optimal short-run and long-run LTC policies are shown to differ, to an extent varying with the particular socialization mechanism at work.
    Keywords: long-term care ; altruism ; socialization ; optimal policy ; crowding out effect
    Date: 2011–09
  26. By: Bhattacharya, Dhritiman (EQUIFAX); Guner, Nezih (MOVE, Barcelona); Ventura, Gustavo (Arizona State University)
    Abstract: We develop a span-of-control model where managerial skills are endogenous and the outcome of investments over the life cycle of managers. We calibrate this model to U.S plant-size data to quantify the effects of distortions that are correlated with the size of production units. These distortions lead to sharp reductions in plant productivity and the fraction of employment in large plants, with a quantitatively important role for managerial investments. We find that the model can account quite well for properties of Japanese size-distribution data, with a model-implied TFP of about 83% of the U.S. Distortions are critical in accounting for the differences in size distribution between the U.S. and Japan.
    Keywords: distortions, size, skill investments, productivity differences
    JEL: O40 E23
    Date: 2011–09
  27. By: Mauro Alessandro; Guido Sandleris; Alejandro Van Der Ghote
    Abstract: Following a sovereign default, governments are usually unable to borrow from international credit markets for some time. The period of "exclusion" has varied from more than twenty years following some default events to less than a year in others. Using a unique dataset on sovereign bond issuances and syndicated bank loans between 1980 and 2000, this paper studies empirically the determinants of the duration of exclusion following a sovereign default and presents a DSGE model of endogeneous sovereign borrowing that rationalizes our key empirical findings. In particular, we find that countries either reaccess the markets in the first years after a default or have to wait a much longer time to do it. We also find that political stability significantly increases the chances of reaccessing the market in any given period after the default. Our political economy model of market reaccess can match hese two features of the data.
    Date: 2011
  28. By: Francesco Ruscitti
    Abstract: We study the di¤erentiability of the value function of a constrained optimization problem. We consider the envelope-theorem framework of Milgrom and Segal (2002), and we accomplish two goals. We show how one can relax Milgrom and Segal’s assumption that the choice set does not vary with parameters. More importantly, we develop a new approach to proving the di¤erentiability of the value function. The key idea and main mathematical tool we employ in our approach are a novel feature in the literature dealing with the di¤erentiability of the value function.
    Keywords: value function, uniform convergence, di¤erentiability, cor-
    JEL: C60 C61 C65
    Date: 2011–09

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.