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on Dynamic General Equilibrium |
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Issue of 2011‒10‒09
nineteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Robert A. Becker (Indiana University); Tapan Mitra (Cornell University) |
| Abstract: | Ramsey equilibrium models with heterogeneous agents and borrowing constraints are shown to yield efficient equilibrium sequences of aggregate capital and consumption. The proof of this result is based on verifying that equilibrium sequences of prices satisfy the Malinvaud criterion for efficiency. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2011-009&r=dge |
| By: | Allen Head (Queen's University); Huw Lloyd-Ellis (Queen's University); Hongfei Sun (Queen's University) |
| Abstract: | We characterize the dynamics of relative house prices, construction rates and population growth across US cities. In response to fluctuations in relative incomes, we find that population growth rates adjust more rapidly than construction rates in the short run and that price appreciation exhibits considerable serial correlation in the short-run and mean reversion in the long-run. We develop a competitive search model of the housing market in which construction, the entry of buyers, house prices and rents are endogenously determined in equilibrium. Our theory generates dynamics that are qualitatively consistent with our empirical observations. In particular, in a version of the economy calibrated to match long-run features of the housing market in U.S. cities, variation in the time it takes to sell a house (i.e. the house's liquidity) induces house values and transaction prices to exhibit momentum, or serially correlated growth. |
| Keywords: | House prices, liquidity, search, construction, dynamic panel |
| JEL: | E30 R31 R10 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1276&r=dge |
| By: | Martin Fukac; Vladimir Havlena |
| Abstract: | This paper is written by authors from technical and economic fields, motivated to find a common language and views on the problem of the optimal use of information in model estimation. The center of our interest is the natural condition of control -- a common assumption in the Bayesian estimation in technical sciences, which may be violated in economic applications. In estimating dynamic stochatic general equilibrium (DSGE) models, typically only a subset of endogenous variables are treated as measured even if additional data sets are available. The natural condition of control dictates the exploitation of all available information, which improves model adaptability and estimates efficiency. We illustrate our points on a basic RBC model. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp11-03&r=dge |
| By: | Yongsung Chang; Andreas Hornstein |
| Abstract: | Many cases of successful economic development, such as South Korea, exhibit long periods of sustained capital accumulation rates. This empirical feature is at odds with the standard neoclassical growth model which predicts initially high and then declining capital accumulation rates. We show that minor modifications of the neoclassical model go a long way towards accounting for the transition dynamics of the South Korean economy. Our modifications recognize that (1) agriculture essentially does not use reproducible capital, and that during the transition period (2) the relative price of capital declines substantially, and (3) the nonfarm employment share increases substantially. |
| Keywords: | Economic growth ; Business cycles ; Economic development |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:11-04&r=dge |
| By: | Miguel Casares (Departamento de Economía-UPNA); Jean-Christophe Poutineau (Faculté des Sciences Economiques, Université de Rennes I, Rennes, France) |
| Abstract: | Introducing both endogenous firm entry and a requirement for external finance in a general-equilibrium model leads to three main results. First, the financial constraint has contractionary effects on both equity investment and the labor supply as they are inversely related to the marginal finance cost. Second, net firm creation amplifies the steady-state impact of changes in either productivity or banking efficiency due to procyclical firm entry. Third, a higher elasticity of substitution (that implies a lower mark-up) cuts the number of firms and makes aggregate output fall in steady state, opposite to standard models with constant number of firms. |
| Keywords: | firm creation, financial frictions, steady-state analysis. |
| JEL: | E13 E44 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nav:ecupna:1102&r=dge |
| By: | Juan Carlos Hatchondo; Leonardo Martinez; Juan M. Sanchez |
| 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 accounts for non-targeted features of the data such as the distribution of down payments, the life-cycle prole of homeownership, 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 coefficients 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 percent reduces defaults on mortgages by 30 percent, reduces the homeownership 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 percent (if homeownership does not adjust). Garnishing defaulters' income in excess of 43 percent of median consumption for one year produces a similar decline in defaults; but, since it reduces the median equilibrium down payment from 19 percent to 9 percent, it boosts homeownership up to 4.3 percentage points (if the aggregate house price level does not adjust) and may increase house prices up to 16.1 percent (if homeownership does not adjust). The introduction of minimum down payments or income garnishment benefit a majority of the population. |
| Keywords: | Mortgages ; Default (Finance) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:11-05&r=dge |
| By: | Thomas A. Lubik |
| Abstract: | I specify a simple search and matching model of the labor market and estimate it on unemployment and vacancy data for Hong Kong over the period 2000-2010 using Bayesian methods. The model fits the data remarkably well. The estimation shows that the main driver of fluctuations in the labor market are productivity shocks, with cyclical movements in the separation rate playing only a subordinate role. The parameter estimates are broadly consistent with those found in the literature. In order to replicate the volatility of unemployment and vacancies the model estimates require a high replacement ratio and a low bargaining power for workers in addition to two extraneous sources of uncertainty. The estimates are robust to a relaxation of the prior information and small changes in the underlying model specification, which suggests that the data are informative and that the model is well specified. Overall, the Hong Kong labor market can be characterised by having a low degree of churning in normal times, but rapid firings and hirings in recessions and expansions. |
| Keywords: | Labor market ; Unemployment |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:11-02&r=dge |
| By: | Susanto Basu (Boston College; NBER); Brent Bundick (Boston College) |
| Abstract: | This paper examines the role of uncertainty shocks in a one-sector, representative-agent dy- namic stochastic general-equilibrium model. When prices are flexible, uncertainty shocks are not capable of producing business-cycle comovements among key macro variables. With countercycli- cal markups through sticky prices, however, uncertainty shocks can generate fluctuations that are consistent with business cycles. Monetary policy usually plays a key role in offsetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then mon- etary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative effects on the economy. Calibrating the size of uncertainty shocks using fluctuations in the VIX, we find that increased uncertainty about the future may indeed have played a signifi- cant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the financial press. |
| Keywords: | Uncertainty Shocks, Monetary Policy, Sticky-Price Models |
| JEL: | E32 E52 |
| Date: | 2011–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:774&r=dge |
| By: | Bosi, Stefano; Laurent, Thierry |
| Abstract: | This paper aims at providing a simple economic framework to address the question of the optimal share of investments in medical R&D in total public spending. In order to capture the long-run impact of tax-financed medical R&D on the growth rate, we develop an endogenous growth model in the spirit of Barro [1990]. The model focuses on the optimal sharing of public resources between consumption and (non-health) investment, medical R&D and other health expenditures. It emphasizes the key role played by the public health-related R&D in enhancing economic growth and welfare in the long run. |
| Keywords: | Public health ; Medical R&D; Public spending; Endogenous growth |
| JEL: | H51 I18 H23 O31 |
| Date: | 2011–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33789&r=dge |
| By: | Fabio Ghironi (Boston College); Sanjay K. Chugh (University of Maryland) |
| Abstract: | We study Ramsey-optimal fiscal policy in an economy in which product varieties are the result of forward-looking investment decisions by firms. There are two main results. First, depending on the particular form of variety aggregation in preferences, firms' dividend payments may be either subsidized or taxed in the long run. This policy balances monopoly incentives for product creation with consumers' welfare benefit of product variety. In the most empirically relevant form of variety aggregation, socially efficient outcomes entail a substantial tax on dividend income, removing the incentive for over-accumulation of capital, which takes the form of variety. Second, optimal policy induces dramatically smaller, but efficient, fluctuations of both capital and labor markets than in a calibrated exogenous policy. Decentralization requires zero intertemporal distortions and constant static distortions over the cycle. The results relate to Ramsey theory, which we show by developing welfare-relevant concepts of efficiency that take into account product creation. |
| Keywords: | zero intertemporal distortions, endogenous product variety, optimal taxation |
| JEL: | E20 E21 E22 E32 E62 |
| Date: | 2011–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:775&r=dge |
| By: | Fernando M. Martin |
| Abstract: | I study how the general and specific details of a micro founded monetary framework affect the determination of policy when the government has limited commitment. The conduct of policy depends on the interaction between the incentive to smooth distortions intertemporally and a time-consistency problem. In equilibrium, fiscal and monetary policies are distortionary, but long-run policy is not afflicted by time-consistency problems. Policy variables in specific applications of the general framework react similarly to variations in fundamentals. Nevertheless, resolving certain environment frictions affect long-run policy significantly. The response of government policy to aggregate shocks is qualitatively similar across the studied model variants. However, there are significant quantitative differences in the response of government policy to productivity shocks, mainly due to the idiosyncratic behavior of the money demand. Environments with no trading frictions display the best fit to post-war U.S. data. |
| Keywords: | Economic policy |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-026&r=dge |
| By: | Rojas-Breu, M. |
| Abstract: | The rate-of-return-dominance puzzle asks why low-return assets, like fiat money, are used in actual economies given that risk-free higher-return assets are available. As long as this question remains unresolved, most conclusions from monetary models which arbitrarily restrict the marketability properties of alternative assets to make money valuable are difficult to assess. In this paper, I provide a framework in which fiat money has value in equilibrium, even though a higher-return asset is available and there are neither restrictions nor transaction costs in using it. I suggest that the use of money is associated with frictions underlying debt contracts. In an environment where full enforcement is not feasible, the actual rate of return on assets is determined by incentives eliciting voluntary debt repayment. I show that the inflation rate or, more generally, the depreciation rate of an asset in which debts are denominated may function as a commitment device. As a result, money is used in equilibrium and the optimal inflation rate is positive. |
| Keywords: | Money, Inflation, Debt Enforcement, Banking. |
| JEL: | E41 E50 E51 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:345&r=dge |
| By: | Scott Davis |
| Abstract: | This paper investigates the effect of international financial integration on international business cycle co-movement. We first show with a reduced form empirical approach how capital market integration (equity) has a negative effect on business cycle co-movement while credit market integration (debt) has a positive effect. We then construct a model that can replicate these empirical results.> ; In the model, capital market integration is modeled as crossborder equity ownership and involves wealth effects. Credit market integration is modeled as cross-border borrowing and lending between credit constrained entrepreneurs and banks, and thus involves balance sheet effects. The wealth effect tends to reduce cross-country output correlation, but balance sheet effects serve to increase correlation as a negative shock in one country causes loan losses on the balance sheets of foreign banks.> ; In versions of the model with a financial accelerator and balance sheet effects, credit market integration has a positive effect on cyclical correlation. However, in versions of the model without the financial accelerator and balance sheet effects, credit market integration has a negative effect on cyclical correlation. |
| Keywords: | International finance ; Business cycles ; Equity ; Debt |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:89&r=dge |
| By: | Olivier LHARIDON, University of Rennes 1 - CREM-CNRS; Franck MALHERBET, Ecole Polytechnique; Sébastien PEREZ-DUARTE, BCE. |
| Abstract: | In this article, we use a stylized model of the labor market to investigate the effects of three alternative and well-known bargaining solutions. We apply the Nash, the Egalitarian and the Kalai-Smorodinsky bargaining solutions in the small firm’s matching model of unemployment. We first show that the Egalitarian and the Kalai-Smorodinsky solutions are easily implementable within search-matching economies. Second, we show that the differences between the three solution are weaker than expected. This contrasts with some of the main results obtained by the recent literature. |
| Keywords: | appariement, négociations, jeux coopératifs. |
| JEL: | C71 C78 J20 J60 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201116&r=dge |
| By: | Yves Zenou (Stockholm University, IFN, and CREAM) |
| Abstract: | We develop a search-matching model with rural-urban migration and an explicit land market. Wages, job creation, urban housing prices are endogenous and we characterize the steady-state equilibrium. We then consider three different policies: a transportation policy that improves the public transport system in the city, an entry-cost policy that encourages investment in the city and a restricting-migration policy that imposes some costs on migrants. We show that all these policies can increase urban employment but the transportation policy has much more drastic effects. This is because a decrease in commuting costs has both a direct positive effect on land rents, which discourages migrants to move to the city, and a direct negative effect on urban wages, which reduces job creation and thus migration. When these two effects are combined with search frictions, the interactions between the land and the labor markets have amplifying positive effects on urban employment. Thus, improving the transport infrastructure in cities can increase urban employment despite the induced migration from rural areas. |
| Keywords: | Rural-urban migration, transportation policies, entry costs, restricting migration |
| JEL: | D83 J61 O18 R14 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:crm:wpaper:1027&r=dge |
| By: | Ippei Fujiwara; Yasuo Hirose |
| Abstract: | Recent studies document the deteriorating performance of forecasting models during the Great Moderation. This conversely implies that forecastability is higher in the preceding era, when the economy was unexpectedly volatile. We offer an explanation for this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium models. First, we analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a prototypical New Keynesian model, we numerically demonstrate that indeterminacy due to passive monetary policy can yield superior forecastability as long as the degree of uncertainty about sunspot fluctuations is relatively small. |
| Keywords: | Forecasting ; Mathematical models ; Monetary policy |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:91&r=dge |
| By: | Cary Deck (Department of Economics, Walton College of Business, University of Arkansas); David Porter (Economic Science Institute, Chapman University); Vernon L. Smith (Economic Science Institute, Chapman University) |
| Abstract: | We construct an asset market in a finite horizon overlapping-generations environment. Subjects are tested for comprehension of their fundamental value exchange environment, and then reminded during each of 25 periods of its declining new value. We observe price bubbles forming when new generations enter the market with additional liquidity and bursting as old generations exit the market and withdrawing cash. The entry and exit of traders in the market creates an M shaped double bubble price path over the life of the traded asset. This finding is significant in documenting that bubbles can reoccur within one extended trading horizon and, consistent with previous cross-subject comparisons, shows how fluctuations in market liquidity influence price paths. We also find that trading experience leads to price expectations that incorporate fundamental value. |
| Keywords: | Asset Markets, Price Bubbles, Laboratory Experiments, Overlapping Generations |
| JEL: | C91 D83 G12 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:11-10&r=dge |
| By: | Shigeru Fujita |
| Abstract: | The purpose of this paper is to identify possible sources of the secular decline in the aggregate job separation rate over the last three decades. The author first shows that aging of the labor force alone cannot account for the entire decline. To explore other sources, he uses a simple labor matching model with two types of workers, experienced and inexperienced, where the former type faces a risk of skill obsolescence during unemployment. When the skill depreciation occurs, the worker is required to restart his career and thus suffers a drop in earnings. The author shows that a higher skill depreciation risk results in a lower aggregate separation rate and a smaller earnings loss. The key mechanisms are that the experienced workers accept lower wages in exchange for keeping the job and that the reluctance to separate from the job produces a larger mass of low-quality matches. He also presents empirical evidence consistent with these predictions. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-44&r=dge |
| By: | Marco Cozzi (Queen's University) |
| Abstract: | This paper discusses a series of Monte Carlo experiments designed to evaluate the empirical properties of heterogeneous-agent macroeconomic models in the presence of sampling variability. The calibration procedure leads to the welfare analysis being conducted with the wrong parameters. The ability of the calibrated model to correctly predict the welfare changes induced by a set of policy experiments is assessed. The results show that, for the economy and the policy reforms under analysis, the model always predicts the right sign of the welfare effects. Quantitatively, the maximum errors made in evaluating a policy change are very small for some reforms (in the order of 0.05 percentage points), but bigger for others (in the order of 0.5 pp). Finally, having access to better data, in terms of larger samples, does lead to sizable increases in the precision of the estimated welfare effects. |
| Keywords: | Monte Carlo, Heterogeneous Agents, Incomplete Markets, Ex-ante Policy Evaluation, Welfare |
| JEL: | C15 C68 D52 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1277&r=dge |