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on Dynamic General Equilibrium |
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Issue of 2011‒10‒22
seventeen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Momota, Akira; Horii, Ryo |
| Abstract: | This paper examines the effect of the timing of childbirth on capital accumulation and welfare in a simple overlapping generations model, where each agent lives for four periods and works for two periods. We show that delayed childbearing not only reduces population, but also generates fluctuations in the age composition of workers in the labor force. This causes the aggregate saving rate to fluctuate, which leads to cycles in the capital-labor ratio. When all agents delay childbearing, we analytically show that both the capital-labor ratio and the welfare of all agents can fall in the long run, despite the population decline. When a fraction of agents delay childbearing, it has differential welfare effects on agents depending on their positions in the demographic cycles. The effects of lower lifetime fertility and technological progress are also examined. |
| Keywords: | Economic growth; Overlapping generations; Cycles; Population; Delayed childbearing |
| JEL: | J13 O41 |
| Date: | 2011–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34088&r=dge |
| By: | Görtz, Christoph; Tsoukalas, John |
| Abstract: | We develop a two-sector DSGE model with financial intermediation to investigate the role of news as a driving force of the business cycle. We find that news about future capital quality is a significant source of aggregate fluctuations, accounting for around 37% in output variation in cyclical frequencies. Financial intermediation is essential for the importance and propagation of capital quality shocks. In addition, news shocks in capital quality generate aggregate and sectoral comovement as in the data and is consistent with procyclical movements in the value of capital. From a historical perspective, news shocks to capital quality are to a large extent responsible for the recession following the 1990s investment boom and the latest recession following the financial crisis, but played a much smaller role during the recession at the beginning of the 1990s. This is in line with the belief that revisions of overoptimistic expectations contributed to the last two recessions while movements in fundamentals played a much bigger role for the recession at the beginning of the 1990s. |
| Keywords: | News; Anticipation effects; Business cycles; DSGE; Bayesian estimation |
| JEL: | E2 E3 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34113&r=dge |
| By: | Bishnu, Monisankar; Ghate, Chetan; Gopalakrishnan, Pawan |
| Abstract: | We construct a model of endogenous investment specific techological change in which the stock of public capital influences the real price of capital goods. We show that the growth and welfare maximizing tax rates coincide in the planned economy. When factor income taxes finance public investment infintely many tax-subsidy combinations can decentralize the planner's allocations. The optimal capital income tax can be positive in this environment. We then augment the model to incorporate administrative costs. A unique combination of factor income taxes now decentralizes the planner's allocations. A simple calibration exercise suggests that changes in factor income taxes does not cause a significant change in the optimal growth rate or welfare. Our framework broadens the environment in which investment specific technological change occurs, and characterizes the role of optimal factor income taxation in raising long run growth and welfare. |
| Keywords: | Investment Specific Technological Change; Endogenous Growth; Capital Income Taxation; Public Policy; Administrative Costs |
| JEL: | E2 H2 E6 O4 |
| Date: | 2011–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34111&r=dge |
| By: | Liang Wang (Department of Economics, University of Hawaii) |
| Abstract: | This paper studies the effect of inflation on welfare in a monetary economy with price dispersion and consumer search. When facing greater price dispersion with higher inflation, consumers search harder for lower prices, and increased search raises welfare by intensifying market competition. Producers post inefficiently high prices, and this creates a welfare loss. Both mechanisms are affected by the consumer's monetary balance. I develop a general equilibrium model with search frictions to incorporate the interrelationship of money, search, and endogenous price dispersion. Inflation aspects welfare through three channels: the real balance channel, the search channel, and the price posting channel. I calibrate the model to U.S. data and find that the welfare cost of 10% annual inflation is worth 3.23% of consumption; however, if either the real balance or the price posting channel is closed, the welfare cost significantly decreases to less than 0.15% of consumption. The price posting channel amplifies the welfare-diminishing effect of the real balance channel, and the aggregated negative effect exceeds the positive effect due to the search channel. The search cost only generates a negligible welfare loss. |
| Keywords: | Inflation, Interest Rates, Money, Price Dispersion, Search, Welfare |
| JEL: | E31 E40 E50 D83 |
| Date: | 2011–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201113&r=dge |
| By: | Michaillat, Pascal |
| Abstract: | This paper develops a theory characterizing the effects of fiscal policy on unemployment over the business cycle. The theory is based on a model of equilibrium unemployment in which jobs are rationed in recessions. Fiscal policy in the form of government spending on public-sector jobs reduces unemployment, especially during recessions: the fiscal multiplier---the reduction in unemployment rate achieved by spending one dollar on public-sector jobs---is positive and countercyclical. Although the labor market always sees vast flows of workers and a great deal of matching, recessions are periods of acute job shortage without much competition for workers among recruiting firms. Hence hiring in the public sector reduces unemployment effectively because it does not crowd out hiring in the private sector much. An implication is that empirical studies should control for the state of the economy when fiscal policies are implemented to estimate accurately the amplitude of fiscal multipliers in recessions. |
| Keywords: | business cycle; fiscal multiplier; job rationing; matching frictions; unemployment |
| JEL: | E24 E32 E62 J64 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8610&r=dge |
| By: | Robert E. Lucas, Jr.; Benjamin Moll |
| Abstract: | We analyze a model economy with many agents, each with a different productivity level. Agents divide their time between two activities: producing goods with the production-related knowledge they already have, and interacting with others in search of new, productivity-increasing ideas. These choices jointly determine the economy’s current production level and its rate of learning and real growth. Individuals’ time allocation decisions depend on the knowledge distribution because the productivity levels of others determine their own chances of improving their productivities through search. The time allocations of everyone in the economy in turn determine the evolution of its knowledge distribution. We construct the balanced growth path for this economy, thereby obtaining a theory of endogenous growth that captures in a tractable way the social nature of knowledge creation. We also study the allocation chosen by an idealized planner who takes into account and internalizes the external benefits of search, and tax structures that implement an optimal solution. Finally, we provide two examples of alternative learning technologies, as concrete illustrations of other directions that might be pursued. |
| JEL: | O0 O15 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17495&r=dge |
| By: | Jonathan Chiu; Cesaire Meh; Randall Wright |
| Abstract: | The generation and implementation of ideas, or knowledge, is crucial for economic performance. We study this process in a model of endogenous growth with frictions. Productivity increases with knowledge, which advances via innovation, and with the exchange of ideas from those who generate them to those best able to implement them (technology transfer). But frictions in this market, including search, bargaining, and commitment problems, impede exchange and thus slow growth. We characterize optimal policies to subsidize research and trade in ideas, given both knowledge and search externalities. We discuss the roles of liquidity and financial institutions, and show two ways in which intermediation can enhance efficiency and innovation. First, intermediation allows us to finance more transactions with fewer assets. Second, it ameliorates certain bargaining problems, by allowing entrepreneurs to undo otherwise sunk investments in liquidity. We also discuss some evidence, suggesting that technology transfer is a significant source of innovation and showing how it is affected by credit considerations. |
| JEL: | O12 O16 O3 O31 O33 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17512&r=dge |
| By: | Wang, Gaowang |
| Abstract: | This paper reexamines the relationship between the time preference rate and the real interest rate in the neoclassical growth model by introducing Keynesian time preference. It is shown that the long-run behavior of the neoclassical growth model persists. When introduucing money by money-in-utility, money is superneutral and the optimal monetary policy is the Friedman rule. |
| Keywords: | Keynesian time preference; Monetary Superneutrality; Optimum Quantity of Money |
| JEL: | O42 E31 E5 |
| Date: | 2011–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34063&r=dge |
| By: | Allen Head; Lucy Qian Liu; Guido Menzio; Randall Wright |
| Abstract: | Why do some sellers set nominal prices that apparently do not respond to changes in the aggregate price level? In many models, prices are sticky by assumption; here it is a result. We use search theory, with two consequences: prices are set in dollars, since money is the medium of exchange; and equilibrium implies a nondegenerate price distribution. When the money supply increases, some sellers may keep prices constant, earning less per unit but making it up on volume, so profit stays constant. The calibrated model matches price-change data well. But, in contrast with other sticky-price models, money is neutral. |
| JEL: | E0 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17520&r=dge |
| By: | Chao Gu; Randall Wright |
| Abstract: | We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies. |
| JEL: | E32 E44 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17510&r=dge |
| By: | Ko, Jun-Hyung |
| Abstract: | This paper investigates the inflation rate that should be set as the target for the central bank. To this end, we develop a two-sector economy model in the existence of long-lived durables. In contrast to recent studies that have been conducted on how monetary policy can affect the role of durable goods, which examine only the production sector, we introduce a service market. Accordingly, we can endogenously derive the traditional user cost equation and the price-rent ratio. Our main findings are as follows: First, even in cases where both service and production sectors are equally sticky, the user cost is more important than the purchase price, from the perspective of welfare loss. Second, in contrast to the situation in the economy that includes only nondurables, a temporary shock persistently influences output fluctuations. However, this does not mean that welfare loss increases as the degree of durability increases. Third, welfare is found to be a strictly increasing function of durability. |
| Keywords: | Durables; User cost; Price-rent ratio; Optimal monetary policy |
| JEL: | E31 E52 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34147&r=dge |
| By: | Hippolyte D'Albis (LERNA - Economie des Ressources Naturelles - INRA : UR1081 - CEA : DPG - Université des Sciences Sociales - Toulouse I, TSE - Toulouse School of Economics - Toulouse School of Economics); Stefan Ambec (LERNA - Economie des Ressources Naturelles - INRA : UR1081 - CEA : DPG - Université des Sciences Sociales - Toulouse I, TSE - Toulouse School of Economics - Toulouse School of Economics) |
| Abstract: | In this article, overlapping generations are extracting a natural resource over an infinite future. We examine the fair allocation of resource and compensations among generations. Fairness is defined by core lower bounds and aspiration upper bounds. The core lower bounds require that every coalition of generations obtains at least what it could achieve by itself. The aspiration upper bounds require that no coalition of generations enjoys a higher welfare than it would achieve if nobody else extracted the resource. We show that, upon existence, the allocation that satisfies the two fairness criteria is unique and assigns to each generation its marginal contribution to the preceding generation. Finally, we describe the dynamics of such an allocation. |
| Keywords: | Natural Resources; Sustainable; Core; Fairness; Overlapping generations |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00630440&r=dge |
| By: | Yiting Li; Guillaume Rocheteau; Pierre-Olivier Weill |
| Abstract: | We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset's resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing. |
| JEL: | E41 E44 E5 E58 G1 G12 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17500&r=dge |
| By: | Cervini, María; Ramos , Xavier; Silva, José I. |
| Abstract: | We study wage effects of two important elements of non-wage labour costs: firing costs and payroll taxes. We exploit a reform that introduced substantial reduction in these two provisions for unemployed workers aged less than thirty and over forty five years. Theoretical insights are gained with a matching model with heterogeneous workers, which predict a positive effect on wages for new entrant workers but an ambiguous effect for incumbent workers. Difference-in-differences estimates, which account for the endogeneity of the treatment status, are consistent with our model predictions and suggest that decreased firing costs and payroll taxes have a positive effect on wages of new entrants. We find larger effects for older than for younger workers and for men than for women. Calibration and simulation of the model corroborate such positive effect for new entrants and also show a positive wage effect for incumbents. The reduction in firing costs accounts, on average, for one third of the overall wage increase. |
| Keywords: | Dismissal costs; payroll tax; evaluation of labour market reforms; difference-in-difference; matching model; Spain |
| JEL: | D31 J31 C23 |
| Date: | 2011–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34033&r=dge |
| By: | John Y. Campbell; João F. Cocco |
| Abstract: | This paper solves a dynamic model of a household's decision to default on its mortgage, taking into account labor income, house price, inflation, and interest rate risk. Mortgage default is triggered by negative home equity, which results from declining house prices in a low inflation environment with large mortgage balances outstanding. Not all households with negative home equity default, however. The level of negative home equity that triggers default depends on the extent to which households are borrowing constrained. High loan-to-value ratios at mortgage origination increase the probability of negative home equity. High loan-to-income ratios also increase the probability of default by tightening borrowing constraints. Comparing mortgage types, adjustable-rate mortgage defaults occur when nominal interest rates increase and are substantially affected by idiosyncratic shocks to labor income. Fixed-rate mortgages default when interest rates and inflation are low, and create a higher probability of a default wave with a large number of defaults. Interest-only mortgages trade off an increased probability of negative home equity against a relaxation of borrowing constraints, but overall have the highest probability of a default wave. |
| JEL: | E21 G21 G33 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17516&r=dge |
| By: | Yuet-Yee Wong; Randall Wright |
| Abstract: | We study bilateral exchange, both direct trade and indirect trade that happens through chains of intermediaries or middlemen. We develop a model of this activity and present applications. This illustrates how, and how many, intermediaries get involved, and how the terms of trade are determined. We show how bargaining with one intermediary depends on upcoming negotiations with downstream intermediaries, leading to holdup problems. We discuss the roles of buyers and sellers in bilateral exchanges, and how to interpret prices. We develop a particular bargaining solution and relate it to other solutions. In addition to contrasting our framework with other models of middlemen, we discuss the connection to different branches of search theory. We also illustrate how bubbles can emerge in intermediation. |
| JEL: | D2 D4 D83 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17511&r=dge |
| By: | Pashchenko, Svetlana; Porapakkarm, Ponpoje |
| Abstract: | One of the major problems of the U.S. health insurance market is that it leaves individuals exposed to reclassification risk. Reclassification risk arises because the health conditions of individuals evolve over time, while a typical health insurance contract only lasts for one year. A change in the health status can lead to a significant change in the health insurance premium. We study how costly this reclassification risk is for the welfare of consumers. More specifically, we use a general equilibrium model to quantify the implications of introducing guaranteed renewable contracts into the economy calibrated to replicate the key features of the health insurance system in the U.S. Guaranteed renewable contracts are private insurance contracts that can provide protection against reclassification risk even in the absence of consumer commitment or government intervention. We find that though guaranteed renewable contracts provide a good insurance against reclassification risk, the welfare effects from introducing this type of contracts are small. In other words, the presence of reclassification risk does not impose large welfare losses on consumers. This happens because some institutional features in the current U.S. system substitute for the missing explicit contracts that insure reclassification risk. In particular, a good protection against reclassification risk is provided through employer-sponsored health insurance and government means-tested transfers. |
| Keywords: | health insurance; reclassification risk; dynamic insurance; guaranteed renewable contracts; general equilibrium |
| JEL: | I11 G22 D91 D52 D58 D60 |
| Date: | 2011–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34189&r=dge |