|
on Dynamic General Equilibrium |
|
Issue of 2011‒11‒01
thirty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Tim BUYSE (SHERPPA, Ghent University); Freddy HEYLEN (SHERPPA, Ghent University and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Renaat VAN DE KERCKHOVE (SHERPPA, Ghent University) |
| Abstract: | We study the effects of pension reform in a four-period OLG model for an open economy where hours worked by three active generations, education of the young, the retirement decision of older workers, and aggregate per capita growth, are endogenous. Next to the characteristics of the pension system, our model assigns an important role to the composition of fiscal policy. We find that the model explains the facts remarkably well for many OECD countries. Our simulation results prefer an intelligent pay-as-you-go pension system above a fully-funded private system. When it comes to promoting employment, human capital, growth, and welfare, positive effects in a PAYG system are the strongest when it includes a tight link between individual labor income (and contributions) and the pension, and when it attaches a high weight to labor income earned as an older worker to compute the pension assessment base. |
| Keywords: | employment by age, endogenous growth, retirement, pension reform, overlapping generations |
| JEL: | E62 H55 J22 O41 |
| Date: | 2011–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2011025&r=dge |
| By: | Pesaran, Hashem (University of Cambridge); Xu, TengTeng (Bank of Canada) |
| Abstract: | This paper proposes a theoretical framework to analyze the impacts of credit and technology shocks on business cycle dynamics, where firms rely on banks and households for capital financing. Firms are identical ex ante but differ ex post due to different realizations of firm specific technology shocks, possible leading to default by some firms. The paper advances a new modelling approach for the analysis of financial intermediation and firm defaults that takes account of the financial implications of such defaults for both households and banks. Results from a calibrated version of the model highlight the role of financial institutions in the transmission of credit and technology shocks to the real economy. A positive credit shock, defined as a rise in the loan to deposit ratio, increases output, consumption, hours and productivity, and reduces the spread between loan and deposit rates. The effects of the credit shock tend to be highly persistent even without price rigidities and habit persistence in consumption behaviour. |
| Keywords: | bank credit, financial intermediation, firm heterogeneity and defaults, interest rate spread, real financial linkages |
| JEL: | E32 E44 G21 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6027&r=dge |
| By: | Karine Constant (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Carine Nourry (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Thomas Seegmuller (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | Recently, many contributions have focused on the relationship between capital accumulation, growth and population dynamics, introducing fertility choice in macro-dynamic models. In this paper, we go one step further highlighting also the link with pollution. We develop a simple overlapping generations model with paternalistic altruism according to wealth and environmental concerns. One can therefore explain a simultaneous increase of capital intensity, population growth and pollution, namely a polluting industrialization. We show in addition that a permanent productivity shock, possibly associated to technological innovations, promotes such a polluting development process, escaping a trap where the economy is relegated to a low capital intensity, population growth and pollution. |
| Keywords: | Growth; Population dynamics; Pollution; Altruism; Development |
| Date: | 2011–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00633608&r=dge |
| By: | Zheng Liu; Pengfei Wang; Tao Zha |
| Abstract: | We argue that positive co-movements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the co-movements by incorporating two key features into a DSGE model: We introduce land as a collateral asset in firms’ credit constraints and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through the joint dynamics of land prices and business investment. |
| Keywords: | Real property |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2011-26&r=dge |
| By: | Kazuo Mino (Kyoto University); Yasuhiro Nakamoto (Kyusyu Sangyo University) |
| Abstract: | This paper explores the effect of consumption externalities on equilibrium dynamics of a standard neoclassical growth model in which there are two types of agents. To emphasize the presence of heterogenous agents, we distinguish intergroup consumption externalities from intragroup consumption externalities. We show that if there are intragroup consumption externalities alone, then the steady state equilibrium satisfies saddle-point stability and the equilibrium path of the economy is uniquely determined. In contrast, even if the intragroup consumption externalities do not exist, the intergroup external effects of consumption may yield either unstability or local indeterminacy of the steady-state equilibrium. In addition to analytical considerations, we show the relationship between the stability and the consumption externalities in numerical examples. |
| Keywords: | consumption externalities, heterogeneous agents, progressive taxation, equilibrium determinacy |
| JEL: | E52 O42 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:792&r=dge |
| By: | K. Vela Velupillai |
| Abstract: | The genesis and the path towards what has come to be called the DSGE model is traced, from its origins in the Arrow-Debreu General Equilibrium model (ADGE), via Scarf's Computable General Equilibrium model (CGE) and its applied version as Applied Computable General Equilibrium model (ACGE), to its ostensible dynamization as a Recursive Competitive Equilibrium (RCE). It is shown that these transformations of the ADGE - including the fountainhead - are computably and constructively untenable. The policy implications of these (negative) results, via the Fundamental Theorems of Welfare Economics in particular, and against the backdrop of the mathematical theory of economic policy in general, are also discussed (again from computable and constructive points of view). Suggestions for going 'beyond DSGE' are, then, outlined on the basis of a framework that is underpinned - from the outset - by computability and constructivity considerations |
| Keywords: | Computable General Equilibrium, Dynamic Stochastic General Equilibrium, Computability, Constructivity, Fundamental Theorems of Welfare Economics, Theory of Policy, Coupled Nonlinear Dynamic |
| JEL: | C02 C62 C68 D58 E61 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpas:1125&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. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:688&r=dge |
| By: | Haefke, Christian (IHS - Institute for Advanced Studies, Vienna); Reiter, Michael (IHS - Institute for Advanced Studies, Vienna) |
| Abstract: | In this paper we use information on the cyclical variation of labor market participation to learn about the aggregate labor supply elasticity. For this purpose, we extend the standard labor market matching model to allow for endogenous participation. A model that is calibrated to replicate the variability of unemployment and participation, and the negative correlation of unemployment and GDP, implies an aggregate labor supply elasticity along the extensive margin of around 0.3 for men and 0.5 for women. This is in line with recent micro-econometric estimates. |
| Keywords: | matching models, labor market participation, labor supply elasticity |
| JEL: | E24 E32 J21 J64 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6039&r=dge |
| By: | Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Pierre MALGRANGE (CEPREMAP, Paris) |
| Abstract: | This paper is a contribution to the forthcoming Edward Elgar Handbook of the History of Economic Analysis volume edited by Gilbert Faccarello and Heinz Kurz. Its aim is to introduce the reader to the main episodes that have marked the course of modern macroeconomics: its emergence after the publication of Keynes’s General Theory, the heydays of Keynesian macroeconomics based on the IS-LM model, disequilibrium and non-Walrasian equilibrium modelling, the invention of the natural rate of unemployment notion, the new classical attack against Keynesian macroeconomics, the first wave of new Keynesian models, real business cycle modelling and, finally, the second wage of new Keynesian models, i.e. DSGE models. A main thrust of the paper is the contrast we draw between Keynesian macroeconomics and stochastic dynamic general equilibrium macroeconomics. We hope that our paper will be useful for teachers of macroeconomics wishing to complement their technical material with a historical addendum. |
| Keywords: | Keynes, Lucas, IS-LM model, DSGE models |
| JEL: | B E E E |
| Date: | 2011–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2011028&r=dge |
| By: | Raouf Boucekkine (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Natali Hritonenko (Prairie View - A&M University); Yuri Yatsenko (Houston Baptist University - Houston Baptist University) |
| Abstract: | We consider an optimal growth model of an economy facing an exogenous pollution quota. In the absence of an international market of pollution permits, the economy has three instruments to reach sustainable growth: R&D to develop cleaner technologies, investment in new clean capital goods, and scrapping of the old dirty capital. The R&D technology depends negatively on a complexity component and positively on investment in this sector at constant elasticity. First, we characterize possible balanced growth paths for different parameterizations of the R&D technology. It is shown that countries with an under-performing R&D sector would need an increasing pollution quota over time to ensure balanced growth while countries with a highly efficient R&D sector would supply part of their assigned pollution permits in an international market without harming their long-term growth. Second, we study transitional dynamics to balanced growth. We prove that regardless of how large the regulation quota is, the transition dynamics leads to the balanced growth with binding quota in a finite time. In particular, we discover two optimal transition regimes: an intensive growth (sustained investment in new capital and R&D with scrapping the oldest capital goods), and an extensive growth (sustained investment in new capital and R&D without scrapping the oldest capital). |
| Keywords: | Sustainable growth; vintage capital; endogenous growth; R&D; pollution quotas |
| Date: | 2011–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00632887&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. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:690&r=dge |
| By: | Postel-Vinay, Fabien (University of Bristol); Turon, Hélène (University of Bristol) |
| Abstract: | Job-to-job turnover provides a way for employers to escape statutory firing costs, as unprofitable workers may willfully quit their job on receiving an outside offer, thus sparing their incumbent employer the firing costs. Furthermore, employers can induce their unprofitable workers to accept outside job offers that they would otherwise reject by offering voluntary severance packages, which are less costly than the full statutory firing cost. We formalize those mechanisms within an extension of the Diamond-Mortensen-Pissarides (DMP) matching model that allows for employed job search and negotiation over severance packages. We find that, while essentially preserving most standard qualitative predictions of the DMP model without employed job search, our model explains why higher firing costs intensify job-to-job turnover at the expense of transitions out of unemployment. We further find that allowing for on-the-job search markedly changes the quantitative predictions of the DMP model regarding the impact of firing costs on unemployment and employment flows: ignoring on-the-job search leads one to strongly underestimate the negative impact of firing costs on unemployment. |
| Keywords: | firing costs, on-the-job search, mutual consent, minimum wage |
| JEL: | J33 J64 E24 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6023&r=dge |
| By: | Carine Nourry (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Thomas Seegmuller (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | We re-examine the destabilizing role of balanced-budget fiscal policy rules based on consumption taxation. Using a one-sector model with infinitely-lived households, and assuming that preferences are of the Greenwood-Hercovitz-Huffman [8] (GHH) type, we show that non-linear consumption taxation may destabilize the economy, promoting expectation-driven fluctuations, if the tax rate is counter-cyclical. We also exhibit a Laffer curve, which explains the multiplicity of steady states when the tax rate is counter-cyclical. All these results are mainly driven by the absence of income effect. Finally, a numerical illustration shows that consumption taxation may be a source of instability for most OECD countries. |
| Keywords: | Indeterminacy; endogenous business cycles; consumption taxes; balanced-budget rule; infinite-horizon model |
| Date: | 2011–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00633609&r=dge |
| By: | Raouf Boucekkine (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Blanca Martínez (Fundamentos del Análisis Económico - Universidad Complutense de Madrid); Ramon Ruiz-Tamarit (Department of Economic Analysis - Universitat de València - Universitat de Valeencia) |
| Abstract: | We study the impact of demographic change on economic short and long-term dynamics in an enlarged Lucas-Uzawa model with intratemporal altruism. Demographics are summarized by population growth rate and initial size. In contrast to the existing literature, the long-run level effects of demographic changes, i.e. their impact on the levels of variables along the balanced growth paths, are deeply characterized in addition to the more standard growth effects. It is shown that the level effect of population growth is a priori ambiguous due to the interaction of three causation mechanisms, a standard one (dilution) and two non-standard, featuring in particular the transmission of demographic shocks into human capital accumulation. Overall, the sign of the level effect of population growth depends on preference and technology parameters, and on the initial conditions as well. In contrast, we prove that the long-run level effect of population size on per capita income is negative while its growth effect is zero. Finally, we show that the model is able to replicate complicated time relationships between economic and demographic changes. In particular, it entails a negative effect of population growth on per capita income, which dominates in the initial periods, and a positive effect which restores a positive correlation between population growth and economic performance in the long-run. |
| Keywords: | Human Capital; Population Growth; Population Size; Endogenous Growth; Level Effect; Growth Effect |
| Date: | 2011–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00632888&r=dge |
| By: | Di Bartolomeo Giovanni; Tirelli Patrizio; Acocella Nicola |
| Abstract: | Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. This is captured by assuming that nominal wages are pre-determined. As a consequence, wage setters act as Stackelberg leaders, whereas in the typical New Keynesian model the wage-setting rule implies that they play a Nash game. We present a DSGE New Keynesian model with pre-determined wages and money entering the representative household's utility function and show how these assumptions are sufficient to identify an inverse relationship between the inflation target and the wage markup (and thus employment) both in the short and the long run. This is due to the complementary effects that wage claims and the inflation target have on money holdings. Model estimates suggest that a moderate long-run inflation rate generates non-negligible output gains. |
| Keywords: | E52, E58, J51, E24 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0079&r=dge |
| By: | Yunfang Hu (Tohoku University); Kazuo Mino (Kyoto University) |
| Abstract: | This paper explores a dynamic two-country model with production externalities in which capital goods are not traded and international lending and borrowing are allowed. Unlike the integrated world economy model based on the Heckscher-Ohlin setting, our model yields indeterminacy of equilibrium under a wider set of parameter values than in the corresponding closed economy model. Our finding demonstrates that the assumption on trade structure would be a relevant determinant in considering the relation between globalization and economic volatility. |
| Keywords: | two-country model, non-traded goods, equilibrium indeterminacy, social constant returns |
| JEL: | F43 O41 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:791&r=dge |
| By: | Anne BUCHER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | To investigate why young workers exhibit higher unemployment and separation rates, I extend the basic matching model of Pissarides by incorporating learning on match quality as Pries and Rogerson (2005). Match quality is heterogenous and is inferred from the output performance. Because matches revealed to be bad are dissolved, the separation risk decreases with job tenure. Within the framework, the specificity of youth only comes from their entry position on the labor market. Discrepancies between age-groups arise as young workers are mainly unemployed searching for their first job, or newly employed facing higher unemployment risks. The model, calibrated above French data, performs well in reproducing the intergenerational gap in worker separation and unemployment rates. |
| Date: | 2011–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2011027&r=dge |
| By: | Alexander K. Karaivanov; Fernando M. Martin |
| Abstract: | This paper analyzes dynamic risk-sharing contracts between profit-maximizing insurers and risk-averse agents who face idiosyncratic income uncertainty and may self-insure through savings. We study Markov-perfect insurance contracts in which neither party can commit beyond the current period. We show that the limited commitment assumption on the insurer's side is only restrictive when he is endowed with a rate of return advantage and the agent has sufficiently large initial assets. In such a case, the consumption profile is distorted relative to the first-best. In a Markov-perfect equilibrium, the agent's asset holdings determine his period outside option and are thus, an integral part of insurance contracts, unlike the case when the insurer can commit. Whether the parties can contract on the agent's savings decisions or not affects the agreement as long as the insurer makes positive profits. |
| Keywords: | Contracts ; Risk |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-029&r=dge |
| By: | George A. Waters (Department of Economics, Illinois State University) |
| Abstract: | Quantity rationing of credit, when ?firms are denied loans, has greater potential to explain macroeconomics ?fluctuations than borrowing costs. This paper develops a DSGE model with both types of financial frictions. A deterioration in credit market con?fidence leads to a temporary change in the interest rate, but a persistent change in the fraction of ?firms receiving ?financing, which leads to a persistent fall in real activity. Empirical evidence confi?rms that credit market con?fidence, measured by the survey of loan officers, is a signi?cant leading indicator for capacity utilization and output, while borrowing costs, measured by interest rate spreads, is not. |
| Keywords: | Quantity Rationing, Credit, VAR |
| JEL: | E10 E24 E44 E50 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ils:wpaper:20111005&r=dge |
| By: | Parag Waknis (University of Connecticut and University of Massachusetts Dartmouth) |
| Abstract: | This paper studies the nature of optimal monetary policy under a Leviathan monetary authority in a microfounded model of money based on ?. Such a monetary authority is a reality whenever and wherever fiscal policy is a primary driver of the monetary policy. Under no commitment, we characterize and solve for a Markov perfect equilibrium as well as for equilibrium with reputation concerns. For the Markov equilibrium, a generalized Euler equation is derived to characterize optimal policy that trades off the current benefit of increasing consumption against the reduced ability to do so in the future. Under reputation equilibrium, centralized market interaction is modeled as an infinitely repeated game of perfect monitoring, between a Leviathan monetary authority (a large player) and the economic agents (small players). Such a game has multiple equilibriums but the large-small player dynamics pins down the equilibrium set of payoffs and features less than maximum inflation tax. Depending on howwe interpret the Leviathan central bank, the factors determining the realized equilibrium differ. Higher fiscal profligacy of the underlying political authority leads to a higher monetary growth rate and inflation tax, while existence of threat of competition in case of a private money supplier or threat of external aggression in case of a self interested sovereign leads to a lower one. The realized equilibrium monetary growth rate and the associated inflation tax is thus, affected by the intensity of context contingent factors. Concentrating only on Markov strategies in this repeated game shows that the Markov perfect equilibrium features maximum inflation tax. |
| Keywords: | Endogenous monetary policy, Leviathan, central bank, inflation tax, money search |
| JEL: | E52 E61 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2011-20&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. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:689&r=dge |
| By: | Peter Skott (University of Massachusetts Amherst); Soon Ryoo (Adelphi University) |
| Abstract: | Fiscal policy is needed to avoid dynamic inefficiency and maintain full employment in a modified Diamond OLG model with imperfect competition. A distributionally neutral tax scheme can maintain full employment in the face of variations in .household confidence.. No variations in taxes will be needed if households correctly anticipate future taxes: the tax policy functions as an insurance scheme. JEL Categories: E62, E22 |
| Keywords: | Public debt, Keynesian OLG model, dynamic effeciency, confidence. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2011-25&r=dge |
| By: | Pedro Garcia Duarte |
| Abstract: | Macroeconomics, or the science of fluctuations in aggregate activity, has always been portrayed as a field composed of competing schools of thought and in a somewhat recurrent state of disarray. Nowadays, macroeconomists are proud to announce that a new synthesis characterizes their field: no longer are there fights and disarray, but rather convergence and progress. I want to discuss how modern macroeconomists see the emergence of such a consensus and, therefore, how they see the history of their sub-discipline. In particular, I stress the role played in the making of such a consensus by a particular understanding of the microfoundations that macroeconomics needs. |
| Keywords: | new neoclassical synthesis; microfoundations; DSGE models; consensus |
| JEL: | B22 B20 E30 |
| Date: | 2011–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2011wpecon2&r=dge |
| By: | Parag Waknis (University of Connecticut and University of Massachusetts Dartmouth) |
| Abstract: | In this paper, we use a dual currency Lagos-Wright model to explore the nature of optimal monetary policy under currency competition using different timing protocols. The central banks are utility maximizing players. To characterize equilibrium with reputation, we model the centralized market sub period of the Lagos-Wright economy as an infinitely repeated game between the two Leviathan central banks (long run players) and a continuum of competitive agents (short run players). Concentrating on Markov strategies in such a game shows that the Markov perfect equilibrium features highest inflation tax. However, allowing for reputation concerns improves the inflation outcome. Such a game typically features multiple equilibriums but the competition between the banks allows the use of renegotiation proof-ness as an equilibrium selection mechanism. Accordingly, equilibrium featuring the lowest inflation tax is weakly renegotiation proof, suggesting that better inflation outcome is more likely in the case of Leviathan currency competition than in the single Leviathan bank case. |
| Keywords: | Monetary policy, currency competition, Leviathan, inflation tax, money search |
| JEL: | E52 E61 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2011-21&r=dge |
| By: | Karsten Jeske (Mellon Capital Management Corporation, San Francisco, CA); Dirk Krueger (Department of Economics, University of Pennsylvania); Kurt Mitman (Department of Economics, University of Pennsylvania) |
| Abstract: | This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households. |
| Keywords: | Housing, Mortgage Market, Default Risk, Government-Sponsored Enterprises |
| JEL: | E21 G11 R21 |
| Date: | 2011–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-034&r=dge |
| By: | Jeske, Karsten; Krueger, Dirk; Mitman, Kurt |
| Abstract: | This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households. |
| Keywords: | Default Risk; Government-Sponsored Enterprises; Housing; Mortgage Market |
| JEL: | E21 G11 R21 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8624&r=dge |
| By: | Alexander K. Karaivanov; Fernando M. Martin |
| Abstract: | We revisit the role of limited commitment in a dynamic risk-sharing setting with private information. We show that a Markov-perfect equilibrium, in which agent and insurer cannot commit beyond the current period, and an infinitely-long contract to which only the insurer can commit, implement identical consumption, effort and welfare outcomes. Unlike contracts with full commitment by the insurer, Markov-perfect contracts feature non-trivial and determinate asset dynamics. Numerically, we show that Markov-perfect contracts provide sizable insurance, especially at low asset levels, and are able to explain a significant part of wealth inequality beyond what can be explained by self-insurance. The welfare gains from resolving the commitment friction are larger than those from resolving the moral hazard problem at low asset levels, while the opposite holds for high asset levels. |
| Keywords: | Moral hazard ; Risk |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-030&r=dge |
| By: | R. Anton Braun (Federal Reserve Bank of Atlanta); Tomoyuki Nakajima (Kyoto University) |
| Abstract: | We provide two ways to reconcile small values of the intertemporal elasticity of substitution (IES) that range between 0.35 and 0.5 with empirical evidence that the IES is large. This is done using a model in which all agents have identical preferences and the same access to asset markets. We also conduct an encompassing test. That test indicates that specifications of the model with small values of the IES are more plausible than specifications with a large IES. |
| Keywords: | Uncertainty; Intertemporal elasticity of substitution; Risk aversion; Business Cycles; Growth. |
| JEL: | E21 E32 O41 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:788&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. Bargaining with intermediaries depends on how they bargain with downstream intermediaries, leading to interesting holdup problems. We discuss the roles of buyers and sellers in bilateral exchange, and how to interpret prices. We develop a particular bargaining solution and relate it to other solutions. We also illustrate how bubbles can emerge in the value of inventories. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:691&r=dge |
| By: | Kartik B. Athreya; Xuan S. Tam; Eric R. Young |
| Abstract: | Loan guarantees are arguably the most widely used policy intervention in credit markets, especially for consumers. This may be natural, as they have several features that, a priori, suggest that they might be particularly effective in improving allocations. However, despite this, little is actually known about the size of their effects on prices, allocations, and welfare. ; In this paper, we provide a quantitative assessment of loan guarantees, in the context of unsecured consumption loans. Our work is novel as it studies loan guarantees in a rich dynamic model where credit allocation is allowed to be affected by both limited commitment frictions and private information. ; Our findings suggest that consumer loan guarantees may be a powerful tool to alter allocations that, if carefully arranged, can improve welfare, sometimes significantly. Specifically, our key findings are that (i) under both symmetric and asymmetric information, guaranteeing small consumer loans nontrivially alters allocations, and strikingly, yields welfare improvements even after a key form of uncertainty—one's human capital level—has been realized, (ii) larger guarantees change allocations very significantly, but lower welfare, sometimes for all household-types, and (iii) substantial further gains are available when guarantees are restricted to households hit by large expenditure shocks. |
| Keywords: | Financial markets ; Consumer finance ; Bankruptcy ; Credit ; Loans |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:11-06&r=dge |
| By: | Natalia, Khorunzhina; Wayne Roy, Gayle |
| Abstract: | This paper investigates the existence and degree of variation across house holds and over time in the intertemporal elasticity of substitution (IES) and the coefficient of relative risk aversion (RRA) that is generated by habit forming preferences. To do so, we develop a new nonlinear GMM estimator to investigate the presence of habit formation in household consumption using data from the Panel Study of Income Dynamics. Our method accounts for classical measurement errors in consumption without parametric assumptions on the distribution of measurement errors. The estimation results support habit formation in food consumption. Using these estimates, we develop bounds for the expectation of the implied heterogenous intertemporal elasticity of substitution and relative risk aversion that account for measurement errors and compute asymptotically valid confidence intervals on these bounds. We find that these parameters display significant variation across households and over time. |
| Keywords: | Nonlinear models; Classical measurement errors; Habit formation; Intertemporal elasticity of substitution; Relative risk aversion |
| JEL: | C13 D12 D91 C33 E21 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34329&r=dge |