|
on Dynamic General Equilibrium |
| By: | Viktors Ajevskis; Kristine Vitola |
| Abstract: | The severe repercussions of the latest financial crisis highlighted the crucial role of the financial sector in the propagation of economic and financial shocks. In this paper we analyse the role of financial market frictions in business cycle fluctuations and in the transmission of monetary policy in a small open economy pursuing fixed exchange rate strategy. To this end, we develop and estimate a DSGE model for Latvia with financially constrained households and firms, embedding monopolistically competitive banking sector facing capital constraints. This general equilibrium framework is useful to study the potential of macro-prudential tools and their interaction with other macroeconomic and monetary policy instruments. Our findings suggest that the banking sector mutes the response of bank retail rates to an increase in the foreign policy rate and thus attenuates the drop in real aggregates. A permanent bank capital contraction subdues output, consumption, investment, domestic lending and foreign borrowing in the long run. Under a temporary shock to bank capital, asset prices and housing investment are first to recover, for loans it takes several years, while output, consumption and capital investment rebound at a slower pace. In the long run, a tighter capital requirement leads to higher output, capital investment and domestic lending while reducing household deposits and foreign liabilities of banks. |
| Keywords: | DSGE, DSGE models, Bayesian estimation, banks, financial frictions, macro-financial linkages, small open economy |
| JEL: | C11 E32 E43 E44 F41 R21 |
| Date: | 2011–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:201103&r=dge |
| By: | Julien Albertini; Günes Kamber; Michael Kirker (Reserve Bank of New Zealand) |
| Abstract: | This paper investigates labour market dynamics in New Zealand by estimating a structural small open economy model enriched with standard search and matching frictions in the labour market. We show that the model its the business cycle features of key macroeconomic variables reasonably well and provides an appealing monetary transmission mechanism. We then extend our analysis to understand the driving forces behind labour market variables. Our findings suggest that the bulk of variation in labour market variables is solely explained by disturbances pertaining to the labour market. |
| JEL: | E32 J6 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2011/04&r=dge |
| By: | Pissarides, Christopher A. (London School of Economics) |
| Abstract: | Christopher A. Pissarides delivered his Prize Lecture on 8 December 2010 at Aula Magna, Stockholm University. |
| Keywords: | Search frictions; |
| JEL: | E24 J64 |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2010_009&r=dge |
| By: | Mortensen, Dale T. (Northwestern University) |
| Abstract: | Dale T. Mortensen delivered his Prize Lecture on 8 December 2010 at Aula Magna, Stockholm University. |
| Keywords: | Search frictions; |
| JEL: | E24 J64 |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2010_008&r=dge |
| By: | Jonathan Chiu; Césaire 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. |
| Keywords: | Economic models; Potential output; Productivity |
| JEL: | E4 G2 O3 O4 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-25&r=dge |
| By: | Guangling (Dave) Liu (Department of Economics, University of Stellenbosch); Nkhahle Seeiso (Department of Economics, University of Stellenbosch) |
| Abstract: | This paper studies the impact of bank capital regulation on business cycle fluctuations. In particular, we study the procyclical nature of Basel II claimed in the literature. To do so, we adopt the Bernanke et al. (1999) ``financial accelerator" model (BGG), to which we augment a banking sector. We first study the impact of a negative shock to entrepreneurs' net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impact of a negative net worth shock on business cycle fluctuations when the minimum capital requirement increases from 8 percent to 12 percent. Our comparison studies between the augmented BGG model with Basel I bank regulation and the one with Basel II bank regulation suggest that, in the presence of credit market frictions and bank capital regulation, the liquidity premium effect further amplifies the financial accelerator effect through the external finance premium channel, which, in turn, contributes to the amplification of Basel II procyclicality. Moreover, under Basel II bank regulation, in response to a negative net worth shock, the liquidity premium and the external finance premium rise much more if the minimum bank capital requirement increases, which, in turn, amplify the response of real variables. Finally, small adjustments in monetary policy can result in stronger response in the real economy, in the presence of Basel II bank regulation in particular, which is undesirable. |
| Keywords: | Business cycle fluctuations, financial accelerator, bank capital requirement, monetary policy |
| JEL: | E32 E44 G28 E50 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers146&r=dge |
| By: | Bruno Decreuse (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); André Zylberberg (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | We propose a search equilibrium model in which homogenous rms post wages along with a vacancy to attract job-seekers, while homogenous unemployed workers invest in costly job-seeking. The key innovation relies on the organization of the search market and the search behavior of the job-seekers. The search market is continuously segmented by wage level, individuals can spread their search investment over the di¤erent sub-markets, and search intensity has marginal decreasing returns on each sub-market. We show that there exists a non-degenerate equilibrium wage distribution. The density of this wage distribution is increasing at low wages, and decreasing at high wages. Under additional restrictions, it is hump-shaped, and it can be right-tailed. Our results are illustrated by an example originating a Beta wage distribution. |
| Keywords: | Search e¤ort; Segmented markets; Equilibrium wage dispersion |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00638150&r=dge |
| By: | Keyu Jin; Nan Li |
| Abstract: | Positive investment comovements across OECD economies as observed in the data are difficult to replicate in open-economy real business cycle models, but also vary substantially in degree for individual country-pairs. This paper shows that a two-country stochastic growth model that distinguishes sectors by factor intensity (capital-intensive vs. labor-intensive) gives rise to an endogenous channel of the international transmission of shocks that first, can substantially ameliorate the "quantity anomalies" that mark large open-economy models, and second, generate a cross-sectional prediction that is strongly supported by the data: investment correlations tend to be stronger for country-pairs that exhibit greater disparity in the factor-intensity of trade. In addition, three new pieces of evidence support the central mechanism: (1) the production composition of capital versus labor-intensive sectors changes over the business cycle; (2) the prices of capital-intensive goods and labor-intensive goods are respectively, procyclical and countercyclical; (3) a positive productivity shock in the U.S. tilts the composition of production towards capital-intensive sectors in other countries. |
| Keywords: | International business cycles, international comovement, composition effects |
| JEL: | F41 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1090&r=dge |
| By: | Obstbaum, Meri (Aalto University School of Economics and Ministry of Finance) |
| Abstract: | This paper shows how frictions in the labour market shape the responses of the economy to government spending shocks. The open economy New Keynesian DSGE model is extended by labour market frictions of the Mortensen-Pissarides type and a detailed description of fiscal policy. The nature of offsetting fiscal measures is found to be critical for the effects of fiscal stimulus, due to the different effects of different tax instruments on the labour market. Specifically, shifting the debt-stabilizing burden towards distortionary labour taxes has detrimental effects on the labour market outcome and on overall economic performance in a flexible wage regime. The results show that wage rigidity increases the effectiveness of fiscal policy in the short term but leads to a worse longer term result including unemployment exceeding steady state levels. The analysis suggests that a closer look at the functioning of labour markets may help to identify fiscal policy transmission channels not captured by the standard New Keynesian model. |
| Keywords: | search frictions; wage bargaining; wage and price rigidity; fiscal rules; debt stabilization |
| JEL: | E62 J41 |
| Date: | 2011–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2011_016&r=dge |
| By: | John Mc Breen; Florence Goffette-Nagot; Pablo Jensen |
| Abstract: | We simulate a closed rental housing market with search and matching frictions, in which both landlord and tenant agents may be imperfectly informed of the characteristics of the market. The model hypotheses are set so as to match a rent posting search model in the spirit of search models of the labor market. In the simulations, landlords decide what rent to post based on the expected effect of the rent on the time-on-the-market (TOM) required to find a tenant. Each tenant observes their idiosyncratic preference for a random offer and decides whether to accept the offer or continue searching, based on their imperfect knowledge of the distribution of offered rents. The steady state to which the simulation evolves shows price dispersion, nonzero search times and vacancies. We further assess the effects of altering the level of information for landlords. Landlords are better off when they have less information. In that case they underestimate the TOM and so the steady-state of the market moves to higher rents. However, when landlords with different levels of information are present on the market, the better informed are consistently better off. The model setup also allows the analysis of market dynamics. It is observed that dynamic shocks to the discount rate can provoke overshoots in rent adjustments due in part to landlords use of outdated information in their rent posting decision. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa11p1395&r=dge |
| By: | Ravi Bansal; Marcelo Ochoa |
| Abstract: | This article makes a contribution towards understanding the impact of temperature fluctuations on the economy and financial markets. We present a long-run risks model with temperature related natural disasters. The model simultaneously matches observed temperature and consumption growth dynamics, and key features of financial markets data. We use this model to evaluate the role of temperature in determining asset prices, and to compute utility-based welfare costs as well as dollar costs of insuring against temperature fluctuations. We find that the temperature related utility-costs are about 0.78% of consumption, and the total dollar costs of completely insuring against temperature variation are 2.46% of world GDP. If we allow for temperature-triggered natural disasters to impact growth, insuring against temperature variation raise to 5.47% of world GDP. We show that the same features, long-run risks and recursive-preferences, that account for the risk-free rate and the equity premium puzzles also imply that temperature-related economic costs are important. Our model implies that a rise in global temperature lowers equity valuations and raises risk premiums. |
| JEL: | E0 G0 Q0 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17574&r=dge |
| By: | Sekyu Choi; Alexandre Janiak; Benjamín Villena-Roldán |
| Abstract: | We estimate and report life cycle transition probabilities between employment, unemployment and inactivity for male workers using Current Population Survey monthly files. We assess the relative importance of each probability in explaining the life cycle profiles of participation and unemployment rates using a novel decomposition method. A key robust finding is that most differences in participation and unemployment over the life cycle can be attributed to the probability of leaving employment and the probability of transiting from inactivity to unemployment, while transitions from unemployment to employment (the job finding probability) play secondary roles. We then show that a simple life cycle extension of a three-state labor search model with leisure shocks can qualitatively replicate the empirical unemployment and participation life cycle profiles, without introducing age or worker heterogeneity in market abilities. We conclude that models that seek to explain life cycle work patterns should not ignore transitions to and from inactivity. JEL Codes: D91, E24, J64. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:278&r=dge |
| By: | Tian, Can |
| Abstract: | Various empirical works have shown that dispersion of firm-level profitability is significantly countercyclical. I incorporate firms' technology adoption decision into firm dynamics model with business cycle features to explain these empirical findings both qualitatively and quantitatively. The option of endogenous exiting and credit constraint jointly play an important role in motivating firms' risk taking behavior. The model predicts that relatively small sized firms are more likely to take risk, and that the dispersion measured as the variance/standard deviation of firm-level profitability is larger in recessions, which are consistent to the data. |
| Keywords: | Firm Dynamics; Business Cycles; Countercyclical Dispersion |
| JEL: | L25 L11 E32 |
| Date: | 2011–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34480&r=dge |
| By: | Marco Battaglini; Stephen Coate |
| Abstract: | This paper explores the interaction between fiscal policy and unemployment. It develops a dynamic economic model in which unemployment can arise but can be mitigated by tax cuts and public spending increases. Such policies are fiscally costly, but can be financed by issuing government debt. In the context of this model, the paper analyzes the simultaneous determination of fiscal policy and unemployment in long run equilibrium. Outcomes with both a benevolent government and political decision-making are studied. With political decision-making, the model yields a simple positive theory of fiscal policy and unemployment. |
| JEL: | E6 E62 H3 H63 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17562&r=dge |
| By: | Nicolas Jacquemet (Centre d'Economie de la Sorbonne); Jean-Marc Robin (Sciences Po - Département d'Economie) |
| Abstract: | We propose a search-matching model of the marriage market that extends Shimer and Smith (2000) to allow for labor supply. We characterize the steady-state equilibrium when exogenous divorce is the only source of risk. The estimated matching probabilities that can be derived from the steady-state flow conditions are strongly increasing in both male and female wages. We estimate that the share of marriage surplus appropriated by the man increases with his wage and that the share appropriated by the woman decreases with her wage. We find that leisure is an inferior good for men and a normal good for women. |
| Keywords: | Marriage search model, collective labor supply, structural estimation. |
| JEL: | C78 D83 J12 J22 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:11050&r=dge |
| By: | Tommaso Trani (IHEID, The Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | I study the composition of international portfolios under collateral constraints and the implied cross-border transmission of shocks. I develop an international portfolio model with these features, in which leveraged investors seek diversification in both assets and secured liabilities and in which the pledgeable portion of assets adjusts to the state of the economy, reflecting borrowers’ credit risk. The new analytical results are as follows. First, agents choose endogenously how much to borrow from each country. Second, the collateral constraint, being a contractual link between secured and unsecured financial instruments, permits to compute portfolios without an arbitrage condition between those classes of assets. Finally, haircuts adjust endogenously through the change in the collateral values. After estimating the parameters governing this adjustment, I find that both portfolios and international transmission mechanism are quite sensitive to leveraged investors’ funding. As for portfolios, secured bonds have particularly effective hedging properties in managing the terms of trade risk. As for the international transmission, tightening haircuts affect the economic slowdown: initially severe contractions are followed by quick reversions to the long-term equilibrium. On a cumulative basis, these two effects compensate if haircuts adjust precisely to the economic state. But in case of uncertainty about this adjustment, collateral constraints are a source of risk which cannot be internationally diversified. |
| Keywords: | Financial flows, borrowing limits, creditworthiness, risk premia, international business cycle, macroeconomic interdipendence. |
| JEL: | F32 F34 F41 G15 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp13-2011&r=dge |
| By: | Emmanuel De Veirman; Ashley Dunstan (Reserve Bank of New Zealand) |
| Abstract: | This paper studies the importance of intertemporal substitution in consumption for the cyclical co-movement of consumption, net worth and income in New Zealand. We can largely explain the empirical hump-shaped consumption response to a transitory wealth increase by allowing for time-varying returns in an otherwise standard Permanent Income Hypothesis (PIH) model. At the net worth peak, households bring consumption forward in anticipation of low returns on saving. The PIH model fully explains the empirical response when households initially expect the net worth shock to be permanent, but gradually learn that it is in fact transitory. |
| JEL: | C22 C32 E21 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2011/05&r=dge |
| By: | Diamond, Peter A. (Massachusetts Institute of Technology) |
| Abstract: | Peter A. Diamond delivered his Prize Lecture on 8 December 2010 at Aula Magna, Stockholm University. |
| Keywords: | Search frictions; |
| JEL: | E24 J64 |
| Date: | 2010–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2010_007&r=dge |
| By: | David Andolfatto |
| Abstract: | Lagos and Wright (2005) demonstrate how the essential properties of a money-search model are preserved in an environment that is rendered highly tractable with the use of quasi-linear preferences. In this paper, I show that this same innovation can be applied to closely related environments used elsewhere in the literature that study insurance and credit markets under limited commitment and private information. The analysis demonstrates clearly how insurance, credit, and money are interrelated in terms of their basic functions. The analysis also leads to a heretofore neglected result pertaining to the Friedman rule. In particular, I find that the same frictions that render money essential may at the same time operate to render the Friedman rule infeasible. Thus, even if the Friedman rule is a desirable policy, an incentive-induced lower bound on the rate of deflation may nevertheless entail a strictly postive rate of inflation. |
| Keywords: | Money ; Credit |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-038&r=dge |
| By: | Albert de-Paz; Jesus Marin-Solano; Jorge Navas (Universitat de Barcelona) |
| Abstract: | In this paper we analyze a stochastic continuous time model in finite horizon in which agents discount the instantaneous utility function and the final function at constant but different instantaneous discount rates of time preference. Within this context we can model problems in which, when the time t approaches to the final time, the valuation of the final function increases compared with previous valuations in a way that cannot be explained by using a unique constant or a variable discount rate. We derive a dynamic programming equation whose solutions are time-consistent Markov equilibria. For this class of time preferences, we study the classical consumption and portfolio rules model (Merton, 1971) for CRRA and CARA utility functions for time- consistent agents, and we compare the different equilibria with the time-inconsistent solutions. The introduction of stochastic terminal time is also discussed. |
| Keywords: | dynamic programming, consumption and portfolio rules, heterogeneous discounting, time consistency |
| JEL: | C73 G11 C61 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bar:bedcje:2011264&r=dge |
| By: | Blake, David; Wright, Douglas; Zhang, Yumeng |
| Abstract: | A defined contribution pension plan allows consumption to be redistributed from the plan member’s working life to retirement in a manner that is consistent with the member’s personal preferences. The plan’s optimal funding and investment strategies therefore depend on the desired profile of consumption over the lifetime of the member. We investigate these strategies under the assumption that the member is a rational life cycle financial planner and has an Epstein-Zin utility function, which allows a separation between risk aversion and the elasticity of intertemporal substitution. We also take into account the member’s human capital during the accumulation phase of the plan and we allow the annuitisation decision to be endogenously determined during the decumulation phase. We show that the optimal funding strategy involves a contribution rate that is not constant over the life of the plan but is age-dependent and reflects the trade-off between the desire for current versus future consumption, the desire for stable consumption over time, the member’s attitude to risk, and changes in the level of human capital over the life cycle. We also show that the optimal investment strategy during the accumulation phase of the plan is ‘stochastic lifestyling’, with an initial high weight in equity-type investments and a gradual switch into bond-type investments as the retirement date approaches in a way that depends on the realised outcomes for the stochastic processes driving the state variables. The optimal investment strategy during the decumulation phase of the plan is to exchange the bonds held at retirement for life annuities and then to gradually sell the remaining equities and buy more annuities, i.e., a strategy known as ‘phased annuitisation’. |
| Keywords: | Defined Contribution Pension Plan; Funding Strategy; Investment Strategy; Epstein-Zin Utility; Stochastic Lifestyling; Phased Annuitisation; Dynamic Programming |
| JEL: | G11 G23 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34277&r=dge |
| By: | Francisco Alvarez-Cuadrado; Ngo Van Long |
| Abstract: | There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the relative importance of each sector, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in the initial attempts, recent models stress the role of supply-side factors in this process of structural change. Along these lines, Ngai and Pissarides (American Economic Review, 2008) focus in differential productivity growth across sectors while Acemoglu and Guerrieri (Journal of Political Economy, 2008) stress differences in factor proportions and capital deepening. We explore a general framework that encompasses, as special cases, these two supply-side mechanisms. Our model uncovers an additional driving force for structural change based on differences in the degree of capital-labor substitutability. When the flexibility to combine capital and labor varies across intermediate goods and the final sector is Cobb-Douglas, as the economy grows the fraction of capital (labor) allocated to the sector with high elasticity of substitution increases (decreases). We provide some casual evidence consistent with this new mechanism. <P>There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the relative importance of each sector, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in the initial attempts, recent models stress the role of supply-side factors in this process of structural change. Along these lines, Ngai and Pissarides (American Economic Review, 2008) focus in differential productivity growth across sectors while Acemoglu and Guerrieri (Journal of Political Economy, 2008) stress differences in factor proportions and capital deepening. We explore a general framework that encompasses, as special cases, these two supply-side mechanisms. Our model uncovers an additional driving force for structural change based on differences in the degree of capital-labor substitutability. When the flexibility to combine capital and labor varies across intermediate goods and the final sector is Cobb-Douglas, as the economy grows the fraction of capital (labor) allocated to the sector with high elasticity of substitution increases (decreases). We provide some casual evidence consistent with this new mechanism. |
| Keywords: | Capital-labor substitution, balanced growth, structural change, Capital-labor substitution, balanced growth, structural change |
| JEL: | O40 O30 |
| Date: | 2011–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2011s-68&r=dge |
| By: | Sebastian Findeisen; Dominik Sachs |
| Abstract: | We study optimal tax and educational policies in a dynamic private information economy, in which ex-ante heterogeneous individuals make an educational investment early in their life and face a stochastic wage distribution. We characterize labor and education wedges in this setting analytically and numerically, using a calibrated example. We present ways to implement the optimum. In one implementation there is a common labor income tax schedule, and a repayment schedule for government loans given out to agents during education. These repayment plans are contingent on loan size and income and capture the history dependence of the labor wedges. Applying the model to US-data and a binary education decision (graduating from college or not) we characterize optimal labor wedges for individuals without college degree and with college degree. The labor wedge of college graduates as a function of income lies first strictly above their counterparts from high-school, but this reverses at higher incomes. The loan repayment schedule is hump-shaped in income for college graduates. |
| Keywords: | Optimal dynamic taxation, education, implementation |
| JEL: | H21 H23 I21 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:040&r=dge |
| By: | Ian Martin |
| Abstract: | This paper investigates the behavior of asset prices in an endowment economy in which a representative agent with power utility consumes the dividends of multiple assets. The assets are Lucas trees; a collection of Lucas trees is a Lucas orchard. The model generates return correlations that vary endogenously, spiking at times of disaster. Since disasters spread across assets, the model generates large risk premia even for assets with stable fundamentals. Very small assets may comove endogenously and hence earn positive risk premia even if their fundamentals are independent of the rest of the economy. I provide conditions under which the variation in a small asset’s price-dividend ratio can be attributed almost entirely to variation in its risk premium. |
| JEL: | G12 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17563&r=dge |
| By: | Fernando E. Alvarez; Francesco Lippi |
| Abstract: | We present a monetary model in the presence of segmented asset markets that implies a persistent fall in interest rates after a once and for all increase in liquidity. The gradual propagation mechanism produced by our model is novel in the literature. We provide an analytical characterization of this mechanism, showing that the magnitude of the liquidity effect on impact, and its persistence, depend on the ratio of two parameters: the long-run interest rate elasticity of money demand and the intertemporal substitution elasticity. At the same time, the model has completely classical long-run predictions, featuring quantity theoretic and Fisherian properties. The model simultaneously explains the short-run “instability” of money demand estimates as-well-as the stability of long-run interest-elastic money demand. |
| JEL: | E31 E4 E41 E43 E5 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17566&r=dge |
| By: | Johannes Bröcker |
| Abstract: | The paper presents a multiregional endogenous growth model designed for calibration with real world data and for numerical policy evaluation. It integrates four strands of research: (1) the Ramsey model of consumer behaviour, (2) Tobin's q-theory of investment, (3) Romer's theory of endogenous growth through horizontal product innovation, and (4) the Dixit-Stiglitz-Ethier theory of intra-industry trade. Integrating the latter into a multiregional model is also an essential ingredient of the New Economic Geography. Thus, the paper is related to this literature as well, but lacks another essential feature of this tradition; the model to be presented does not exhibit catastrophic agglomeration. A symmetric first nature will always generate a “flat earth†steady state equilibrium. The model has an arbitrary (possibly large) number of regions with a representative household and a production sector in each of them. There are three types of goods, non-tradable local goods, horizontally diversified tradables, and designs of tradable products that are the exclusive property of their producers (called “blueprintsâ€, for short). Goods are produced combining - in identical proportions for all three of them - four inputs, labour, capital local and tradable goods. Blueprint production benefits from a technological positive externality. Technologies and preferences are uniform across space. Beyond goods markets and real factor markets there is a frictionless global bond market. All markets are perfectly competitive except the tradables market, which is monopolistic in the familiar Dixit-Stiglitz-Ethier style. The engine of sustainable long run growth is the accumulation of blueprints. Agents act under perfect foresight. The paper explains the formal structure, the solution and calibration techniques and illustrates the application by a small example. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa11p1676&r=dge |
| By: | Monacelli, Tommaso; Perotti, Roberto |
| Abstract: | Does it matter, for the size of the government spending multiplier, which category of agents bears the brunt of the necessary adjustment in taxes? In an economy with heterogeneous agents and imperfect financial markets, the answer depends on whether or not New Keynesian features, such are price rigidity, are present. If prices are flexible, the tax-financing rule is either neutral or leads to a larger multiplier when taxes are levied on the borrowing constrained agents. If prices are sticky, the multiplier is larger when taxes are levied on the unconstrained agents. We discuss the conditions under which these results hold. Furthermore, we study the real effects of fiscal expansions via pure, revenue-neutral, tax redistributions. |
| JEL: | E62 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8641&r=dge |
| By: | Nicolas Coeurdacier; Pierre-Olivier Gourinchas |
| Abstract: | This paper presents a model of international portfolios with real exchange rate and non financial risks that accounts for observed levels of equity home bias. A key feature is that investors can trade equities as well as domestic and foreign real bonds. Bonds matter: in equilibrium, investors structure their bond portfolio to hedge real exchange rate risk since relative bond returns are strongly correlated with real exchange rate movements. Equity home bias does not arise from the co-movements between relative stock returns and real exchange rates, but from the hedging properties of stock returns against other sources of risk, conditionally on bond returns. We estimate the optimal equity and bond portfolios implied by the model for G-7 countries and find strong empirical support for the theory. We are able to account for a significant share of the equity home bias and obtain a currency exposure of bond portfolios comparable to the data. |
| JEL: | F30 F41 G11 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17560&r=dge |
| By: | Domingo Pérez Ximénez-De-Embún; Marcos Sanso |
| Abstract: | This paper presents a theoretical approach to solve the main problems faced to explain the relationship between aggregate economic growth and the urban structure. The most significant conclusion reached is that there is a theoretical relationship between aggregate economic growth and urban concentration with an inverted-U shape. This result had been previously found in an empirical context (Henderson, 2003), but not as outcome of a theoretical model. An overlapping generations model with four different types of goods (some with both technological and local externalities) and two cities where their production could be located provides the dynamics of the movements of labor and goods across cities. The resulting system of two cities with different patterns of specialization, urban concentration and economic growth rates, makes clear how to set out the comparison of aggregate growth rates: only the aggregate growth rate between two steady states, one without migration but with trade specialization and the other after migration and specialization, makes sense. Henderson, V. (2003), The Urbanization Process and Economic Growth: The So-What Question, Journal of Economic Growth, 8, 47-71. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa11p884&r=dge |
| By: | Amparo Castelló-Climent; Ana Hidalgo-Cabrillana |
| Abstract: | We develop a theory of human capital investment to study the channels through which students react to school quality when deciding on investments in secondary education and above, and to study how educational quality affects economic growth. In a dynamic general equilibrium closed economy, primary education is mandatory but there is an opportunity to continue on in education, which is a private choice. High-quality education increases the returns to schooling, and hence the incentives to accumulate human capital. This is caused by two main effects: higher quality makes higher education accessible to more people (extensive channel), and once individuals decide to participate in higher education, higher quality increases the volume of investment made per individual (intensive channel). Furthermore, educational quality plays a central role in explaining the composition of human capital and the long-run level of income. Cross-country data evidence shows that the proposed channels are quantitatively important and that the effect of the quality and quantity of education on growth depends on the stage of development. |
| Keywords: | Quality of education, human capital composition, economic growth |
| JEL: | I21 O11 O15 O4 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1087&r=dge |
| By: | Torben Klarl |
| Abstract: | A large and still growing body of literature suggests that entrepreneurship is of exceptional importance in explaining regional specific efficiencies of knowledge spillovers. Although quantifying the impact of entrepreneurial activity for economic growth is an interesting issue -- particularly at the regional level -- a consice formulation within a theoretical growth model is missing. This paper in general tries to uncover the link between own- and neighbour-related regional entrepreneurial activity in innovation and regional growth within a spatial semi-endogenous growth model in the spirit of Jones (1995) reflecting recent empirical findings on entrepreneurial activity for economic growth. The paper makes the following points: firstly, the degree of tacit knowledge spillover within the R\&D-sector is positively related to own and neigbhour-related entrepreneurial activity and secondly, for a given entrepreneur's willingness to invest in R\&D-projects the degree of tacit knowledge spillover is higher with stronger institutions. The paper derives an explicit solution for the transitional as well as for the balanced growth path level of entrepreneurs' innovative activities. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa11p278&r=dge |
| By: | Ravi Bansal; Marcelo Ochoa |
| Abstract: | In this paper we show that temperature is an aggregate risk factor that adversely affects economic growth. Our argument is based on evidence from global capital markets which shows that the covariance between country equity returns and temperature (i.e., temperature betas) contains sharp information about the cross-country risk premium; countries closer to the Equator carry a positive temperature risk premium which decreases as one moves farther away from the Equator. The differences in temperature betas mirror exposures to aggregate growth rate risk, which we show is negatively impacted by temperature shocks. That is, portfolios with larger exposure to risk from aggregate growth also have larger temperature betas; hence, a larger risk premium. We further show that increases in global temperature have a negative impact on economic growth in countries closer to the Equator, while its impact is negligible in countries at high latitudes. Consistent with this evidence, we show that there is a parallel between a country's distance to the Equator and the economy's dependence on climate sensitive sectors; in countries closer to the Equator industries with a high exposure to temperature are more prevalent. We provide a Long-Run Risks based model that quantitatively accounts for cross-sectional differences in temperature betas, its link to expected returns, and the connection between aggregate growth and temperature risks. |
| JEL: | E0 G12 Q0 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17575&r=dge |
| By: | R. Anton Braun (Federal Reserve Bank of Atlanta); Tomoyuki Nakajima (Kyoto University) |
| Abstract: | We compare the dynamics of in flation and bond yields leading up to a sovereign debt crisis in settings where asset markets are frictionless to other settings with financial fric- tions. As compared to the case with frictionless asset markets, an asset market structure with financial frictions generates a significant delay in the response of prices to news about a future debt crisis. With complete markets prices jump in response to news about the possibility of a future debt crisis. However, when short selling of government bonds is restricted some agents can't act on their beliefs and prices don't respond to the news. Instead prices only move in periods immediately prior the crisis. |
| Keywords: | sovereign debt crisis; defl ation; fiscal risk; leverage; borrowing constraint |
| JEL: | E31 E62 H60 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:796&r=dge |