nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒11‒21
sixteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Demography, Capital Flows and Unemployment By Marchiori, Luca; Pierrard, Olivier; Sneessens, Henri R.
  2. Endogenous lifetime, accidental bequests and economic growth By Fanti, Luciano; Gori, Luca; Tramontana, Fabio
  3. The Macroeconomics of TANSTAAFL By Grossmann, Volker; Steger, Thomas M.; Trimborn, Timo
  4. Generalized Taylor and Generalized Calvo price and wage-setting: micro evidence with macro implications By Dixon, Huw; Bihan, Hervé Le
  5. Distributional dynamics under smoothly state-dependent pricing By James Costain; Anton Nakov
  6. News driven business cycles and data on asset prices in estimated DSGE models By Stefan Avdjiev
  7. Existence, Optimality and Dynamics of Equilibria with Endogenous Time Preference By Cuong Le Van; Cagri Saglam; Selman Erol
  8. The Extension of Social Security Coverage in Developing Countries By Juergen Jung; Chung Tran
  9. Policy change and learning in the RBC model By Mitra , Kaushik; Evans , George W.; Honkapohja , Seppo
  10. Multi-Levels Bargaining and Efficiency in Search Economies By Olivier Lharidon, University of Rennes 1 - CREM-CNRS; Franck Malherbet, Ecole Polytechnique
  11. Concave Consumption Function and Precautionary Wealth Accumulation By Richard M. H. Suen
  12. Marriage with Labor Supply By Nicolas Jacquemet; Jean-Marc Robin
  13. Fisheries Management under Irreversible Investment: Does Stochasticity Matter? By Poudel, Diwakar; Sandal, Leif K.; Kvamsdal, Sturla F.; Steinshamn, Stein I.
  14. Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment By Sandra Gomes; Pascal Jacquinot; Matthias Mohr; Massimiliano Pisani
  15. Optimal monetary policy with state-dependent pricing By Anton Nakov; Carlos Thomas
  16. Credit Crises, Precautionary Savings, and the Liquidity Trap By Veronica Guerrieri; Guido Lorenzoni

  1. By: Marchiori, Luca (Central Bank of Luxembourg); Pierrard, Olivier (Central Bank of Luxembourg); Sneessens, Henri R. (University of Luxembourg)
    Abstract: This paper contributes to the already vast literature on demography-induced international capital flows by examining the role of labor market imperfections and institutions. We setup a two-country overlapping generations model with search unemployment, which we calibrate on EU15 and US data. Labor market imperfections are found to significantly increase the volume of capital flows, because of stronger employment adjustments in comparison with a competitive economy. We next exploit the model to investigate how demographic asymmetries may have contributed to unemployment and welfare changes in the recent past (1950-2010). We show that a policy reform in one country also has an impact on labor markets in other countries when capital is mobile.
    Keywords: demographics, capital flows, overlapping generations, general equilibrium, unemployment
    JEL: J11 F21 D91 C68
    Date: 2011–10
  2. By: Fanti, Luciano; Gori, Luca; Tramontana, Fabio
    Abstract: his paper introduces unintentional bequests in a closed economy overlapping generations model à la Chakraborty (2004). We show that poverty traps due to scarce public investments in health can exist. However, and most important, the existence of unintentional bequests makes the health tax rate to play a prominent role in determining the stability conditions of the equilibrium in rich economies. Indeed, non-monotonic dynamics, Neimark-Sacker bifurcations and deterministic chaos can occur depending on the size of the public health system.
    Keywords: Accidental bequests; Endogenous lifetime; Health; OLG model
    JEL: I18 J18 O40 C62
    Date: 2011–11–11
  3. By: Grossmann, Volker; Steger, Thomas M.; Trimborn, Timo
    Abstract: This paper shows that dynamic inefficiency can occur in dynamic general equilibrium models with fully optimizing, infinitely-lived households even in a situation with underinvestment. We identify necessary conditions for such a pos- sibility and illustrate it in a standard R\&D-based growth model. Calibrating the model to the US, we show that a moderate increase in the R\&D subsidy indeed leads to an intertemporal free lunch (i.e., an increase in per capita consumption at all times). Hence, Milton Friedman’s conjecture There ain’t no such thing as a free lunch (TANSTAAFL) may not apply.
    Keywords: Intertemporal free lunch; Dynamic inefficiency; R\&D-based growth; Transitional dynamics.
    JEL: E20 H20 O41
    Date: 2011–11
  4. By: Dixon, Huw (Cardiff Business School); Bihan, Hervé Le
    Abstract: The Generalized Calvo and the Generalized Taylor models of price and wage-setting are, unlike the standard Calvo and Taylor counterparts, exactly consistent with the distribution of durations observed in the data. Using price and wage micro-data from a major euro-area economy (France), we develop calibrated versions of these models. We assess the consequences for monetary policy transmission by embedding these calibrated models in a standard DSGE model. The Generalized Taylor model is found to help rationalizing the humpshaped and persistent response of inflation, without resorting to the counterfactual assumption of systematic wage and price indexation.
    Keywords: Contract length; steady state; hazard rate; Calvo; Taylor; wage-setting; price-setting
    JEL: E31 E32 E52 J30
    Date: 2011–10
  5. By: James Costain; Anton Nakov
    Abstract: Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into "intensive", "extensive", and "selection" margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to sector-specific shocks is gradual, but inappropriate econometrics might make it appear immediate.
    Date: 2011
  6. By: Stefan Avdjiev
    Abstract: The existing literature on estimated structural News Driven Business Cycle (NDBC) models has focused almost exclusively on macroeconomic data and has largely ignored asset prices. In this paper, we present evidence that including data on asset prices in the estimation of a structural NDBC model dramatically affects inference about the main sources of business cycle fluctuations. Combined with the large body of evidence that asset price movements reflect changes in expectations of future developments in the economy, our results imply that data on asset prices should always be used in the estimation of structural NDBC models because they contain information that cannot be obtained by using solely macroeconomic data.
    Keywords: News Driven Business Cycles, Asset Prices, Estimated DSGE Models, Bayesian MCMC Methods
    Date: 2011–11
  7. By: Cuong Le Van (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, University of Exeter Business School - University of Exeter Business School, VCREME - VanXuan Center of Research in Economics, Management and Environment - VanXuan Center of Research in Economics, Management and Environment); Cagri Saglam (Bilkent University - Bilkent University); Selman Erol (Bilkent University - Bilkent University)
    Abstract: To account for the development patterns that differ considerably among economies in the long run, a variety of one-sector models that incorporate some degree of market imperfections based on technological external effects and increasing returns have been presented. This paper studies the dynamic implications of, yet another mechanism, the endogenous rate of time preference depending on the stock of capital, in a one-sector growth model. The planner's problem is presented and the optimal paths are characterized. We show that development or poverty traps can arise even under a strictly convex technology. We also show that even under a convex-concave technology, the optimal path can exhibit global convergence to a unique stationary point. The multipliers system associated with an optimal path is proven to be the supporting price system of a competitive equilibrium under externality and detailed results concerning the properties of optimal (equilibrium) paths are provided. We show that the model exhibits globally monotone capital sequences yielding a richer set of potential dynamics than the classic model with exogenous discounting.
    Keywords: Endogenous time preference; Optimal growth; Competitive equilibrium; Multiple steady-states
    Date: 2011–03
  8. By: Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University)
    Abstract: We study the dynamic general equilibrium effects of introducing a social pension program to elderly informal sector workers in developing countries who lack formal risk sharing mechanisms against income and longevity risk. To this end, we formulate a stochastic dynamic general equilibrium model that incorporates defining features of developing countries: a large informal sector, private transfers as an informal safety net, and a non-universal social security system. We find that the extension of retirement benefits to informal sector workers results in efficiency losses due to adverse effects on capital accumulation and the allocation of resources across formal and informal sectors. Despite these losses recipients of social pensions experience welfare gains as the positive insurance effects attributed to the extension of a social insurance system dominate. The welfare gains crucially depend on the skill distribution, private intra-family transfers and the specific tax used to finance the expansion.
    Keywords: Informal Sector, Family Social Safety Nets, Social Pension, General Equi-librium, and Welfare.
    JEL: E6 E21 E26 H30 H53 H55 I38 O17
    Date: 2011–11
  9. By: Mitra , Kaushik (School of Economics & Finance, University of St Andrews); Evans , George W. (University of Oregon and University of St Andrews); Honkapohja , Seppo (Bank of Finland)
    Abstract: What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Both permanent and temporary policy changes are analyzed. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.
    Keywords: taxation; government spending; expectations; permanent and temporary policy changes
    JEL: D84 E21 E43 E62
    Date: 2011–11–10
  10. By: Olivier Lharidon, University of Rennes 1 - CREM-CNRS; Franck Malherbet, Ecole Polytechnique
    Abstract: In this note, we extend the traditional search and matching framework to take account of the different levels at which negotiations may take place. We show that, in the absence of any distortion, sector-level bargaining ought to be less efficient than bargaining taking place at the other levels. This type of inefficiency leaves room for labor market policies. We show that a well designed combination of employment protection, hiring subsidy and payroll tax is able to restore efficiency. In addition, this result suggests that the relationship between the labor market performance and the level at which bargaining takes place is conditional on labor market institutions.
    Keywords: Search and Matching Models, Bargaining Levels, Labor Market Policies
    JEL: J41 J48 J51 J60
    Date: 2011–11
  11. By: Richard M. H. Suen (University of Connecticut)
    Abstract: This paper examines the theoretical foundations of precautionary wealth accumulation in a multi-period model where consumers face uninsurable earnings risk and borrowing constraints. We begin by characterizing the consumption function of individual consumers. We show that consumption function is concave when the utility function has strictly positive third derivative and the inverse of absolute prudence is a concave function. These conditions encompass all HARA utility functions with strictly positive third derivative as special cases. We then show that when consumption function is concave, a mean-preserving spread in earnings risk would encourage wealth accumulation at both the individual and aggregate levels.
    Keywords: Consumption function, borrowing constraints, precautionary saving
    JEL: D81 D91 E21
    Date: 2011–11
  12. By: Nicolas Jacquemet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jean-Marc Robin (Sciences Po - Department of Economics)
    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.
    Date: 2011–10
  13. By: Poudel, Diwakar (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Sandal, Leif K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Kvamsdal, Sturla F. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Steinshamn, Stein I. (SNF, Institute for Research in Economics and Business Administration)
    Abstract: We present a continuous, nonlinear, stochastic and dynamic model for capital investment in the exploitation of a renewable resource. Both the resource stock and capital stock are treated as state variables. The resource owner controls fishing effort and the investment rate in an optimal way. Biological stock growth and capital depreciation rate are stochastic in the model. We find that the stochastic resource should be managed conservatively. The capital utilization rate is found to be a non-increasing function of stochasticity. Investment could be either higher or lower depending on the interaction between the capital and the resource stocks. In general a stochastic capital depreciation rate has only weak influence on optimal management. In the long run, the steady state harvest for a stochastic resource becomes lower than the deterministic level.
    Keywords: Physical capital; irreversible investment; stochastic growth; long-term sustainable optimal
    JEL: Q20 Q22
    Date: 2011–11–04
  14. By: Sandra Gomes (Bank of Portugal); Pascal Jacquinot (European Central Bank); Matthias Mohr (European Central Bank); Massimiliano Pisani (Bank of Italy)
    Abstract: We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, a unilateral markup reduction by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. Second, cross-country coordination of reforms would add extra benefits to each region, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. In the long run German (Portuguese) output would increase by 9.2 (8.6) percent. Third, cross-country coordination would make the macroeconomic performance of the different regions more homogeneous, in terms of price competitiveness and real activity. Overall, our results suggest that while reforms implemented individually by each country in the euro area will produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects.
    Keywords: economic policy, structural reforms, dynamic general equilibrium modeling, competition, markups.
    JEL: C53 E52 F47
    Date: 2011–10
  15. By: Anton Nakov (Banco de España and ECB); Carlos Thomas (Banco de España)
    Abstract: We study optimal monetary policy from the timeless perspective in a general state-dependent pricing framework. Firms are monopolistic competitors and are subject to idiosyncratic menu cost shocks. We find that, under isoelastic preferences and no government spending, strict price stability is optimal both in the long run and in response to aggregate shocks. Key to this finding is an “envelope” property: at zero inflation, a marginal increase in the rate of inflation has no effect on firms’ profits and therefore has no effect on the rate of price adjustment. We offer an analytic solution which does not rely on local approximation or efficiency of the steady-state.
    Keywords: monetary policy, state-dependent pricing, monopolistic competition
    JEL: E31
    Date: 2011–11
  16. By: Veronica Guerrieri; Guido Lorenzoni
    Abstract: We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers’ borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards. Adding durable goods to the model, households take larger debt positions and the output response may be larger.
    JEL: E2 E4
    Date: 2011–11

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