nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒12‒05
seven papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Survival and long-run dynamics with heterogeneous beliefs under recursive preferences By Jaroslav Borovicka
  2. Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective By Jean-Baptiste Michau
  3. Making the case for a low intertemporal elasticity of substitution By R. Anton Braun; Tomoyuki Nakajima
  4. Oil efficiency, demand, and prices: a tale of ups and downs By Martin Bodenstein; Luca Guerrieri
  5. Product durability and trade volatility By Dimitra Petropoulou; Kwok Tong Soo
  6. RHOMOLO: A Dynamic General Equilibrium Modelling Approach to the Evaluation of the EU's Regional Policies By Ben Gardiner; Andries Brandsma; Olga Ivanova; d'Artis Kancs
  7. Human Capital, R&D and Productivity Convergence of European Regions. A spatial analysis of RHOMOLO's semi endogenous growth approach. By Fabio Manca; Giuseppe Piroli

  1. By: Jaroslav Borovicka
    Abstract: I study the long-run behavior of a two-agent economy where agents differ in their beliefs and are endowed with homothetic recursive preferences of the Duffie-Epstein-Zin type. When preferences are separable, the economy is dominated in the long run by the agent whose beliefs are relatively more precise, a result consistent with the market selection hypothesis. However, recursive preference specifications lead to equilibria in which both agents survive, or to ones where either agent can dominate the economy with a strictly positive probability. In this respect, the market selection hypothesis is not robust to deviations from separability. I derive analytical conditions for the existence of nondegenerate long-run equilibria, and show that these equilibria exist for plausible parameterizations when risk aversion is larger than the inverse of the intertemporal elasticity of substitution, providing a justification for models that combine belief heterogeneity and recursive preferences.
    Keywords: Consumption (Economics)
    Date: 2011
  2. By: Jean-Baptiste Michau (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)
    Abstract: While the participation decision is discrete in a static context, i.e. to work or not to work, such is not the case in a life-cycle context where workers choose the fraction of their lifetime that they spend working. In this paper, I therefore characterize the optimal redistribution policy in a life-cycle framework with both an intensive and an extensive margin of labor supply. The government should optimally design a history-dependent social security system which induces higher productivity individuals to retire later. Some redistribution therefore needs to be done through the pension system; a standard non-linear income tax is not enough.
    Keywords: Extensive margin, Optimal redistribution, Retirement age, Social security
    Date: 2011–11–08
  3. By: R. Anton Braun; Tomoyuki Nakajima
    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. We do this reconciliation using a model in which all agents have identical preferences and the same access to asset markets. We also conduct an encompassing test, which indicates that specifications of the model with small values of the IES are more plausible than specifications with a large IES.
    Date: 2011
  4. By: Martin Bodenstein; Luca Guerrieri
    Abstract: The macroeconomic implications of oil price fluctuations vary according to their sources. Our estimated two-country DSGE model distinguishes between country-specific oil supply shocks, various domestic and foreign activity shocks, and oil efficiency shocks. Changes in foreign oil efficiency, modeled as factor-augmenting technology, were the key driver of fluctuations in oil prices between 1984 and 2008, but have modest effects on U.S. activity. A pickup in foreign activity played an important role in the 2003-2008 oil price runup. Beyond quantifying the responses of oil prices and economic activity, our model informs about the propagation mechanisms. We find evidence that nonoil trade linkages are an important transmission channel for shocks that affect oil prices. Conversely, nominal rigidities and monetary policy are not.
    Date: 2011
  5. By: Dimitra Petropoulou; Kwok Tong Soo
    Abstract: One of the main causes behind the trade collapse of 2008–09 was a significant fall in the demand for durable goods. This paper develops a small country, overlapping generations model of international trade in which goods durability gives rise to a more than proportional fall in trade volumes, as observed in 2008–09. The model has three goods—two durable, traded goods and one nondurable, nontraded good and two factors of production. The durability of goods affects consumers' lifetime wealth and their optimal consumption bundle across goods and time periods. A uniform productivity shock reduces consumers' lifetime wealth inducing a re-optimisation away from durables. This gives rise to a more than proportional effect on international trade, provided the nontraded sector is sufficiently capital intensive. The elasticity of trade flows to GDP is found to be increasing in both the degree of durability and the size of the shock.> ; Thus the model provides microfoundations for the asymmetric shock to the demand for durable goods observed in recessions and clarifies the link between this endogenous shift in preferences and international trade flows. It also explains the observation that deeper downturns are associated with a higher elasticity of trade to GDP. Furthermore, the greater the degree of durability of traded goods, the larger is the share of domestically produced goods in consumption, for plausible factor intensities. This provides an alternative explanation for the home bias in consumption, and hence another explanation for Trefler’s "missing trade."
    Keywords: International trade
    Date: 2011
  6. By: Ben Gardiner; Andries Brandsma; Olga Ivanova; d'Artis Kancs
    Abstract: This paper describes some of the features of a new dynamic general equilibrium framework (RHOMOLO) being developed at the European Commission (JRC-IPTS, together with DG REGIO) for evaluating EU Cohesion Policy. The design of the model reflects the objectives of Cohesion Policy, and a broader understanding of impact analysis which goes beyond pure economic effects and also considers environmental and social indicators. The model has both regional and sectoral dimensions – regionally, the aim is for complete NUTS2 (NUTS1 for Germany) coverage of the EU27, while the potential sector coverage is 23 – all of which leads to very large modelling dimensions and presents challenges in terms of data availability. The model is constructed using the concept of Dynamic Spatial Computable General Equilibrium (DSCGE), which ensures Walrasian equilibrium in a sequence of model solutions over time, and also incorporates elements of New Economic Geography (NEG) in the way it captures the forces of economic agglomeration and dispersion.
    Date: 2011–09
  7. By: Fabio Manca; Giuseppe Piroli
    Abstract: The aim of the paper is to test the Benhabib and Spiegel (2005) productivity (TFP) catch-up framework on European regions. Differences in the stock of human capital across regions are hypothesized to be the cause of differences in the speed by which follower regions converge and catch-up with the technology frontier. We find robust empirical evidence for this hypothesis. Also, we find evidence of complementarities between R&D expenditures and human capital accumulation for which R&D impacts TFP growth as long as a critical mass for the stock of human capital is reached. The results are robust to sectoral disaggregations and to the choice of a country or sectoral specific leader in the TFP gap computation and to control for spatial dependence across European regions.
    Date: 2011–09

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