nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒12‒13
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. A Fiscal Stimulus and Jobless Recovery By Cristiano Cantore; Paul Levine; Giovanni Melina
  2. Bayesian estimation of small-scale DSGE model of the Ukrainian economy By Semko, Roman
  3. Price search, consumption inequality, and expenditure inequality over the life cycle By Arslan, Yavuz; Taskin, Temel
  4. Organizational Capital and Optimal Ramsey Taxation By Alok Johri; Bidyut Kumar Talukdar
  5. Investment, Matching and Persistence in a modified Cash-in-Advance Economy By Auray, Stephane; de Blas, Beatriz
  6. Household Leverage and Fiscal Multipliers By Javier Andrés; José Emilio Boscá; Javier Ferri
  7. Housing and Debt over the Life Cycle and over the Business Cycle By Matteo Iacoviello; Marina Pavan
  8. The macroeconomic effects of fiscal policy. By Cloyne, J.S.
  9. Foreign Output Shocks and Monetary Policy Regimes in Small Open Economies: A DSGE Evaluation of East Asia By Joseph D. ALBA; Wai–Mun CHIA; Donghyun PARK
  10. Learning from experience in the stock market By Anton Nakov; Galo Nuno
  11. International Capital Flows with Limited Commitment and Incomplete Markets By Jurgen von Hagen; Haiping Zhang
  12. Sectoral Price Facts in a Sticky-Price Model By Carlos Carvalho; Jae Won Lee
  13. Education, Innovation, and Long-Run Growth By Katsuhiko Hori; Katsunori Yamada
  14. Macroeconomics With Heterogeneity: A Practical Guide By Fatih Guvenen
  15. Interpreting the Hours-Technology time-varying relationship By Cantore, C.; Ferroni, F.; León-Ledesma, M A.
  16. Optimal Dynamic Taxes By Mikhail Golosov; Maxim Troshkin; Aleh Tsyvinski
  17. The Accuracy of Perturbation Methods to Solve Small Open Economy Models By Angelo M. Fasolo
  18. A Political Economy Theory of Government Debt and Social Security By Ryo Arawatari; Tetsuo Ono
  19. Marital Status and Derived Pension Rights: A Political Economy Model of Public Pensions with Borrowing Constraints By Tetsuo Ono
  20. The Dynamics of Continuous Cultural Traits in Social Networks By Berno Buechel; Tim Hellmann; Michael M. Pichler
  21. Assessing the Impact of Public Transfers on Private Risk Sharing Arrangements: Evidence from a Randomized Experiment in Mexico By Marina Pavan; Aldo Colussi
  22. Job Loss, Credit Constraints and Consumption Growth By Thomas F. Crossley; Hamish W. Low (corresponding author)
  23. Financing public education when altruistic agents have retirement concerns By Daniel Montolio (University of Barcelona (UB) and Barcelona Institute of Economics (IEB)); Amedeo Piolatto (University of Barcelona (UB) and Barcelona Institute of Economics (IEB))
  24. Economic performance and government size By António Afonso; João Tovar Jalles
  25. On the core and Walrasian expectations equilibrium in infinite dimensional commodity spaces By Bhowmik, Anuj; Cao, Jiling
  26. Existence, Stability and Computation of Stationary Distributions: An Extension of the Hopenhayn-Prescott Theorem By Takashi Kamihigashi; John Stachurski

  1. By: Cristiano Cantore (University of Surrey); Paul Levine (University of Surrey); Giovanni Melina (University of Surrey)
    Abstract: We analyse the effects of a government spending expansion in a dynamic stochastic general equilibrium (DSGE) model with Mortensen-Pissarides labour market frictions, deep habits and a constant-elasticity-of-substitution (CES) production function. The combination of deep habits and CES technology is crucial. The presence of deep habits enables the model to deliver output and unemployment multipliers in the high range of recent empirical estimates, while an elasticity of substitution between capital and labour in the range of available estimates allows it to produce a scenario compatible with the observed jobless recovery. An accommodative monetary policy with respect to the output gap alongside sticky prices plays an important role for the stabilisation properties of the fiscal stimulus.
    Keywords: Fiscal policy; deep habits; labour market search-match frictions; unemployment; CES production function
    JEL: E24 E62
    Date: 2011–12
  2. By: Semko, Roman
    Abstract: In this article we try to introduce Bayesian methodology for the estimation of dynamic stochastic general equilibrium model of the Ukrainian economy. The resulting impulse response functions can be used for increasing the efficiency of monetary and fiscal policy interventions. In addition, we showed that technology is one of the most important factors contributing to the stable long-term growth path of the economic system of Ukraine.
    Keywords: DSGE model; Bayesian estimation; monetary and fiscal policy
    JEL: O23 E6 C11
    Date: 2011
  3. By: Arslan, Yavuz; Taskin, Temel
    Abstract: In this paper, we incorporate a price search decision into a life cycle model and differentiate consumption from expenditure. Consumers with low wealth and bad income shocks search more for cheaper prices and pay less, which makes their consumption higher than in a model without search option. A plausibly calibrated version of our model predicts that the cross-sectional variance of consumption is about 17% smaller than the cross-sectional variance of expenditure throughout the life cycle. Price search has an alternative productive activity role for lower-income people to increase their consumption levels. We discuss other implications of price search over the life cycle as well.
    Keywords: Consumption inequality; price search; incomplete markets; life cycle models; partial insurance
    JEL: D91 D10 E21
    Date: 2011–07–01
  4. By: Alok Johri; Bidyut Kumar Talukdar
    Abstract: Many recent studies have argued that it is useful to introduce a third input into the neoclassical production technology which encapsulates the productivity enhancing knowledge created in the process of production. This input, often called organizational capital, has been shown to improve the predictions of dynamic general equilibrium models, especially at the business cycle frequency. In this paper, we study the impact of organizational capital on optimal capital taxation in the Ramsey tradition and find that the planner would choose to tax capital income in the presence of organizational capital even in environments where earlier models predicted zero taxes or even subsidies.
    Keywords: optimal taxation, Ramsey model, learning-by-doing, organizational capital
    JEL: E6
    Date: 2011–12
  5. By: Auray, Stephane (Crest-Ensai, Universites Lille Nord de France (ULCO), France); de Blas, Beatriz (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)
    Abstract: We simulate and estimate a new Keynesian search and matching model with sticky wages in which capital has to be financed with cash, at least partially. Our objective is to assess the ability of this framework to account for the persistence of output and inflation observed in the data. We find that our setup generates enough output and inflation persistence with standard stickiness parameters. The key factor driving these results is the inclusion of investment in the CIA constraint, rather than any other nominal or real rigidity. The model reproduces labor market dynamics after a positive increase in productivity: hours fall, nominal wages hardly react, and real wages go up. Regarding money supply shocks, we investigate the conditions under which our model specification generates the liquidity effect, a fact which is absent in most sticky price models.
    Keywords: persistence; sticky prices; staggered bargaining wages; monetary facts; labor market facts; cash-in-advance.
    JEL: E32 E41 E52
    Date: 2011–12
  6. By: Javier Andrés (University of Valencia, Spain); José Emilio Boscá (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain)
    Abstract: We study the size of fiscal multipliers in response to a government spending shock under different household leverage conditions in a general equilibrium setting with search and matching frictions. We allow for different levels of household indebtedness by changing the intensive margin of borrowing (loan-to-value ratio), as well as the extensive margin, defined as the number of borrowers over total population. The interaction between the consumption decisions of agents with limited access to credit and the process of wage bargaining and vacancy posting delivers two main results: (a) higher initial leverage makes it more likely to find output multipliers higher than one; and (b) a positive government expenditure shock always produces a positive multiplier for vacancies and employment. The latter result is in sharp contrast with models in which some households do not have access to the financial market (RoT consumers), in which the implied labor market responses to fiscal shocks are inconsistent with the empirical evidence. We also find that the impact on GDP of consolidations is lower when consumers have a more limited capacity to borrow, and that increasing government spending in an episode of intense private deleveraging can still generate positive and significant effects on consumption and output, although the fiscal output (employment) multiplier decreases (increases) with the intensity of the credit crunch. In the model with indebted impatient households we also observe that output (employment) multipliers decrease (increase) markedly with the degree of shock persistence and increase with the degree of price stickiness.
    Keywords: fiscal multipliers, private leverage, labour market search
    JEL: E24 E44 E62
    Date: 2011–11
  7. By: Matteo Iacoviello (Federal Reserve Board); Marina Pavan (Universitat Jaume I & LEE)
    Abstract: We study housing and debt in a quantitative general equilibrium model. In the cross-section, the model matches the wealth distribution, the age pro?les of homeownership and mortgage debt, and the frequency of housing adjustment. In the time-series, the model matches the procyclicality and volatility of housing investment, and the procyclicality of mortgage debt. We use the model to conduct two experiments. First, we investigate the consequences of higher individual income risk and lower downpayments, and ?nd that these two changes can explain, in the model and in the data, the reduced volatility of housing investment, the reduced procyclicality of mortgage debt, and a small fraction of the reduced volatility of GDP. Second, we use the model to look at the behavior of housing investment and mortgage debt in an experiment that mimics the Great Recession: we ?nd that countercyclical ?nancial conditions can account for large drops in housing activity and mortgage debt when the economy is hit by large negative shocks.
    Keywords: Housing, Housing Investment, Mortgage Debt, Life-cycle Models, Income Risk, Homeownership, Precautionary Savings, Borrowing Constraints
    JEL: E22 E32 E44 E51 D92 R21
    Date: 2011
  8. By: Cloyne, J.S.
    Abstract: This thesis analyses the macroeconomic effects of changes in fiscal policy. Chapter 1 provides an overview. Chapter 2 estimates the macroeconomic effects of tax changes in the United Kingdom. Identification is achieved by constructing an extensive new 'narrative' dataset of 'exogenous' tax changes in the post-war U.K. economy. Using this dataset I find that a 1 per cent cut in taxes increases GDP by 0.6 per cent on impact and by 2.5 per cent over three years. These findings are remarkably similar to narrative-based estimates for the United States. Furthermore, 'exogenous' tax changes are shown to have contributed to major episodes in the U.K. post-war business cycle. The long appendix contains the detailed historical narrative and dataset. Chapter 3 estimates the endogenous feedback from output, debt and government spending to fiscal instruments in the United States. The central innovation is to make direct use of narrative-measured tax shocks in a DSGE model estimated using Bayesian methods. I therefore assume the tax shocks are observable, rather than latent variables. I show that the feedback from debt to the fiscal instruments is weaker than previously estimated and that the capital tax multiplier is higher. Moreover, the data are more consistent with a model with endogenous feedback than one with an exogenous fiscal policy specification. Chapter 4 examines the transmission mechanism of government spending shocks by constructing and estimating a DSGE model for the United States. I show that the endogenous response of different taxes and the strength of wealth effect on labour supply play a powerful role. Given that there is little prior information on the strength of these mechanisms, I estimate the key parameters in the model. I show that this estimated model can match the empirical responses of key variables that are a challenge for many models of this type.
    Date: 2011–09–28
  9. By: Joseph D. ALBA (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore); Wai–Mun CHIA (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore); Donghyun PARK (Asian Development Bank6 ADB Avenue, Mandaluyong City,Metro Manila, Philippines 1550)
    Abstract: East Asia’s small open economies were hit in varying degrees by the sharp drop in the output of major industrial countries during the global financial and economic crisis of 2008-2009. This highlights the role of monetary policy regimes in cushioning small open economies from adverse external output shocks. To assess the welfare impact of external shocks on key macroeconomic variables under different monetary policy regimes, we numerically solve and calculate the welfare loss function of a dynamic stochastic general equilibrium (DSGE) model. We find that CPI inflation targeting minimizes welfare losses for import-to-GDP ratios from 0.3 to 0.9. However, welfare under the pegged exchange rate regime is almost equivalent to CPI inflation targeting when the import-to-GDP ratio is one while the Taylor-type rule minimizes welfare when the import-to-GDP ratio is 0.1. We calibrate the model and derive welfare implications for eight East Asian small open economies.
    Keywords: Trade channel, Import-to-GDP ratio, small open economies, welfare, exchange rate regimes, inflation targeting, Taylor rule, foreign output shock
    JEL: F40 F41 E52 F31
    Date: 2011–05
  10. By: Anton Nakov (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.); Galo Nuno (Banco de España, Alcala 48, 28014 Madrid, Spain.)
    Abstract: We study the dynamics of a Lucas-tree model with finitely lived agents who "learn from experience." Individuals update expectations by Bayesian learning based on observations from their own lifetimes. In this model, the stock price exhibits stochastic boom-and-bust fluctuations around the rational expectations equilibrium. This heterogeneous-agents economy can be approximated by a representative-agent model with constant-gain learning, where the gain parameter is related to the survival rate. JEL Classification: G12, D83, D84.
    Keywords: Learning from experience, OLG, assett pricing, bubbles, heterogeneous agents.
    Date: 2011–11
  11. By: Jurgen von Hagen (University of Bonn, Indiana University and CEPR. Lennestrasse. 37, D-53113 Bonn, Germany.); Haiping Zhang (School of Economics, Singapore Management Unversity)
    Abstract: Recent literature has proposed two alternative types of financial frictions, i.e., limited commitment and incomplete markets, to explain the patterns of international capital flows between developed and developing countries observed in the past two decades. This paper integrates both types of frictions into a two-country overlapping-generations framework to facilitate a direct comparison of their eects. In our model, limited commitment distorts the investment made by agents with different productivity, which creates a wedge between the interest rates on equity capital vs. credit capital; while incomplete markets distort the investment among projects with different riskiness, which creates a wedge between the risk-free rate and the mean rate of return to risky capital. We show that the two approaches are observationally equivalent with respect to their implications for international capital flows, production eciency, and aggregate output.
    Keywords: financial development, financial frictions, foreign direct investment, incomplete markets, limited commitment, international capital flows
    JEL: E44 F41
    Date: 2011–12
  12. By: Carlos Carvalho (PUC-Rio); Jae Won Lee (Rutgers University)
    Abstract: We develop a multi-sector sticky-price DSGE model that can endogenously deliver differential responses of prices to aggregate and sectoral shocks. Input-output production linkages induce across-sector pricing complementarities that contribute to a slow response of prices to aggregate shocks. In turn, input-market segmentation at the sectoral level induces within-sector pricing substitutability, which helps the model deliver a fast response of prices to sector-specific shocks. We estimate the model using aggregate and sectoral price and quantity data for the U.S., and find that it accounts extremely well for a range of sectoral price facts.
    Keywords: heterogeneity, price stickiness, sectoral data, FAVAR, sectoral shocks
    JEL: E30 E31 E32
    Date: 2011–11–04
  13. By: Katsuhiko Hori (Institute of Economic Research, Kyoto University); Katsunori Yamada (Institute of Social and Economic Research, Osaka University)
    Abstract: This study augments a second-generation Schumpeterian growth model to employ human capital explicitly. We clarify the general-equilibrium interactions of subsidy policies to R&D and human capital accumulation in a unified framework. Despite a standard intuition that subsidizing these growth-enhancing activities is always mutually growth promoting, we find asymmetric effects for subsidies on R&D and those on education. Our theoretical result of asymmetric policy effects provides an important empirical caveat that empirical researchers may find false negative relationships between education subsidies and the output growth rate, if they merely rely on the standard human capital model.
    Keywords: Schumpeterian growth model; human capital accumulation; subsidies
    JEL: O15 O32 O41
    Date: 2011–11
  14. By: Fatih Guvenen
    Abstract: This article reviews macroeconomic models with heterogeneous households. A key question for the relevance of these models concerns the degree to which markets are complete. This is because the existence of complete markets imposes restrictions on (i) how much heterogeneity matters for aggregate phenomena and (ii) the types of cross-sectional distributions that can be obtained. The degree of market incompleteness, in turn, depends on two factors: (i) the richness of insurance opportunities provided by the economic environment and (ii) the nature and magnitude of idiosyncratic risks to be insured. First, I review a broad collection of empirical evidence---from econometric tests of “full insurance,” to quantitative and empirical analyses of the permanent income (“self insurance”) model that examine how it fits the facts about life cycle allocations, to studies that try to directly measure where economies place between these two benchmarks (“partial insurance”). The empirical evidence I survey reveals significant uncertainty in the profession regarding the magnitudes of idiosyncratic risks as well as whether or not these risks have increased since the 1970s. An important difficulty stems from the fact that inequality often arises from a mixture of idiosyncratic risk and fixed (or predictable) heterogeneity, making the two challenging to disentangle. I also discuss applications of incomplete markets models to trends in wealth, consumption, and earnings inequality both over the life cycle and over time, where this challenge is evident. Third, I discuss “approximate” aggregation---the finding that some incomplete markets models generate aggregate implications very similar to representative-agent models. What approximate aggregation does and does not imply is illustrated through several examples. Finally, I discuss some computational issues relevant for solving and calibrating such models and I provide a simple yet fully parallelizable global optimization algorithm that can be used to calibrate heterogeneous agent models.
    JEL: E1 E13 E21 E24 E32 E6
    Date: 2011–11
  15. By: Cantore, C.; Ferroni, F.; León-Ledesma, M A.
    Abstract: We investigate the time varying relation between hours and technology shocks using a structural business cycle model. We propose an RBC model with a Constant Elasticity of Substitution (CES) production function that allows for capital- and labor-augmenting technology shocks. We estimate the model with Bayesian techniques. In the full sample, we find (i) evidence in favor of a less than unitary elasticity of substitution (rejecting Cobb-Douglas) and (ii) a sizable role for capital augmenting shock for business cycles fluctuations. In rolling sub-samples, we document that the transmission of technology shocks to hours worked has been varying over time. We argue that this change is due to the increase of the elasticity of factor substitution. That is, labor and capital became less complementary throughout the sample inducing a change in the sign and size of the response of hours. We conjecture that this change may have been induced by a change in the skill composition of the labor input.
    Keywords: Hours Worked and Business Cycles, Bayesian Methods.
    JEL: E32 E62 C11 C22
    Date: 2011
  16. By: Mikhail Golosov; Maxim Troshkin; Aleh Tsyvinski
    Abstract: We study optimal labor and savings distortions in a lifecycle model with idiosyncratic shocks. We show a tight connection between its recursive formulation and a static Mirrlees model with two goods, which allows us to derive elasticity-based expressions for the dynamic optimal distortions. We derive a generalization of a savings distortion for non-separable preferences and show that, under certain conditions, the labor wedge tends to zero for sufficiently high skills. We estimate skill distributions using individual data on the U.S. taxes and labor incomes. Computed optimal distortions decrease for sufficiently high incomes and increase with age.
    JEL: E62 H21 H24 H31
    Date: 2011–12
  17. By: Angelo M. Fasolo
    Abstract: This paper presents the evaluation of the canonical RBC models for small-open economies described in Schmitt-Grohé and Uribe (2003) when the solution is obtained by perturbation methods up to a third-order approximation. The models are evaluated in terms of accuracy of solution, ergodic moments, and local responses in extreme regions of the state vector. Results show that the gains from non-linear solutions are significant in terms of accuracy and with respect to the outcome of simulations: when compared to the linear approximation of the equilibrium conditions, non-linear solution generates very different dynamics of the stationary-inducing devices and smaller responses of consumption and output if the economy is in a state of low capital. However, changes in the main allocations of the economy when using different solution methods appear only locally and under significant increases in the volatility of the economy.
    Date: 2011–11
  18. By: Ryo Arawatari (Graduate School of Economics, Nagoya University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper analyzes the determinants of government debt and social security for the old in a closed-economy, overlapping-generation model. Under the probabilistic voting, the model presents (i) an intergenerational link of resource allocation via debt and social security; (ii) multiple political equilibria; and (iii) a negative cor- relation between tax and debt. These three results are robust to the introduction of public goods as an alternative government expenditure or to the introduction of income heterogeneity within a generation.
    Keywords: Government debt; Social security; Overlapping generations; Proba- bilistic voting
    JEL: D72 H55 H63
    Date: 2011–11
  19. By: Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper develops an overlapping-generation model featuring four types of households: single female, single male, one-breadwinner couple and two-breadwinner couple. The paper considers majority voting over public pension in the presence of derived pension rights for one-breadwinner couples. In an economy with a low in- tertemporal elasticity of substitution, borrowing-constrained one-breadwinner cou- ples may prefer a lower tax rate than do other types of households, although the for- mer attain a higher benefit-to-cost ratio of public pension than do others. Changes in the gender wage gap, the level of derived pension rights, and the fraction of two- breadwinner couples produce an inverse U-shaped relationship between the relevant variable and the tax rate.
    Keywords: Borrowing constraint; Marital status; Gender wage gap; Derived pen- sion rights; Political economy
    JEL: D72 H55 J12
    Date: 2011–11
  20. By: Berno Buechel (University of Hamburg); Tim Hellmann (Institute of Mathematical Economics, Bielefeld University); Michael M. Pichler (Institute of Mathematical Economics, Bielefeld University)
    Abstract: We consider an OLG model (of a socialization process) where continuous traits are transmitted from an adult generation to the children. A weighted social network describes how children are influenced not only by their parents but also by other role models within the society. Parents can invest into the purposeful socialization of their children by strategically displaying a cultural trait (which need not coincide with their true trait). Based on Nash equilibrium behavior, we study the dynamics of cultural traits throughout generations. We provide conditions on the network structure that are sufficient for long-run convergence to a society with homogeneous subgroups. In the special case of quadratic utility, the condition is that each child is more intensely shaped by its parents than by the social environment. The model is akin to the classical DeGroot model of opinion formation which we generalize by allowing for strategic interaction.
    Keywords: cultural transmission, social networks, preference formation, cultural persistence, opinion dynamics
    Date: 2011–12
  21. By: Marina Pavan (The Geary Institute, University College Dublin); Aldo Colussi (University of Western Ontario)
    Abstract: We adopt a structural approach to studying the e,ects of public transfers on consumption smoothing, risk sharing and welfare in small village economies. We calibrate the key parameters of a dynamic limited commitment model using data gathered as part of the Mexican Progresa program, and take advantage of the randomized experimental design of the data to validate the model using the treatment sample. The limited commitment model enriched to allow for unobserved heterogeneity in preferences can reasonably well explain consumption dynamics and cross-sectional distributions. The calibrated model correctly predicts the increase in consumption smoothing of transfers’ recipients, and the decrease in risk sharing between beneficiaries and non beneficiaries of the program. Progresa transfers are found to crowd-out between 3% and 10% of the pre-existing private transfers, but the overall direct e,ect of the subsidy on consumption is welfare improving for all households. Last, we use our structural model to evaluate a counterfactual, fully funded, insurance scheme.
    Keywords: Risk Sharing, Limited Commitment, Crowding-out, Transfers Programs
    JEL: H31 I38 D31 E21
    Date: 2011
  22. By: Thomas F. Crossley (Koc University, University of Cambridge and Institute for Fiscal Studies); Hamish W. Low (corresponding author) (University of Cambridge and Institute for Fiscal Studies)
    Abstract: We use direct evidence on credit constraints to study their importance for household consumption growth and for welfare. We distentangle the direct effect on consumption growth of a currently binding credit constraints from the indirect effect of a potentially binding credit constraint which generates consumption risk. Our data is focused on job losers. We find that less than 5% of job losers experience a binding credit constraint, but for those that do, they experience significant welfare losses, and consumption growth is 24% higher than for the rest of the population. However, even among those who are currently unconstrained and who are able to borrow if needed, consumption responds to transitory income.
    Keywords: Job Loss, Credit Constraints, Consumption
    JEL: D12 D91 J64
    Date: 2011–10
  23. By: Daniel Montolio (University of Barcelona (UB) and Barcelona Institute of Economics (IEB)); Amedeo Piolatto (University of Barcelona (UB) and Barcelona Institute of Economics (IEB)) (Universitat de Barcelona)
    Abstract: Human capital and, therefore, education have an impact on the societys future welfare. In this paper we study the connection between the voters support to public education and the retirement concerns. We show that voters anticipate the positive effect of education on future pensions. The support for a publicly financed education system increases, the more redistributive the pension system is, and this is true also amongst citizens preferring a private school. We also show that the ends against the middle equilibrium can occur even when the voters preferred tax rate is decreasing in income.
    Keywords: olg, pension system, altruism, education, voting
    JEL: D72 H55 H31 H42 H52
    Date: 2011
  24. By: António Afonso (ISEG/UTL – Technical University of Lisbon, Department of Economics; UECE – Research Unit on Complexity and Economics; European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); João Tovar Jalles (University of Aberdeen, Business School, Edward Wright Building, Dunbar Street, AB24 3QY, Aberdeen, UK and European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We construct a growth model with an explicit government role, where more government resources reduce the optimal level of private consumption and of output per worker. In the empirical analysis, for a panel of 108 countries from 1970-2008, we use different proxies for government size and institutional quality. Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth. JEL Classification: C10, C23, H11, H30, O40.
    Keywords: Growth, institutions, fiscal rules, pooled mean group, common correlated effects.
    Date: 2011–11
  25. By: Bhowmik, Anuj; Cao, Jiling
    Abstract: In this paper, we establish two different characterizations of Walrasian expectations allocations by the veto power of the grand coalition in an asymmetric information economy having finitely many agents and states of nature and whose commodity space is a Banach lattice. The first one deals with Aubin non-dominated allocations, and the other claims that an allocation is a Walrasian expectations allocation if and only if it is not privately dominated by the grand coalition, by considering perturbations of the original initial endowments in precise directions.
    Keywords: Asymmetric information economy; Aubin non-dominated allocation; Private core; Privately non-dominated allocation; Properness; Walrasian expectations allocation
    JEL: D11 D82 D51
    Date: 2011–06–23
  26. By: Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University); John Stachurski (Research School of Economics, Australian National University)
    Abstract: This paper strengthens the Hopenhayn and Prescott stability theorem for monotone economies. We extend the theorem to a larger class of applications, and develop new perspectives on the nature and causes of stability and instability. In addition, we show that models satisfying the Hopenhayn-Prescott theorem are ergodic, in the sense that sample averages of time series converge with probability one to their corresponding expectations under the stationary distribution, independent of initial conditions.
    Date: 2011–12

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