nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒01‒10
seven papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Human Capital Risk, Contract Enforcement, and the Macroeconomy By Tom Krebs; Moritz Kuhn; Mark L. J. Wright
  2. Business cycles in a small open economy: The case of Hong Kong. By Paulina Etxeberria-Garaigorta.; Amaia Iza
  3. Information, Commitment, and Separation in Illiquid Housing Markets By Derek Stacey
  4. Taxation and Migration: Policies to Manage a Resource Boom By Ratbek Dzhumashev; Jaai Parasnis
  5. Growth with a Fixed Factor By Erzo G. J. Luttmer
  6. Income Asymmetries and the Permanent Income Hypothesis By Juan Urquiza
  7. Dedollarization and financial robustness By Gondo, Rocio; Orrego, Fabrizio

  1. By: Tom Krebs; Moritz Kuhn; Mark L. J. Wright
    Abstract: We develop a macroeconomic model with physical and human capital, human capital risk, and limited contract enforcement. We show analytically that young (high-return) households are the most exposed to human capital risk and are also the least insured. We document this risk-insurance pattern in data on life-insurance drawn from the Survey of Consumer Finance. A calibrated version of the model can quantitatively account for the life-cycle variation of insurance observed in the US data and implies welfare costs of under-insurance for young households that are equivalent to a 4 percent reduction in lifetime consumption. A policy reform that makes consumer bankruptcy more costly leads to a substantial increase in the volume of credit and insurance.
    JEL: D52 E21 E24 J24
    Date: 2011–12
  2. By: Paulina Etxeberria-Garaigorta. (Department of Economics, University of Pennsylvania, visiting scholar.); Amaia Iza (Departamento de Fundamentos del Análisis Económico II, Universidad del País Vasco)
    Abstract: This paper analyzes the business cycle properties of the Hong Kong economy during the 1982-2004 period, which includes the financial crisis experienced in 1997-98. We show that output, output growth rate and real interest rates volatilities in Hong Kong are higher than their respective average volatilities among developed economies. In this paper, we build a stochastic neoclassical small open economy model that seeks to replicate the main business cycle characteristics of Hong Kong, and through which we try to quantify the role played by exogenous Total Factor Productivity (transitory and permanent), real interest rates shocks and financial frictions. The main findings are that the trend volatility has to be higher than the volatility of the transitory fluctuations around the trend; that the volatility of real interest rates are mainly due to country risk spread, and that financial frictions matter to explain real interest rates countercyclicality.
    Keywords: Business cycles, Financial Frictions, Total Factor Productiviy, Country Risk Spread,
    JEL: E13 E32 F41
    Date: 2011–12–29
  3. By: Derek Stacey (Queen's University)
    Abstract: I propose a model of the housing market using a search framework with asymmetric information in which sellers are unable to commit to asking prices announced ex ante. Relaxing the commitment assumption prevents sellers from using price posting as a signalling device to direct buyers` search. Adverse selection and inefficient entry on the demand side then contribute to housing market illiquidity. Real estate agents that can improve the expected quality of a match can segment the market and alleviate information frictions. Even if one endorses the view that real estate agents provide no technological advantage in the matching process, incentive compatible listing contracts are implementable as long as housing is not already sufficiently liquid. The theoretical implications are qualitatively consistent with the empirical observations of real estate brokerage: platform differentiation, endogenous sorting, and listing contract features that reinforce incentive compatibility.
    Keywords: Housing, Search, Liquidity, Real Estate Agents
    JEL: D40 D44 D83 R31
    Date: 2012–01
  4. By: Ratbek Dzhumashev; Jaai Parasnis
    Abstract: The Australian economy is currently experiencing a resource boom and policy responses to this boom such as migration and taxation, as well as the broader role of monetary and fiscal policies are the subject of academic as well as public debate. This paper investigates the impact of a resource boom in a dynamic macroeconomic model, focusing on the allocation of resources across sectors and changes in income distribution. Further, the paper contributes to the current policy debate by analysing the role and effectiveness of government policy through its migration policy and taxation of the mining sector, in addressing the short run and steady state impacts of a resource boom. Results illustrate that while increased immigration is an appropriate short run response, long run welfare can be enhanced by higher taxation of the mining sector. Indeed, results show that increased tax revenue can fund appropriate transfers to mitigate the adverse effects on labour income and provision of public goods to increase productivity in the rest of the economy.
    Keywords: Dutch Disease, natural resources, economic growth, income distribution
    JEL: E25 E60 H20 Q33 Q38
    Date: 2011–12
  5. By: Erzo G. J. Luttmer (Department of Economics, University of Minnesota and Federal Reserve Bank of Minnesota)
    Abstract: Consider an economy in which a fi…xed supply of unskilled labor can be combined with knowledge capital to produce consumption. The technology for accumulating knowledge capital is linear in knowledge capital. This leads to long-term growth if the production function for consumption goods is approximately Cobb-Douglas for large values of the stock of knowledge capital. The quality-ladder economy of Boldrin and Levine [2010] generates a menu of Leontief technologies with this feature. If the initial capital stock is low, there can be a long period of stagnation before unskilled wages start to grow, as in Lewis [1954]. A small open economy with a sufficiently low initial capital stock will run a trade surplus during its initial stages of development.
    Keywords: economic growth, aggregate productivity
    JEL: O4
    Date: 2012–01–01
  6. By: Juan Urquiza
    Abstract: Within the context of the Permanent Income Hypothesis (PIH), the predictions for consumption depend crucially upon the process for income. In this paper, we consider an unobserved components model that allows for both asymmetric transitory movements and correlation between permanent and transitory innovations. Using aggregate U.S. data, we show that this model fits labor income data significantly better than common alternatives. However, we find that consumption is excessively smooth relative to the predictions of our model. To reconcile these predictions with the data, we explore the possibility of imperfect information. A delayed information version of the model fits the data better but consumption is excessively sensitive compared to the predictions of this model. We are able to match the data when we consider an economy in which 60 – 65% of consumers behave according to the PIH with full information and the remaining consumers have delayed information.
    Keywords: Unobserved Components Models, markov-Switching, consumption dynamics, excess smoothness, excess sensitivity, imperfect information
    JEL: C22 C51 E21 E32
    Date: 2011
  7. By: Gondo, Rocio (University of Maryland); Orrego, Fabrizio (Central Bank of Peru)
    Abstract: This paper evaluates the qualitative and quantitative implications of financial dedollarization of firms' liabilities on real aggregates in a small open economy model. We extend the standard Cespedes, Chang, and Velasco (2004) model by allowing entrepreneurs borrow in both foreign and domestic currency so as to finance firms' capital needs. A real depreciation reduces the value of firms' net worth whenever there is a currency mismatch in their balance sheets. Under flexible exchange rates, a lower degree of dollarization lessens the negative impact on output and investment, since there is a smaller increase in the cost of external borrowing. The quantitative results show that the balance sheet channel accounts for about 70 percent of the output and investment drop in Peru following the Russian Crisis, and a reduction in debt dollarization would have reduced output drop in 0.9 percentage points of GDP.
    Keywords: Small open economy, balance sheet eects, dollarization
    JEL: F31 F41 G32
    Date: 2011–12

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