nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒01‒25
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. An Equilibrium Asset Pricing Model with Labor Market Search By Lars-Alexander Kuehn; Nicolas Petrosky-Nadeau; Lu Zhang
  2. Employment Protection and Business Cycles in Emerging Economies By Lama, Ruy; Urrutia, Carlos
  3. Directed Search over the Life Cycle By Guido Menzio; Irina A. Telyukova; Ludo Visschers
  4. Survey of Research on Financial Sector Modeling within DSGE Models: What Central Banks Can Learn from It By Frantisek Brazdik; Michal Hlavacek; Ales Marsal
  5. Indeterminacy and nonlinear dynamics in an OLG growth model with endogenous labour supply and inherited tastes By Gori, Luca; Sodini, Mauro
  6. Welfare improving taxation on savings in a growth model By Long Xin; Pelloni Alessandra
  7. Reforming the labor market and improving competitiveness: An analysis for Spain using FiMod By Schwarzmüller, Tim; Stähler, Nikolai
  8. Fat-Tail Distributions and Business-Cycle Models By Guido Ascari; Giorgio Fagiolo; Andrea Roventini
  9. Self – Employment, Labor Market Rigidities and Unemployment Over the Business Cycle By Gonzalo Castex; Miguel Ricaurte
  10. Expectations-driven cycles in the housing market By Lambertini, Luisa; Mendicino , Caterina; Punzi , Maria Teresa
  11. News Shocks, Productivity and the U.S. Investment Boom-Bust Cycle By Lilia Karnizova
  12. Child Benefit and Fiscal Burden in the Endogenous Fertility Setting By Ishida, Ryo; Oguro, Kazumasa; Takahata, Junichiro
  13. Housing market and current account imbalances in the international economy By Punzi, Maria Teresa
  14. Existence and generic efficiency of equilibrium in two-period economies with private state-verification By João Correia da Silva; Carlos Hervés-Beloso

  1. By: Lars-Alexander Kuehn; Nicolas Petrosky-Nadeau; Lu Zhang
    Abstract: Search frictions in the labor market help explain the equity premium in the financial market. We embed the Diamond-Mortensen-Pissarides search framework into a dynamic stochastic general equilibrium model with recursive preferences. The model produces a sizeable equity premium of 4.54% per annum with a low interest rate volatility of 1.34%. The equity premium is strongly countercyclical, and forecastable with labor market tightness, a pattern we confirm in the data. Intriguingly, search frictions, combined with a small labor surplus and large job destruction flows, give rise endogenously to rare disaster risks a la Rietz (1988) and Barro (2006).
    JEL: G12 J23
    Date: 2012–01
  2. By: Lama, Ruy (International Monetary Fund); Urrutia, Carlos (Centro de Investigación Económica, ITAM)
    Abstract: We build a small open economy, real business cycle model with labor market frictions to evaluate the role of employment protection in shaping business cycles in emerging economies. The model features matching frictions and an endogenous selection effect by which inefficient jobs are destroyed in recessions. In a quantitative version of the model calibrated to the Mexican economy we find that reducing separation costs to a level consistent with developed economies would reduce output volatility by 15 percent. We also use the model to analyze the Mexican crisis episode of 2008 and conclude that an economy with lower separation costs would have experienced a smaller drop in output and in measured total factor productivity with no significant change in aggregate employment.
    Date: 2012–01
  3. By: Guido Menzio; Irina A. Telyukova; Ludo Visschers
    Abstract: We develop a life-cycle model of the labor market in which different worker-firm matches have different quality and the assignment of the right workers to the right firms is time consuming because of search and learning frictions. The rate at which workers move between unemployment, employment and across different firms is endogenous because search is directed and, hence, workers can choose whether to seek low-wage jobs that are easy to find or high-wage jobs that are hard to find. We calibrate our theory using data on labor market transitions aggregated across workers of different ages. We validate our theory by showing that it correctly predicts the pattern of labor market transitions for workers of different ages. Finally, we use our theory to decompose the age profiles of transition rates, wages and productivity into the effects of age variation in work-life expectancy, human capital and match quality.
    JEL: E24 J63 J64
    Date: 2012–01
  4. By: Frantisek Brazdik; Michal Hlavacek; Ales Marsal
    Abstract: This survey gives insight into the ongoing research in financial frictions modeling. The recent financial turmoil has fueled interest in operationalizing financial frictions concepts and introducing them into tools for policy makers. The rapid growth of the literature on these issues is the motivation for our review of the presented approaches. The empirical facts that motivate the inclusion of financial frictions are surveyed. This survey provides a description of the basic approaches for introducing financial frictions into dynamic stochastic general equilibrium models. The significance and empirical identification of the financial accelerator effect is then discussed. The role of financial frictions models in CNB monetary and macroprudential policy is also described. It is concluded that given the heterogeneity of the approaches to financial frictions it is beneficial for the conduct of monetary policy to focus on the development of satellite approaches. The role of financial frictions in DSGE models for macroprudential policy is also discussed, as these models can be used to generate stress-testing scenarios. It can be concluded that DSGE models with financial frictions could complement current stress-testing practice, but are not able to replace stress tests.
    Keywords: DSGE models, financial accelerator, financial frictions.
    JEL: E21 E22 E27 E59
    Date: 2011–12
  5. By: Gori, Luca; Sodini, Mauro
    Abstract: This study analyses the dynamics of a two-dimensional overlapping generations economy with endogenous labour supply à la Reichlin (1986) and aspirations, i.e. effective consumption by individuals of the current generation depends on the standard of living (based on consumption experience) of those that belong to the previous generation. We show that the relative importance of aspirations in utility is responsible for the existence of either one (normalised) steady state or two steady states. In particular, when the relative degree of aspiration is fairly high, the supply of labour becomes higher than those corresponding to the normalised steady state because individuals want to increase the amount of time spent at work when they are young in order to increase consumption possibilities when they are old, since the relative importance of past consumption is high in such a case. As regards local stability, the normalised steady state can be determinate or indeterminate and can undergo either a transcritical bifurcation or supercritical flip bifurcation depending on the intensity of the taste externality. Moreover, some interesting global dynamic properties emerge: indeed, when the relative importance of aspirations is strong enough, cyclical or quasi-cyclical behaviour and/or coexistence of attractors may occur. In particular, this last phenomena may cause global indeterminacy even if the stationary equilibria are locally determinate.
    Keywords: Aspirations; Indeterminacy; Labour supply; OLG model; Nonlinear dynamics
    JEL: C68 O41 J22 C61 C62
    Date: 2012–01–13
  6. By: Long Xin; Pelloni Alessandra
    Keywords: Capital Income taxes, R&D, growth effect, welfare effect
    JEL: E62 H21 O41
    Date: 2011–12
  7. By: Schwarzmüller, Tim; Stähler, Nikolai
    Abstract: This paper uses an extended version of 'FiMod - A DSGE Model for Fiscal Policy Simulations' (Stähler and Thomas, 2011) with endogenous job destruction decisions by private firms to analyze the effects of several currently discussed labor market reforms on the Spanish economy. The main focus is on the firms' hiring and firing decisions, on the implications for fiscal balances and on Spain's international competitiveness. We find that measures aiming at reducing (policy-induced) outside option of workers, such as a decrease in unemployment benefits, public wages or, to a lesser extent, public-sector employment, seem most beneficial to foster output, employment, international competitiveness and fiscal balances. Decreasing the unions' bargaining power also accomplishes this task, however, at a lower level and at the cost of higher job turnover. Our simulation suggests that reforming employment protection legislation does not seem to be a suitable tool from the perspective of improving international competitiveness. All measures imply (income) redistribution between optimizing and liquidity-constrained consumers. Our analysis also suggests that those reforms that are beneficial for Spain generate positive spillovers to the rest of EMU, too. --
    Keywords: general equilibrium,fiscal policy simulations,labor market search
    JEL: E24 E32 E62 H20 H50
    Date: 2011
  8. By: Guido Ascari; Giorgio Fagiolo; Andrea Roventini
    Abstract: Recent empirical findings suggest that macroeconomic variables are seldom normally distributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) densities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this statistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.
    Keywords: Growth-Rate Distributions, Normality, Fat Tails, Time Series, Exponential-Power Distributions, Laplace Distributions, DSGE Models, RBC Models
    JEL: C1 E3
    Date: 2012–01–18
  9. By: Gonzalo Castex; Miguel Ricaurte
    Abstract: In a general equilibrium context, we analyze the impact of changes in institutional labor market conditions, such as access to financing and efficiency, on the composition of employment and unemployment, considering the nature of formal labor contracts and the entrepreneurial capacity of the labor force. We extend the Mortensen - Pissarides model to allow for two types of formal job contracts: temporary and permanent; and we also allow for self-employment. We show that labor market efficiency as well as access to selfemployment financing played a key role in the evolution of employment in Chile during the last 15 years. Additionally, and not surprisingly, tougher access to financing adversely affects self-employment
    Date: 2011–12
  10. By: Lambertini, Luisa (EPFL, College of Management); Mendicino , Caterina (Banco de Portugal, Departamento Estudos Economicos); Punzi , Maria Teresa (University of Nottingham)
    Abstract: Survey data suggests that news of changes in business conditions are significantly related to house prices and consumers' beliefs of favorable buying conditions in the housing market. This paper explores the transmission of "news shocks" as a source of boom-bust cycles in the housing market. News on shocks originated in different sectors of the economy can generate booms in the housing market in accordance with the average behavior in the data; expectations on monetary policy and in inflationary shocks that are not fulfilled can also lead to the observed subsequent macroeconomic recession. Investigating the role of the credit market for house market fluctuations we find that favorable credit conditions that are expected to be reversed in the near future generate boom-bust cycle dynamics in line with the most recent episode. Further, credit conditions also affect boom-bust cycles generated by news shocks originated in other sectors of the economy. In particular, lower loan-to-value ratios reduce the severity of expectations-driven cycles and the volatility of household debt, aggregate consumption and GDP.
    Keywords: boom-bust cycles; credit frictions; housing market
    JEL: E32 E44 E52
    Date: 2012–01–11
  11. By: Lilia Karnizova (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: Overly optimistic expectations concerning productivity and consequent downward revisions are commonly viewed as a key determinant of U.S. investment during the boom-bust cycle of 1995–2003. This view is formalized and evaluated in a general equilibrium model with news shocks about future productivity and preferences for financial wealth. The model generates a boom-bust cycle in response to good news that is not realized. A method is devised to estimate “the productivity prospects”: a series that captures the effects of news shocks on economic decisions. The estimated series rises during the boom, falls during the recession and helps forecast future productivity shocks at several horizons. The model's predictions for sample paths of hours worked, output, investment, consumption, wages and stock prices are largely in conformity with U.S. data. The model therefore offers a possible solution to several puzzles identified in the literature regarding the 1990's boom and the 2001 recession.
    Keywords: boom-bust cycles; news shocks; investment; expectations; preferences for wealth
    JEL: E21 E22 E27 E32
    Date: 2012
  12. By: Ishida, Ryo; Oguro, Kazumasa; Takahata, Junichiro
    Abstract: This paper analyzes the possibility of improving the efficiency of child benefit programs in an overlapping generations economy that has endogenous fertility and large government debt levels. We derive the conditions for this improvement using Representative-Consumer and Children-for-Representative-Consumers efficiency criteria in the endogenous fertility setting, as proposed by Michel and Wigniolle (2007). We find that the result crucially depends on the relative amount of accumulated government debt in the economy. When the elasticity of interest rates to child benefit is close to zero and there exists a huge amount of accumulated debt in the economy, financing child benefit programs by issuing debt and using lump-sum tax leads to RC-improvements. This finding is likely to hold in the economies of developed countries that have low fertility rates. We finally provide the implications of these findings on the real economy.
    Keywords: Endogenous fertility, Pareto-efficiency, child benefit, fiscal burden
    JEL: D9 J13 D61
    Date: 2012–01
  13. By: Punzi, Maria Teresa (Bank of Finland Research)
    Abstract: This paper presents a two-sector, two-country model showing that inflation in the housing market, a low personal savings rate, and a construction investment boom can contribute to a large current account deficit. In the model, demand by a group of households in the domestic country is constrained by the availability of collateral. This implies more procyclical debt capacity because constrained households can borrow against the increase in the value of their houses during an expansion. A higher degree of financial liberalization and development helps constrained households reach higher loan-to-value ratios, thus relaxing their borrowing constraints. The resulting higher net worth and lower need for savings imply a worsening current account.
    Keywords: housing market; current account; international economy
    JEL: E21 E32 F32 F41 J22
    Date: 2012–01–10
  14. By: João Correia da Silva (CEF.UP, Faculdade de Economia, Universidade do Porto); Carlos Hervés-Beloso (Universidad de Vigo)
    Abstract: Private state-verification is introduced in a two-period economy with spot markets in both periods and complete futures markets for contingent delivery in the second period. Existence of equilibrium is established, under standard assumptions. The equilibrium allocation is shown to be generically efficient if the number of states is not greater than the number of goods.
    Keywords: General equilibrium, Differential information, Private state-verification, Two-period economies, Existence of equilibrium, Generic efficiency
    JEL: C62 C72 D51 D82
    Date: 2012–01

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