nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒02‒08
five papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Limited Participation in International Business Cycle Models: A Formal Evaluation By Gao, Xiaodan; Hnarkovska, Viktoria; Marmer, Vadim
  2. Endogenous Growth and Fluctuations in an Overlapping Generations Economy with Credit Market Imperfections By Kunieda, Takuma; Shibata, Akihisa
  3. Fiscal Multipliers over the Business Cycle By Pascal Michaillat
  4. Evaluating point and density forecasts of DSGE models By Wolters, Maik Hendrik
  5. The financial accelerator and monetary policy rules By Christoph Thoenissen; Gunes Kamber

  1. By: Gao, Xiaodan; Hnarkovska, Viktoria; Marmer, Vadim
    Abstract: In this paper we study the role of limited asset market participation (LAMP) for international business cycles. We show that when limited participation is introduced into an otherwise standard model of international business cycles, the performance of the model improves significantly, especially in matching cross-country correlations. To perform formal evaluation of the models we develop a novel statistical procedure that adapts the test of Vuong (1989) to DSGE models and accounts for the possibility that models are misspecified. Based on this test we show that the improvements brought out by LAMP are statistically significant, leading a model with LAMP to outperform a representative agent model. Furthermore, when LAMP is introduced, a model with complete markets is found to do better than a model with no trade in financial assets - a well-known favorite in the literature. Our results remain robust to the inclusion of investment specific technical change.
    Keywords: international business cycles, incomplete markets, limited asset market participation
    JEL: F3 F4
    Date: 2012–01–22
  2. By: Kunieda, Takuma; Shibata, Akihisa
    Abstract: We study the dynamic properties of growth rates in an overlapping generations economy with credit market imperfections. The analysis demonstrates that in early stages of financial development where credit constraints are severe, growth rates evolve monotonically. At the intermediate level of financial development, as the degree of credit market imperfections diminishes, growth rates exhibit endogenous fluctuations for some parameter values. However, as the financial sector matures, fluctuations disappear and the growth rates evolve once again monotonically.
    Keywords: Credit market imperfections; Endogenous business fluctuations; Endogenous growth; Heterogeneous agents
    JEL: O41
    Date: 2011–12
  3. By: Pascal Michaillat
    Abstract: This paper illustrates why fiscal policy becomes more effective as unemployment rises in recessions. The theory is based on the equilibrium unemployment model of Michaillat (forthcoming), in which jobs are rationed in recessions. Fiscal policy takes the form of government spending on public-sector jobs. Recessions are periods of acute job shortage without much competition for workers among recruiting firms; hiring in the public sector does not crowd out hiring in the private sector much; therefore fiscal policy reduces unemployment effectively. Formally the fiscal multiplier—the reduction in unemployment rate achieved by spending one dollar on public-sector jobs—is countercyclical. An implication is that available estimates of the fiscal multiplier, which measure the average effect of fiscal policy over the business cycle, do not apply in recessions because the multiplier is much higher in recessions than on average.
    Keywords: Fiscal multiplier, unemployment, business cycle, job rationing, matching frictions
    JEL: E24 E32 E62 J64
    Date: 2012–01
  4. By: Wolters, Maik Hendrik
    Abstract: This paper investigates the accuracy of point and density forecasts of four DSGE models for inflation, output growth and the federal funds rate. Model parameters are estimated and forecasts are derived successively from historical U.S. data vintages synchronized with the Fed’s Greenbook projections. Point forecasts of some models are of similar accuracy as the forecasts of nonstructural large dataset methods. Despite their common underlying New Keynesian modeling philosophy, forecasts of different DSGE models turn out to be quite distinct. Weighted forecasts are more precise than forecasts from individual models. The accuracy of a simple average of DSGE model forecasts is comparable to Greenbook projections for medium term horizons. Comparing density forecasts of DSGE models with the actual distribution of observations shows that the models overestimate uncertainty around point forecasts.
    Keywords: DSGE models; forecasting; model uncertainty; forecast combination; density forecasts; real-time data; Greenbook
    JEL: E0 E32 C53 E31 E37
    Date: 2012–01–23
  5. By: Christoph Thoenissen; Gunes Kamber
    Abstract: The ability of financial frictions to amplify the output response of monetary policy, as in the financial accelerator model of Bernanke et al. (1999), is analyzed for a wider class of policy rules where the policy interest rate responds to both in inflation and the output gap. When policy makers respond to the output gap as well as in inflation, the standard financial accelerator model reacts less to an interest rate shock than does a comparable model without an operational financial accelerator mechanism. In recessions, when firm-specific volatility rises, financial acceleration due to financial frictions is further reduced, even under pure inflation targeting.
    Keywords: Financial acceleration; financial frictions; monetary policy.
    JEL: E32 E52
    Date: 2011–12

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