nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒02‒20
34 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Is Labor Supply Important for Business Cycles? By Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Ayşegül Şahin
  2. Demography, capital flows and unemployment By Luca MARCHIORI; Olivier PIERRARD; Henri R. SNEESSENS
  3. Bayesian Estimation of DSGE Models: Is the Workhorse Model Identified? By Evren Caglar; Jagjit S. Chadha; Katsuyuki Shibayama
  4. Evidence on a DSGE Business Cycle model subject to Neutral and Investment-Specific Technology Shocks using Bayesian Model Averaging By Rodney W. Strachan; Herman K. van Dijk
  5. Confronting Model Misspecification in Macroeconomics By Daniel F. Waggoner; Tao Zha
  6. Fat-tail Distributions and Business-Cycle Models By Guido Ascari; Giorgio Fagiolo; Andrea Roventini
  7. The Conditions for a Balanced Growth in a Model with Public Finance: an Analytic Solution By Carboni, Oliviero; Russu, Paolo
  8. Selective Hiring and Welfare Analysis in Labor Market Models By Merkl, Christian; van Rens, Thijs
  9. Unemployment Benefits or Taxes: How Should Policy Makers Redistribute Income over the Business Cycle? By Ek, Susanne
  10. Optimal Asset Taxes in Financial Markets with Aggregate Uncertainty By Florian Scheuer
  11. A Growth Model with Qualities, Varieties, and Human Capital: Stability and Transitional Dynamics By Tiago Neves Sequeira; Alexandra Ferreira Lopes; Orlando Gomes
  12. Growth vs. level effect of population change on economic development: An inspection into human-capital-related mechanisms By Raouf BOUCEKKINE; B. MARTINEZ; J. R. RUIZ-TAMARIT
  13. Identifying News Shocks with Forecast Data By Yasuo Hirose; Takushi Kurozumi
  14. The Contributions of Search and Human Capital to Earnings Growth Over the Life Cycle By Audra J. Bowlus; Alexander Huju Liu
  15. Aggregate Implications of a Credit Crunch By Francisco J. Buera; Benjamin Moll
  16. Optimal savings for retirement: The role of individual accounts and disaster expectations By Le Blanc, Julia; Scholl, Almuth
  17. Excessive Imbalance Procedure in the EU: a Welfare Evaluation By Andrzej Torój
  18. A gains from trade perspective on macroeconomic fluctuations By Beaudry, Paul; Portier, Franck
  19. Taxes and Labor Supply: Portugal, Europe, and the United States By Andre C. Silva
  20. Towards a Micro-Founded Theory of Aggregate Labor Supply By Andres Erosa; Luisa Fuster; Gueorgui Kambourov
  21. Optimal risk sharing and borrowing constraints in a continuous-time model with limited commitment By Grochulskiy, Borys; Zhang, Yuzhe
  22. Fooled by Search: Housing Prices, Turnover and Bubbles By Brian M. Peterson
  23. Seasonal cycles in the housing market By Selcuk, Cemil
  24. Incomplete financial participation: exclusive markets, investment clubs and credit risk By Pérez Fernández, Víctor; Torres-Martínez, Juan Pablo
  25. Time-Varying Oil Price Volatility and Macroeconomic Aggregates By Michael Plante; Nora Traum
  26. Is the matching function Cobb-Douglas? By Ausias Ribo1 (Universitat de Barcelona); Montserrat Vilalta-Bufi (Universitat de Barcelona)
  27. Wages, rents, unemployment, and the quality of life By Wrede, Matthias
  28. Determinants of credit to households in a life-cycle model By Michal Rubaszek; Dobromil Serwa
  29. Price policies and Price dispersion in the private healthcare insurance industry: The Catalan case By Oliva, Martí; Carles Lavila, Misericòrdia
  30. Optimal taxation and the skill premium By Konstantinos Angelopoulos; James Malley; Apostolis Philippopoulos
  31. Optimal Monetary Policy in an Estimated Local Currency Pricing Model By Okano, Eiji; Eguchi, Masataka; Gunji, Hiroshi; Miyazaki, Tomomi
  32. Fiscal Policy in a Financial Crisis: Standard Policy vs. Bank Rescue Measures By Robert Kollmann; Werner Roeger; Jan in'tVeld
  33. An assessment of Stability and Growth Pact Reform Proposals in a Small-Scale Macro Framework By Jerome Creel; Paul Hubert; Francesco Saraceno
  34. Why Are So Many Disabled Individuals Not Working in Spain? A Job Search Approach By Silva, José I.; Vall Castello, Judit

  1. By: Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Ayşegül Şahin
    Abstract: We build a general equilibrium model that features uninsurable idiosyncratic shocks, search frictions and an operative labor supply choice along the extensive margin. The model is calibrated to match the average levels of gross flows across the three labor market states: employment, unemployment, and non-participation. We use it to study the implications of two kinds of aggregate shocks for the cyclical behavior of labor market aggregates and flows: shocks to search frictions (the rates of job finding and job loss) and shocks to the return on the market activity (any factors affecting aggregate productivity). We find that both kinds of shocks are needed to explain the labor market data, and that an active labor supply channel is key. A model with friction shocks only, calibrated to match unemployment fluctuations, accounts for only a small fraction of employment fluctuations and has counterfactual cyclical predictions for participation.
    JEL: E24 J22 J64
    Date: 2012–01
  2. By: Luca MARCHIORI (Central Bank of Luxembourg and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Olivier PIERRARD (Central Bank of Luxembourg and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Henri R. SNEESSENS (CREA, Université du Luxembourg and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and IZA, Bonn)
    Abstract: This paper contributes to the already vast literature on demography-induced international capital flows by examining the role of labor market imperfections and institutions. We setup a two-country overlapping generations model with search unemployment, which we calibrate on EU15 and US data. Labor market imperfections are found to significantly increase the volume of capital flows, because of stronger employment adjustments in comparison with a competitive economy. We next exploit themodel to investigate how demographic asymmetriesmay have contributed to unemployment and welfare changes in the recent past (1950-2010). We show that a policy reform in one country also has an impact on labor markets in other countries when capital is mobile.
    Keywords: demographics; capital flows; overlapping generations; general equilibrium; unemployment
    JEL: C68 D91 E24 F21 J11
    Date: 2011–10–31
  3. By: Evren Caglar (University of Kent); Jagjit S. Chadha (University of Kent); Katsuyuki Shibayama (University of Kent)
    Abstract: Koop, Pesaran and Smith (2011) suggest a simple diagnostic indicator for the Bayesian estimation of the parameters of a DSGE model. They show that, if a parameter is well identified, the precision of the posterior should improve as the (artificial) data size T increases, and the indicator checks the speed at which precision improves. It does not require any additional programming; a researcher just needs to generate artificial data and estimate the model with different T. Applying this to Smets and Wouters'(2007) medium size US model, we find that while exogenous shock processes are well identified, most of the parameters in the structural equations are not.
    Keywords: Bayesian Estimation, Dynamic stochastic general equilibrium models, Identification.
    JEL: C51 C52 E32
    Date: 2012–02
  4. By: Rodney W. Strachan; Herman K. van Dijk
    Abstract: The empirical support for a DSGE type of real business cycle model with two technology shocks is evaluated using a Bayesian model averaging procedure that makes use of a finite mixture of many models within the class of vector autoregressive (VAR) processes. The linear VAR model is extended to permit equilibrium restrictions and restrictions on long-run responses to technology shocks apart from having a range of lag structures and deterministic processes. These model features are weighted as posterior probabilites and computed using MCMC and analytical methods. Uncertainty exists as to the most appropriate model for our data, with five models receiving significant support. The model set used has substantial implications for the results obtained. We do find support for a number of features implied by the real business cycle model. Business cycle volatility seems more due to investment specific technology shocks than neutral technology shocks and this result is robust to model specification. These techonolgy schocks appear to account for all stochastic trends in our system after 1984. we provide evidence on the uncertainty bands associated with these results.
    JEL: C11 C32 C52
    Date: 2012–02
  5. By: Daniel F. Waggoner; Tao Zha
    Abstract: We estimate a Markov-switching mixture of two familiar macroeconomic models: a richly parameterized DSGE model and a corresponding BVAR model. We show that the Markov-switching mixture model dominates both individual models and improves the fit considerably. Our estimation indicates that the DSGE model plays an important role only in the late 1970s and the early 1980s. We show how to use the mixture model as a data filter for estimation of the DSGE model when the BVAR model is not identified. Moreover, we show how to compute the impulse responses to the same type of shock shared by the DSGE and BVAR models when the shock is identified in the BVAR model. Our exercises demonstrate the importance of integrating model uncertainty and parameter uncertainty to address potential model misspecification in macroeconomics.
    JEL: C52 E2 E4
    Date: 2012–01
  6. By: Guido Ascari (University of Pavia); Giorgio Fagiolo (Sant'Anna School of Advanced Studies); Andrea Roventini (OFCE-Sciences-po,Sant'Anna School of Advanced Studies)
    Abstract: Recent empirical findings suggest that macroeconomic variables are seldom normally dis- tributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) den- sities, 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 sta- tistical 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
  7. By: Carboni, Oliviero; Russu, Paolo
    Abstract: This paper studies the equilibrium dynamics of a growth model with public finance where two different allocations of public resources are considered. The model simulta- neously determines the optimal shares of consumption, capital accumulation, taxes and composition of the two different public expenditures which maximize a representative household’s lifetime utilities for a centralized economy. The analysis supplies a closed form solution. Moreover, with one restriction on the parameters ( = ) we fully de- termine the solutions path for all variables of the model and determine the conditions for a balanced growth.
    Keywords: growth models; fiscal policy; public spending composition
    JEL: H50 H20 O40
    Date: 2011
  8. By: Merkl, Christian (University of Erlangen-Nuremberg); van Rens, Thijs (CREI and Universitat Pompeu Fabra)
    Abstract: Firms select not only how many, but also which workers to hire. Yet, in standard search models of the labor market, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a search model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective.
    Keywords: labor market models, welfare, optimal unemployment insurance
    JEL: E24 J65
    Date: 2012–01
  9. By: Ek, Susanne (Uppsala University)
    Abstract: This paper studies optimal unemployment benefit levels and optimal proportional income tax rates over the business cycle. Previous research suggests that policy makers should make unemployment insurance (UI) dependent on the business cycle because the UI system can be used to smooth consumption across different economic states. However, high benefits increase unemployment. An alternative way to redistribute income is to vary tax rates over the business cycle. In this paper, we develop an equilibrium search and matching model with risk-averse workers and two states, namely, a good and a bad state. The model yields potential ambiguity concerning the welfare effects of business cycle-dependent UI. The model is calibrated to United States (U.S.) labor market data. The numerical results suggest that higher benefits in the bad state are optimal, but the benefit differential is small. A more efficient way for policy makers to redistribute income over the business cycle is to decrease taxes in the bad state. Compared to an optimal uniform system, however, differentiation yields small welfare gains. Nevertheless, imposing two tax rates strictly dominates imposing two benefit levels. This finding is robust to a wide range of sensitivity checks.
    Keywords: job search, business cycles, unemployment insurance, time-varying benefits and taxes
    JEL: E32 H24 J64 J65
    Date: 2012–01
  10. By: Florian Scheuer
    Abstract: This paper studies Pareto-optimal risk-sharing arrangements in a private information economy with aggregate uncertainty and ex ante heterogeneous agents. I show how to implement Pareto-optima as equilibria when agents can trade claims to consumption contingent on aggregate shocks in financial markets. The first result is that if aggregate and idiosyncratic shocks are independent, the implementation of optimal allocations does not require any interventions in financial markets. This result can be extended to dynamic settings in the sense that, in this case, only savings need to be distorted, but not trades in financial markets. Second, I characterize optimal trading distortions in financial markets when aggregate and idiosyncratic shocks are not independent. In this case, optimal asset taxes must be higher for those securities that pay out in aggregate states in which consumption is more volatile. For instance, this can provide an efficiency justification for the frequently observed differential tax treatment of different asset classes, such as debt and equity claims.
    JEL: D8 E2 E6 G1 H2
    Date: 2012–02
  11. By: Tiago Neves Sequeira (Universidade da Beira Interior, CEFAGE-UBI and INOVA); Alexandra Ferreira Lopes (ISCTE - IUL, ISCTE Business School, UNIDE - IUL and CEFAGE-UBI); Orlando Gomes (ISCAL - Lisbon Polytechnic Institute and UNIDE - IUL)
    Abstract: This article analyses the stability properties of the steady-state and the transitional dynamics of an endogenous growth model with human capital, increasing-varieties R&D, and quality-ladders R&D [Strulik, 2005, Review of International Economics, 13 (1): 129-145]. We show that when spillovers within R&D sectors are higher than spillovers across the two R&D sectors, the equilibrium is unstable. However, when spillovers between sectors are higher than within, the equilibrium is a saddle-path. This result emphasizes the need for empirical research that compares quantitatively the importance of these two types of spillovers and highlights the importance of studying intersectoral effects between the two R&D sectors. We describe plausible paths of economic development after changes in crucial parameters and uncover some transitional effects that were impossible to detect in the steady-state analysis. We also show that this model’s transition dynamics can mimic the main features of the process of productivity slowdown that began in the 1970’s.
    Keywords: Vertical and Horizontal R&D, Human Capital, Endogenous Growth Models; Steady-State Stability; Transitional Dynamics.
    JEL: O11 O15 O31 O33 O41
    Date: 2012
  12. By: Raouf BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), Center for Operations Research and Econometrics (CORE) and GREQAM,Aix-Marseille University, France); B. MARTINEZ (Department of Economics, Universidad Complutense de Madrid (Spain)); J. R. RUIZ-TAMARIT (Department of Economic Analysis, Universitat de Valencia (Spain), and Department of Economics, Université Catholique de Louvain (Belgium) (IRES))
    Abstract: This paper studies the different mechanisms and the dynamics through which demography is channelled to the economy. We analyze the role of demographic changes in the economic development process by studying the transitional and the long-run impact of both the rate of population growth and the initial population size on the levels of per capita human capital and income. We do that in an enlarged Lucas-Uzawa model with intergenerational altruism. In contrast to the existing theoretical literature, the long-run level effects of demographic changes, i.e. their impact on the levels of the variables along the balanced growth path, are deeply characterized in addition to the more standard long-run growth effects. We prove that the level effect of the population rate of growth is non-negative (positive in the empirically most relevant case) for the average level of human capital, but a priori ambiguous for the level of per capita income due to the interaction of three transmission mechanisms of demographic shocks, a standard one (dilution) and two non-standard (altruism and human capital accumulation). Overall, the sign of the level effects of population growth depend on preference and technology parameters, but numerically we show that the joint negative effect of dilution and altruism is always stronger than the finduced positive human capital effect. The growth effect of population growth depends basically on the attitude to intergenerational altruism and intertemporal substitution. Moreover, we also prove that the long-run level effects of population size on per capita human capital and income may be negative, nil, or positive, depending on the relationship between preferences and technology, while its growth effect is zero. Finally, we show that the model is able to replicate complicated time relationships between economic and demographic changes. In particular, it entails a negative effect of population growth on per capita income, which dominates in the initial periods, and a positive effect which restores a positive correlation between population growth and economic performance in the long term.
    Keywords: Human Capital, Population Growth, Population Size, Endogenous Growth, Level Effect, Growth Effect
    JEL: C61 C62 E2 J10 O41
    Date: 2011–10–28
  13. By: Yasuo Hirose; Takushi Kurozumi
    Abstract: Recent studies attempt to quantify the empirical importance of news shocks (ie., anticipated future schocks) in business cycle fluctuations. This paper identifies news schocks in a dynamic stochastic general equilibrium model estimated with not only actual data but also forecast data. The estimation results show new empirical evidence that antecipated future technology shocks are the most important driving force of U.S. business cycles. The use of the forecast data makes the anticipated shocks play a much more important role in fitting model-implied expectations to this data, since such shocks have persistent effects on the expectaions and thereby help to replicate the observed persistence of the forecasts.
    JEL: E30 E32
    Date: 2012–02
  14. By: Audra J. Bowlus (University of Western Ontario); Alexander Huju Liu (University of Western Ontario)
    Abstract: This paper presents and estimates a unified model where both human capital investment and job search are endogenized. This unification enables us to quantify the relative contributions of each mechanism to life cycle earnings growth, while investigating potential interactions between human capital investment and job search. Within the unified framework, the expectation of rising rental rates of human capital through job search gives workers more incentive to invest in human capital. In addition, unemployed workers reduce their reservation rental rates and increase their search effort to leave unemployment quickly to take advantage of human capital accumulation on the job. The results show both forces are important for earnings growth and the interactions are substantial: human capital accumulation accounts for 31% of total earnings growth, job search accounts for 46%, and the remaining 23% is due to the interactions of the two.
    Keywords: Human Capital; Job Search; Life Cycle, Earnings Growth
    JEL: J24 J64 D91
    Date: 2012
  15. By: Francisco J. Buera; Benjamin Moll
    Abstract: We take an off-the-shelf model with financial frictions and heterogeneity, and study the mapping from a credit crunch, modeled as a shock to collateral constraints, to simple aggregate wedges. We study three variants of this model that only differ in the form of underlying heterogeneity. We find that in all three model variants a credit crunch shows up as a different wedge: efficiency, investment, and labor wedges. Furthermore, all three model variants have an undistorted Euler equation for the aggregate of firm owners. These results highlight the limitations of using representative agent models to identify sources of business cycle fluctuations.
    JEL: E32 E44
    Date: 2012–01
  16. By: Le Blanc, Julia; Scholl, Almuth
    Abstract: We employ a life-cycle model with income risk to analyze how tax-deferred individual accounts affect households' savings for retirement. We consider voluntary accounts as opposed to mandatory accounts with minimum contribution rates. We contrast add-on accounts with carve-out accounts that partly replace social security contributions. Quantitative results suggest that making add-on accounts mandatory has adverse welfare effects across income groups. Carve-out accounts generate welfare gains for high and middle income earners but welfare losses for low income earners. In the presence of rare stock market disasters, individual accounts with default portfolio allocation crowd out direct stockholding and substantially reduce welfare. --
    Keywords: individual retirement accounts,household portfolio choice,consumption and saving over the life-cycle
    JEL: E21 H55 G11
    Date: 2011
  17. By: Andrzej Torój (Ministry of Finance, Poland)
    Abstract: We develop a framework for assessing the welfare implications of the new EU's Excessive Imbalance Procedure (EIP) to be implemented in 2012, with a special focus on the current account (CA) constraint. For this purpose, we apply a New Keynesian 2-region, 2-sector DSGE model, using the second order Taylor approximation of the households' utility around the steady state as a standard measure of welfare. The compliance with the CA criterion is ensured by modifying the policymakers' loss function in line with Woodford's (2003) treatment of the zero lower bound of nominal interest rates. The introduction of EIP threshold on CA balance results in a welfare loss equivalent to steady-state decrease in consumption of 0.105% after the euro adoption or 0.033% before that. If we consider the 4% threshold on current plus capital account (rather than current account alone), this cost decreases to 0.019 under the euro and approximately a half of that without the euro. EIP can be seen as a factor augmenting the cost of euro adoption.
    Keywords: Excessive Imbalance Procedure, EMU, DSGE, welfare, constrained optimum policy
    JEL: C54 D60 E42 F32
    Date: 2012–02–03
  18. By: Beaudry, Paul; Portier, Franck
    Abstract: Business cycles reflect changes over time in the amount of trade between individuals. In this paper we show that incorporating explicitly intra-temporal gains from trade between individuals into a macroeconomic model can provide new insight into the potential mechanisms driving economic fluctuations as well as modify key policy implications. We first show how a gains from trade approach can easily explain why changes in perceptions about the future (including news about the future and risk shocks) can cause booms and bust. We then turn to fiscal policy, and discuss under what conditions fiscal multipliers can be observed. While much of our analysis is conducted in a flexible price environment, we also present implications of our model for a sticky price environments, as it allows to understand stable-inflation boom-bust cycles. The source of the explicit gains from trade in our setup derives from simply assuming that in the short run workers are not perfect mobile across all sectors of the economy. We provide evidence from the PSID in support of this modeling assumption. --
    Keywords: business cycle,investment,heterogeneous agents
    JEL: E32
    Date: 2012
  19. By: Andre C. Silva
    Abstract: I relate hours worked with taxes on consumption and labor for Portugal, France, Spain, United Kingdom and United States. From 1986 to 2001, hours per worker in Portugal decreased from 35.1 to 32.6. With the parameters for Portugal, the model predicts hours worked in 2001 with an error of only 12 minutes from the actual hours. Across countries, most predictions differ from the data by one hour or less. The model is not sensible to special assumptions on the parameters. I calculate the long run effects of taxes on consumption, hours, capital and welfare for Portugal. I extend the model to discuss implications for Social Security. I discuss the steady state and the transition from a pay-as-yougo to a fully funded system. JEL codes:E6, H3
    Keywords: labor supply, consumption tax, labor income tax
    Date: 2012
  20. By: Andres Erosa; Luisa Fuster; Gueorgui Kambourov
    Abstract: We build a heterogeneous life-cycle model which captures a large number of salient features of individual labor supply, by education, over the life cycle. The model provides an aggregation theory of individual labor supply, firmly grounded on micro evidence, and is used to study the aggregate labor supply responses to changes in the economic environment. We find that the aggregate labor supply elasticity to a transitory wage shock is 1.27, with the extensive margin accounting for 54% of the response. Furthermore, we also simulate the 1987 tax holiday in Iceland - a quasi-natural experiment - and find that the aggregate labor supply responses in the model are similar to those actually observed in Iceland.
    Keywords: Aggregate labor supply, intensive margin, extensive margin, heterogeneous agents, life cycle
    JEL: D9 E2 E13 E62 J22
    Date: 2011–11–23
  21. By: Grochulskiy, Borys; Zhang, Yuzhe
    Abstract: We study a continuous-time version of the optimal risk-sharing problem with one-sided commitment. In the optimal contract, the agent's consumption is a time-invariant, strictly increasing function of a single state variable: the maximal level of the agent's income realized to date. We characterize this function in terms of the agent's outside option value function and the discounted amount of time in which the agent's income process is expected to reach a new to-date maximum. Under constant relative risk aversion we solve the model in closed-form: optimal consumption of the agent equals a constant fraction of his maximal income realized to date. In the complete-markets implementation of the optimal contract, the Alvarez-Jermann solvency constraints take the form of a simple borrowing constraint familiar from the Bewley-Aiyagari incomplete-markets models.
    Keywords: Limited commitment; Borrowing constraints
    JEL: D86 C61
    Date: 2011–07–22
  22. By: Brian M. Peterson
    Abstract: This paper develops and estimates a model to explain the behaviour of house prices in the United States. The main finding is that over 70% of the increase in house prices relative to trend during the increase of house prices in the United States from 1995 to 2006 can be explained by a pricing mechanism where market participants are ‘Fooled by Search.’ Trading frictions, also known as search frictions, have been argued to affect asset prices, so that asset markets are constrained efficient, with shocks to liquidity causing prices to temporarily deviate from long run fundamentals. In this paper a model is proposed and estimated that combines search frictions with a behavioural assumption where market participants incorrectly believe that the efficient market theory holds. In other words, households are ‘Fooled by Search.’ Such a model is potentially fruitful because it can replicate the observation that real price growth and turnover are highly correlated at an annual frequency in the United States housing market. A linearized version of the model is estimated using standard OLS and annual data. In addition to explaining over 70% of the housing bubble in the United States, the model also predicts and estimation confirms that in regions with a low elasticity of supply, price growth should be more sensitive to turnover. Using the lens of turnover, a supply shock is identified and estimated that has been responsible for over 80% of the fall in real house prices from the peak in 2006 to 2010.
    Keywords: Asset pricing; Business fluctuations and cycles
    JEL: E3 R2 R21
    Date: 2012
  23. By: Selcuk, Cemil
    Abstract: The housing market exhibits a puzzling yet repetitive seasonal boom and bust cycle where prices and trade volume rise in summers and fall in winters. This paper presents a search model that analytically generates the observed deterministic cycle.
    Keywords: housing; search; thin and thick markets; seasonality
    JEL: D39 D83 D49
    Date: 2012
  24. By: Pérez Fernández, Víctor; Torres-Martínez, Juan Pablo
    Abstract: We develop a general equilibrium model with incomplete financial participation and price dependent financial constraints. In our model, equilibrium exists even when agents do not have access to all financial contracts. For instance, exclusive credit lines and investment clubs are compatible with our framework. We also extend the literature of incomplete financial participation to include debts backed by price dependent collateral, and non-ordered preferences negatively affected by the amount of default.
    Keywords: Incomplete nancial participation; Exclusive credit lines; Collateralized loans
    JEL: D53 D52
    Date: 2012–01
  25. By: Michael Plante (Federal Reserve Bank of Dallas); Nora Traum (North Carolina State University)
    Abstract: We illustrate the theoretical relation among output, consumption, investment, and oil price volatility in a real business cycle model. The model incorporates demand for oil by a firm, as an intermediate input, and by a household, used in conjunction with a durable good. We estimate a stochastic volatility process for the real price of oil over the period 1986-2011 and utilize the estimated process in a non-linear approximation of the model. For realistic calibrations, an increase in oil price volatility produces a temporary decrease in durable spending, while precautionary savings motives lead in- vestment and real GDP to rise. Irreversible capital and durable investment decisions do not overturn this result.
    Date: 2012–02
  26. By: Ausias Ribo1 (Universitat de Barcelona); Montserrat Vilalta-Bufi (Universitat de Barcelona) (Universitat de Barcelona)
    Abstract: We study the theoretical properties that particular matching functions must satisfy to represent a frictional labor market within a general equilibrium random matching model. We analyze Cobb-Douglas, CES and other functional forms of the matching function. Our findings establish restrictions on the parameters of these matching functions to ensure that the equilibrium is interior. These restrictions provide both theoretical reasons to choose among several functional forms and model misspecification tests for empirical work.
    Keywords: interior equilibrium, random matching, matching function, cobbdouglas
    JEL: J6
    Date: 2012
  27. By: Wrede, Matthias
    Abstract: Combining a spatial equilibrium model with a matching unemployment model, this paper analyzes the regional quality of life when wages, rents, and unemployment risk compensate for local amenities and disamenities. In particular, the paper shows for quasi-linear utility that the effects of any amenity on wages and unemployment rates are of opposite sign. Additionally, the wage rate and the labor market tightness increase and the unemployment ratio decreases in reaction to an increase in the level of an amenity if the amenity is marginally more beneficial to producers than to consumers per unit of land. Based on the model, quality of life of the unemployed in West German counties is estimated. --
    Keywords: quality of life,unemployment,matching,mobility
    JEL: R12 R13 R14 H22
    Date: 2012
  28. By: Michal Rubaszek (National Bank of Poland, 00-919 Warszawa, ul. Świętokrzyska 11/21, Poland and Warsaw School of Economics.); Dobromil Serwa (National Bank of Poland, 00-919 Warszawa, ul. Świętokrzyska 11/21, Poland and Warsaw School of Economics.)
    Abstract: This paper applies a life-cycle model with individual income uncertainty to investigate the determinants of credit to households. We show that the value of household credit to GDP ratio depends on (i) the lending-deposit interest rate spread, (ii) individual income uncertainty, (iii) individual productivity persistence, and (iv) the generosity of the pension system. Subsequently, we provide empirical evidence for the predictions of the theoretical model on the basis of data for OECD and EU countries. JEL Classification: E21, E43, E51.
    Keywords: Household credit, life cycle economies, banking sector.
    Date: 2012–02
  29. By: Oliva, Martí; Carles Lavila, Misericòrdia
    Abstract: We present an overlapping generations model that explains price dispersion among Catalonian healthcare insurance firms. The model shows that firms with different premium policies can coexist. Furthermore, if interest rates are low, firms that apply equal premium to all insureds can charge higher average prices than insurers that set premiums according to the risk of insured. Economic theory, health insurance, health economics.
    Keywords: Assegurances de salut, Economia de la salut -- Catalunya, 338 - Situació econòmica. Política econòmica. Gestió, control i planificació de l'economia. Producció. Serveis. Turisme. Preus,
    Date: 2011
  30. By: Konstantinos Angelopoulos; James Malley; Apostolis Philippopoulos
    Abstract: The stylized facts suggest a negative relationship between tax progres- sivity and the skill premium from the early 1960s until the early 1990s, and a positive one thereafter. They also generally imply rising tax progressivity, except for the 1980s. In this paper, we ask whether optimal tax policy is consistent with these observations, taking into account the demographic and technological factors that have also affected the skill premium. To this end, we construct a dynamic general equilibrium model in which the skill premium and the progressivity of the tax system are endogenously determined, with the latter being optimally chosen by a benevolent government. We find that optimal policy delivers both a progressive tax system and model predictions which are generally consistent, except for the 1980s, with the stylized facts relating to the skill premium and progressivity. To capture the patterns in the data over the 1980s requires that we adopt a government policy which is biased towards the interests of skilled agents. Thus, in addition to demo- graphic and technological factors, changes in the preferences of policy-makers appear to be a potentially important factor in determining the evolution of the observed skill premium.
    Keywords: skill premium, optimal tax policy, government preferences
    JEL: E62 E65 J31
    Date: 2012–01
  31. By: Okano, Eiji; Eguchi, Masataka; Gunji, Hiroshi; Miyazaki, Tomomi
    Abstract: We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.
    Keywords: local currency pricing, optimal monetary policy, CPI inflation, fixed exchange rate, Bayesian estimation
    JEL: E52 E62 F41
    Date: 2012–01
  32. By: Robert Kollmann; Werner Roeger; Jan in'tVeld
    Abstract: A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment.
    Keywords: State support for banks; financial crises; fiscal stimulus; real activity
    JEL: E62 E63 G21 G28 H25
    Date: 2012–01
  33. By: Jerome Creel (Observatoire Francais des Conjonctures Economiques); Paul Hubert (Observatoire Francais des Conjonctures Economiques); Francesco Saraceno (Observatoire Francais des Conjonctures Economiques)
    Abstract: This paper contributes to the debate on fiscal governance for the European Monetary Union, assessing the different fiscal rules currently discussed. We simulate a small scale macroeconomic model with forward looking agents, augmented with a public finances block. We account for both the positive (output stabilization) and negative (via risk premia) effects of debt and deficit. By the appropriate choice of the exogenous fiscal variables, in the fiscal block, we replicate the working of the rules embedded in the so-called "fiscal compact": a balanced budget rule (the "new golden rule"), and the debt reduction rule (to reach 60% of GDP in 20 years). We compare these rules with the Maastricht 3% deficit limit (status quo), and with an "investment" rule leaving room for public investment. We evaluate the performance in terms of output loss during a fiscal consolidation, as well as following demand and supply shocks in steady state. All rules guarantee long run sustainability. The investment rule emerges robustly as the one guaranteeing the lower output loss, followed by the status quo. The "fiscal compact" rules appear to be recessionary
    Keywords: Fiscal Rules, Small scale Macroeconomic Models, golden rule, fiscal consolidation, EMU economic governance, fiscal compact, Dynare
    JEL: C63 E62 E63 H61
    Date: 2012–02
  34. By: Silva, José I. (Universitat de Girona); Vall Castello, Judit (Universitat de Girona)
    Abstract: Unlike other disability systems in developed economies, the Spanish system allows partially disabled individuals to work while receiving disability benefits. The puzzle is, however, that employment rates in this group of individuals are very low. The aim of this paper is to understand the incentives and disincentives to work provided by the partial disability scheme in Spain. We first present a theoretical job search model for partially disabled individuals and then estimate a complementary log-log duration model. According to both models, the probability of finding a job falls with the level of disability, the age at which the individual starts receiving disability benefits, and the increase in the local unemployment rate. Moreover, as a result of an increase in the level of disability benefits we find a strong substitution effect that reduces the probability of disabled individuals older than 55 years finding a job to almost zero, in both of the two models. We simulate that the strong substitution effect would be replaced by an equally large income effect even if the increase in the benefits would not be suspended if the individual finds a job.
    Keywords: job search model, disability benefits, duration analysis
    JEL: C41 I18 J64
    Date: 2012–01

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