nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒03‒08
35 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Endogenous Market Structures and Labor Market Dynamics (New version) By Andrea Colciago; Lorenza Rossi
  2. Real Business Cycles with Capital Maintenance By Alice Albonico; Sarantis Kalyvitis; Evi Pappa
  3. the Dynamics of unemployment and wage Distributions . By Robin, Jean-Marc
  4. Should unemployment insurance be asset-tested? By Koehne, Sebastian; Kuhn, Moritz
  5. Search Capital By Carrillo-Tudela, Carlos; Smith, Eric
  6. Mortgage Defaults By Leonardo Martinez; Juan Carlos Hatchondo; Juan M. Sanchez
  7. Fat-Tail Distributions and Business-Cycle Models By Guido Ascari; Giorgio Fagiolo; Andrea Roventini
  8. Macroprudential Rules and Monetary Policy when Financial Frictions Matter By Jeannine Bailliu; Césaire Meh; Yahong Zhang
  9. Precautionary demand for money in a monetary business cycle model By Telyukova, Irina A.; Visschers, Ludo
  10. The role of money and monetary policy in crisis periods: the Euro area case By Benchimol, Jonathan; Fourçans, André
  11. Mortgage Amortization and Amplification By Chiara Forlati; Luisa Lambertini
  12. Monetary policy and redistribution: What can or cannot be neutralized with Mirrleesian taxes By Gahvari, Firouz; Micheletto, Luca
  13. Real wages and monetary policy: A DSGE approach By Perry, Bryan; Phillips, Kerk L.; Spencer, David E.
  14. Demographic Transition and Economic Welfare: The Role of Humanitarian Aid By Stephen M. Miller; Kyriakos C. Neanidis
  15. Environmental maintenance in a dynamic model with heterogenous agents By Kirill Borissov; Thierry Brechet; Stephane Lambrecht
  16. The effect of social security, health, demography and technology on retirement By Ferreira, Pedro Cavalcanti; Santos, Marcelo Rodrigues dos
  17. Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances By Bertrand Gruss; Jose L. Torres
  18. Approximating High-Dimensional Dynamic Models: Sieve Value Function Iteration By Peter Arcidiacono; Patrick Bayer; Federico A. Bugni; Jonathan James
  19. Public Infrastructure, non Cooperative Investments and Endogenous Growth By Charles Figuières; Fabien Prieur; Mabel Tidball
  20. Macrofinancial Modeling at Central Banks: Recent Developments and Future Directions By Jan Vlcek; Scott Roger
  21. Borrowing from thy neighbour: a European perspective on sovereign debt By Miller, Marcus; Rankin, Neil; Zhang, Lei
  22. Sudden Floods, Macroprudention Regulation and Stability in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  23. Business Cycles and Household Formation: The Micro vs the Macro Labor Elasticity By Sebastian Dyrda; Greg Kaplan; José-Víctor Ríos-Rull
  24. Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates? By Pau Rabanal; Juan F. Rubio-Ramirez
  25. Fiscal Rules and the Sovereign Default Premium By Leonardo Martinez; Juan Carlos Hatchondo; Francisco Roch
  26. Explaining the Spread of Temporary Jobs and its Impact on Labor Turnover By Cahuc, Pierre; Charlot, Olivier; Malherbet, Franck
  27. A structural interpretation of the impact of the great recession on the Austrian economy using an estimated DSGE model By Gerhard Fenz; Lukas Reiss; Martin Schneider
  28. Oil Exporters’ Dilemma: How Much to Save and How Much to Invest By Fuad Hasanov; Reda Cherif
  29. Revisiting the “Productivity-Hours Puzzle” in the RBC Paradigm: The Role of Investment Adjustment Costs By Alice Albonico; Sarantis Kalyvitis; Evi Pappa
  30. Life, Death and World Inequality By Cordoba, Juan Carlos
  31. Boundedly Rational Dynamic Programming: Some Preliminary Results By Xavier Gabaix
  32. Unemployment risk and wage differentials By Pinheiro, Roberto B.; Visschers, Ludo
  33. Income Inequality and Current Account Imbalances By Michael Kumhof; Romain Ranciere; Claire Lebarz; Alexander W. Richter; Nathaniel A. Throckmorton
  34. Crime, Fertility, and Economic Growth: Theory and Evidence By Kyriakos C. Neanidis; Vea Papadopoulou
  35. Borrowing constraints and the trade balance-output comovement By Zhao, Yan

  1. By: Andrea Colciago (Department of Economics, University of Milano Bicocca); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We propose a model characterized by strategic interactions among an endogenous number of producers and search and matching frictions in the labor market. In line with U.S. data: (i) new firms account for a relatively small share of overall employment, but they create a relevant fraction of new jobs; (ii) firms’ entry is procyclical; (iii) price mark ups are countercyclical, while aggregate profits are procyclical. In response to a technology shock the labor share decreases on impact and overshoots its long run level. Also the propagation on labor market variables is stronger than in the standard search model. We argue that the countercyclicality of the price mark up is the key mechanism for our results.
    Keywords: Endogenous Market Structures, Job Creation, Firms’ Entry, Search and Matching Frictions
    JEL: E24 E32 L11
    Date: 2011–11
  2. By: Alice Albonico (Department of Economics and Quantitative Methods, University of Pavia); Sarantis Kalyvitis (Department of International and European Economic Studies, Athens University of Economics and Business); Evi Pappa (Departament de Economia y d’Historia Economica, Universitat Autonoma de Barcelona and CEPR)
    Abstract: We develop a stochastic general equilibrium model in which maintenance endogenously affects the capital depreciation rate. The model performs well in generating maintenance series that match closely existing survey-based measures for Canada. Maintenance is procyclical and comoves almost always with output. Investmentspecific shocks are the only disturbances that induce a negative correlation between output and maintenance. This feature is crucial for the identification of such shocks in the short run. We use Bayesian estimation to obtain the time profile of equipment capital depreciation in Canadian manufacturing. The depreciation rate has been quite volatile and procyclical over the last 50 years.
    Keywords: real business cycle, technology shocks, endogenous capital depreciation, maintenance
    JEL: E22 E32 E37
    Date: 2011–06
  3. By: Robin, Jean-Marc (Département d'économie)
    Abstract: Postel-Vinay and Robin’s (2002) sequential auction model is extended to allow for aggregate productivity shocks. Workers exhibit permanent differences in ability while firms are identical. Negative aggregate productivity shocks induce job destruction by driving the surplus of matches with low ability workers to negative values. Endogenous job destruction coupled with worker heterogeneity thus provides a mechanism for amplifying productivity shocks that offers an original solution to the unemployment volatility puzzle (Shimer (2005)). Moreover, positive or negative shocks may lead employers and employees to renegotiate low wages up and high wages down when agents’ individual surpluses become negative. The model delivers rich business cycle dynamics of wage distributions and explains why both low wages and high wages are more procyclical than wages in the middle of the distribution.
    Keywords: Unemployment dynamics, wage distribution, inequality, search-matching;
    Date: 2011–09
  4. By: Koehne, Sebastian; Kuhn, Moritz
    Abstract: A series of empirical studies has documented that job search behavior depends on the financial situation of the unemployed. Starting from this observation, we ask how unemployment insurance policy should take the individual financial situation into account. We use a quantitative model with a realistically calibrated unemployment insurance system, individual consumption-saving decision and moral hazard during job search to answer this question. We find that the optimal policy provides unemployment benefits that increase with individual assets. By implicitly raising interest rates, asset-increasing benefits encourage self-insurance, which facilitates consumption smoothing during unemployment but does not exacerbate moral hazard for job search. Asset-increasing benefits also have desirable properties from a dynamic perspective, because they emulate key features of the dynamics of constrained efficient allocations. We find welfare gains from introducing asset-increasing benets that are substantial and amount to 1.5% of consumption when comparing steady states and 0.8% of consumption when taking transition costs into account. More generous replacement rates or benefits targeted to asset-poor households, by contrast, have a negative effect on welfare.
    Keywords: unemployment insurance; asset testing; incomplete markets; consumption and saving
    JEL: H21 J65 E21
    Date: 2012–02–27
  5. By: Carrillo-Tudela, Carlos (University of Essex); Smith, Eric (University of Essex)
    Abstract: We construct a simple equilibrium search model in which workers accumulate information about previously met employment contacts. We term the latter search capital. Here search capital (partially) insures workers against adverse shocks. The model provides a theory of job-to-job transitions that are associated with voluntary or involuntary mobility and with wage rises or wage cuts. It also shows why low wage and younger workers are associated with a higher probability of becoming unemployed.
    Keywords: search capital, turnover, wage cuts
    JEL: J62 J63 J64
    Date: 2012–02
  6. By: Leonardo Martinez; Juan Carlos Hatchondo; Juan M. Sanchez
    Abstract: This paper incorporates house price risk and mortgages into a standard incomplete market (SIM) model. The model is calibrated to match U.S. data and accounts for non-targeted features of the data such as the distribution of down payments, the life-cycle profile of home ownership, and the mortgage default rate. The average coefficients that measure the agents’ ability to self-insure against income shocks are similar to those of a SIM model without housing but housing increases the values of these coefficients for younger agents. The response of consumption to house price shocks is minimal. The introduction of minimum down payments or income garnishment benefits a majority of the population.
    Keywords: Bankruptcy , Economic models , Housing prices , United States ,
    Date: 2012–01–24
  7. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Giorgio Fagiolo (Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa); Andrea Roventini (University Paris Ouest Nanterre La Defense, Department of Economic Sciences (University of Verona) and Laboratory of Economics and Management (LEM) (Sant'Anna School of Advanced Studies, Pisa))
    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
  8. By: Jeannine Bailliu; Césaire Meh; Yahong Zhang
    Abstract: This paper examines the interaction between monetary policy and macroprudential policy and whether policy makers should respond to financial imbalances. To address this issue, we build a dynamic general equilibrium model that features financial market frictions and financial shocks as well as standard macroeconomic shocks. We estimate the model using Canadian data. Based on these estimates, we show that it is beneficial to react to financial imbalances. The size of these benefits depends on the nature of the shock where the benefits are larger in the presence of financial shocks that have broader effects on the macroeconomy.
    Keywords: Economic models; Financial markets; Financial stability; Monetary policy framework
    JEL: E42 E50 E60
    Date: 2012
  9. By: Telyukova, Irina A.; Visschers, Ludo
    Abstract: We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models,the only uncertainty aecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and nd that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables.
    Keywords: precautionary demand for money; business cycle fluctuations; money velocity fluctuations
    JEL: E32 E40 E41
    Date: 2011–12
  10. By: Benchimol, Jonathan (ESSEC Business School); Fourçans, André (ESSEC Business School)
    Abstract: In this paper, we test two models of the Eurozone, with a special emphasis on the role of money and monetary policy during crises. The role of separability between money and consumption is investigated further and we analyse the Euro area economy during three different crises: 1992, 2001 and 2007. We find that money has a rather significant role to play in explaining output variations during crises whereas, at the same time, the role of monetary policy on output decreases significantly. Moreover, we find that a model with non-separability between consumption and money has better forecasting performance than a baseline separable model over crisis periods.
    Keywords: Euro area; Money; DSGE forecasting
    JEL: E31 E51 E58
    Date: 2012–02–01
  11. By: Chiara Forlati (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland); Luisa Lambertini (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)
    Abstract: Mortgages characterized by negative or low early amortization schedules amplify the macroeconomic effects of a housing risk shock. We analyze the role of mortgage amortization in a two-sector DSGE model with housing risk and endogenous default. Mortgage loan contracts extend to two periods and have adjustable rates. The fraction of principal to be repaid in the first period can vary. As the fraction of principal to be paid in the first period falls, steady-state mortgages and leverage increase and the impact of a housing risk shock on consumption and output is amplified. Borrowers prefer negative amortization. If free to choose the amortization schedule, borrowers would repay most of the principal in the last period of the contract. Low early repayments of principal allow borrowers to hold on to their housing stock and postpone default to the second period having incurred small sunk costs.
    Keywords: Housing, Mortgage default, Mortgage risk
    JEL: E32 E44 G01 R31
    Date: 2012–02
  12. By: Gahvari, Firouz (Department of Economics, University of Illinois); Micheletto, Luca (Uppsala Center for Fiscal Studies)
    Abstract: This paper develops an overlapping-generations model with heterogeneous agents in terms of earning ability and cash-in-advance constraint. It shows that tax pol- icy cannot fully replicate or neutralize the redistributive implications of monetary policy. While who gets the extra money becomes irrelevant, the rate of growth of money supply keeps its bite. A second lesson is that the Friedman rule is not in general optimal. The results are due to the existence of another source of het- erogeneity among individuals besides dierences in earning ability that underlies the Mirrleesian approach to optimal taxation. They hold even in the presence of a general income tax and preferences that are separable in labor supply and goods. If dierences in earning ability were the only source of heterogeneity, the scal au- thority would be able to neutralize the eects of a change in the rate of monetary growth and a version of the Friedman rule becomes optimal.
    Keywords: Monetary policy; scal policy; redistribution; Friedman rule; heterogeneity; overlapping generations; second best 1
    JEL: H21 H52
    Date: 2012–01–25
  13. By: Perry, Bryan; Phillips, Kerk L.; Spencer, David E.
    Abstract: Economists have long investigated the cyclical behavior of real wages in order to draw inferences regarding the relative stickiness of prices and wages. Recent studies have adopted techniques intended to identify monetary shocks and examined the response of real wages and output or employment to such shocks. A finding that real wages are procyclical in response to a positive monetary policy shock, for example, is taken as evidence that prices are stickier than wages. In this paper, we show that factors other than wage and price stickiness affect the response of real wages to a monetary policy shock. Accordingly, examining the response of real wages is not enough to sort out the relative stickiness of prices and wages. We use two prominent DSGE models to help us address this issue. These models incorporate both sticky wages and prices but in different ways. The first model (Huang, Liu, and Phaneuf, American Economic Review, 2004) is relatively simple and is not intended for policy analysis. Its relative simplicity allows us to approach the issues both analytically and through simulations. The second model (Smets and Wouters, American Economic Review, 2007) is a relatively complex model of the U.S. economy with many frictions and intended to be useful for policy analysis. Because of its complexity, we must rely principally on simulation exercises. Using these models we offer robust evidence that the real wage response to monetary policy is affected in important ways by properties of the economy other than stickiness of wages and prices, such as the importance of intermediate goods in the production process and the size of key elasticities. Consequently, we cannot appropriately infer the relative stickiness of wages and prices from examining only the response of real wages to a monetary policy shock.
    Keywords: real wages, monetary policy, DSGE models
    JEL: E32 D52 E10
    Date: 2012–02–29
  14. By: Stephen M. Miller; Kyriakos C. Neanidis
    Abstract: This paper considers the effects of humanitarian aid on economic welfare through a demographic transition channel. We develop a two-period overlapping generations model where reproductive agents face a non-zero probability of death in childhood. As adults, agents allocate their time to work, leisure, and child rearing activities. Health status in adulthood exhibits "state dependence", as it depends on health in childhood. In this framework, we examine the effects of changes in inkind and monetary humanitarian aid on economic welfare. We conclude that if parents strongly value children, giving monetary aid produces more children and yields higher welfare. This positive welfare effect dominates an indirect negative welfare effect due to a lower growth rate. But, if parents value the quality of their children (health status), they achieve greater utility by inkind aid, which also lowers fertility and augments economic growth.
    Date: 2012
  15. By: Kirill Borissov; Thierry Brechet; Stephane Lambrecht
    Abstract: We assume a population of infinitely-lived households of the economy split into two groups: one with a high discount factor (the patient) and one with a low one (the impatient). The environmental quality is deteriorated by firm's polluting emissions. The governmental policy consists in proposing households to vote for a tax aimed at environmental maintenance. We study the voting equilibrium at steady states. The resulting equilibrium maintenance is the one of the median voter. We show that (i)~an increase in total factor productivity may produce effects described by the Environmental Kuznets Curve, (ii)~an increase in the patience of impatient households may foster environmental quality if the median voter is impatient and maintenance positive, (iii)~a decrease in inequality among the patient households leads to an increase in environmental quality if the median voter is patient and maintenance is positive. We also show that, if the median income is lower than the mean, our model predict lower level of environmental quality than the representative agent model, and that increasing public debt decreases the level of environmental quality.
    Keywords: intertemporal choice and growth, discounting, government environmental policy, externalities, environmental taxes; voting equilibrium
    JEL: D90 Q58 H23 D72
    Date: 2012–02–27
  16. By: Ferreira, Pedro Cavalcanti; Santos, Marcelo Rodrigues dos
    Abstract: This article studies the determinants of the labor force participation of the elderlyand investigates the factors that may account for the increase in retirement in thesecond half of the last century. We develop a life-cycle general equilibrium modelwith endogenous retirement that embeds Social Security legislation and Medicare. In-dividuals are ex ante heterogeneous with respect to their preferences for leisure andface uncertainty about labor productivity, health status and out-of-pocket medical ex-penses. The model is calibrated to the U.S. economy in 2000 and is able to reproducevery closely the retirement behavior of the American population. It reproduces thepeaks in the distribution of Social Security applications at ages 62 and 65 and the ob-served facts that low earners and unhealthy individuals retire earlier. It also matchesvery closely the increase in retirement from 1950 to 2000. Changes in Social Securitypolicy - which became much more generous - and the introduction of Medicare accountfor most of the expansion of retirement. In contrast, the isolated impact of the increasein longevity was a delaying of retirement.
    Date: 2012–02–24
  17. By: Bertrand Gruss; Jose L. Torres
    Abstract: In this paper we use a general equilibrium model with heterogeneous agents to assess the macroeconomic and welfare consequences in the United States of alternative fiscal policies over the medium-term. We find that failing to address the fiscal imbalances associated with current federal fiscal policies for a prolonged period would result in a significant crowding-out of private investment and a severe drag on growth. Compared to adopting a reform that gradually reduces federal debt to its pre-crisis level, postponing debt stabilization for two decades would entail a permanent output loss of about 17 percent and a welfare loss of almost 7 percent of lifetime consumption. Moreover, the long-run welfare gains from the adjustment would more than compensate the initial losses associated with the consolidation period.
    Date: 2012–01–31
  18. By: Peter Arcidiacono; Patrick Bayer; Federico A. Bugni; Jonathan James
    Abstract: Many dynamic problems in economics are characterized by large state spaces which make both computing and estimating the model infeasible. We introduce a method for approximating the value function of high-dimensional dynamic models based on sieves and establish results for the: (a) consistency, (b) rates of convergence, and (c) bounds on the error of approximation. We embed this method for approximating the solution to the dynamic problem within an estimation routine and prove that it provides consistent estimates of the model's parameters. We provide Monte Carlo evidence that our method can successfully be used to approximate models that would otherwise be infeasible to compute, suggesting that these techniques may substantially broaden the class of models that can be solved and estimated.
    JEL: C13 C14 C54 C61 C63 C73
    Date: 2012–03
  19. By: Charles Figuières; Fabien Prieur; Mabel Tidball
    Abstract: This paper develops a two-country general equilibrium model with endogenous growth where governments behave strategically in the provision of productive infrastructure. The public capitals enter both national and foreign production as an external input, and they are …nanced by a at tax on income. In the private sector, fi…rms and households take the public policy as given when making their decisions. For arbitrary constant tax rates, the dynamic analysis reveals two important features. Firstly, under constant returns, the two countries growth rates differ during the transition but are identical on the balanced growth path. Secondly, due to the infrastructure externality, assuming away constant returns to scale a country with decreasing returns can experience sustained growth provided that the other grows at a positive constant rate. Then we endogeneize tax rates. It is shown that both a Markov Perfect Equilibrium (MPE) and a Centralized Solution (CS) exist, even when the parameters allow for endogenous growth, therefore explosive paths for the state variables. Nash growth rates are compared with the centralized rates. We show that cooperation in infrastructure provision does not necessarily lead to higher growth for each country. We also show that, in some con…gurations of households' preferences and initial conditions, cooperation would call for a slowdown in the initial stages of development, whereas strategic investments would not. Lastly, depending also on the con…guration of preferences, we show that cooperation can increase or decrease the gap between countries' growth rates.
    Date: 2012–03
  20. By: Jan Vlcek; Scott Roger
    Abstract: This paper surveys dynamic stochastic general equilibrium models with financial frictions in use by central banks and discusses priorities for future development of such models for the purpose of monetary and financial stability analysis. It highlights the need to develop macrofinancial models which allow analysis of the macroeconomic effects of macroprudential policy tools and to evaluate elements of the Basel III reforms as a priority. The paper also reviews the main approaches to introducing financial frictions into general equilibrium models.
    Keywords: Central banks , Economic models , Monetary policy , Monetary transmission mechanism ,
    Date: 2012–01–20
  21. By: Miller, Marcus (University of Warwick); Rankin, Neil (University of York); Zhang, Lei (University of Warwick)
    Abstract: European capital markets show increasing concern about the extent of sovereign debts and their sustainability. Here we explore some insights that the Overlapping Generations (OLG) framework has to offer on such issues. The OLG framework implies, for example, that there is a limit to the amount of debt that may be sustained in a closed economy- with high debt raising interest rates and crowding out capital formation. But capital market integration with less indebted partners allows for a fall in interest rates as a result of borrowing from one's neighbour. Indeed we find that - in equilibrium - most of the debt of a high indebted country will be transferred to partner countries.
    Keywords: debt sustainability, overlapping generations, sovereign default, Euro-zone debt crisis
    Date: 2012
  22. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: We develop a dynamic stochastic model of a middle-income, small open economy with a two-level banking intermediation structure, a risk-sensitive regulatory capital regime, and imperfect capital mobility. Firms borrow from a domestic bank and the bank borrows on world capital markets, in both cases subject to an endogenous premium. A sudden flood in capital flows generates an expansion in credit and activity, and asset price pressures. Countercyclical regulation, in the form of a Basel III-type rule based on real credit gaps, is effective at promoting macroeconomic stability (defined in terms of the volatility of a weighted average of inflation and the output gap) and financial stability (defined in terms of the volatility of a composite index of the nominal exchange rate and house prices). However, because the gain in terms of reduced volatility may exhibit diminishing returns, a countercyclical regulatory rule may need to be supplemented by other, more targeted, macroprudential instruments.
    Date: 2012–02
  23. By: Sebastian Dyrda; Greg Kaplan; José-Víctor Ríos-Rull
    Abstract: We provide new evidence on the the cyclical behavior of household size in the United States from 1979 to 2010. During economic downturns, people live in larger households. This is mostly, but not entirely, driven by young people moving into or delaying departure from the parental home. We assess the importance of these cyclical movements for aggregate labor supply by building a model of endogenous household formation within a real business cycle structure. We use the model to measure how much more volatile are hours due to two mechanisms: (i) the presence of a large group of mostly young individuals with non-traditional living arrangements; and (ii) the possibility for these individuals to change their living situation in response to aggregate conditions. Our exercise assumes that older people living in stable households have a Frisch elasticity that is consistent with the micro evidence that is based on such people. The inclusion of people living in unstable households yields an implied aggregate, or macro, Frisch elasticity that is around 45% larger than the assumed micro elasticity.
    JEL: E32 J10 J22
    Date: 2012–03
  24. By: Pau Rabanal; Juan F. Rubio-Ramirez
    Abstract: Real exchange rates exhibit important low-frequency fluctuations. This makes the analysis of real exchange rates at all frequencies a more sound exercise than the typical business cycle one, which compares actual and simulated data after the Hodrick-Prescott filter is applied to both. A simple two-country, two-good model, as described in Heathcote and Perri (2002), can explain the volatility of the real exchange rate when all frequencies are studied. The puzzle is that the model generates too much persistence of the real exchange rate instead of too little, as the business cycle analysis asserts. Finally, we show that the introduction of adjustment costs in production and in portfolio holdings allows us to reconcile theory and this feature of the data.
    Keywords: Business cycles , Economic models , Real effective exchange rates ,
    Date: 2012–01–17
  25. By: Leonardo Martinez; Juan Carlos Hatchondo; Francisco Roch
    Abstract: This paper finds optimal fiscal rule parameter values and measures the effects of imposing fiscal rules using a default model calibrated to an economy that in the absence of a fiscal rule pays a significant sovereign default premium. The paper also studies the case in which the government conducts a voluntary debt restructuring to capture the capital gains from the increase in its debt market value implied by a rule announcement. In addition, the paper shows how debt ceilings may reduce the procyclicality of fiscal policy and thus consumption volatility.
    Keywords: Debt restructuring , Economic models , Fiscal policy , Risk premium , Sovereign debt ,
    Date: 2012–01–25
  26. By: Cahuc, Pierre (Ecole Polytechnique, Paris); Charlot, Olivier (University of Cergy-Pontoise); Malherbet, Franck (University of Rouen)
    Abstract: This paper provides a simple model which explains the choice between permanent and temporary jobs. This model, which incorporates important features of actual employment protection legislations neglected by the economic literature so far, reproduces the main stylized facts about entries into permanent and temporary jobs observed in Continental European countries. We show that the stringency of legal constraints on the termination of permanent jobs has a strong positive impact on the turnover of temporary jobs. We also find that job protection has very small effects on total employment but induces large substitution of temporary jobs for permanent jobs which significantly reduces aggregate production.
    Keywords: temporary jobs, employment protection legislation
    JEL: J63 J64 J68
    Date: 2012–02
  27. By: Gerhard Fenz; Lukas Reiss; Martin Schneider
    Abstract: In this paper we present an analysis of the impact of the great recession of the years 2008 and 2009 on the Austrian economy. For this purpose, we utilize the new estimated DSGE model of the OeNB for the Austrian economy within the Euro area. This model is a small open-economy version of Smets & Wouters (2003), where the domestic economy is linked to a highly stylized representation of the rest of the Euro area via trade and financial flows. The model identifies foreign demand and confidence shocks as the main transmission channels. Moreover the risk premium shock contributed significantly to the downturn of the Austrian economy. In contrast price shocks (price markup and raw material shocks) were supportive throughout the crisis. The strong resilience of the Austrian labour market during the crisis and the subsequent upswing is reected in a series of negative technology shocks. JEL classification:
    Date: 2012–01–30
  28. By: Fuad Hasanov; Reda Cherif
    Abstract: Policymakers in oil-exporting countries confront the question of how to allocate oil revenues among consumption, saving, and investment in the face of high income volatility. We study this allocation problem in a precautionary saving and investment model under uncertainty. Consistent with data in the 2000s, precautionary saving is sizable and the marginal propensity to consume out of permanent shocks is below one, in stark contrast to the predictions of the perfect foresight model. The optimal investment rate is high if productivity in the tradable sector is high enough.
    Keywords: Oil exporting countries , Oil revenues , Public investment , Resource allocation , Savings ,
    Date: 2012–01–10
  29. By: Alice Albonico (Department of Economics, University of Pavia); Sarantis Kalyvitis (Department of International and European Economic Studies, Athens University of Economics and Business); Evi Pappa (European University Institute, Department of Economics)
    Abstract: Conventional RBC models have been heavily criticized for their inability to generate the estimated negative correlations of hours and productivity in response to technology shocks ('productivity-hours puzzle'). In this paper we show that by just enhancing the standard frame- work with investment adjustment costs can resolve the 'productivity-hours puzzle'.
    Keywords: technology shocks; productivity-hours puzzle; investment adjustment costs; wealth effect.
    JEL: E22 E32
    Date: 2012–02
  30. By: Cordoba, Juan Carlos
    Abstract: Life expectancy around the world has increased substantially since 1970. In contrast, consump-tion per capita has fallen in some countries, remained stagnant, or sharply increased in others.What are the welfare gains of the systematic increase in life expectancy around the world? Howdoes a "full measure" of per capita income, one that adjusts for life expectancy, compare tostandard measures of world inequality that only consider income? This paper documents howstandard models used to answer these questions give rise to a number of predictions that areinconsistent with well-documented evidence, particularly on the value of statistical life. It thenproposes a generalized model with non-separable preferences that exhibits a low elasticity ofintertemporal substitution and a low degree of mortality aversion. The non-separable modelreverts the counterfactual predictions of the standard model, and it also provides plausiblemeasures of changes in welfare and inequality around the world.
    Keywords: Welfare; life expectancy; value of statistical life; mortality risk aversion; Epstein-Zin-Weil pref- erences; AIDS.
    JEL: D J
    Date: 2012–03–01
  31. By: Xavier Gabaix
    Abstract: A key open question in economics is the practical, portable modeling of bounded rationality. In this short note, I report ongoing progress that is more fully developed elsewhere. I present some results from a new model in which the decision-maker builds a simplified representation of the world. The model allows to model boundedly rational dynamic programming in a parsimonious and quite tractable way. I illustrate the approach via a boundedly rational version of the consumption-saving life cycle problem. The consumer can pay attention to the variables such as the interest rate and his income, or replace them, in his mental model, by their average values. Endogenously, the consumer pays little attention to interest rate but pays keen attention to his income. One consequence of this is that Euler equations will be biased, and the intertemporal elasticity of substitution will be biased toward 0, in a manner that is quantitatively important.
    JEL: D03 E21
    Date: 2012–01
  32. By: Pinheiro, Roberto B.; Visschers, Ludo
    Abstract: Workers in less secure jobs are often paid less than identical-looking workers in more secure jobs. We show that this lack of compensating differentials for unemployment risk can arise in equilibrium when all workers are identical, and firms differ, but do so only in offered job security (the probability that the worker is not sent into unemployment). In a setting where workers search on and off the job, wages paid increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. As a result, unemployment spells become persistent for low-wage and unemployed workers, a seeming pattern of ‘unemployment scarring’, that is created entirely by firm heterogeneity alone. Higher in the wage distribution, workers can take wage cuts to move to more stable employment.
    Keywords: Unemployment risk; Wage Differentials; Unemployment Scarring
    JEL: J63 J31 J64
    Date: 2012–01
  33. By: Michael Kumhof; Romain Ranciere; Claire Lebarz; Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: This paper studies the empirical and theoretical link between increases in income inequality and increases in current account deficits. Cross-sectional econometric evidence shows that higher top income shares, and also financial liberalization, which is a common policy response to increases in income inequality, are associated with substantially larger external deficits. To study this mechanism we develop a DSGE model that features workers whose income share declines at the expense of investors. Loans to workers from domestic and foreign investors support aggregate demand and result in current account deficits. Financial liberalization helps workers smooth consumption, but at the cost of higher household debt and larger current account deficits. In emerging markets, workers cannot borrow from investors, who instead deploy their surplus funds abroad, leading to current account surpluses instead of deficits.
    Date: 2012–01–11
  34. By: Kyriakos C. Neanidis; Vea Papadopoulou
    Abstract: This paper studies the link between crime and fertility and the way by which they jointly impact on economic growth. In a three-period overlapping generations model, where health status in adulthood depends on health in childhood, adult agents allocate their time to work, leisure, child rearing and criminal activities. An autonomous increase in the probability o¤enders face in escaping apprehension, increases both crime and fertility non-monotonically, giving rise to an ambiguous e¤ect on growth. A cross-country empirical examination, based on data that span four decades, supports the non-linear e¤ects on both crime and fertility. At the same time, it reveals a negative effect on output growth.
    Date: 2012
  35. By: Zhao, Yan
    Abstract: The countercyclical trade balance ratio is one of the key stylized facts for open economies. The magnitude differs from country to country. Specifically, the trade balance ratio is more negatively correlated with output in emerging economies than in developed economies, suggesting that the trade balance is more sensitive to output changes in the former group. This paper explores whether this difference is caused by international borrowing constraints imposed on emerging economies. By modeling the borrowing constraints as conditional on macroeconomic performance, the paper shows that when a positive shock takes place in emerging economies, $GDP$ increases and the borrowing constraint becomes less binding, which results in less incentive to accumulate foreign assets. When a negative shock is present, in contrast, $GDP$ decreases, and the representative household has to increase the trade balance to avoid the possibly binding borrowing constraints.
    Keywords: borrowing constraint; trade balance-output comovement
    JEL: F41 F47
    Date: 2011–11–01

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