nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒03‒14
twelve papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Bayesian Estimation of DSGE Models By Pablo A Guerron-Quintana; James M Nason
  2. Demographic Transition and Economic Welfare: The Role of Humanitarian Aid By Stephen M. Miller; Kyriakos C. Neanidis
  3. Sorting and the output loss due to search frictions By Coen Teulings
  4. Is It Really Good to Annuitize? By James Feigenbaum; Emin Gahramanov
  5. The Formal Sector Wage Premium and Firm Size for Self-employed Workers By Olivier Bargain; Eliane El Badaoui; Prudence Kwenda; Eric Strobl; Frank Walsh
  6. Markov Switching Monetary Policy in a two-country DSGE Model By Mavromatis, Konstantinos
  7. New firm creation and failure: A matching approach By Gries, Thomas; Jungblut, Stefan; Naudé, Wim
  8. Smithian Growth Through Creative Organization By Legros, Patrick; Newman, Andrew F; Proto, Eugenio
  9. The French Great Depression: a business cycle accounting analysis By Slim Bridji
  10. Macroeconomics with Financial Frictions: A Survey By Markus K. Brunnermeier; Thomas M. Eisenbach; Yuliy Sannikov
  11. Optimal Liquidity Management and Hedging in the presence of a non predictable investment opportunity By Villeneuve, Stéphane
  12. The Evolution of Education: A Macroeconomic Analysis By Diego Restuccia; Guillaume Vandenbroucke

  1. By: Pablo A Guerron-Quintana; James M Nason
    Abstract: We survey Bayesian methods for estimating dynamic stochastic general equilibrium (DSGE) models in this article. We focus on New Keynesian (NK)DSGE models because of the interest shown in this class of models by economists in academic and policy-making institutions. This interest stems from the ability of this class of DSGE model to transmit real, nominal, and fiscal and monetary policy shocks into endogenous fluctuations at business cycle frequencies. Intuition about these propagation mechanisms is developed by reviewing the structure of a canonical NKDSGE model. Estimation and evaluation of the NKDSGE model rests on being able to detrend its optimality and equilibrium conditions, to construct a linear approximation of the model, to solve for its linear approximate decision rules, and to map from this solution into a state space model to generate Kalman filter projections. The likelihood of the linear approximate NKDSGE model is based on these projections. The projections and likelihood are useful inputs into the Metropolis-Hastings Markov chain Monte Carlo simulator that we employ to produce Bayesian estimates of the NKDSGE model. We discuss an algorithm that implements this simulator. This algorithm involves choosing priors of the NKDSGE model parameters and fixing initial conditions to start the simulator. The output of the simulator is posterior estimates of two NKDSGE models, which are summarized and compared to results in the existing literature. Given the posterior distributions, the NKDSGE models are evaluated with tools that determine which is most favored by the data. We also give a short history of DSGE model estimation as well as pointing to issues that are at the frontier of this research.
    JEL: C32 E10 E32
    Date: 2012–02
  2. By: Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Kyriakos C. Neanidis (University of Manchester)
    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 in-kind 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 in-kind aid, which also lowers fertility and augments economic growth.
    Keywords: Aid, Fertility, Health, Growth, Welfare
    JEL: C23 F35 F43 I12 O41
    Date: 2012–02
  3. By: Coen Teulings
    Abstract: <p>The authors analyze a general search model with on-the-job search and sorting of heterogeneous workers into heterogeneous jobs.</p><p>This model yields a simple relationship between (i) the unemployment rate, (ii) the value of non-market time, and (iii) the max-mean wage differential. The latter measure of wage dispersion is more robust than measures based on the reservation wage, due to the long left tail of the wage distribution. We estimate this wage differential using data on match quality and allow for measurement error. The estimated wage dispersion and mismatch for the US is consistent with an unemployment rate of 5%. Finally, we find that without search frictions, output would be 6.6% higher.</p>
    JEL: E24 J62 J63 J64
    Date: 2012–03
  4. By: James Feigenbaum; Emin Gahramanov
    Abstract: Although rational consumers without bequest motives are better o¤ investing exclusively with annuitized instruments in partial equilibrium, we demonstrate the welfare effect of annuitization is ambiguous in general equilibrium on account of the pecuniary externality. Accidental bequests improve consumption allocations by transferring capital mostly to young people rather than to the old, for whom the present value of the transfer is much less. If households are not borrowing constrained in the rational competitive equilibrium where they annuitize, there will exist a consumption/investment rule involving nonannuitized investments that confers higher utility in general equilibrium while maintaining the same equilibrium capital stock. Thus it may be that households eschew annuitization because society has learned it is suboptimal. Regardless of the explanation for this behavior, policymakers should not take steps to encourage more annuitization by the public.
    Keywords: consumption, saving, coordination, learning, general equilibrium, pecuniary externality, annuities puzzle, bequests, mortality risk, overlapping generations, optimal irrational behavior, Golden Rule
    JEL: C61 D11 E21
    Date: 2012–03–07
  5. By: Olivier Bargain (Aix-Marseille School of Economics); Eliane El Badaoui (EconomiX - University Paris 10); Prudence Kwenda (University College Dublin); Eric Strobl (Ecole Polytechnique Paris); Frank Walsh (University College Dublin)
    Abstract: We develop a model where workers may enter self-employment or search for jobs as employees and where there is heterogeneity across workers’ managerial ability. Workers with higher skills will manage larger firms while workers with low managerial ability will run smaller firms and will be in self-employment only when they cannot find a salaried job. For these workers self-employment is a secondary/informal form of employment. The Burdett and Mortensen (1998) equilibrium search model is used for illustration as a special case of our more general framework. Empirical evidence from Mexico is provided and demonstrates that firm size wage effects for employees and selfemployed workers are broadly consistent with the model.
    Keywords: Self-employment, Managerial ability, Informal sector
    Date: 2012–03–05
  6. By: Mavromatis, Konstantinos (Department of Economics, University of Warwick and Warwick Business School, Finance Group,)
    Abstract: In this paper I show, using both empirical and theoretical analysis, that changes in monetary policy in one country can have important e.ects on other economies. My ew empirical evidence shows that changes in the monetary policy behaviour of the Fed since the start of the Euro, well captured by a Markov-switching Taylor rule, have had significant e.ects on the behaviour of inflation and output in the Eurozone even though ECB’s monetary policy is found to be fairly stable. Using a two-country DSGE model, I examine this case theoretically; monetary policy in one of the countries (labelled foreign) switches regimes according to a Markov-switching process and this has nonnegligible e.ects in the other (home) country. Switching by the foreign central bank renders commitment to a time invariant interest rate rule suboptimal for the home central bank. This is because home agents expectations change as foreign monetary policy changes which a.ects the dynamics of home inflation and output. Optimal policy in the home country instead reacts to the regime of the foreign monetary policy and so implies a time-varying reaction of the home Central Bank. Following this time-varying optimal policy at home eliminates the e.ects in the home country of foreign regime shifts, and also reduces dramatically the e.ects in the foreign country. Therefore, changes in foreignmonetary regimes should not be neglected in considering monetary policy at home. Key words: Markov-switching DSGE ; Optimal monetary policy ; Dynamic programming ;SVAR ; real-time data. JEL Classification: E52 ; F41 ; F42.
    Date: 2012
  7. By: Gries, Thomas (Economics Department, University of Paderborn); Jungblut, Stefan (Economics Department, University of Paderborn); Naudé, Wim (UNU-MERIT/MGSoG, University of Maastricht, and Maastricht School of Management)
    Abstract: We propose that the rate of creation and failure of new firm start-ups can be modelled as a search and matching process, as in labor market matching models. Deriving a novel Entrepreneurship-Beveridge curve, we show that a successful start-up depends on the efficiency with which entrepreneurial ability is matched with business opportunity, and outline a number of possible applications of this matching approach to formalize the economics of entrepreneurship.
    Keywords: Entrepreneurship, start-ups, labor market matching
    JEL: L26 M13 O10 O14
    Date: 2012
  8. By: Legros, Patrick (ECARES and CEPR); Newman, Andrew F (Boston University and CEPR); Proto, Eugenio (University of warwick)
    Abstract: We consider a model in which appropriate organization fosters innovation, but because of contractibility problems, this benefit cannot be internalized. The organizational design element we focus on is the division of labor, which as Adam Smith argued, facilitates invention by observers of the production process. However, entrepreneurs choose its level only to facilitate monitoring their workers. Whether there is innovation depends on the interaction of the markets for labor and for inventions. A high level of specialization is chosen when the wage share is low. But low wage shares arise only when there are few entrepreneurs, which limits the market for innovations therefore and discourages inventive activity. When there are many entrepreneurs, the innovation market is large, but the rate of invention is low because there is little specialization. Rapid technological progress therefore requires a balance between these opposing e ects, which occurs with a moderate relative scarcity of entrepreneurs and workers. In a dynamic version of the model in which a credit constraint limits entry into entrepreneurship, this relative scarcity depends on the wealth distribution, which evolves endogenously. There is an inverted-U relation between growth rates driven by innovation and the level of inequality. Institutional improvements have ambiguous effects on growth. In light of the model, we offer a reassessment of the mechanism by which organizational innovations such as the factory may have spawned the industrial revolution. Key words: factory system ; industrial revolution ; technological change ; contracts
    Date: 2012
  9. By: Slim Bridji
    Abstract: Using the business cycle accounting framework [Chari V., P. Kehoe and E. McGrattan 2007. Business Cycle Accounting. Econometrica 75, 781-836.], this paper sheds new light on the French Great Depression. Frictions that reduce the efficiency with which factor inputs are used (efficiency wedge) were the primary factor in the economic downturn. The decline in consumption can be attributed to distortions in the Euler equation (investment wedge). In addition, frictions creating a gap between the marginal rate of substitution and the marginal product of labor (labor wedge) contributed to the slowdown of the economy after 1936. This drop in the efficiency wedge might have resulted from financial frictions and tariff policies, whereas the investment wedge might have been caused by financial frictions due to agency costs. A potential explanation for the decline of the labor wedge after 1936 is institutionals changes in the labor market.
    Keywords: Business cycle accounting, French economy, Great Depression
    JEL: E32 N14 N44
    Date: 2012–02
  10. By: Markus K. Brunnermeier; Thomas M. Eisenbach; Yuliy Sannikov
    Date: 2012–02–29
  11. By: Villeneuve, Stéphane
    Abstract: In this paper, we develop a dynamic model that captures the interaction between the cash reserves, the risk management policy and the profitability of a non-predictable irreversible investment opportunity. We consider a firm that has assets in place generating a stochastic cash- ow stream. The firm has a non-predictable growth opportunity to expand its operation size by paying a sunk cost. When the opportunity is available, the firm can finance it either by cash or by costly equity issuance. We provide an explicit characterization of the firm strategy in terms of investment, hedging, equity issuance and dividend distribution.
    Date: 2012–01–23
  12. By: Diego Restuccia; Guillaume Vandenbroucke
    Abstract: Between 1940 and 2000 there has been a substantial increase of educational attainment in the United States. What caused this trend? We develop a model of human capital accumulation that features a non-degenerate distribution of educational attainment in the population. We use this framework to assess the quantitative contribution of technological progress and changes in life expectancy in explaining the evolution of educational attainment. The model implies an increase in average years of schooling of 24 percent which is the increase observed in the data. We find that technological variables and in particular skill-biased technical change represent the most important factors in accounting for the increase in educational attainment. The strong response of schooling to changes in income is informative about the potential role of educational policy and the impact of other trends affecting lifetime income.
    Keywords: educational attainment, schooling, skill-biased technical progress, human capital
    JEL: E1 O3 O4
    Date: 2012–03–01

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