nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒03‒28
thirty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Bayesian evaluation of DSGE models with financial frictions By Michał Brzoza-Brzezina; Marcin Kolasa
  2. Price Search, Consumption Inequality, and Expenditure Inequality over the Life Cycle By Yavuz Arslan; Temel Taskin
  3. Household leverage and fiscal multipliers By Javier Andrés; José Boscá; Francisco Ferri
  4. Directed search over the life cycle By Guido Menzio; Irina A. Telykova; Ludo Visschers
  5. International Capital Flows with Limited Commitment and Incomplete Markets By von Hagen, Jürgen; Zhang, Haiping
  6. Economics and Climate Change: Integrated Assessment in a Multi-Region World By Hassler, John; Krusell, Per
  7. Relational consumption and nonlinear dynamics in an overlapping generations model By Antoci, Angelo; Sodini, Mauro; Zarri, Luca
  8. Policy Change and Learning in the RBC Model By Evans, George W.; Honkapohja, Seppo; Mitra, Kaushik
  9. The Procyclical Effects of Bank Capital Regulation By Repullo, Rafael; Suarez, Javier
  10. Relational Consumption and Nonlinear Dynamics in an Overlapping Generations Model By Angelo Antoci; Mauro Sodini; Luca Zarri
  11. Fiscal Policy and Learning By Evans, George W.; Honkapohja, Seppo; Mitra, Kaushik
  12. Exchange-Rate Dark Matter By Martin D. D. Evans
  13. Monetary Policy Transmission in a Model with Animal Spirits and House Price Booms and Busts By Bofinger, Peter; Debes, Sebastian; Gareis, Johannes; Mayer, Eric
  14. Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt By Song, Zheng Michael; Storesletten, Kjetil; Zilibotti, Fabrizio
  15. Home Bias in Open Economy Financial Macroeconomics By Coeurdacier, Nicolas; Rey, Hélène
  16. Trading Off Generations: Infinitely Lived Agent Versus OLG By Schneider, Maik T.; Traeger, Christian P.; Winkler, Ralph
  17. Life Expectancy, Labor Supply, and Long-Run Growth: Reconciling Theory and Evidence By Strulik, Holger; Werner, Katharina
  18. Efficient Cheap Talk in Directed Search: On the Non-essentiality of Commitment in Market Games By Kim, Kyungmin; Kircher, Philipp
  19. The Risky Steady-State By Coeurdacier, Nicolas; Rey, Hélène; Winant, Pablo
  20. Fiscal Policy in a Financial Crisis: Standard Policy vs. Bank Rescue Measures By Kollmann, Robert; Roeger, Werner; Veld, Jan in't
  21. Smoothing shocks and balancing budgets in a currency union By James Costain; Beatriz de Blas
  22. Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis By R. Anton Braun; Tomoyuki Nakajima
  23. On the optimal supply of liquidity with borrowing constraints By Lippi, Francesco; Trachter, Nicholas
  24. Stability and policy rules in emerging markets By Ashima Goyal; Shruti Tripathi
  25. Has India emerged? Business cycle stylized facts from a transitioning economy By Chetan Ghate; Radhika Pandey; Ila Patnaik
  26. Children and the Wealth of Nations By Cordoba, Juan Carlos
  27. Economies of Scale in Banking, Confidence Shocks, and Business Cycles By Scott J. Dressler; Erasmus K. Kersting
  28. Do Frictions Matter in the Labor Market? Accessions, Separations, and Minimum Wage Effects By Dube, Arindrajit; Lester, T. William; Reich, Michael
  29. Global Warming and the Population Externality By Stuart, Charles; Bohn, Henning
  30. Game Over: Simulating Unsustainable Fiscal Policy By Richard W. Evans; Laurence J. Kotlikoff; Kerk L. Phillips
  31. A Century of Human Capital and Hours By Diego Restuccia; Guillaume Vandenbroucke

  1. By: Michał Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics); Marcin Kolasa (National Bank of Poland, Warsaw School of Economics)
    Abstract: We evaluate two most popular approaches to implementing financial frictions into DSGE models: the Bernanke et al. (1999) setup, where financial frictions enter through the price of loans, and the Kiyotaki and Moore (1997) model, where they concern the quantity of loans. We take both models to the US data and check how well they fit it on several margins. Overall, comparing the models favors the framework of Bernanke et al. (1999). However, even this model is not able to make a clear improvement over the benchmark New Keynesian model, and the Kiyotaki and Moore (1997) underperforms it on several margins. Furthermore, none of the extensions explains the 2007-09 recession as significantly more “financial” than several previous ones.
    Keywords: financial frictions, DSGE models, DSGE-VAR, Bayesian analysis
    JEL: E30 E44
    Date: 2012
  2. By: Yavuz Arslan; Temel Taskin
    Abstract: In this paper, we incorporate a price search decision into an incomplete markets model and differentiate consumption from expenditure. In our model, consumers are allowed to allocate part of their time on searching for low prices which leads to an endogenous price dispersion. A plausibly calibrated version of the model predicts that the cross-sectional variance of consumption is, on average, 15% smaller than the cross-sectional variance of expenditure throughout the life cycle. Price search has an alternative productive activity role and provides a partial insurance mechanism against bad income shocks. We also discuss some policy implications.
    Keywords: Consumption inequality, price search, incomplete markets, life cycle models, partial insurance
    JEL: D10 D91 E21
    Date: 2012
  3. By: Javier Andrés (Universidad de Valencia); José Boscá (Universidad de Valencia); Francisco Ferri (Universidad de Valencia)
    Abstract: We study the size of fi scal multipliers in response to a government spending shock under different household leverage conditions in a general equilibrium setting with search and matching frictions. We allow for different levels of household indebtedness by changing the intensive margin of borrowing (loan-to-value ratio), as well as the extensive margin, defi ned as the number of borrowers over total population. The interaction between the consumption decisions of agents with limited access to credit and the process of wage bargaining and vacancy posting delivers two main results: (a) higher initial leverage makes it more likely to fi nd output multipliers higher than one; and (b) a positive government expenditure shock always produces a positive multiplier for vacancies and employment. The latter result is in sharp contrast to models in which some households do not have access to the fi nancial market (RoT consumers), in which the implied labor market responses to fi scal shocks are inconsistent with the empirical evidence. We also fi nd that the impact on GDP of consolidations is lower when consumers have a more limited capacity to borrow, and that increasing government spending in an episode of intense private deleveraging can still generate positive and signifi cant effects on consumption and output, although the fi scal output (employment) multiplier decreases (increases) with the intensity of the credit crunch. In the model with indebted impatient households we also observe that output (employment) multipliers decrease (increase) markedly with the degree of shock persistence and increase with the degree of price stickiness.
    Keywords: Fiscal multipliers, private leverage, labour market search
    JEL: E24 E44 E62
    Date: 2012–03
  4. By: Guido Menzio; Irina A. Telykova; Ludo Visschers
    Abstract: We develop a life-cycle model of the labor market in which different worker-firm matches have different quality and the assignment of the right workers to the right firms is time consuming because of search and learning frictions. The rate at which workers move between unemployment, employment and across different firms is endogenous because search is directed and, hence, workers can choose whether to seek low-wage jobs that are easy to find or high-wage jobs that are hard to find. We calibrate our theory using data on labor market transitions aggregated across workers of different ages. We validate our theory by showing that it correctly predicts the pattern of labor market transitions for workers of different ages. Finally, we use our theory to decompose the age profiles of transition rates, wages and productivity into the effects of age variation in work-life expectancy, human capital and match quality.
    Keywords: Directed search, Labor reallocation, Lifecycle
    JEL: E24 J63 J64
    Date: 2012–01
  5. By: von Hagen, Jürgen; Zhang, Haiping
    Abstract: Recent literature has proposed two alternative types of financial frictions, i.e., limited commitment and incomplete markets, to explain the patterns of international capital flows between developed and developing countries observed in the past two decades. This paper integrates both types of frictions into a two-country overlapping-generations framework to facilitate a direct comparison of their effects. In our model, limited commitment distorts the investment made by agents with different productivity, which creates a wedge between the interest rates on equity capital vs. credit capital; while incomplete markets distort the investment among projects with different riskiness, which creates a wedge between the risk-free rate and the mean rate of return to risky capital. We show that the two approaches are observationally equivalent with respect to their implications for international capital flows, production efficiency, and aggregate output.
    Keywords: financial development; financial frictions; foreign direct investment; international capital flows; limited commitment
    JEL: E44 F41
    Date: 2012–01
  6. By: Hassler, John; Krusell, Per
    Abstract: This paper develops a model that integrates the climate and the global economy---an integrated assessment model---with which different policy scenarios can be analyzed and compared. The model is a dynamic stochastic general-equilibrium setup with a continuum of regions. Thus, it is a full stochastic general-equilibrium version of RICE, Nordhaus's pioneering multi-region integrated assessment model. Like RICE, our model features traded fossil fuel but otherwise has no markets across regions---there is no insurance nor any intertemporal trade across them. The extreme form of market incompleteness is not fully realistic but arguably not a decent approximation of reality. Its major advantage is that, along with a set of reasonable assumptions on preferences, technology, and nature, it allows a closed-form model solution. We use the model to assess the welfare consequences of carbon taxes that differ across as well as within oil-consuming and -producing regions. We show that, surprisingly, only taxes on oil producers can improve the climate: taxes on oil consumers have no effect at all. The calibrated model suggests large differences in views on climate policy across regions.
    Keywords: climate; dynamic; integrated assessment; regional; stochastic
    JEL: H23 O44 Q0
    Date: 2012–01
  7. By: Antoci, Angelo (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Sodini, Mauro (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Zarri, Luca (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)
    Abstract: In this paper, we show that incorporating the relational dimension into an otherwise standard OLG model and focusing on dynamic leisure externalities leads to dramatically different predictions. Here we show that when the old perceive private and relational consumption as substitutable goods, a series of interesting dynamic outcomes – such as local indeterminacy, non-linear phenomena (including chaotic dynamics) and even multiple equilibria with global indeterminacy – may arise. We also draw some welfare implications and relate them to the well-known “happiness paradox” arising within contemporary affluent societies.
    Keywords: overlapping generations framework; growth; leisure; relational goods; happiness paradox
    JEL: D63 J22 O33 O41 Z13
    Date: 2012–03–19
  8. By: Evans, George W.; Honkapohja, Seppo; Mitra, Kaushik
    Abstract: What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Both permanent and temporary policy changes are analyzed. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.
    Keywords: Expectations; Government Spending; Permanent and Temporary Policy Change; Taxation
    JEL: D84 E21 E43 E62
    Date: 2012–03
  9. By: Repullo, Rafael; Suarez, Javier
    Abstract: We develop and calibrate a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period and the business cycle is a Markov process that determines loans' probabilities of default. Banks anticipate that shocks to their earnings and the possible variation of capital requirements over the cycle can impair their future lending capacity and, as a precaution, hold capital buffers. We compare the relative performance of several capital regulation regimes, including one that maximizes a measure of social welfare. We show that Basel II is significantly more procyclical than Basel I, but makes banks safer. For this reason, it dominates Basel I in terms of welfare except for small social costs of bank failure. We also show that for high values of this cost, Basel III points in the right direction, with higher but less cyclically-varying capital requirements.
    Keywords: Banking regulation; Basel capital requirements; Capital market frictions; Credit rationing; Loan defaults; Relationship banking; Social cost of bank failure
    JEL: E44 G21 G28
    Date: 2012–03
  10. By: Angelo Antoci (University of Sassari); Mauro Sodini (University of Pisa, Department of Statistics and Mathematics Applied to Economics); Luca Zarri (Department of Economics (University of Verona))
    Abstract: In this paper, we show that incorporating the relational dimension into an otherwise standard OLG model and focusing on dynamic leisure externalities leads to dramatically different predictions. Here we show that when the old perceive private and relational consumption as substitutable goods, a series of interesting dynamic outcomes - such as local indeterminacy, non-linear phenomena (including chaotic dynamics) and even multiple equilibria with global indeterminacy - may arise. We also draw some welfare implications and relate them to the well-known ‘happiness paradox’ arising within contemporary affluent societies.
    Keywords: overlapping generations framework; growth; leisure; relational goods; happiness paradox
    JEL: D63 J22 O33 O41 Z13
    Date: 2012–03
  11. By: Evans, George W.; Honkapohja, Seppo; Mitra, Kaushik
    Abstract: What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Both permanent and temporary policy changes are analyzed. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.
    Keywords: Expectations; Government Spending; Permanent and temporary policy changes; Taxation
    JEL: D84 E21 E43 E62
    Date: 2012–03
  12. By: Martin D. D. Evans (Department of Economics, Georgetown University)
    Abstract: Dark matter is believed to account for 83 percent of the matter in the universe and plays a central role in cosmology modeling. This paper argues that an analogous form of dark matter plays a similarly important role in international macroeconomics. Like its cosmological counterpart, exchange-rate dark matter cannot be directly observed, but its existence can be inferred from observations on the real exchange rates and interest rates. In the first part of this paper I show that dark matter is the dominant driver of short- and medium-term changes in real exchange rates for the G-7 countries; accounting for more than 90 percent of the variance at the five-year horizon. Although standard models stress the role of real interest differentials as the proximate drivers of real exchange-rate variations, my findings indicate that they are empirically unimportant. To understand the nature of exchange-rate dark matter, the second part of the paper develops an open-economy DSGE model in which the risk shocks driving households’ habits interact with collateral constraints and incomplete markets. The model not only shows that risk shocks can account for the role of dark matter as a driver of real exchange-rate dynamics, but also that these same shocks have significant macroeconomic implications. My analysis suggests that exchange rates appear disconnected from traditional macroeconomic fundamentals because they are particularly susceptible to risk shocks that play an important role in international macroeconomics
    Keywords: Exchange Rate Dynamics, Open-Economy Macro Models, Habits, Incomplete Markets, Collateral Constraints.
    Date: 2012–01–01
  13. By: Bofinger, Peter; Debes, Sebastian; Gareis, Johannes; Mayer, Eric
    Abstract: Can monetary policy trigger pronounced boom-bust cycles in house prices and create persistent business cycles? We address this question by building heuristics into an otherwise standard DSGE model. As a result, monetary policy sets off waves of optimism and pessimism ('animal spirits') that drive house prices, which, in turn, have strong repercussions on the business cycle. We compare our findings to a standard model with rational expectations by means of impulse responses. We suggest that a standard Taylor rule is not well-suited to maintain macroeconomic stability. Instead, an augmented rule that incorporates house prices is shown to be superior.
    Keywords: animal spirits; housing markets; monetary policy
    JEL: D83 E32 E52
    Date: 2012–01
  14. By: Song, Zheng Michael; Storesletten, Kjetil; Zilibotti, Fabrizio
    Abstract: This paper proposes a dynamic politico-economic theory of fiscal policy in a world comprising a set of small open economies, whose driving force is the intergenerational conflict over debt, taxes, and public goods. Subsequent generations of voters choose fiscal policy through repeated elections. The presence of young voters induces fiscal discipline, i.e., low taxes and low debt accumulation. The paper characterizes the Markov-perfect equilibrium of the voting game in each economy, as well as the stationary equilibrium debt distribution and interest rate of the world economy. The equilibrium can reproduce some salient features of fiscal policy in modern economies.
    Keywords: Fiscal discipline; Fiscal policy; General equilibrium; Government debt; High debt in Greece and Italy; Intergenerational conflict; Markov equilibrium; Political economy; Public goods; Repeated voting
    JEL: D72 E62 H41 H62 H63
    Date: 2012–01
  15. By: Coeurdacier, Nicolas; Rey, Hélène
    Abstract: Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modelling that incorporate international portfolio choices in standard two-country general equilibrium models. We refer to this new literature as Open Economy Financial Macroeconomics. We focus on three broad classes of explanations: (i) hedging motives in frictionless financial markets (real exchange rate and non-tradable income risk), (ii) asset trade costs in international financial markets (such as transaction costs or differences in tax treatments between national and foreign assets), (iii) informational frictions and behavioural biases. Recent theories call for new portfolio facts beyond equity home bias. We present new evidence on crossborder asset holdings across different types of assets: equities, bonds and bank lending and new micro data on institutional holdings of equity at the fund level. These data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment.
    Keywords: home bias; open economy financial macroeconomics; portfolio choice
    JEL: F41 G11 G15
    Date: 2012–01
  16. By: Schneider, Maik T.; Traeger, Christian P.; Winkler, Ralph
    Abstract: The prevailing literature discusses intergenerational trade-offs in climatechange predominantly in terms of the Ramsey equation relying on the infinitelylived agent model. We discuss these trade-offs in a continuous time OLG framework and relate our results to the infinitely lived agent setting. We identify three shortcomings of the latter: First, underlying normative assumptions about social preferences cannot be deduced unambiguously. Second, the distribution among generations living at the same time cannot be captured. Third, the optimal solution may not be implementable in overlapping generations market economies.
    Keywords: climate change, intergenerational equity, overlapping generations, time preference, discounting, infinitely lived agents, Agricultural and Resource Economics, Natural Resources and Conservation
    Date: 2012–01–26
  17. By: Strulik, Holger; Werner, Katharina
    Abstract: We set up a three-period overlapping generation model in which young individuals allocate their time to schooling and work, healthy middle aged individuals allocate their time to leisure and work and their income to consumption and savings for retirement, and old age individuals live off their savings. The three period setup allows us to distinguish between longevity and active life expectancy (i.e. the expected length of period 1 and 2). We show that individuals optimally respond to a longer active life by educating more and, if the labor supply elasticity is high enough, by supplying less labor. We calibrate the model to US data and show that the historical evolution of increasing education and declining labor supply can be explained as an optimal response to increasing active life expectancy. We integrate the theory into a unified growth model and reestablish increasing life expectancy as an engine of long-run economic development.
    Keywords: longevity, active life expectancy, education, hours worked, economic growth
    JEL: E20 I25 J22 O10 O40
    Date: 2012–03
  18. By: Kim, Kyungmin; Kircher, Philipp
    Abstract: Directed search models are market games in which each firm announces a wage commitment to attract a worker. Miscoordination among workers generates search frictions, yet in equilibrium more productive firms post more attractive wage commitments to fill their vacancies faster, which yields constrained efficient outcomes. We show that commitment is not essential: Exactly the same efficient allocation can be sustained when announcements are pure cheap talk followed by a suitable subsequent wage-formation stage. The insights from existing commitment models extend unchanged to such a cheap-talk environment, even when workers differ in outside opportunities or observable common productivity.
    Keywords: cheap talk; commitment; competitive search; directed search
    JEL: C72 D82 D83
    Date: 2012–01
  19. By: Coeurdacier, Nicolas; Rey, Hélène; Winant, Pablo
    Abstract: We propose a simple quantitative method to linearize around the risky steady state of a small open economy. Unlike when the deterministic steady state is used, the net foreign asset position is well defined. We allow for both stochastic income and stochastic interest rate.
    Keywords: steady state
    JEL: E10 F41
    Date: 2012–01
  20. By: Kollmann, Robert; Roeger, Werner; Veld, Jan in't
    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: financial crisis; fiscal stimulus; real activity; state support for banks
    JEL: E62 E63 G21 G28 H25
    Date: 2012–02
  21. By: James Costain (Banco de España); Beatriz de Blas (Universidad autónoma de Madrid)
    Abstract: We study simple fiscal rules for stabilizing the government debt level in response to asymmetric demand shocks in a country that belongs to a currency union. We compare debt stabilization through tax rate adjustments with debt stabilization through expenditure changes. While rapid and flexible adjustment of public expenditure might seem institutionally or informationally infeasible, we discuss one concrete way in which this might be implemented: setting salaries of public employees, and social transfers, in an alternative unit of account, and delegating the valuation of this numeraire to an independent fi scal authority. Using a sticky-price DSGE matching model of a small open economy in a currency union, we compare the business cycle implications of several different fiscal rules that all achieve the same reduction in the standard deviation of the public debt. In our simulations, compared with rules that adjust tax rates, a rule that stabilizes the budget by adjusting public salaries and transfers reduces fluctuations in consumption, employment, and private and public after-tax real wages, thus bringing the market economy closer to the social planner’s solution.
    Keywords: Fiscal authority, public wages, sovereign debt, monetary union
    JEL: E24 E32 E62 F41
    Date: 2012–01
  22. By: R. Anton Braun (Federal Reserve Bank of Atlanta (Email: r.anton.; Tomoyuki Nakajima (Institute of Economic Research, Kyoto University, and the Canon Institute for Global Studies (Email:
    Abstract: We compare the dynamics of inflation and bond yields leading up to a sovereign debt crisis in settings where asset markets are frictionless to other settings with financial frictions. As compared to the case with frictionless asset markets, an asset market structure with financial frictions generates a significant delay in the response of prices to news about a future debt crisis. With complete markets prices jump in response to news about the possibility of a future debt crisis. However, when short selling of government bonds is restricted some agents can't act on their beliefs and prices don't respond to the news. Instead prices only move in periods immediately prior the crisis.
    Keywords: Sovereign Debt Crisis, Deflation, Fiscal Risk, Leverage, Borrowing Constraint
    JEL: E31 E62 H60
    Date: 2012–03
  23. By: Lippi, Francesco; Trachter, Nicholas
    Abstract: We characterize policies for the supply of liquidity in an economy where agents have a precautionary savings motive due to random production opportunities and the presence of borrowing constraints. We show that a socially efficient provision of liquidity involves a trade-off between insurance and production incentives. Two scenarios are studied: if no aggregate information is available to the policy maker, constant flat expansions are socially beneficial if unproductive spells are sufficiently long. If some aggregate information is available, a socially beneficial state-dependent policy prescribes expanding the supply of liquidity in recessions and contracting it in expansions.
    Keywords: Friedman rule; Heterogenous agents; Incomplete markets; Liquidity; Precautionary savings; State dependent policy.
    JEL: E5
    Date: 2012–03
  24. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Shruti Tripathi (Indira Gandhi Institute of Development Research)
    Abstract: Stability results for an open economy DSGE adapted to an emerging market (SOEME) with a dualistic structure have the same structure as in the original model, but those derived for the simulated version turn out to impose no restriction on the coefficient of inflation, but rather a threshold on the coefficient of the output gap. Other rigidities, lags and some degree of backward looking behavior in the simulated SOEME model arising from its calibration to an emerging market, may be helping provide a nominal anchor. Estimation of a Taylor rule for India, simulations in the SOEME model itself and a variant with government debt, confirm the analytical result. Implications are, first, optimization can be as effective as following a monetary policy rule. Second, knowledge of the specific rigidities in an economy can give useful inputs for the design of policy-their effect on stability should be more carefully researched.
    Keywords: DSGE, emerging economy, rigidities, stability, optimization, Taylor rule
    JEL: E26 E52
    Date: 2012–01
  25. By: Chetan Ghate (Indian Statistical Institute, New Delhi); Radhika Pandey (National Institute of Public Finance and Policy); Ila Patnaik (National Institute of Public Finance and Policy)
    Abstract: This paper presents a comprehensive set of stylised facts for business cycles in India from 1950 - 2009. We find that the nature of the business cycle has changed dramatically after India's liberalisation reforms in 1991. In particular, after the the mid 1990s, the properties of India's business cycle has moved closer in key respects to select advanced countries. This is consistent with India's structural transformation from a pre-dominantly agricultural and planned developing economy to a more market based industrial-income economy. We also identify in what respects the behaviour of the Indian business cycle is different from that of other advanced economies, and closer to that of other less developed economies. This is the first exercise of this kind to generate an exhaustive set of stylised facts for India using both annual and quarterly data.
    Keywords: Macroeconomics, Real Business Cycles, Emerging Market DSGE Models, Volatility and Growth
    JEL: E10 E32
    Date: 2011–05
  26. By: Cordoba, Juan Carlos
    Abstract: The welfare of individuals depends on the quality as well as the quantity of life. The quantity of life itself depends on longevity but also on the number of descendants. Specifically, children, grandchildren, etc., offer an alternative way to extend the effective life of altruistic individuals. Everything else equal, a lower fertility rate reduces the welfare of altruistic parents. This paper incorporates fertility into an overall assessment of the degree and evolution of welfare around the world and shows that it is quantitatively important. Our calculations suggest a major quantity-quantity tradeoff:  for the period 1970-2005, the overall welfare gains due to longevity improvements were mostly offset by welfare losses due to fertility reductions. The effective quantity of life remained roughly constant or even fell, substantially.
    JEL: I J O
    Date: 2012–03–16
  27. By: Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University); Erasmus K. Kersting (Department of Economics and Statistics, Villanova School of Business, Villanova University)
    Abstract: Equilibrium indeterminacy due to economies of scale (ES) in financial intermediation is quantitatively examined in a monetary business-cycle environment. Financial intermediation provides deposits which serve as a substitute for currency to purchase consumption, and depositing decisions are susceptible to non-fundamental shocks to confidence. The analysis considers various assumptions on nominal rigidities and the timing of deposit decisions. The results suggest that indeterminacy arises for small degrees of ES, and the resulting confidence shocks qualitatively mimic monetary shocks. A calibration exercise concludes that US economic volatility from this non-fundamental source has increased over time while volatility from fundamental sources has decreased.
    Keywords: Firms; Financial Intermediation, Inside Money, Indeterminacy, Business Cycles
    JEL: C68 E32 E44
    Date: 2012–02
  28. By: Dube, Arindrajit; Lester, T. William; Reich, Michael
    Abstract: We measure labor market frictions using a strategy that bridges design-based and structural approaches: estimating an equilibrium search model using reduced-form minimum wage elasticities identified from border discontinuities and fitted with Bayesian and LIML methods. We begin by providing the first test of U.S. minimum wage effects on labor market flows and find negative effects on employment flows, but not levels. Separations and accessions fall among restaurants and teens, especially those with low tenure. Our estimated parameters of a search model with wage posting and heterogeneous workers and firms imply that frictions help explain minimum wage effects.
    Keywords: J23, J32, J48, J63, Labor Economics
    Date: 2011–06–24
  29. By: Stuart, Charles; Bohn, Henning
    Abstract: We calculate the harm a birth imposes on others when greenhouse gas emissions are a problem and a cap limits emissions damage. This negative population externality, which equals the corrective Pigovian tax on having a child, is substantial in calibrations. In our base case, the Pigovian tax is 21 percent of a parent's lifetime income in steady state and 5 percent of lifetime income immediately after imposition of a cap, per child. The optimal population in steady state, which maximizes utility taking account of the externality, is about one quarter of the population households would choose voluntarily
    Keywords: population externality, Pigovian tax, emissions cap, endogenous fertility, population growth, economic growth, optimal population, calibrated optimal child tax, greenhouse gas emissions, global warming, Economic Theory, Growth and Development, Public Economics
    Date: 2011–04–22
  30. By: Richard W. Evans; Laurence J. Kotlikoff; Kerk L. Phillips
    Abstract: Fiscal sustainability is one of the most pressing policy issues of our time. Yet it remains difficult to quantify. Official debt is plagued with a number of measurement difficulties since its measurement reflects the choice of words, not policies. And forming the fiscal gap–the imbalance in the government's intertemporal budget–requires strong discount rate assumptions. An alternative approach, taken here, is specifying a stochastic general equilibrium model and determining via simulation how long it takes for the economy to reach game over–the point where current policy can no longer be maintained. Our simulations, based on an OLG model calibrated to the U.S. economy, produce an average duration to game over of roughly one century, with a 35 percent chance of reaching the fiscal limit in roughly 30 years. The prospect of man-made economic collapse produces large equity premia, like those observed in the data. Our simulations show that both the fiscal gap and the equity premium rise as the economy gets closer to hitting its fiscal limit, suggesting that the fiscal gap and the equity premium may be good indicators of unsustainable policy.
    JEL: C63 C68 E62 H55
    Date: 2012–03
  31. By: Diego Restuccia; Guillaume Vandenbroucke
    Abstract: An average person born in the United States in the second half of the nineteenth century completed 7 years of schooling and spent 58 hours a week working in the market. By contrast, an average person born at the end of the twentieth century completed 14 years of schooling and spent 40 hours a week working. In the span of 100 years, completed years of schooling doubled and working hours decreased by 30 percent. What explains these trends? We consider a model of human capital and labor supply to quantitatively assess the contribution of exogenous variations in productivity (wage) and life expectancy in accounting for the secular trends in educational attainment and hours of work. We find that the observed increase in wages and life expectancy account for 80 percent of the increase in years of schooling and 88 percent of the reduction in hours of work. Rising wages alone account for 75 percent of the increase in schooling and almost all the decrease in hours in the model, whereas rising life expectancy alone accounts for 25 percent of the increase in schooling and almost none of the decrease in hours of work.
    Keywords: Schooling, hours of work, productivity, life expectancy, trends, United States
    JEL: E1 I25 J11 O4
    Date: 2012–03–21

This nep-dge issue is ©2012 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.