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on Dynamic General Equilibrium |
| By: | Florin Bilbiie (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Fabio Ghironi (Department of Economics - Boston College); Marc Melitz (Department of Economics - Harvard university (Cambridge, USA)) |
| Abstract: | This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers and products over the business cycle. Economic expansions induce higher entry rates by prospective entrants subject to irreversible investment costs. The sluggish response of the number of producers (due to sunk entry costs and a time-to-build lag) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The return to investment (corresponding to the creation of new productive units) determines household saving decisions, producer entry, and the allocation of labor across sectors. The model performs at least as well as the benchmark real business cycle model with respect to the implied second-moment properties of key macroeconomic aggregates. In addition, our framework jointly predicts procyclical product variety and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can simultaneously reproduce most of the variance of GDP, hours worked, and total investment found in the data. |
| Keywords: | Business cycle propagation; Entry; Markups; Product creation; Profits; Variety |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00680634&r=dge |
| By: | Jurgen von Hagen (University of Bonn, Indiana University and CEPR); Haiping Zhang (School of Economics, Singapore Management University) |
| 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: | E44, F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:22-2011&r=dge |
| By: | Rafal Raciborski; Julia Lendvai; Lukas Vogel |
| Abstract: | The paper studies the impact of a securities transaction tax (STT) on financial trading, stock prices and real economic variables in a closed-economy dynamic stochastic general-equilibrium model featuring financial frictions. The model incorporates channels by which 'noise trading' affects real economic volatility. Firms' investment expenditure is related to the value of their outstanding shares. The model is calibrated to stylised facts of financial trading and firms' financing. The simulations suggest distortive effects of the STT on real variables similar to those of corporate income taxation. At the same time, the STT reduces economic volatility, but this stabilisation gain is quantitatively modest. |
| JEL: | E22 E44 E62 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0450&r=dge |
| By: | Jurgen von Hagen (University of Bonn, Indiana University and CEPR); Haiping Zhang (School of Economics, Singapore Management University) |
| Abstract: | We show in a tractable, multi-country OLG model that cross-country differences in financial development explain three recent empirical patterns of international capital fl ows. International capital mobility affects output in each country directly through the size of domestic investment as well as indirectly through the composition of domestic investment and the level of domestic savings. In contrast to earlier literature, our model admits the possibility that the indirect effects dominate the direct effects and international capital mobility raises output in the poor country and globally, although net capital flows are in the direction of the rich country. Our model adds to the understanding of the benefits of international capital mobility in the presence of financial frictions. |
| Keywords: | financial frictions, financial development, foreign direct investment |
| JEL: | E44 F41 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:20-2011&r=dge |
| By: | Cristiano Cantore; Filippo Ferroni; Miguel A León-Ledesma |
| Abstract: | We investigate the time variation in the correlation between hours and technology shocks using a structural business cycle model. We propose an RBC model with a Constant Elasticity of Substitution (CES) production function that allows for capital- and labor-augmenting technology shocks. We estimate the model using US data with Bayesian techniques. In the full sample, we find (i) evidence in favor of a less than unitary elasticity of substitution (rejecting Cobb-Douglas) and (ii) a sizable role for capital augmenting shock for business cycles fluctuations. In rolling sub-samples, we document that the impact of technology shocks on hours worked varies over time and switches from negative to positive towards the end of the sample. We argue that this change is due to the increase in the elasticity of factor substitution. That is, labor and capital became less complementary throughout the sample inducing a change in the sign and size of the the response of hours. We conjecture that this change may have been induced by a change in the skill composition of the labor input. |
| Keywords: | Real Business Cycles models; Constant Elasticity of Substitution production function; Hours worked dynamics |
| JEL: | E32 E37 C53 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1201&r=dge |
| By: | Ikefuji, Masako; Horii, Ryo |
| Abstract: | Using an endogenous growth model with physical and human capital accumulation, this paper considers the sustainability of economic growth when the use of a polluting input (e.g., fossil fuels) intensifies the risk of capital destruction through natural disasters. We find that growth is sustainable only if the tax rate on the polluting input increases over time. The long-term rate of economic growth follows an inverted V-shaped curve relative to the growth rate of the environmental tax, and it is maximized by the least aggressive tax policy of those that asymptotically eliminate the use of polluting inputs. Unavailability of insurance can accelerate or decelerate the growth-maximizing speed of the tax increase depending on the relative significance of the risk premium and precautionary savings effects. Welfare is maximized under a milder environmental tax policy, especially when the pollutants accumulate gradually. |
| Keywords: | human capital; global warming; environmental tax; nonbalanced growth path; precautionary saving; risk premium |
| JEL: | O41 H23 Q54 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37825&r=dge |
| By: | Antoine Martin; David Skeie; Ernst-Ludig von Thadden |
| Abstract: | This paper develops a dynamic model of financial institutions that borrow short-term and invest into long-term marketable assets. Because such intermediaries performmaturity transformation, they are subject to potential runs. We derive distinct liquidity and collateral constraints that characterize the fragility of such institutions as a result of changing market expectations. The liquidity constraint depends on the intermediary’s endogenous liquidity position that acts as a buffer against runs. The collateral constraint depends crucially on the microstructure of particular funding markets that we examine in detail. In particular, our model provides insights into the fragility and differences of the tri-party repo market and the bilateral repo market that were at the heart of the recent financial crisis. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp687&r=dge |
| By: | Giorgio Fagiolo; Andrea Roventini |
| Abstract: | The Great Recession seems to be a natural experiment for macroeconomics showing the inadequacy of the predominant theoretical framework - the New Neoclassical Synthesis - grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, representative agent, etc.). We briefly introduce one of the most successful alternative research projects - known in the literature as agent-based computational economics (ACE) - and we present the way it has been applied to policy analysis issues. We then provide a survey of agent-based models addressing macroeconomic policy issues. Finally, we conclude by discussing the methodological status of ACE, as well as the (many) problems it raises. |
| Keywords: | Economic Policy, Monetary and Fiscal Policies, New Neoclassical Synthesis, New Keynesian Models, DSGE Models, Agent-Based Computational Economics, Agent-Based Models, Great Recession, Crisis |
| JEL: | B41 B50 E32 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-17&r=dge |
| By: | Jurgen von Hagen (University of Bonn, Indiana University and CEPR); Haiping Zhang (School of Economics, Singapore Management University) |
| Abstract: | We develop a tractable two-country overlapping-generations model and show that cross-country differences in financial development can explain three recent empirical patterns of international capital flows: Financial capital flows from relatively poor to relatively rich countries while foreign direct investment fl ows in the opposite direction; net capital flows go from poor to rich countries; despite of its negative net international investment positions, the United States receives a positive net investment income. We also explore the welfare and distributional effects of international capital fl ows and show that the patterns of capital fl ows may reverse along the convergence process of a developing country. |
| Keywords: | Capital account liberalization, financial development, foreign direct investment, symmetry breaking |
| JEL: | E44 F41 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:21-2011&r=dge |
| By: | Christopher L. House; Jing Zhang |
| Abstract: | We develop a dynamic equilibrium model of labor demand with adverse selection. Firms learn the quality of newly hired workers after a period of employment. Adverse selection makes it costly to hire new workers and to release productive workers. As a result, firms hoard labor and under-react to labor demand shocks. The adverse selection problem also creates a market for temporary workers. In equilibrium, firms hire a buffer stock of permanent workers and respond to changing business conditions by varying their temp workers. A hiring subsidy or tax can improve welfare by discouraging firms from hoarding too many productive workers. |
| JEL: | D82 E24 J23 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17962&r=dge |
| By: | Benjamin Eden (Department of Economics, Vanderbilt University) |
| Abstract: | I examine the implementation of the Friedman rule under the assumption that age dependent lump sum transfers are possible and private intermediation is costly. This is done both in an infinitely lived agents model and in an overlapping generations model. I argue that in addition to a zero nominal-interest-rate policy (the so called Friedman rule) a transfer to young agents, or a government loan program is required for satiating agents with real balances. The paper also contributes to the understanding of Friedman's original article and discusses related questions about the size of the financial sector. It is shown that the adoption of the (modified) Friedman rule will crowd out private lending and borrowing. I also look at the social value of a market for contingent claims and argue that resources spent on operating a market for accidental nominal bequests are a waste from the social point of view in spite of the fact that individuals have an incentive to trade in such markets. |
| Keywords: | The Friedman Rule, Accidental bequests, The optimal size of the financial sector, Government loans |
| JEL: | E40 E52 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:1202&r=dge |
| By: | Andrea Caggese; Vincente Cunat |
| Abstract: | We develop a dynamic industry model where financing frictions affect the entry decisions of new firms in the home market, as well as the riskiness of operating firms. These two factors in turn determine a joint endogenous distribution of firms across productivity, volatility and financial wealth. We show that this endogenous distribution is crucial to understand export and productivity dynamics after a trade liberalization. In particular, the calibrated model predicts that financing frictions have an ambiguous effect on the number of firms starting to export. They reduce the ability of firms to finance the fixed costs necessary to start exporting, but they also change the distribution of domestic firms so that most of them find more profitable to access foreign markets. More importantly, the model predicts that financing constraints, even when they have a negligible net effect on the number of exporting firms, reduce the aggregate productivity gains induced by trade liberalization by 30% to 50%, because they distort the selection into export of the most productive firms. In the second part of the paper we verify the main predictions of the model with a rich dataset of Italian manufacturing firms for the period 1995-2003. |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp685&r=dge |
| By: | Nobuhiro Kiyotaki; John Moore |
| Abstract: | The paper presents a model of a monetary economy where there are differences in liquidity across assets. Money circulates because it is more liquid than other assets, not because it has any special function. There is a spectrum of returns on assets, reflecting their differences in liquidity. The model is used, first, to investigate how aggregate activity and asset prices fluctuate with shocks to productivity and liquidity; second, to examine what role government policy might have through open market operations that change the mix of assets held by the private sector. With its emphasis on liquidity rather than sticky prices, the model harks back to an earlier interpretation of Keynes (1936), following Tobin (1969). |
| JEL: | E10 E44 E50 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17934&r=dge |
| By: | Lukas Vogel |
| Abstract: | The paper extends the QUEST III model by home production to discuss fiscal limits in an economy with tax avoidance. It finds that revenue-maximising labour and corporate tax rates in the benchmark model are relatively high (54% and 72%) compared to current EU-average implicit tax rates. No such limit is found for the consumption tax. Higher substitutability between market and home production flattens the Laffer curves for labour and corporate taxation and introduces one for the consumption tax. Although higher tax rates raise additional tax revenue, the economic costs of higher distortionary taxation in terms of output contraction are substantial. |
| JEL: | E62 H20 H30 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0448&r=dge |
| By: | Ken Kasa (Simon Fraser University); Todd Walker (Indiana University); Charles Whiteman (University of Iowa) |
| Abstract: | This paper develops a dynamic asset pricing model with persistent heterogeneous beliefs. The model features competitive traders who receive idiosyncratic signals about an underlying fundamentals process. We adapt Futia’s (1981) frequency domain methods to derive conditions on the fundamentals that guarantee noninvertibility of the mapping between observed market data and the underlying shocks to agents’ information sets. When these conditions are satisfied, agents must ‘forecast the forecasts of others’. The additional dynamics of the heterogeneous beliefs equilibrium can account for observed violations of variance bounds, predictability of excess returns, and rejections of cross-equation restrictions. |
| Keywords: | Heterogenous beliefs; Volatility |
| JEL: | G12 D82 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp12-06&r=dge |
| By: | Matthias Messner; Nicola Pavoni; Sleet Christopher |
| Abstract: | We bring together the theories of duality and dynamic programming. We show that the dual of an additively separable dynamic optimization problem can be recursively decomposed using summaries of past Lagrange multipliers as state variables. Analogous to the Bellman decomposition of the primal problem, we prove equality of values and solution sets for recursive and sequential dual problems. In non-additively separable settings, the equivalence of the recursive and sequential dual is not guaranteed. We relate recursive dual and recursive primal problems. If the Lagrangian associated with a constrained optimization problem admits a saddle then, even in non-additively separable settings, the values of the recursive dual and recursive primal problems are equal. Additionally, the recursive dual method delivers necessary conditions for a primal optimum. If the problem is strictly concave, the recursive dual method delivers necessary and sufficient conditions for a primal optimum. When a saddle exists, states on the optimal dual path are subdifferentials of the primal value function evaluated at states on the optimal primal path and vice versa. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cmu:gsiawp:1772106779&r=dge |
| By: | R. Anton Braun; Lena Mareen Körber; Yuichiro Waki |
| Abstract: | A growing body of recent research examines the nonlinearity created by a zero lower bound on the nominal interest rate. It is common practice in the literature to log-linearize the other equilibrium restrictions around a deterministic steady state with a stable price level. This paper shows that the resulting log-linearized equilibria can have some very unpleasant properties. We make this point using a tractable stochastic New Keynesian model that admits an exact solution. We characterize the log-linearized equilibrium. This characterization is highly misleading. Using the log-linearized equilibrium conditions gives incorrect results about existence and uniqueness of equilibrium and provides an incorrect classification of the types of zero-bound equilibria that can arise in the true economy. These problems are severe. For instance, using empirically relevant parameterizations of the model labor falls in response to a tax cut in the log-linearized economy but rises in the true nonlinear economy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2012-05&r=dge |
| By: | Steven Grenadier; Andrey Malenko; Ilya A. Strebulaev |
| Abstract: | We provide a dynamic model of an industry in which agents strategically time liquidation decisions in an effort to protect their reputations. As in traditional models, agents delay liquidation attempting to signal their quality. However, when the industry faces a common shock that indiscriminately forces liquidation of a subset of projects, agents with bad enough projects choose to liquidate even if their projects are unaffected by the shock. Such "blending in with the crowd" creates an additional incentive to delay liquidation, further amplifying the shock. As a result, even minuscule common shocks can be evidenced by massive liquidations. As agents await common shocks, the industry accumulates "living dead" projects. Surprisingly, the potential for moderate negative common shocks often improves agents values. |
| JEL: | G01 G24 G31 G32 G33 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17945&r=dge |
| By: | Douglas Gale; Tanju Yorulmazer |
| Abstract: | Banks hold liquid and illiquid assets. An illiquid bank that receives a liquidity shock sells assets to liquid banks in exchange for cash. We characterize the constrained efficient allocation as the solution to a planners problem and show that the market equilibrium is constrained inefficient, with too little liquidity and inefficient hoarding. Our model features a precautionary as well as a speculative motive for hoarding liquidity, but the inefficiency of liquidity provision can be traced to the incompleteness of markets (due to private information) and the increased price volatility that results from trading assets for cash. |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp682&r=dge |
| By: | Laurence Ales; Roozbeh Hosseini; Larry E. Jones |
| Abstract: | In this paper we study the efficient allocation of health resources across individuals. We focus on the relation between health resources and income (taken as a proxy for productivity). In particular we determine the efficient level of the health care social safety net for the indigent. We assume that individuals have different life cycle profiles of productivity. Health care increases survival probability. We adopt the classical approach of welfare economics by considering how a central planner with an egalitarian (ex-ante) perspective would allocate resources. We show that, under the efficient allocation, health care spending increases with labor productivity, but only during the working years. Post retirement, everyone would get the same health care. Quantitatively, we find that the amount of inequality across the income distribution in the data is larger that what would be justified solely on the basis of production efficiency, but not drastically so. As a rough summary, in U.S. data top to bottom spending ratios are about 1.5 for most of the life cycle. Efficiency implies a decline from about 2 (at age 25) to 1 at retirement. We find larger inefficiencies in the lower part of the income distribution and in post retirement ages. |
| JEL: | H4 H51 I18 I38 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17937&r=dge |