nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒05‒02
sixteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Optimal Redistributive Taxation with both Labor Supply and Labor Demand Responses By Laurence Jacquet; Etienne lehmann; Bruno Van Der Linden
  2. "Estimating a Search and Matching Model of the Aggregate Labor Market in Japan" By Ching-Yang Lin; Hiroaki Miyamoto
  3. Demographic Transition and Economic Welfare: The Role of Humanitarian Aid By Pierre-Richard Agénor; Devrim Yilmaz
  4. A Theory of Optimal Capital Taxation By Piketty, Thomas; Saez, Emmanuel
  5. Seasonal Cycles in the Housing Market By Selcuk, Cemil
  6. Business cycle fluctuations and learning-by-doing externalities in a one-sector model. By Hippolyte d'Albis; Emmanuelle Augeraud-Véron; Alain Venditti
  7. Economic growth and inequality patterns in the presence of costly technology adoption and uncertainty By Ziv Chinzara; Radhika Lahiri
  8. A Remark on the Form of Accumulation Functions in Economic Growth Models By Ý. Hakan Yetkiner
  9. Informative Advertising in Directed Search. By Pedro Gomis-Porqueras; Benoit Julien; Chengsi Wang
  10. Equilibres Multiples, Croissance Endogène et Politiques Publiques By Ali Abcha
  11. Model uncertainty, state uncertainty, and state-space models By Yulei Luo; Jun Nie; Eric R. Young
  12. On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints By Dixon, Huw; Pourpourides, Panayiotis M.
  13. Public Sector Wage Bargaining, Unemployment, and Inequality By Gabriele Cardullo
  14. Reserves, Liquidity and Money: An Assessment of Balance Sheet Policies By Jagjit S. Chadhay; Luisa Corrado; Jack Meaning
  15. Investment Composition and International Business Cycles By Oviedo, P. Marcelo; Singh, Rajesh
  16. Capital Controls with International Reserve Accumulation: Can this Be Optimal? By Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick

  1. By: Laurence Jacquet; Etienne lehmann; Bruno Van Der Linden (THEMA, Universite de Cergy-Pontoise; CREST; IRES - Université Catholique de Louvain and FNRS)
    Abstract: This paper characterizes the optimal redistributive tax schedule in a matching unemployment framework where (voluntary) nonparticipation and (involuntary) un- employment are endogenous. The optimal employment tax rate is given by an inverse employment elasticity rule. This rule depends on the global response of the employ- ment rate, which depends not only on the participation (labor supply) responses, but also on the vacancy posting (labor demand) responses and on the product of these two responses. For plausible values of the parameters, our matching environment induces much lower employment tax rates than the usual competitive model with endogenous participation only.
    Keywords: Optimal taxation, Labor market frictions, Unemployment, Kalai so- lution.
    JEL: D82 H21 J64
    Date: 2012
  2. By: Ching-Yang Lin (Graduate School of International Relations, International University of Japan); Hiroaki Miyamoto (Graduate School of International Relations, International University of Japan)
    Abstract: This paper studies how well a search and matching model can describe aggregate Japanese labor market dynamics in a full information setting. We develop a discrete- time search and matching model with productivity and separation shocks and use it as a data-generating process for our empirical analysis. Using Bayesian methods, we estimate the model for data on unemployment and vacancy postings in Japan. We Â…nd that the model is successful in matching the volatility in unemployment and vacancies while it does not match the volatility of output and wages. We also Â…nd that both productivity and separation shocks contribute to movements in unemployment and vacancies, but productivity shocks more so.
    Date: 2012–04
  3. By: Pierre-Richard Agénor; Devrim Yilmaz
    Abstract: This paper analyzes the dynamics of public debt in a simple two-period overlapping generations model of endogenous growth with productive public goods. Alternative fiscal rules are defined, with particular attention devoted to the golden rule. Conditions under which multiple equilibria may emerge under that rule are characterized. The analysis is then extended to consider the case of an endogenous risk premium, a generalized golden rule, and network externalities. If network effects are sufficiently strong, an increase in public investment may shift the economy from a low-growth equilibrium to a steady state characterized by both higher public debt ratios and higher output growth. This shift may enhance welfare as well. These results illustrate the importance of preserving the allocation of resources to specific types of public investment, even in a context of fiscal retrenchment.
    Date: 2012
  4. By: Piketty, Thomas; Saez, Emmanuel
    Abstract: This paper develops a realistic, tractable normative theory of socially-optimal capital taxation. We present a dynamic model of savings and bequests with heterogeneous random tastes for bequests to children and for wealth per se. We derive formulas for optimal tax rates on capitalized inheritance expressed in terms of estimable parameters and social preferences. The long-run optimal tax rate increases with the aggregate steady-state flow of inheritances to output, decreases with the elasticity of bequests to the net-of-tax rate, and decreases with the strength of preferences for leaving bequests. For realistic parameters, the optimal tax rate on capitalized inheritance should be as high as 50%-60% - or even higher for top wealth holders - if the government has meritocratic preferences (i.e., puts higher welfare weights on those receiving little inheritance) and if capital is highly concentrated (as it is in the real world). In contrast to the Atkinson-Stiglitz result, bequest taxation remains desirable in our model even with optimal labor taxation because inequality is two-dimensional: with inheritances, labor income is no longer the unique determinant of lifetime resources. In contrast to Chamley-Judd, positive capital taxation is desirable because our preferences allow for finite long run elasticities of inheritance to tax rates. Finally, we discuss how capital market imperfections and uninsurable shocks to rates of return can justify shifting one-off inheritance taxation toward lifetime capital taxation, and can account for the actual structure and mix of inheritance and capital taxation.
    Keywords: optimal taxation
    JEL: H10
    Date: 2012–04
  5. By: Selcuk, Cemil (Cardiff Business School)
    Abstract: The housing market exhibits a puzzling yet repetitive seasonal boom and bust cycle where prices and trade volume rise in summers and fall in winters. This paper presents a search model that analytically generates the observed deterministic cycle.
    Keywords: housing; search; thin and thick markets; seasonality
    JEL: D39 D49 D83
    Date: 2012–01
  6. By: Hippolyte d'Albis (Centre d'Economie de la Sorbonne - Paris School of Economics); Emmanuelle Augeraud-Véron (LMA - Université de la Rochelle); Alain Venditti (GREQAM et EDHEC)
    Abstract: We consider a one-sector Ramsey-type growth model with inelastic labor and learning-by-doing externalities based on cumulative gross investment (cumulative production of capital goods), which is assumed, in accordance with Arrow [4], to be a better index of experience than the average capital stock. We prove that a slight memory effect characterizing the learning-by-doing process is enough to generate business cycle fluctuations through a Hopf bifurcation leading to stable periodic orbits. This is obtained for reasonable parameter values, notably for both the amount of externalities and the elasticity of intertemporal substitution. Hence, contrary to all the results available in the literature on aggregate models, we show that endogenous fluctuations are compatible with a low (in actual fact, zero) wage elasticity of the labor supply.
    Keywords: One-sector infinite-horizon model, learning-by-doing externalities, inelastic labor, business cycle fluctuations, Hopf bifurcation, local determinacy.
    JEL: C62 E32 O41
    Date: 2012–03
  7. By: Ziv Chinzara (QUT); Radhika Lahiri (QUT)
    Abstract: We develop a stochastic endogenous growth model to explain the diversity in growth and inequality patterns and the non-convergence of incomes in transitional economies where an underdeveloped financial sector imposes an implicit, fixed cost on the diversification of idiosyncratic risk. In the model endogenous growth occurs through physical and human capital deepening, with the latter being the more dominant element. We interpret the fixed cost as 'learning by doing' cost for entrepreneurs who undertake risk in the absence of well developed financial markets and institutions that help diversify such risk. As such, this cost may be interpreted as the implicit returns foregone due to the lack of diversification opportunities that would otherwise have been available, had such institutions been present. The analytical and numerical results of the model suggest three growth outcomes depending on the productivity differences between the projects and the fixed cost associated with the more productive project. We label these outcomes as poverty trap, dual economy and balanced growth. Further analysis of these three outcomes highlights the existence of a diversity within diversity. Specifically, within the 'poverty trap' and 'dual economy' scenarios growth and inequality patterns differ, depending on the initial conditions. This additional diversity allows the model to capture a richer range of outcomes that are consistent with the empirical experience of several transitional economies.
    Keywords: Overlapping generations model, costly technology adoption, uncertainty, economic growth, inequality
    Date: 2012–03–19
  8. By: Ý. Hakan Yetkiner (Department of Economics, Izmir University of Economics)
    Abstract: This study is a short note designed to underline the importance of using the theoretically required form of accumulation functions. It is now a common knowledge that a growth model must rely on non-diminishing returns to a factor of production in order to generate endogenous growth. In Lucas (1988), for example, there is no diminishing-returns to the accumulation of human capital, which is the source of endogenous growth in the model. This rule, however, can lead to the following potentially misleading assumption: diminishing marginal productivity to each factor of production—given that there is no other source of long run growth—is sufficient for generating steady state equilibrium at levels. In this short note, we make two points. First, diminishing marginal productivity alone is not necessarily sufficient for generating steady state equilibrium at levels. Second, the inclusion of a theoretically required counter-force in the accumulation function together with diminishing returns is sufficient for generating steady state equilibrium. In conclusion, we heuristically argue that an accumulation function with no theoretically required counter-moving force, with or without diminishing returns, may bias the results of the model.
    Keywords: Accumulation function, Stationary state, Steady state, Differential equations, Economic Growth, Long-run Equilibrium
    JEL: O10 O15 O41
    Date: 2012–04
  9. By: Pedro Gomis-Porqueras (Department of Economics, Monash University); Benoit Julien (School of Economics, University of New South Wales); Chengsi Wang (School of Economics, University of New South Wales)
    Abstract: We consider a directed search environment where capacity constrained sellers reach uncoordinated buyers through costly advertising while buyers observed all prices probabilistically. We show that: (i) the equilibrium advertising intensity has an inverted U-shape in market tightness, (ii) the equilibrium advertising intensity is higher under an auction mechanism than under posted pricing, and (iii) the equilibrium price and measure of informed buyers may be positively correlated even in large markets.
    Keywords: costly advertising, directed search, imperfect observability, sales mechanism.
    JEL: E52 E63
    Date: 2012–04
  10. By: Ali Abcha
    Abstract: Public policies can change the number of equilibria in an endogenous growth model. This work shows that in a growth model with monopolistic competition the existence of externalities not internalized by the agents can result in a multiplicity of equilibria. Government intervention in the economy can have an impact on this multiplicity by the management of externalities and adverse effects of imperfect competition. However inefficient public intervention can make the economy converge to a suboptimal equilibrium. To this end, we develop a macroeconomic model for a closed economy that has a perfectly competitive sector of final goods and a sector of monopolistically competitive intermediate goods. In order to identify the effects of a public policy on this model we simulate.
    Keywords: multiple equilibria, endogenous growth, public policies
    Date: 2012
  11. By: Yulei Luo; Jun Nie; Eric R. Young
    Abstract: This technical paper considers ways to capture uncertainty in the context of so-called "state-space" models. ; State-space models are powerful tools commonly used in macroeconomics, international economics, and finance. State-space models can generate estimates of an underlying, ultimately unobserved variable—such as the natural rate of unemployment—based on the movements of other variables that are observed and have some relationship to the unobserved variable. The paper shows how several macroeconomic models can be mapped to the state-space framework, thus helping quantify uncertainty about the true model (model uncertainty) or about the amount of information available when decisions are made (state uncertainty).
    Date: 2012
  12. By: Dixon, Huw (Cardiff Business School); Pourpourides, Panayiotis M. (Cardiff Business School)
    Abstract: We depart from the assumption of perfect competition in the final goods sector, commonly used in cash-in-advance (CIA) models, providing extensive theoretical analysis of the general equilibrium of an economy with imperfect competition, endogenous production and fully flexible prices in the presence of occasionally binding CIA constraints, under general assumptions about the velocity of money. Homothetic preferences generate Marshallian demands which are linear in own price allowing for any combination of equilibrium number of firms and demand elasticity. Whether the CIA constraint binds or not depends, among others, on the degree of imperfect competition. As the market becomes more competitive it is certainly no less likely that the CIA constraint will bind. The degree of imperfect competition directly affects the distribution of consumption and indirectly the level of output and work effort via the CIA constraint. With perfect foresight, there is an optimal negative steady-state inflation rate. We also consider how the introduction of capital and bonds would fit into the framework.
    Date: 2012–01
  13. By: Gabriele Cardullo (DIEM, Faculty of Economics, University of Genoa, Italy)
    Abstract: In many countries, the government pays almost identical nominal wages to workers living in regions with notable economic disparities. In most cases this is the result of highly centralized pay systems. By developing a two-region general equilibrium model with unions and search frictions in the labour market, I study the differences in terms of unemployment, real wages, and inequality between a regional wage bargaining process and a national one in the public sector. Adopting the former lowers public sector real salaries but it also decreases unemployment and jacks up private sector real earnings. Simulations conducted on the basis of Italian data show that, compared to a national negotiation process, a regional one also increases inequality both within and between regions.
    Keywords: public sector wages; unemployment; economic integration; local labour markets
    JEL: H53 J38 J64 R12 R13
    Date: 2012–02
  14. By: Jagjit S. Chadhay (School of Economics, Keynes College, University of Kent); Luisa Corrado (Faculty of Economics, University of Rome "Tor Vergata"); Jack Meaning (School of Economics, Keynes College, University of Kent)
    Abstract: The financial crisis and its aftermath has stimulated a vigorous debate on the use of macro-prudential instruments for both regulating the banking system and for providing additional tools for monetary policy makers. The widespread adoption of non-conventional monetary policies has provided some evidence on the efficacy of liquidity and asset purchases for o¤setting the lower zero bound. Central banks have thus been reminded as to the effectiveness of extended open market operations as a supplementary tool of monetary policy. These tools are essentially fiscal instruments, as they issue central bank liabilities backed by ?scal transfers. And so having written these tools into the fiscal budget constraint, we can examine the consequences of these operations within the context of a micro-founded macroeconomic model of banking and money. We can mimic the responses of the Federal Reserve balance sheet to the crisis. Specifically, we examine the role of reserves for bond and capital swaps in stabilising the economy and also the impact of changing the composition of the central bank balance sheet. We find that such policies can significantly enhance the ability of the central bank to stabilise the economy. This is because balance sheet operations supply (remove) liquidity to a financial market that is otherwise short (long) of liquidity and hence allows other financial spreads to move less violently over the cycle to compensate.
    Keywords: non-conventional monetary interest on reserves, monetary and ?scal policy instruments, Basel III.
    JEL: E31 E40 E51
    Date: 2012–04–18
  15. By: Oviedo, P. Marcelo; Singh, Rajesh
    Abstract:  This paper studies a two country model with economies disaggregated into traded and nontraded sectors and in which investment goods as in practice are produced by combining inputs from all sectors. The model also accounts for nontraded distribution services employed in retailing traded goods to consumers. The results show that the model with multiple input investments outperforms the standard model in which sectoral output also serves as its capital. In particular, it substantially improves (a) the movements of trade balance and relative prices, (b) within country comovements of sectoral and aggregate quantities, and (c) cross-country comovements of output vis-à-vis consumption.
    JEL: F F32 F34 F41
    Date: 2012–04–21
  16. By: Bacchetta, Philippe (University of Lausanne, CEPR); Benhima, Kenza (University of Lausanne); Kalantzis, Yannick (Banque de France)
    Abstract: Motivated by the Chinese experience, we analyze a semi-open economy where the central bank has access to international capital markets, but the private sector has not. This enables the central bank to choose an interest rate different from the international rate. We examine the optimal policy of the central bank by modelling it as a Ramsey planner who can choose the level of domestic public debt and of international reserves. The central bank can improve savings opportunities of credit-constrained consumers modelled as in Woodford (1990). We find that in a steady state it is optimal for the central bank to replicate the open economy, i.e., to issue debt financed by the accumulation of reserves so that the domestic interest rate equals the foreign rate. When the economy is in transition, however, a rapidly growing economy has a higher welfare without capital mobility and the optimal interest rate differs from the international rate. We argue that the domestic interest rate should be temporarily above the international rate. We also find that capital controls can still help reach the first best when the planner has more fiscal instruments.
    Date: 2012–04

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