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on Dynamic General Equilibrium |
| By: | Richard W. Evans (Department of Economics, Brigham Young University); Kerk L. Phillips (Department of Economics, Brigham Young University) |
| Abstract: | The overlapping generations (OLG) model is an important framework for analyzing any type of question in which age cohorts are affected differently by exogenous shocks. However, as the dimensions and degree of heterogeneity in these models increase, the computational burden imposed by rational expectations solution methods for nonstationary equilibrium transition paths increases exponentially. As a result, these models have been limited in the scope of their use to a restricted set of applications and a relatively small group of researchers. In addition to providing a detailed description of the benchmark rational expectations computational method, this paper presents an alternative method for solving for equilibrium transition paths in OLG life cycle models that is new to this class of model. The key insight is that even naive limited information forecasts within the model produce aggregate time series similar to full information rational expectations time series as long as the naive forecasts are updated each period. We find that our alternate model forecast method reduces computation time by 85 percent, and the approximation error is small. |
| Keywords: | Computable General Equilibrium Models, Heterogeneous Agents, Overlapping Generations Model, Distribution of Savings |
| JEL: | C63 C68 D31 D91 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:byu:byumcl:201204&r=dge |
| By: | Kaminoyama, Ken-ichi; Kawagishi, Taketo |
| Abstract: | In this paper, we assume that a cash-in-advance (CIA) constraint itself depends on relative income, which implies status. This constraint means that agents with higher income are more creditworthy and can make purchases with fewer money holdings. Under this assumption, we construct a one-sector neoclassical growth model and show that there exists a unique steady state that has saddle-path stability without specifying each function. Furthermore, we examine the effects of money growth on capital accumulation. If the status elasticity of CIA constraint is large, the Tobin effect can arise. In contrast, if it is small, the anti-Tobin effect can arise. |
| Keywords: | Cash-in-advance constraint; Status; Money growth; Neoclassical growth model; Tobin/anti-Tobin effect |
| JEL: | O42 E52 E41 |
| Date: | 2012–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38382&r=dge |
| By: | Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume |
| Abstract: | This paper examines issues related to the estimation of the government spending multiplier (GSM) in a Dynamic Stochastic General Equilibrium context. We stress a potential source of bias in the GSM arising from the combination of Edgeworth complementarity/substitutability between private consumption and government expenditures and endogenous government expenditures. Due to crossequation restrictions, omitting the endogenous component of government policy at the estimation stage would lead an econometrician to underestimate the degree of Edgeworth complementarity and, consequently, the long-run GSM. An estimated version of our model with US postwar data shows that this bias matters quantitatively. The results prove to be robust to a number of perturbations. |
| Keywords: | , , Government spending rules, DSGE models, Edgeworth complementarity/substitutability, Multiplier |
| JEL: | C32 E32 E62 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:25755&r=dge |
| By: | Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume |
| Abstract: | This paper is a quantitative investigation into the characteristics of the Laffer curve in a neoclassical growth model with incomplete markets and heterogeneous, liquidity-constrained agents. We show that the shape of the Laffer curves related to taxes on labor, capital and consumption dramatically changes depending on which of transfers or government debt are adjusted to make the government budget constraint hold. When transfers are adjusted, the Laffer curve has the traditional shape. However, when debt is adjusted, the Laffer curve looks like a horizontal S, in which case fiscal revenues can be associated with up to three diferent levels of taxation. This finding occurs because the tax rates change non monotonically with public debt when markets are incomplete. |
| Keywords: | , , , , , , , Laffer Curve, Incomplete Markets, Labor Supply, Precautionary Savings, Public Debt |
| JEL: | E6 H6 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:25754&r=dge |
| By: | Matthew Canzoneri; Fabrice Collard; Harris Dellas; Behzad Diba |
| Abstract: | The Great Recession, and the fiscal response to it, has revived interest in the size of fiscal multipliers. Standard business cycle models have difficulties generating multipliers greater than one. And they also fail to produce any significant asymmetry in the size of the multipliers over the business cycle. In this paper we employ a variant of the Curdia-Woodford model of costly financial intermediation to show that fiscal multipliers are strongly countercyclical. In particular, they can take values exceeding two during recessions, declining to values below one during expansions. |
| Keywords: | Government Spending Multipliers; Cyclicality; Financial Frictions |
| JEL: | E32 E62 H3 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1204&r=dge |
| By: | Melvyn G. Coles; Dale T. Mortensen |
| Abstract: | This paper considers a dynamic, non-steady state environment in which wage dispersion exists and evolves in response to shocks. Workers do not observe firm productivity and firms do not commit to future wages, but there is on-the-job search for higher paying jobs. The model allows for firm turnover (new start-up firms are created, some existing firms die) and firm specific productivity shocks. In a separating equilibrium, more productive firms signal their type by paying strictly higher wages in every state of the market. Consequently, workers always quit to firms paying a higher wage and so move efficiently from less to more productive firms. As a further implication of the cost structure assumed, endogenous firm size growth is consistent with Gibrat's law. The paper provides a complete characterization and establishes existence and uniqueness of the separating (non-steady state) equilibrium in the limiting case of equally productive firms. The existence of equilibrium with any finite number of firm types is also established. Finally, the model provides a coherent explanation of Danish manufacturing data on firm wage and labor productivity dispersion as well as the cross firm relationship between them. |
| JEL: | D21 D49 D8 E24 J42 J64 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18022&r=dge |
| By: | Noritaka Maebayashi (Graduate School of Economics, Osaka University); Takeo Hori (College of Economics, Aoyama Gakuin University); Koichi Futagami (Graduate School of Economics, Osaka University) |
| Abstract: | We construct an endogenous growth model with productive public capital and government debt when government debt is adjusted to the target level. We examine how reducing public debt in an economy with a large public debt affects the transition of the economy and welfare. We find that the government faces the following trade off when reducing its debt. In the short run, public investment is reduced to decrease the debt and this has a negative effect on welfare. However, as the interest payments on the debt decrease, public investment begins to increase. Eventually, the government can increase the amount of public investment by more than before. This has a positive effect on welfare, implying that reducing the debt is welfare improving. Furthermore, we find that the adjustment speed of reductions in debt affects welfare crucially. The relationships between the welfare gains and the adjustment speed are U-shaped in many cases. However, they are decreasing monotonically when the tax rate is low and the initial debt?GDP ratio is sufficiently large. |
| Keywords: | Reductions in public debt, Debt policy rule, Public capital, Endogenous Growth |
| JEL: | E62 H54 H63 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1208&r=dge |
| By: | Brito, Paulo; Dixon, Huw (Cardiff Business School) |
| Abstract: | In this paper we consider the entry and exit of firms in a Ramsey model with capital and an endogenous labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. The costs of entry (exit) are quadratic in the flow of new firms. The number of firms becomes a second state variable and the entry dynamics gives rise to a richer set of dynamics than in the standard case: in particular, there is likely to be a hump shaped response of output to a fiscal shock with maximum impact after impact and before steady-state is reached. Output and capital per firm are also likely to be hump shaped. |
| Keywords: | Entry; Ramsey; fiscal policy; macroeconomic dynamics |
| JEL: | E22 D92 E32 D92 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2012/7&r=dge |
| By: | Victor E. Li (Department of Economics and Statistics, Villanova School of Business, Villanova University) |
| Abstract: | This paper evaluates the implications of search and matching frictions in the financial market for the transmission of monetary policy. Borrowers and lenders participate in a decentralized loan market for the purpose of establishing long-term credit relationships and the provision of loanable funds to productive firms. Locating credit relationships is costly in terms of time and real resources and the interest rate is negotiated via a bargaining mechanism. This structure is incorporated into an otherwise standard monetary business cycle framework and used to study how such frictions in the credit market contribute to explaining the contemporaneous impact and propagation of monetary growth shocks and inflation. It is found that while anticipated inflation negatively impacts real activity it can also increase loan market participation and the inflow of newly established credit relationships. It is shown that while bargaining and costly search mitigate the traditional inflation tax effect of monetary injections, the existence of long term lending relations tend to dampen the immediate liquidity effects. The model also indicates that there may not necessarily exist a negative correlation between credit market tightness and aggregate activity. Furthermore, search frictions provide a potentially important mechanism for explaining the persistence of monetary shocks, an issue that has been problematic in limited participation models of the transmission mechanism. |
| Keywords: | Firms; Search Model, Financial Market, Bargaining, Monetary Transmission |
| JEL: | D83 D9 E0 E4 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:19&r=dge |
| By: | Jonathan Halket; Santhanagopalan Vasudev |
| Abstract: | In a Bewley model with endogenous price volatility, home ownership and mobility across locations and jobs, we assess the contribution of financial constraints, housing illiquidities and house price risk to home ownership over the life cycle. The model can explain the rise in home ownership and fall in mobility over the life cycle. While some households rent due to borrowing constraints in the mortgage market, factors that effect propensities to save and move, such as risky house values and transactions costs, are more important determinants of the ownership rate. |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:712&r=dge |
| By: | Hairault, Jean-Olivier (University of Paris 1 Panthéon-Sorbonne); Langot, François (University of Le Mans); Zylberberg, Andre (University of Paris 1 Panthéon-Sorbonne) |
| Abstract: | As a preliminary step, we first provide some new empirical evidence that labor market conditions affect retirement decisions at the individual level: unemployed people are more likely to retire. Our main objective in this paper is then to propose an equilibrium unemployment approach to retirement decisions that allows us to unveil the factors which explain why unemployed workers choose to retire earlier and the conditions under which this behavior is optimal. Two main conclusions emerge: the retirement decision of unemployed workers depends on the labor-market frictions whereas that of employed workers does not; the existence of search externalities makes the retirement age of unemployed workers intrinsically suboptimal. Considering Social Security policy issues, we show that the complete elimination of the implicit tax on continued activity is not necessarily welfare-optimizing in a second best world where the labor market equilibrium suffers from distortions. |
| Keywords: | search, matching, retirement, Social Security |
| JEL: | J22 J26 H55 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6511&r=dge |
| By: | Erceg, Christopher; Lindé, Jesper |
| Abstract: | This paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important differences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation. |
| Keywords: | currency union; fiscal policy; monetary policy; New Keynesian Small Open Economy DSGE Model; zero lower bound constraint |
| JEL: | E52 E58 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8955&r=dge |
| By: | Bryan Perry (Department of Economics, Brigham Young University); Kerk L. Phillips (Department of Economics, Brigham Young University); David E. Spencer (Department of Economics, Brigham Young University) |
| Abstract: | Economists have long investigated the cyclical behavior of real wages in order to draw inferences regarding the relative stickiness of prices and wages. Recent studies have adopted techniques intended to identify monetary shocks and examined the response of real wages and output or employment to such shocks. A finding that real wages are procyclical in response to a positive monetary policy shock, for example, is taken as evidence that prices are stickier than wages. In this paper, we show that factors other than wage and price stickiness affect the response of real wages to a monetary policy shock. Accordingly, examining the response of real wages is not enough to sort out the relative stickiness of prices and wages. We use two prominent DSGE models to help us address this issue. These models incorporate both sticky wages and prices but in different ways. The first model (Huang, Liu, and Phaneuf, American Economic Review, 2004) is relatively simple and is not intended for policy analysis. Its relative simplicity allows us to approach the issues both analytically and through simulations. The second model (Smets and Wouters, American Economic Review, 2007) is a relatively complex model of the U.S. economy with many frictions and intended to be useful for policy analysis. Because of its complexity, we must rely principally on simulation exercises. Using these models we offer robust evidence that the real wage response to monetary policy is affected in important ways by properties of the economy other than stickiness of wages and prices, such as the importance of intermediate goods in the production process and the size of key elasticities. Consequently, we cannot appropriately infer the relative stickiness of wages and prices from examining only the response of real wages to a monetary policy shock. |
| Keywords: | real wages, monetary policy, DSGE models |
| JEL: | E32 E52 E10 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:byu:byumcl:201202&r=dge |
| By: | Jonathan Halket |
| Abstract: | We define and prove the existence of an equilibrium for Bewley-style models of heterogeneous agents in incomplete markets with discrete and continuous choices. Our sample model also features endogenous price volatility across many markets (locations) but still has a steady state equilibrium with a finite-dimensional state space. Our proof of existence uses Kakutani’s Fixed Point Theorem and does not require the set of households that are indifferent between two discrete choices to be measure zero. |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:711&r=dge |
| By: | Laun, Tobias (Dept. of Economics, Stockholm School of Economics) |
| Abstract: | This paper analyzes optimal insurance against unemployment and disability in a private information economy with endogenous health and search effort. Individuals can reduce the probability of becoming disabled by exerting, so-called, prevention effort, which is costly in terms of utility. A healthy, i.e., not disabled, individual either works or is unemployed. An unemployed individual can exert search effort in order to increase the probability of finding a new job. I show that the optimal sequence of consumption is increasing for a working individual and constant for a disabled individual. During unemployment, decreasing benefits are not necessarily optimal in this setting. The prevention constraint implies increasing benefits over time while the search constraint demands decreasing benefits while being unemployed. However, if individuals respond sufficiently much to search incentives, the latter effect dominates the former and the optimal consumption sequence is decreasing during unemployment. |
| Keywords: | Unemployment insurance; Disability insurance; Optimal contracts |
| JEL: | D86 E24 H53 J65 |
| Date: | 2012–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0742&r=dge |
| By: | Chatelain, Jean-Bernard; Ralf, Kirsten |
| Abstract: | The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight features of the ongoing crisis. We therefore suggest two complementary assumptions: (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its “fundamental long term value”. Both assumptions are compatible with a structural research programme taking into account the Lucas' critique (1976) but may start a creative destruction process of the Lucas' view of business cycles theory. |
| Keywords: | asset prices; liquidity trap; monetary policy; financial stability; business cycles; liquidity trap; dynamic stochastic general equilibrium models |
| JEL: | E5 E6 E4 E3 |
| Date: | 2012–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38474&r=dge |
| By: | Matt P. Dziubinski (Aarhus University and CREATES); Stefano Grassi (Aarhus University and CREATES) |
| Abstract: | This paper shows the potential of heterogeneous computing in solving dynamic equilibrium models in economics. We illustrate the power and simplicity of the C++ Accelerated Massive Parallelism recently introduced by Microsoft. Starting from the same exercise as Aldrich et al. (2011) we document a speed gain together with a simplified programming style that naturally enables parallelization. |
| Keywords: | Code optimization, CUDA, C++, C++ AMP, Data parallelism, DSGE models, Econometrics, Heterogeneous computing, Highperformance computing, Parallel computing. |
| JEL: | C88 |
| Date: | 2012–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2012-15&r=dge |
| By: | Funke, Michael (BOFIT); Paetz, Michael (BOFIT) |
| Abstract: | In the wake of the 2008-2009 global financial crisis, the macroeconomic discussion has returned to the topic of proactive macroprudential policies. One proactive approach, the use of loan-to-value (LTV) policies to curb booming property markets, has long been used by Hong Kong’s monetary authorities to actively manage and mitigate the potential fallout from housing price bubbles. Here, we analyse the merits of this countercyclical macroprudential policy in a New Keynesian DSGE model. We conclude that nonlinear LTV policy rules implemented in reaction to episodes of high property price inflation can limit transmission of housing price cycle effects to the real economy. |
| Keywords: | macroprudential policy; DSGE model; loan-to-value ratio; Hong Kong |
| JEL: | C63 E21 E32 E69 F41 |
| Date: | 2012–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2012_011&r=dge |
| By: | Jochen, Mankart |
| Abstract: | This paper examines the effects of the Chapter 7 wealth exemption level on welfare, bankruptcy filings, debt and asset holdings. I build on the heterogeneous agent life cycle model by Livshits, MacGee, and Tertilt (2007) which features uninsurable income and expense shocks. I extend their model by allowing borrowers to simultaneously invest in the risk free asset. When a borrower defaults on her debt by filing for Chapter 7 bankruptcy, she can keep her assets up to the wealth exemption level. Wealth exemption levels are important for two reasons. First, they explain the credit card debt puzzle identified by Gross and Souleles (2002b). Around thirty percent of borrowers, both in the model and in the data, who borrow at high interest rates simultaneously save at low interest rates. Second, ignoring the exemption level biases results because it overstates the costs of defaulting. At the same time, wealth exemption levels are unimportant in the sense that they have an impact only at low exemption levels. The effects of increases in the exemption level fade out very quickly. There is no strong positive relationship between exemption levels, which vary across U.S. states, and default rates in the model. This is in contrast to the previous literature, but consistent with the data. The reason is that those borrowers who might default do not own much wealth. Therefore, only very few households are affected by increases in the exemption level. A further result is that aggregate savings are increasing in the exemption level because a high exemption level gives poor agents who might default an incentive to save. |
| Keywords: | Personal bankruptcy law, wealth exemption level, asset portfolios, credit card debt puzzle |
| JEL: | E21 D31 K35 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2012:11&r=dge |
| By: | Nicole Tabasso (University of Surrey) |
| Abstract: | In this paper general CES consumption preferences are introduced into an endogenous growth model `a la Bernard, Eaton, Jensen, and Kortum (2003) and Eaton and Kortum (2001). This is in contrast to the more generally used assumption of logarithmic preferences. The paper shows that the CES preference structure does not alter the expected profits from engaging in R&D and therefore the growth path. This is proof that the analytically more convenient logarithmic preferences do not sacrifice generality. It is argued that the driving force behind this result is the common assumption of undirected research. |
| Keywords: | CES Preferences, Endogenous Growth, Research |
| JEL: | O30 O40 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0712&r=dge |
| By: | Mina Baliamoune-Lutz; Zuzana Brixiová; Léonce Ndikumana |
| Abstract: | Limited access of entrepreneurs to credit constrains the creation and growth of private firms. In Africa, access to credit is particularly limited for small and medium enterprises (SMEs) due to unclear property rights and the lack of assets that can be used as collateral. This paper presents a model where firm creation and growth hinge on matching potential entrepreneurs with productive technologies, while firm growth depends on acquired capital. The shortage of collateral creates a binding credit constraint on borrowing by SMEs and hence private sector growth and employment, even though the banking sectors have ample liquidity, as is the case in many African countries. The model is tested using a sample of 20 African countries over the period 2005-09. The empirical results suggest that policies aimed at easing the binding credit constraints (e.g., the depth of credit information and the strength of legal rights pertaining to collateral and bankruptcy) would stimulate productive entrepreneurship and private sector employment in Africa. |
| Keywords: | credit constraints; productive entrepreneurship; employment, policies |
| JEL: | G21 L26 D24 |
| Date: | 2011–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2011-1025&r=dge |
| By: | Francesco Caprioli (Bank of Italy); Pietro Rizza (Bank of Italy); Pietro Tommasino (Bank of Italy) |
| Abstract: | We derive the optimal fiscal policy for a government that is committed to honoring its debt but faces investors which fear a sovereign default. We assume that investors are able to learn from new evidence, as in Marcet and Sargent (1989), so that they can gradually correct their overly pessimistic view about the government's creditworthiness. We show that in an economy with these features, contrary to the prescriptions of standard models, a frontloaded fiscal consolidation after an adverse fiscal shock is optimal. |
| Keywords: | Ramsey-optimal fiscal policy, non-contingent public debt, learning. |
| JEL: | D83 E62 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_859_12&r=dge |
| By: | Jesse Perla; Christopher Tonetti |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ste:nystbu:12-03&r=dge |