nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒05‒15
34 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Demography, capital flows and unemployment By Luca Marchiori; Olivier Pierrard; Henri R. Sneessens
  2. Diagnosing labor market search models: a multiple-shock approach By Kenneth Beauchemin; Murat Tasci
  3. Evaluating DSGE model forecasts of comovements By Edward Herbst; Frank Schorfheide
  4. Numerical Solution of Dynamic Equilibrium Models under Poisson Uncertainty By Olaf Posch; Timo Trimborn
  5. Selective hiring and welfare analysis in labor market models By Christian Merkl; Thijs van Rens
  6. Fiscal stimulus and distortionary taxation By Thorsten Drautzburg; Harald Uhlig
  7. Saving on a Rainy Day, Borrowing for a Rainy Day By Alan, S.; Crossley, T.; Low, H.
  8. A Model of Rule-of-Thumb Consumers With Nominal Price and Wage Rigidities By Sergio Ocampo Díaz
  9. Growth and Distribution in a Model with Endogenous Time Peferences and Borrowing Constraints By Kirill Borissov
  10. Factor Shares, Income Distribution and Capital Flows By Hernando Zuleta
  11. Laffer Strikes Again: Dynamic Scoring of Capital Taxes By Holger Strulik; Timo Trimborn
  12. Optimal income taxation with asset accumulation By Abraham, Arpad; Koehne, Sebastian; Pavoni, Nicola
  13. The Generalized Model of Economic Growth with Human Capital Accumulation By Yury A. Kuznetsov; Olga V.Michasova
  14. Understanding booms and busts in housing markets By Craig Burnside; Martin Eichenbaum; Sergio Rebelo
  15. International Capital Flows and Credit Market Imperfections: a Tale of Two Frictions By Alberto Martin; Filippo Taddei
  16. Approximating high-dimensional dynamic models: sieve value function iteration By Peter Arcidiacono; Patrick Bayer; Federico A. Bugni; Jonathan James
  17. Vintage Capital Growth Theory: Three Breakthroughs By Raouf Boucekkine; David de la Croix and Omar Licandro
  18. Social Capital, Government Expenditures, and Growth By Giacomo Ponzetto; Ugo Troiano
  19. Preservation and Endogenous Uncertain Future Preferences By Alain Ayong Le Kama
  20. Minimum Wage Shocks, Employment Flows and Labor Market Frictions By Dube, Arindrajit; Lester, T. William; Reich, Michael
  21. Moral hazard, investment, and firm dynamics By Hengjie Ai; Rui Li
  22. Trade in Intermediate Goods, Endogenous Growth and Intellectual Property Rights By Bidisha Chakraborty
  23. The Dynamic Effects of Fiscal Stimulus in a Two Sector Open Economy By Ross Guest; Anthony J. Makin
  24. Public Investment Policy, Distribution, and Growth: What Levels of Redistribution through Public Investment Maximize Growth? By Yoseph Yilma Getachew
  25. Barriers to Capital Accumulation and the Incidence of Child Labor By Richard C. Barnett; Marco A. Espinosa-Vega
  26. Endogenous Saving in a Model of Factor-Eliminating Technical Change By Brad Sturgill
  27. Predation, Labor Share and Development By Carlos Bethencourt; Fernando Perera-Tallo
  28. Tax Avoidance, Human Capital Accumulation and Economic Growth By María Jesús Freire-Serén; Judith Panadés i Martí
  29. Gradual Green Tax Reforms By Carlos de Miguel; Baltasar Manzano
  30. Recognizability and Liquidity of Assets By Young Sik Kim; Manjong Lee
  31. Revisiting the Great Moderation using the Method of Indirect Inference By Minford, Patrick; Ou, Zhirong
  32. Information disclosure and exchange media By David Andolfatto; Fernando M. Martin
  33. Money is an Experience Good: Competition and Trust in the Private Provision of Money By Ramon Marimon; Juan Pablo Nicolini; Pedro Teles
  34. Structural Change, Urban Congestion, and the End of Growth By Volker Grossmann

  1. By: Luca Marchiori (Central Bank of Luxembourg and IRES Université catholique de Louvain); Olivier Pierrard (Central Bank of Luxembourg and IRES Université catholique de Louvain); Henri R. Sneessens (and IRES Université catholique de Louvain)
    Abstract: This paper contributes to the already vast literature on demography-induced international capital flows by examining the role of labor market imperfections and institutions. We setup a two-country overlapping generations model with search unemployment, which we calibrate on EU15 and US data. Labor market imperfections are found to significantly increase the volume of capital flows, because of stronger employment adjustments in comparison with a competitive economy. We next exploit the model to investigate how demographic asymmetries may have contributed to unemployment and welfare changes in the recent past (1950-2010). We show that a policy reform in one country also has an impact on labor markets in other countries when capital is mobile.
    Keywords: demographics; capital flows; overlapping generations; general equilibrium; unemployment
    JEL: C68 D91 E24 F21 J11
    Date: 2011
  2. By: Kenneth Beauchemin; Murat Tasci
    Abstract: We construct a multiple shock, discrete time version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to underpredict the volatility of key labor market variables. In addition to the standard labor productivity shock, we introduce shocks to matching effi ciency and job separation. We conduct two set of experiments. First, we estimate the joint probability distribution of shocks that simultaneously satisfy the observed data and the fi rst-order conditions of the multiple-shock model, and then simulate its properties. Although the multiple-shock model generates significantly more volatility while preserving the Beveridge curve relationship, it generates counterfactual implications for the cyclicality of job separations. Using a business cycle accounting approach, we design the second set of experiments to isolate the sources of model incompleteness and show that the model requires significant procyclical and volatile matching efficiency and counterfactually procyclical job separations to render the observed data without error. We conjecture that the basic Mortensen-Pissarides model lacks mechanisms to generate sufficiently strong labor market reallocation over the business cycle, and suggest nontrivial labor force participation and job-to-job transitions as promising avenues of research.
    Keywords: Employment ; Labor market ; Labor turnover
    Date: 2012
  3. By: Edward Herbst; Frank Schorfheide
    Abstract: This paper develops and applies tools to assess multivariate aspects of Bayesian Dynamic Stochastic General Equilibrium (DSGE) model forecasts and their ability to predict comovements among key macroeconomic variables. We construct posterior predictive checks to evaluate conditional and unconditional density forecasts, in addition to checks for root-mean-squared errors and event probabilities associated with these forecasts. The checks are implemented on a three-equation DSGE model as well as the Smets and Wouters (2007) model using real-time data. We find that the additional features incorporated into the Smets-Wouters model do not lead to a uniform improvement in the quality of density forecasts and prediction of comovements of output, inflation, and interest rates.
    Date: 2012
  4. By: Olaf Posch; Timo Trimborn
    Abstract: We propose a simple and powerful numerical algorithm to compute the transition process in continuous-time dynamic equilibrium models with rare events. In this paper we transform the dynamic system of stochastic differential equations into a system of functional differential equations of the retarded type. We apply the Waveform Relaxation algorithm, i.e., we provide a guess of the policy function and solve the resulting system of (deterministic) ordinary differential equations by standard techniques. For parametric restrictions, analytical solutions to the stochastic growth model and a novel solution to Lucas' endogenous growth model under Poisson uncertainty are used to compute the exact numerical error. We show how (potential) catastrophic events such as rare natural disasters substantially affect the economic decisions of households.
    Keywords: Continuous-time DSGE, Poisson uncertainty, Waveform Relaxation
    JEL: C63 E21 O41
    Date: 2011–09
  5. By: Christian Merkl; Thijs van Rens
    Abstract: Firms select not only how many, but also which workers to hire. Yet, in standard labor market models, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a standard search and matching model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective.
    Keywords: labor market models, welfare, optimal unemployment insurance
    JEL: E24 J65
    Date: 2012–09
  6. By: Thorsten Drautzburg; Harald Uhlig
    Abstract: We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act of 2009. We extend the benchmark Smets-Wouters New Keynesian model (Smets and Wouters, 2007), allowing for credit-constrained households, the zero lower bound, government capital, and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound, and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain if they discount the future substantially.
    Date: 2011
  7. By: Alan, S.; Crossley, T.; Low, H.
    Abstract: The aim of this paper is to understand what a recession means for individual consumers, and to model in a life-cycle framework how individuals respond to recessions. Our focus is on the sharp increase in savings rates that have been observed in the current and recent recessions. We show empirically that these saving spikes were short-lived and common to all working age groups. We then study life-cycle models in which recessions involve one or more of: (i) an aggregate permanent negative shock to individual income; (ii) an increase in the variance of idiosyncratic permanent shocks; (iii) a tightening of credit constraints; (iv) asset market crashes. In simulations and in the data we aggregate explicitly from individual behavior. We model credit tightening as a constraint on new borrowing and this generates an option value of borrowing in good times. We show that the rise in the aggregate savings ratio is driven by increases in uncertainty, rather than tightening of credit; temporary shocks to the supply of credit generate increases in saving only among younger agents.
    Keywords: credit constraints, savings, recessions, uncertainty
    JEL: D91 E21 D14 G01
    Date: 2012–05–04
  8. By: Sergio Ocampo Díaz
    Abstract: This document presents a dynamic stochastic general equilibrium model with rule of thumb (Non-Ricardian) agents and both nominal price and wage rigidities. The model follows closely that of Galí et al. (2004) and expands it to include a second way form of heterogeneity (besides the Non-Ricardian agents), namely the nominal wage stickiness á la Calvo, as in Erceg et al. (2000). Special attention is given to the algebraic details of the model. The model is calibrated and its dynamics are explored trough the analysis of impulse response functions.
    Keywords: DSGE, nominal rigidities, rule of thumb consumers. Classification JEL: E32, E37, C68.
    Date: 2012–05
  9. By: Kirill Borissov
    Abstract: This paper proposes an AK-model with endogenous time preferences and borrowing constraints. It is assumed that the subjective discount factor of a household is an increasing function of its relative income. First we describe the structure of balanced-growth equilibrium paths, on which the population splits into two groups ? the rich and the poor. Then we study sliding equilibrium paths. They become balanced from some time onwards and eventually all the capital is owned by the household that is the richest at the initial state. Finally, we consider time consistent equilibrium paths and prove their existence.
    Keywords: AK-model, Income Distribution, Endogenous Time Preferences
    JEL: D90 O41
    Date: 2011–09
  10. By: Hernando Zuleta
    Abstract: We present an endogenous growth model where innovations are factor-saving and model the choice of technologies in an Overlapping Generations Model where any technology can be adopted paying a cost. Markets are competitive and marginal productivity of factors determines factor prices; therefore, the income share of reproducible factors increases with the stage of development. Beyond the standard results of this type of model we find that (i) In poor economies technological change may reduce future income, (ii) without bequests long run growth is not possible, (iii) if the economy presents long run growth then intra generation inequality may last forever but if the economy does not present long run growth then in steady state there is no intra generation inequality (iv) when the economy is open the pattern of capital flows depends not only on the relative abundance of factors but also on the technologies and, for this reason, capital may not flow from rich to poor economies (v) consequently, capital flows may not help to break poverty traps.
    Keywords: Endogenous Growth, Capital Income Share, Income Distribution, Technology, Capital Flows
    Date: 2011–09
  11. By: Holger Strulik; Timo Trimborn
    Abstract: We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70-90 percent and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3 to 1.2 percent after abolishment of the tax.
    Keywords: Corporate Taxation, Capital Gains, Tax Allowances, Revenue Estimation, Laffer Curve, Dynamic Scoring.
    JEL: E60 H20 O40
    Date: 2011–09
  12. By: Abraham, Arpad; Koehne, Sebastian; Pavoni, Nicola
    Abstract: Several frictions restrict the government's ability to tax assets. First of all, it is very costly to monitor trades on international asset markets. Moreover, agents can resort to non-observable low-return assets such as cash, gold or foreign currencies if taxes on observable assets become too high. This paper shows that limitations in asset observability have important consequences for the taxation of labor income. Using a dynamic moral hazard model of social insurance, we …find that optimal labor income taxes typically become less progressive when assets are imperfectly observed. We evaluate the effect quantitatively in a model calibrated to U.S. data.
    Keywords: Optimal Income Taxation; Capital Taxation; Asset Accumulation; Progressivity
    JEL: H21 D82 E21
    Date: 2012–05–03
  13. By: Yury A. Kuznetsov; Olga V.Michasova
    Abstract: In this paper we proposed and study the generalized model of economic growth with human capital accumulation. The existence of a balanced growth path (BGP, the trajectory with constant growth rates of all variables) can be proved for the model. The paper identifies the conditions of existence and some qualitative features of the paths. The study of the BGP qualitative features, as well as the detailed study of the structure of the phase space in a neighborhood of a steady-state for the set of parameters which are typical for the developed economies, were carried out using numerical and analytical methods with MatLab.
    Keywords: Economic Growth, Human Capital, Balanced Growth Path
    Date: 2011–09
  14. By: Craig Burnside; Martin Eichenbaum; Sergio Rebelo
    Abstract: Some booms in housing prices are followed by busts. Others are not. In either case it is difficult to find observable fundamentals that are correlated with price movements. We develop a model consistent with these observations. Real estate agents have heterogeneous expectations about long-run fundamentals but change their views because of "social dynamics." Agents meet randomly with one another. Those with tighter priors are more likely to convert others to their beliefs. The model generates a "fad": The fraction of the population with a particular view rises and then falls. Depending on which agent is correct about fundamentals, these fads generate boom-busts or protracted booms.
    Date: 2012
  15. By: Alberto Martin; Filippo Taddei
    Abstract: The financial crisis of 2007-08 has underscored the importance of adverse selection in financial markets. This friction has been mostly neglected by macroeconomic models of financial frictions, however, which have focused almost exclusively on the effects of limited pledgeability. In this paper, well this gap by developing a standard growth model with adverse selection. Our main results are that, by fostering unproductive investment, adverse selection: (i) leads to an increase in the economys equilibrium interest rate, and; (ii) it generates a negative wedge between the marginal return to investment and the equilibrium interest rate. Under financial integration, we show how this translates into excessive capital inflows and endogenous cycles. We also explore how these results change when limited pledgeability is added to the model. We conclude that both frictions complement one another and argue that limited pledgeability exacerbates the effects of adverse selection.
    Keywords: Limited Pledgeability, Adverse Selection, International Capital Flows, Credit Market Imperfections
    JEL: D53 D82 E22 F34
    Date: 2012–02
  16. By: Peter Arcidiacono; Patrick Bayer; Federico A. Bugni; Jonathan James
    Abstract: Many dynamic problems in economics are characterized by large state spaces, which make both computing and estimating the model infeasible. We introduce a method for approximating the value function of high-dimensional dynamic models based on sieves and establish results for the: (a) consistency, (b) rates of> convergence, and (c) bounds on the error of approximation. We embed this method for approximating the solution to the dynamic problem within an estimation routine and prove that it provides consistent estimates of the model’s parameters. We provide Monte Carlo evidence that our method can successfully be used to approximate models that would otherwise be infeasible to compute, suggesting that these techniques may substantially broaden the class of models that can be solved and estimated.> Keywords:
    Keywords: Estimation theory ; Quantitative policy modeling ; Simulation modeling
    Date: 2012
  17. By: Raouf Boucekkine; David de la Croix and Omar Licandro
    Abstract: Vintage capital growth models have been at the heart of growth theory in the 60s. This research line collapsed in the late 60s with the so-called embodiment controversy and the technical sophistication of the vintage models. This paper analyzes the astonishing revival of this literature in the 90s. In particular, it out- lines three methodological breakthroughs explaining this resurgence: a growth accounting revolution, taking advantage of the availability of new time series, an optimal control revolution allowing to safely study vintage capital optimal growth models, and a vintage human capital revolution, along with the rise of economic demography, accounting for the vintage structure of human capital similarly to physical capital age structuring. The related literature is surveyed.
    Keywords: Vintage capital, embodied technical progress, growth accounting, optimal control, endogenous growth, vintage human capital, demography
    JEL: D63 D64 C61
    Date: 2011–06
  18. By: Giacomo Ponzetto; Ugo Troiano
    Abstract: Countries with greater social capital have higher economic growth. We show that social capital is also highly positively correlated across countries with government expenditure on education. We develop an infinite-horizon model of public spending and endogenous stochastic growth that explains both facts through frictions in political agency when voters have imperfect information. In our model, the government provides services that yield immediate utility, and investment that raises future productivity. Voters are more likely to observe public services, so politicians have electoral incentives to under-provide public investment. Social capital increases voters' awareness of all government activity. As a consequence, both politicians' incentives and their selection improve. In the dynamic equilibrium, both the amount and the efficiency of public investment increase, permanently raising the growth rate.
    Keywords: Social Capital, Government Expenditures, Economic Growth, Public Investment, Elections, Imperfect Information
    JEL: D72 D83 H50 H54 O43 Z13
    Date: 2012–02
  19. By: Alain Ayong Le Kama (Université Paris-Ouest Nanterre La Défense, Chaire Economie du Climat)
    Abstract: We extend the Beltratti, Chichilnisky and Heal’s (1993) and (1998) continuoustime stochastic dynamic framework to analyze the optimal depletion of an environmental asset whose consumption is irreversible, in the face of an exogenous uncertainty about future preferences. We introduce an endogenous uncertainty about future preferences. The idea is that the ability of the future generations to change their preferences will depend on the state of the asset. More precisely, we assume that future generations may have a probability to change their preferences all the higher since the stock of the resource becomes low. We describe within this model more clearly the behavior of the central planner facing this type of uncertainty.
    Keywords: preservation of natural resources, uncertainty, preferences
    JEL: O4 Q2
    Date: 2012–02
  20. By: Dube, Arindrajit; Lester, T. William; Reich, Michael
    Abstract: We provide the first estimates of the effects of minimum wages on employment flows in the U.S. labor market, identifying the impact using policy discontinuities at state borders. We find that minimum wages have a sizable negative effect on employment flows but not stocks: separations and accessions fall among affected workers. We interpret our findings using a job-ladder model, in which minimum wage increases can reduce job-to-job transitions. We find that a standard calibration of the model generates predicted relative magnitudes of the employment stock and flow elasticities that are very close to our reduced-form estimates.
    Keywords: Economics, Applied Economics, Minimum Wage, Labor Market Flows, Job Turnover, Search Frictions, Monopsony
    Date: 2012–04–06
  21. By: Hengjie Ai; Rui Li
    Abstract: We present a dynamic general equilibrium model with heterogeneous firms. Owners of firms delegate investment decisions to managers, whose consumption and investment decisions are private information. We solve the optimal contracts and characterize the implied general equilibrium. Our calibrated model has implications on the cross-sectional distribution and time-series dynamics of firms' investment, managers' compensation, and dividend payout policies. Risk sharing requires that managers' equity shares decrease with firm sizes. That, in turn, implies it is harder to prevent private benefit in larger firms, where managers have a lower equity stake under the optimal contract. Consequently, small firms invest more, pay less dividends, and grow faster than large firms. Despite the heterogeneity in firms' decision rules and the failure of Gibrat's law, we show that the size distribution of firms in our model resembles a power law distribution with a slope coefficient about 1.06, as in the data.
    Date: 2012
  22. By: Bidisha Chakraborty
    Abstract: The present paper develops a product cycle model of North South trade and integrates Romer (1990) model and Helpman (1993) model. In this paper, North innovates the variety of intermediate good and South immitates it. Final goods are not traded while variety of capital intensive intermediate goods are traded. The effect of intellectual property rights on economic growth is studied. It is shown that there may exist a unique steady state balanced growth equilibrium or there may exist multiple steady state equilibria and tighter intellectual property rights may lead to both higher and lower steady state balanced growth rate depending on the human capital endowment of both the countries. This contradicts the result obtained by Helpman (1993).
    Keywords: North-South trade, Product development, Intellectual property rights, Human Capital, Endogenous growth, Steady state equilibrium
    Date: 2011–09
  23. By: Ross Guest; Anthony J. Makin
    Abstract: In 2009-10 governments around the world implemented unprecedented fiscal stimulus in order to counter the impact of the Global Financial Crisis of 2008-09. This paper analyses the impact of fiscal stimulus using a dynamic open economy, overlapping generations model that allows for feedback effects of fiscal stimulus on private sector expenditure via changes in the tax rate and the interest rate. There are two types of goods – traded (T) and non-traded (N) goods, which differ in their capital intensities. The main qualitative result is that the dynamic output gains from fiscal stimulus depend on the productivity of the initial stimulus spending, on the speed of repayment of debt, on the sensitivities of the interest rate to government debt and of labour supply to the tax rate. Also, the overlapping generations framework allows an intergenerational welfare analysis. Among the biggest winners from stimulus are those about to retire. The biggest losers are those near the start of their working lives when the stimulus is implemented.
    Date: 2011–09
  24. By: Yoseph Yilma Getachew
    Abstract: This paper studies the distributional and the growth effects of public investment in a simple growth model with incomplete market where both growth and inequality are endogenously determined. Taxation lowers growth through distorting private investment, whereas public investment stimulates long run growth. Higher inequality corresponds to lower growth when the credit and insurance markets are missing as these prevent the efficient amount of investment to be undertaken in the economy. In this case, public investment may have additional efficiency benefit through substituting for the missing markets. It serves as means to relax resource constraints that impede certain investment. The efficiency effect of complementary public investment, on the other hand, is compromised as it aggravates it.
    Keywords: Public Capital; Elasticity of Substitution; Wealth Mobility; Growth. Incomplete Market
    JEL: D3 E25 H4 O11
    Date: 2011–09
  25. By: Richard C. Barnett; Marco A. Espinosa-Vega
    Abstract: The World Bank documents an inverse relationship between GDP per-capita and child labor participation rates. We construct a life-cycle model with human and physical capital in which parents make a time allocation choice for their child. The model considers two features that have shown potential in explaining differences in states of development across nations. These are: i) a minimum consumption requirement, and ii) barriers to physical capital accumulation. We find the introduction of capital barriers alone is not enough to replicate the aforementioned observation by the World Bank. However, we find the interplay of a minimum consumption requirement and barriers to capital may enhance our understanding of child labor, human capital, and the poverty of nations. Additionally, we find support for policies aimed at reducing capital barriers as means to reduce child labor over an out and out ban on it.
    Date: 2011–09
  26. By: Brad Sturgill
    Abstract: Virtually all theoretical studies satisfy the requirement for economic growth via the augmentation of non-reproducible factors of production. Peretto and Seater (2009), however, satisfy the requirement using a different mechanism. They develop an endogenous theory of factor elimination, whereby the non-reproducible factors of production are eliminated from the production process. They allow factor intensities to change endogenously via spending on R&D, and this serves as the catalyst for growth. In this paper, I extend the theory developed by Peretto and Seater by incorporating endogenous saving. Peretto and Seater assume that households save a fixed fraction of their total income. The general equilibrium dynamics in their model have two possible outcomes. If the exogenous saving rate is high enough, the economy’s production function becomes AK in the limit thereby supporting perpetual growth. If the saving rate is not sufficiently high, the economy goes to a Solow steady state with no growth and a standard production function with fixed factor intensities. My model yields the same testable implications pertaining to cross-country factor shares, offers the same insight into the transition from a primitive to an advanced economy and provides the same resolution to the linearity critique as that of Peretto and Seater. However, the equilibrium dynamics in my model have only one possible outcome—the economy achieves perpetual growth. Consumer optimization alters the model so that the possibility of a Solow Steady state is eliminated; all equilibrium paths lead to a production function that asymptotically becomes AK. This extension, which is analogous to moving from the Solow model to the Cass model, enriches the theory. The primary new finding is that the saving rate, when chosen by optimizing households, is always high enough to support perpetual growth. The inclusion of consumer optimization also lays the foundation for the model to be extended in the future to analyze government policies because government policies, in general, impact the incentive to save.
    Date: 2011–09
  27. By: Carlos Bethencourt; Fernando Perera-Tallo
    Abstract: This paper proposes a new mechanism based on the allocation of labor to help understand why differences among countries have remained stable. We formulate a neoclassical growth model in which agents devote time either to produce or to commit predation. Labor share is the key variable which determines in equilibrium the time devoted to each activity: an increase in the labor share raises the incentive to devote time to production and discourages predation. When the elasticity of substitution between labor and capital is lower than one, the labor share rises throughout the transition while the per capita capital is lower than the steady state level. This increase in the labor share reduces the incentive to predate and increases the incentive to work for production. Empirical evidence supports these results: low per capita income countries have larger portions of predation and present lower labor shares. The standard effects of an increase in the productivity are amplified by the indirect effects of productivity on the reallocation of labor from predation to production. Institutional improvements play a key role in reducing predation and increasing the level of per capita income.
    Keywords: Predation, Rent-seeking, Labor share, Growth, Development
    JEL: O15 O17 O29 O30
    Date: 2011–09
  28. By: María Jesús Freire-Serén; Judith Panadés i Martí
    Abstract: Human capital accumulation may negatively affect economic growth by increasing tax avoidance and reducing effective tax rates and productive public investment. This paper analyzes how the endogenous feedback between human capital accumulation and tax avoidance affects economic growth and macroeconomic dynamics. Our findings show that this interaction produces remarkable growth and welfare effects.
    Keywords: tax avoidance, tax non-compliance, Economic growth
    JEL: E62 H26 O30 O40 O41
    Date: 2011–12
  29. By: Carlos de Miguel; Baltasar Manzano (Universidade de Vigo and Economics for Energy)
    Abstract: Green tax reforms have become an important tool not only in protecting the environment but also in bringing about a more efficient tax system. However, reforms often imply accepting sacrifices in the short-run and bring about the risk of potential political opposition. Within this framework, the debate on whether to implement green tax reforms in one-step or gradually becomes of great interest. In this paper we use a calibrated dynamic general equilibrium model to evaluate different reforms that consist in increasing energy taxes and adjusting capital taxation in a revenue-neutral framework. Our findings show that, although an environmental dividend is always granted, the efficiency dividend depends on the type of reform, its size and how gradually it is implemented. Thus, one-step reforms that produce an efficiency dividend would imply large efficiency costs in the short-run. In this case, the reform could only produce efficiency gains in the short-run if it is implemented gradually, although such gains would end up disappearing in the long-run.
    Keywords: Green Tax Reform, General Equilibrium
    JEL: E62 Q43 H23
    Date: 2011–09
  30. By: Young Sik Kim (Department of Economics & SIRFE, Seoul National University Seoul, Korea); Manjong Lee (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: This paper incorporates the recognizability of assets explicitly into the standard search model of exchange to determine the liquidity returns as an equilibrium outcome. Assuming that money is universally recognizable but bond is not, the two types of the single-coincidence meetings arise?one where both money and bond are accepted and the other where only money is accepted as medium of exchange?depending on a seller¡¯s strategy of accepting or rejecting the bond of unrecognized quality and a buyer¡¯s strategy of carrying the counterfeit bond. The equilibrium restrictions imply that the liquidity differentials between money and bond tend to increase with the recognizability problem. With the relatively mild recognizability problem, there only exists an equilibrium where all the buyers bring the authentic bond to the decentralized market and sellers always accept the bond of unrecognized quality, and hence money and bond become equally liquid. As the recognizability problem becomes sufficiently severe, there only exists an equilibrium where some buyers bring the counterfeit bond, but sellers randomize between accepting and rejecting the bond of unrecognized quality. Money commands higher liquidity than bond by providing the additional liquidity service when sellers reject the bond of unrecognized quality as well as when they recognize the counterfeit bond. The coexistence of money and bond requires a higher full (liquidity augmented) return for bond than money, implying a positive liquidity premium.
    Keywords: recognizability, liquidity, asset prices
    JEL: E40
    Date: 2012
  31. By: Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: We investigate the relative roles of monetary policy and shocks in causing the Great Moderation, using indirect inference where a DSGE model is tested for its ability to mimic a VAR describing the data. A New Keynesian model with a Taylor Rule and one with the Optimal Timeless Rule are both tested. The latter easily dominates, whether calibrated or estimated, implying that the Fed's policy in the 1970s was neither inadequate nor a cause of indeterminacy; it was both optimal and essentially unchanged during the 1980s. By implication it was largely the reduced shocks that caused the Great Moderation — among them monetary policy shocks the Fed injected into inflation.
    Keywords: Great Moderation; Shocks; Monetary policy; Optimal Timeless Rule; Taylor Rule; Indirect Inference; Wald statistic
    JEL: E42 E52 E58
    Date: 2012–05
  32. By: David Andolfatto; Fernando M. Martin
    Abstract: When commitment is lacking, intertemporal trade is facilitated with the use of exchange media—interpreted broadly to include monetary and collateral assets. We study the properties of a model commonly used to motivate monetary exchange, extended to include a physical asset whose expected short-run return is subject to a news shock, but whose expected long-run return is stable. The nondisclosure of news enhances the asset’s property as an exchange medium, and generally improves social welfare. When a nondisclosure policy is infeasible, the framework admits a role for government debt, including fiat money. When lump-sum taxation is not permitted, fiat money may still improve welfare—but only if its circulation is supported by a cash-in-advance constraint.>
    Keywords: Disclosure of information ; Monetary policy - United States
    Date: 2012
  33. By: Ramon Marimon; Juan Pablo Nicolini; Pedro Teles
    Abstract: We study the interplay between competition and trust as efficiency- enhancing mechanisms in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on efficiency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good.
    Keywords: E40, E50, E58, E60
    Date: 2011–05
  34. By: Volker Grossmann
    Abstract: This paper develops a two-sector R&D-based growth model with congestion effects from increasing urban population density. We show that endogenous technological progress causes structural change if there are positive productivity spillovers from the modern to the traditional sector and Engel’s law holds. In turn, urban congestion effects cause a productivity slowdown in the modern sector. Eventually, economic growth may cease in the long-run. We also show that land dilution from a higher workforce may give rise to negative scale effects on GDP per capita. Finally, we investigate how the optimal land allocation depends on the strength of urban congestion effects.
    Keywords: Congestion, Endogenous growth, Engel’s law, Structural change, Urbanization
    Date: 2011–09

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