nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒05‒29
24 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Matching efficiency and business cycle fluctuations By Francesco Furlanetto; Nicolas Groshenny
  2. Technical change in a neoclassical two-sector model of optimal growth By Mehdi Senouci
  3. Monetary and Fiscal Policy Interactions in an Emerging Open Economy Exposed to Sudden Stops Shock: A DSGE Approach By Aliya Algozhina
  4. Optimal Fertility along the Lifecycle By Pierre Pestieau; Grégory Ponthière
  5. Optimal Unemployment Insurance for Older Workers By Jean-Olivier Hairault; François Langot; Sébastien Ménard; Thepthida Sopraseuth
  6. What's News in Business Cycles By Schmitt-Grohé, Stephanie; Uribe, Martín
  7. Costs and benefits of Slovakia entering the euro area. A quantitative evaluation. By Juraj Zeman
  8. Using the "Chandrasekhar Recursions" for likelihood evaluation of DSGE models By Edward P. Herbst>
  9. Saving on a Rainy Day, Borrowing for a Rainy Day By Sule Alan; Thomas Crossley; Hamish Low
  10. Intermediated Trade By Antras, Pol; Costinot, Arnaud
  11. Inequality, Growth and the Politics of Education and Redistribution By Tetsuo Ono
  12. Industry Dynamics and Indeterminacy in an OLG Economy with Endogenous Occupational Choice By Subir Bose; Suresh Mutuswami
  13. Global Banks, Financial Shocks and International Business Cycles: Evidence from an Estimated Model By Kollmann, Robert
  14. Efficiency of Optimal Taxation in a Dynamic Stochastic Environment: Case of South Africa By Jacques K. Ngoie; Niek Schoeman
  15. What does a monetary policy shock do? An international analysis with multiple filters By Efrem Castelnuovo
  16. Long-Term Care, Altruism and Socialization By Grégory Ponthière
  17. Pricing and Signaling with Frictions By Alain Delacroix; Shouyong Shi
  18. Optimal Lifecycle Fertility in a Barro Becker Economy By Pierre Pestieau; Grégory Ponthière
  19. Optimal consumption under uncertainty, liquidity constraints, and bounded rationality By Ömer Özak
  20. Intertemporal Substitution in the Time Allocation of Married Women By Ken Yamada
  21. Aging population and public pensions: theory and evidence By Verbič, Miroslav; Spruk, Rok
  22. Catch-up and Fall-back through Innovation and Imitation By Jess Benhabib; Jesse Perla; Christopher Tonetti
  23. Technical Appendix to "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks" By Garth Heutel
  24. Private Liquidity and Banking Regulation By Cyril Monnet; Daniel R. Sanches

  1. By: Francesco Furlanetto (Norges Bank (Central Bank of Norway)); Nicolas Groshenny (Reserve Bank of New Zealand)
    Abstract: A large decline in the e¢ ciency of the U.S. labor market in matching unemployed workers and vacant jobs has been documented during the Great Recession. We use a simple New Keynesian model with search and matching frictions in the labor market to study the propagation of matching e¢ ciency shocks. We show that the transmission of these disturbances and their importance for business cycle fluctuations depend crucially on the form of hiring costs and on the presence of nominal rigidities.
    Keywords: Resource curse, Political economy.
    JEL: E32 C51 C52
    Date: 2012–04–30
  2. By: Mehdi Senouci (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper investigates into the consequences of sector-speci c technological progress in a two-sector, optimal growth model. In accordance with existing theory, we find that consumption-specifi c Hicks-neutral technical shocks increase consumption but leave other parameters unchanged. Hicks-neutral, investment-specifi c technical shocks increase the wage-rental ratio, and increase steady-state consumption by a factor equal to the macroeconomic ratio of capital share to labor share. If the elasticity of substitution is equal to one in the long run, the growth regime with only investment-specifi c technical change is sustainable and asymptotically balanced.
    Keywords: Productivity ; optimal growth ; golden rule ; two-sector models
    Date: 2012–04
  3. By: Aliya Algozhina
    Abstract: The monetary and fiscal policy interactions have gained a new research interest after the 2008 crisis due to the global increase of fiscal debt. This paper constructs a macroeconomic model of joint fiscal and monetary policy for an emerging open economy taking into account its structural uniqueness. In particular, the two instruments of monetary policy, interest rate and foreign exchange intervention; the two instruments of fiscal policy, government consumption and government investment; and a sudden stops shock through the collateral constraint of foreign borrowings are modeled here in a single DSGE framework. The parameters are calibrated for the case of Hungary using data over 1995Q1-2011Q3. The impulse response functions show that government consumption is unproductive and increases fiscal debt as opposed to government investment, foreign exchange intervention positively affects net exports but does not stimulate an economy per se causing inflation, and a negative shock to the upper bound of leverage ratio in the collateral constraint of foreign borrowings generates a sudden stops crisis for the emerging world. Monetary and fiscal policy intimately interact in the short and medium run such that there is an immediate response of monetary instruments to fiscal shocks, while fiscal instruments adjust to monetary shocks in the medium run.
    Keywords: Monetary Policy, Fiscal Policy, Emerging Open Economy, Sudden Stops, Collateral Constraint
    JEL: E63 F41 G01
    Date: 2012–05
  4. By: Pierre Pestieau (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CREPP - Center of Research in Public Economics and Population Economics - Université de Liège, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain, CEPR - Center for Economic Policy Research - CEPR); Grégory Ponthière (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, ENS - Ecole Normale Supérieure de Paris - Ecole Normale Supérieure de Paris - ENS Paris)
    Abstract: We explore the optimal fertility age-pattern in a four-period OLG economy with physical capital accumulation. For that purpose, we .rstly compare the dynamics of two closed economies, Early and Late Islands, which di¤er only in the timing of births. On Early Island, children are born from parents in young adulthood, whereas, on Late Island, children are born from parents in older adulthood. We show that, unlike on Early Island, there exists no stable stationary equilibrium on Late Island, which exhibits cyclical dynamics. We also characterize the social optimum in each economy, and show that Samuelson.s Serendipity Theorem still holds. Finally, we study the dynamics and social optimum of an economy with interior fertility rates during the reproduction period. It is shown that various fertility age-patterns are compatible with the social optimum, as long as these yield the optimal cohort growth rate. The Serendipity Theorem remains valid in that broader demographic environment.
    Keywords: childbearing ages ; early and late motherhoods ; fertility ; overlapping generations ; social optimum
    Date: 2011–07
  5. By: Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, IZA - Institute for the Study of Labor); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Mans, CEPREMAP - Centre pour la recherche économique et ses applications); Sébastien Ménard (GAINS - Université du Maine); Thepthida Sopraseuth (CEPREMAP - Centre pour la recherche économique et ses applications, GAINS-TEPP - Université du Maine)
    Abstract: This paper studies the optimal unemployment insurance for older workers in a repeated principal-agent model, where the search intensity of risk-averse workers (the agents) is not observed by the risk-neutral insurance agency (the principal). When unemployment benefits are the only available tool, the insurance agency is not able to induce older workers to search for a job. This is because of the short time-horizon of workers close to retirement. We propose to introduce a pension tax dependent on the length of the unemployment spell. We show that this device performs better than a wage tax after re-employment. First, it makes jobs more attractive, as they are free of tax. Second, because re-employment will be short-lived, a pension tax is a more powerful incentive than a wage tax, and provides more substantial fiscal gains to the agency. Finally, a pension tax allows those workers near retirement who still do not exercise job search to smooth their consumption during their unemployment spell, as if they could borrow against their future pension.
    Date: 2012–02–13
  6. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: In the context of a dynamic, stochastic, general equilibrium model, we perform classical maximum-likelihood and Bayesian estimations of the contribution of anticipated shocks to business cycles in the postwar United States. Our identification approach relies on the fact that forward-looking agents react to anticipated changes in exogenous fundamentals before such changes materialize. It further allows us to distinguish changes in fundamentals by their anticipation horizon. We find that anticipated shocks account for about half of predicted aggregate fluctuations in output, consumption, investment, and employment.
    Keywords: Anticipated Shocks; Bayesian Estimation.; Sources of Aggregate Fluctuations
    JEL: C11 C51 E13 E32
    Date: 2012–05
  7. By: Juraj Zeman (National Bank of Slovakia, Research Department)
    Abstract: Entering monetary union brings both benefits and costs. The loss of an independent monetary policy, including the loss of exchange rate policy, constrains the ability to stabilize the domestic economy in the event of asymmetric shocks. This leads to more volatile business cycles and hence lower utility of risk-averse agents in the economy. On the other hand, the common currency reduces transaction costs, thus increasing trade and growth. The objective of this article is to quantitatively evaluate these costs and benefits, using an estimated two-country DSGE model for Slovakia and the euro area.
    Keywords: monetary union, costs and benefits, two-country DSGE
    JEL: E E F F42
    Date: 2012–04
  8. By: Edward P. Herbst>
    Date: 2012
  9. By: Sule Alan (University of Cambridge and Koc University); Thomas Crossley (University of Cambridge and Koc University); Hamish Low (University of Cambridge and Institute for Fiscal Studies)
    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 tighening 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
  10. By: Antras, Pol; Costinot, Arnaud
    Abstract: This paper develops a simple model of international trade with intermediation. We consider an economy with two islands and two types of agents, farmers and traders. Farmers can produce two goods, but in order to sell these goods in centralized (Walrasian) markets, they need to be matched with a trader, and this entails costly search. In the absence of search frictions, our model reduces to a standard Ricardian model of trade. We use this simple model to contrast the implications of changes in the integration of Walrasian markets, which allow traders from different islands to exchange their goods, and changes in the access to these Walrasian markets, which allow farmers to trade with traders from different islands. We find that intermediation always magnifies the gains from trade under the former type of integration, but leads to more nuanced welfare results under the latter, including the possibility of aggregate losses.
    Date: 2011
  11. By: Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper analyzes the political economy of public education and redistribution in an overlapping-generation model of a two-class society in which growth is driven by the accumulation of human capital. The levels of public education and lump- sum financial transfers are determined by voting, while private education which supplements public education is purchased individually. The model, which includes two-dimensional voting, demonstrates multiple steady-state political equilibria. One is an equilibrium with a high share of public education in government expenditure; the other is an equilibrium with a high share of lump-sum transfers. Numerical analysis shows empirically plausible result of growth, inequality and the composition of redistributive expenditures.
    Keywords: Education, political economy, inequality, growth
    JEL: D72 D91 I24
    Date: 2012–05
  12. By: Subir Bose; Suresh Mutuswami
    Abstract: We perturb the bilateral bargaining model by introducing small ambiguity (via the epsilon contamination model) about the agents' types. We assume that the preferences are characterized by ambiguity aversion (Gilboa-Schmeidler). The rest of the setup is exactly as in Myerson and Satterthwaite [10]. And we show that in this environment, it is possible to design a mechanism that generates almost-efficient trade. Crucially, the mechanism has to be extensive-form; standard (normal form) direct revelation mechanism can only generate outcome that is continuous with respect to the amount of ambiguity.
    Keywords: Ambiguity Aversion, Mechanism Design, Bilateral Bargaining, Myerson Satterthwaite.
    JEL: C78 D8
    Date: 2012–05
  13. By: Kollmann, Robert
    Abstract: This paper estimates a two-country model with a global bank, using US and Euro Area (EA) data, and Bayesian methods. The estimated model matches key US and EA business cycle statistics. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for US real activity. During the Great Recession (2007-09), banking shocks accounted for about 20% of the fall in US and EA GDP, and for more than half of the fall in EA investment and employment.
    Keywords: Bayesian econometrics; financial crisis; global banking; investment; real activity
    JEL: E44 F36 F37 G21
    Date: 2012–05
  14. By: Jacques K. Ngoie; Niek Schoeman
    Abstract: This study investigates the optimality hypothesis of taxation and the volatility thereof in South Africa when using appropriate tax rates within a dynamic stochastic environment. Using a Marshallian macroeconomic model disaggregated by sectors (MMM-DA) several features of the South African economy are analysed that may contribute to the efficiency of the optimal taxation hypothesis. The results show that within a tax regime where revenue from labour and capital income constitutes the most significant source of government income, both such taxes distort the economy but that the distortion from a tax on capital exceeds that of a tax on income. This study has twofold implications. It highlights the impact of efficient optimal taxation on both overall economic growth and fiscal policy in the country.
    Keywords: Optimality hypothesis; Dynamic stochastic environment; Marshallian macroeconomic model
    JEL: K21 L40 D78
    Date: 2012
  15. By: Efrem Castelnuovo (University of Padova)
    Abstract: What does a monetary policy shock do? We answer this question by estimating a new-Keynesian monetary policy DSGE model for a number of economies with a variety of empirical proxies of the business cycle. The effects of two different policy shocks, an unexpected interest rate hike conditional on a constant inflation target and an unpredicted drift in the inflation target, are scrutinized. Filter-specific Bayesian impulse responses are contrasted with those obtained by combining multiple business cycle indicators. Our results document the substantial uncertainty surrounding the estimated effects of these two policy shocks across a number of countries.
    Keywords: Multiple filtering, business cycle proxies, new-Keynesian business cycle model, trend inflation, monetary policy shocks.
    JEL: C32 E32 E37
    Date: 2012–05
  16. By: Grégory Ponthière (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: The public provision of long-term care (LTC) can replace family-provided LTC when adults are not sufficiently altruistic towards their elderly parents. But State intervention can also modify the transmission of values and reduce the long-run prevalence of family altruism in the population. That evolutionary effect questions the desirability of the LTC public provision. To characterize the optimal LTC policy, we develop a three-period OLG model where the population is divided into altruistic and non-altruistic agents, and where the transmission of (non) altruism takes place through a socialization process à la Bisin and Verdier (2001). The optimal short-run and long-run LTC policies are shown to differ, to an extent varying with the particular socialization mechanism at work.
    Keywords: long-term care ; altruism ; socialization ; optimal policy ; crowding out effect
    Date: 2011–09
  17. By: Alain Delacroix; Shouyong Shi
    Abstract: We study a large market with directed search and signaling. Each seller chooses an investment that determines the quality of the good which is the seller's private information. A seller also chooses the price of the good and the number of selling sites. After observing sellers' choices of prices and sites, but not quality, buyers choose which price to search. The sites posting the same price and the buyers searching for that price match with each other randomly. In this environment, a seller's choices of prices and sites can direct buyers' search decisions and signal quality ex-ante. After matching, a buyer also receives an imperfectly informative signal about the quality of the good and decides whether to trade at the posted price. When the latter signal received is sufficiently accurate, we prove that there is a unique equilibrium. Moreover, when the quality differential is large, the equilibrium (under private information) implements the socially efficient allocation under public information. When the quality differential is small, the equilibrium is inefficient in the quality of goods produced or/and the number of sites created. This inefficiency is caused by a conflict between the search-directing role and the signaling role of a posted price. We also compare the price-posting equilibrium with the equilibrium under bargaining. The bargaining equilibrium features efficient quality, but inefficient entry. It is superior to the price-posting equilibrium when a seller's bargaining power is intermediate and the quality differential is small.
    Keywords: Directed search; Search, Signaling; Pricing; Efficiency
    JEL: D8 C78 E24
    Date: 2012–05–18
  18. By: Pierre Pestieau (CREPP - Center of Research in Public Economics and Population Economics - Université de Liège, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain, CEPR - Center for Economic Policy Research - CEPR); Grégory Ponthière (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: Parenthood postponement is a key demographic trend of the last three decades. In order to rationalize that stylized fact, we extend the canonical model by Barro and Becker (1989) to include two - instead of one reproduction periods. We examine how the cost structure of early and late children in terms of time and goods a¤ects the optimal fertility timing. Then, focusing a stationary equilibrium with stationary population, we provide two alternative explanations for the observed postponement of births: (1) a fall of the direct cost of late children (thanks to medical advances); (2) a rise in hourly productivity, which increases the (relative) opportunity costs of early children in comparison to late children.
    Keywords: Fertility ; Birth Timing ; Population ; Dynastic Altruism ; OLG Model
    Date: 2012–03
  19. By: Ömer Özak (Southern Methodist University)
    Abstract: I study how boundedly rational agents can learn the solution to an infinite horizon optimal consumption problem under uncertainty and liquidity constraints. I present conditions for the existence of an optimal linear consumption rule and characterize it. Additionally, I use an empirically plausible theory of learning to generate a class of adaptive learning algorithms that converges to the optimal rule. This provides an adaptive and boundedly rational foundation to neoclassical consumption theory.
    Keywords: Adaptive learning models, bounded rationality, dynamic programming, consumption function, behavioral economics, liquidity constraint, Markov process
    JEL: C6 D8 D9 E21
    Date: 2012–05
  20. By: Ken Yamada (School of Economics, Singapore Management University)
    Abstract: This paper studies a life-cycle model of home production to examine how married women change their allocation of time in response to evolutionary movements along the life-cycle wage profile in Japan. After accounting for the potential bias due to heterogeneity, measurement error, weak instruments, and missing data, the estimates of intertemporal substitution elasticity obtained from the home production model are moderate and similar to those obtained from the standard labor supply model.
    Keywords: labor supply, home production, intertemporal substitution
    JEL: J22
    Date: 2012–01
  21. By: Verbič, Miroslav; Spruk, Rok
    Abstract: Rapidly aging population in high-income countries has exerted additional pressure on the sustainability of public pension expenditure. We present a formal model of public pension expenditure under endogenous human capital, where the latter facilitates a substantial decrease in equilibrium fertility rate alongside the improvement in life expectancy. We demonstrate how higher life expectancy and human capital endowment facilitate the rise of net replacement rate. We provide and examine an empirical model of old-age expenditure in a panel of 33 countries in the period 1998–2008. Our results indicate that increases in total fertility rate and effective retirement age would reduce age-related expenditure substantially. While higher net replacement rate would alleviate the risk of old-age poverty, it would endanger long-term sustainability of public finance by imposing additional pressure on deficit and public debt.
    Keywords: public pensions; aging; social security; replacement rate; life expectancy
    JEL: C51 H55 J11
    Date: 2011–09
  22. By: Jess Benhabib; Jesse Perla; Christopher Tonetti
    Abstract: Will fast growing emerging economies sustain rapid growth rates until they “catch-up” to the technology frontier? Are there incentives for some developed countries to free-ride off of innovators and optimally “fallback” relative to the frontier? This paper models agents growing as a result of investments in innovation and imitation. Imitation facilitates technology diffusion, with the productivity of imitation modeled by a catch-up function that increases with distance to the frontier. The resulting equilibrium is an endogenous segmentation between innovators and imitators, where imitating agents optimally choose to “catch-up” or “fall-back” to a productivity ratio below the frontier.
    JEL: O14 O30 O31 O33 O40
    Date: 2012–05
  23. By: Garth Heutel (University of North Carolina Greensboro)
    Abstract: Technical appendix for the Review of Economic Dynamics article
    Date: 2011–07
  24. By: Cyril Monnet; Daniel R. Sanches
    Keywords: Banks and banking ; Regulation ; Banking structure
    Date: 2012

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