nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒07‒14
sixteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Two-way capital flows and global imbalances: a neoclassical approach By Pengfei Wang; Yi Wen; Zhiwei Xu
  2. Interest rates and business cycles in emerging economies: The role of financial frictions By Fernández, Andrés; Gulan, Adam
  3. Learning from experience in the stock market By Anton Nakov
  4. Frequency of trade and the determinacy of equilibrium in economies of overlapping generations. By Hippolyte d'Albis; Emmanuelle Augeraud-Véron
  5. Risk Aversion in the Euro area By Jonathan Benchimol
  6. Dynamic Bargain Over Redistribution in Legislatures By Facundo Piguillem; Alessandro Riboni
  7. Estimating contract indexation in a financial accelerator model By Charles T. Carlstrom; Timothy S. Fuerst; Alberto Ortiz; Matthias Paustian
  8. A theory of search with deadlines and uncertain recall By S. Nuray Akin; Brennan Platt
  9. Time-varying oil price volatility and macroeconomic aggregates By Michael Plante; Nora Traum
  10. R&D and economic growth in a cash-in-advance economy By Chu, Angus C.; Cozzi, Guido
  11. Global Banks and Crisis Transmission By Sebnem Kalemli-Ozcan; Elias Papaioannou; Fabrizio Perri
  12. Wages, rents, unemployment, and the quality of life By Wrede, Matthias
  13. Gender Occupational Segregation in an Equilibrium Search Model By Usui, Emiko
  14. The effect of pension wealth on private savings. Results from an extended life cycle model By Zhiyang Jia and Weizhen Zhu
  15. Incomplete Financial Markets With Real Assets and Endogenous Credit Limits By Matthew Hoelle; Marina Pireddu; Antonio Villanacci
  16. A Note on Particle Filters Applied to DSGE Models By Angelo Marsiglia Fasolo

  1. By: Pengfei Wang; Yi Wen; Zhiwei Xu
    Abstract: Financial capital and fixed capital tend to flow in opposite directions between poor and rich countries. Why? What are the implications of such two-way capital flows for global trade imbalances and welfare in the long run? This paper introduces frictions into a standard two- country neoclassical growth model to explain the pattern of two-way capital flows between emerging economies (such as China) and the developed world (such as the United States). We show how underdeveloped credit markets in China can lead to abnormally high rate of returns to fixed capital but excessively low rate of returns to financial capital relative to the U.S., hence driving out household savings (financial capital) on the one hand while simultaneously attracting foreign direct investment (FDI) on the other. When calibrated to match China’s high marginal product of capital and low real interest rate, the model is able to account for the observed rising trends of China’s financial capital outflows and FDI inflows as well as its massive trade imbalances. Despite double heterogeneity in households and firms and a less than 100% capital depreciation rate, our two-country model is analytically tractable with closed form solutions at the micro level, which permits exact aggregation by the law of large numbers, so the general equilibrium of the model can be solved by standard log-linearization or higher order perturbation methods without the need of using numerical computation methods. Our model yield, among other things, three implications that stand in sharp contrast with the existing literature: (i) Global trade imbalances between emerging economies and the developed world are sustainable even in the steady state. (ii) There exists an immiserization effect of FDI --- namely, FDI is beneficial for the sourcing country but harmful to the recipient country under financial frictions. (iii) Our quantitative results cast doubts on the conventional wisdom that the "saving glut" of emerging economies is responsible for the low world interest rate.>
    Keywords: Capital movements ; International trade ; International finance
    Date: 2012
  2. By: Fernández, Andrés (Research Department, Inter-American Development Bank); Gulan, Adam (Bank of Finland Research)
    Abstract: Countercyclical country interest rates have been shown to be both a distinctive characteristic and an important driving force of business cycles in emerging market economies. In order to account for this, most business cycle models of emerging market economies have relied on ad hoc and exogenous countercyclical interest rate processes. We embed a financial contract à la Bernanke et al. (1999) into a standard small open economy business cycle model that endogenously delivers countercyclical interest rates. We then take the model to the data. For this purpose we build a novel panel dataset for emerging economies that includes financial data, namely sovereign and corporate interest rates as well as leverage. We show that the model accounts well not only for countercyclical interest rates, but also for other stylized facts of emerging economies' business cycles, including the dynamics of leverage.
    Keywords: business cycle models; emerging economies; financial frictions
    JEL: E32 E44 F41
    Date: 2012–06–18
  3. By: Anton Nakov
    Abstract: We study the dynamics of a Lucas-tree model with finitely lived individuals who "learn from experience." Individuals update expectations by Bayesian learning based on observations from their own lifetimes. In this model, the stock price exhibits stochastic fluctuations around the rational expectations equilibrium. This heterogeneous-agents economy can be approximated by a representative-agent model with constant-gain learning, where the gain parameter is related to the survival rate.
    Date: 2012
  4. By: Hippolyte d'Albis (Centre d'Economie de la Sorbonne - Paris School of Economics); Emmanuelle Augeraud-Véron (MIA - Université de la Rochelle)
    Abstract: In a recent article, Demichelis and Polemarchakis (2007) highlighted the role played by the frequency of trade on the degree of indeterminacy of equilibrium in economies of overlapping generations. Assuming that time has a finite starting point and extends into the infinite future, they prove that the degree of indeterminacy increases with the number of periods in the life-span of individuals, which is assumed to be certain. We show that this result does not hold when individual longevity is uncertain. We build a discrete time model that uniformly converges to a standard continuous time overlapping-generation model when the frequency of trade is infinite. Deriving the equilibrium prices, we demonstrate that the degree of indeterminacy is independent of the frequency of trade and is always equal to one.
    Keywords: Overlapping generations, perpetual youth model, determinacy, continuous time, discrete time.
    JEL: D50 D90
    Date: 2012–06
  5. By: Jonathan Benchimol (Economics Department - ESSEC Business School, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne)
    Abstract: We propose a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where a risk aversion shock enters a separable utility function. We analyze five periods, each one lasting twenty years, to follow over time the dynamics of several parameters (such as the risk aversion parameter), the Taylor rule coefficients and the role of this risk aversion shock on output and real money balances in the Eurozone. Our analysis suggests that risk aversion was a more important component of output and real money balance dynamics between 2006 and 2011 than it had been between 1971 and 2006, at least in the short run.
    Keywords: Risk aversion; Output; Money; Euro area; New Keynesian DSGE models; Bayesian estimation;
    Date: 2012–06–28
  6. By: Facundo Piguillem (EIEF); Alessandro Riboni (University of Montreal)
    Abstract: This paper studies legislative bargaining over redistribution in the context of a Neoclassical growth model where agents are heterogeneous in their initial capital. In each period, members of a legislature negotiate over the current capital tax. Tax revenues finance lump-sum redistribution. A key feature of the bargaining process is that the status quo is endogenous: the capital tax chosen in the current period becomes the default option in the next legislative session. We argue that the endogenous status quo serves a disciplinary role: policymakers may not propose (or accept) high taxes because doing so may improve, via a change of the status quo, the bargaining power of low wealth legislators in future sessions. We nd equilibrium capital taxes below 35% under dierent calibrations of the model. Finally, we analyze how redistribution and taxation vary as we change the distribution of agenda setting power, the distribution of wealth within the legislature, and institutional features of the bargaining protocol.
    JEL: E6 H0
    Date: 2012
  7. By: Charles T. Carlstrom; Timothy S. Fuerst; Alberto Ortiz; Matthias Paustian
    Abstract: This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler, and Gilchrist (1999). The principal conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation.
    Keywords: Business cycles
    Date: 2012
  8. By: S. Nuray Akin (Department of Economics, University of Miami); Brennan Platt (Department of Economics, Brigham Young University)
    Abstract: We analyze an equilibrium search model where buyers seek to purchase a good before a deadline and face uncertainty regarding the availability of past price quotes in the future. Sellers cannot observe a potential buyer's remaining time until deadline nor his quote history, and hence post prices that weigh the probability of sale versus the profit once sold. The model's equilibrium can take one of three forms. In a late equilibrium, buyers initially forgo purchases, preferring to wait until the deadline. In an early equilibrium, any equilibrium offer is accepted as soon as it is received. In a full equilibrium, higher prices are turned down until near the deadline, while lower prices are immediately accepted. Equilibrium price and sales dynamics are determined by the time remaining until the deadline and the quote history of the consumer.
    Keywords: Equilibrium Search; Deadlines; Uncertain Recall; Price Posting; Reservation Prices
    JEL: D40 D83
    Date: 2012–01–12
  9. By: Michael Plante; Nora Traum
    Abstract: We illustrate the theoretical relation among output, consumption, investment, and oil price volatility in a real business-cycle model. The model incorporates demand for oil by a firm, as an intermediate input, and by a household, used in conjunction with a durable good. We estimate a stochastic volatility process for the real price of oil over the period 1986–2011 and utilize the estimated process in a nonlinear approximation of the model. For realistic calibrations, an increase in oil price volatility produces a temporary decrease in durable spending, while precautionary savings motives lead investment and real GDP to rise. Irreversible capital and durable investment decisions do not overturn this result.
    Keywords: Time-series analysis ; Consumption (Economics) ; Capital investments ; Natural resources ; Energy consumption
    Date: 2012
  10. By: Chu, Angus C.; Cozzi, Guido
    Abstract: R&D investment has well-known liquidity problems, with potentially important consequences. In this paper, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian model with cash-in-advance (CIA) constraints on consumption, R&D investment, and manufacturing. Our results are as follows. Under the CIA constraints on consumption and R&D (manufacturing), an increase in the nominal interest rate would decrease (increase) R&D and economic growth. So long as the effect of cash requirements in R&D is relatively more important than in manufacturing, the nominal interest rate would have an overall negative effect on R&D and economic growth as documented in recent empirical studies. We also analyze the optimality of Friedman rule and find that Friedman rule can be suboptimal due to a unique feature of the Schumpeterian model. Specifically, we find that the suboptimality or optimality of Friedman rule is closely related to a seemingly unrelated issue that is the overinvestment versus underinvestment of R&D in the market economy, and this result is robust to alternative versions of the Schumpeterian model.
    Keywords: economic growth; R&D; quality ladders; cash-in-advance; monetary policy; Friedman rule
    JEL: O30 O40 E41
    Date: 2012–07
  11. By: Sebnem Kalemli-Ozcan; Elias Papaioannou; Fabrizio Perri
    Abstract: We study the effect of financial integration (through banks) on the transmission of international business cycles. In a sample of 20 developed countries between 1978 and 2009 we find that, in periods without financial crises, increases in bilateral banking linkages are associated with more divergent output cycles.This relation is significantly weaker during financial turmoil periods, suggesting that financial crises induce co-movement among more financially integrated countries. We also show that countries with stronger, direct and indirect, financial ties to the U.S. experienced more synchronized cycles with the U.S. during the recent 2007-2009 crisis. We then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity. The model suggests that the relation between integration and synchronization depends on the type of shocks hitting the world economy, and that shocks to global banks played an important role in triggering and spreading the 2007-2009 crisis.
    JEL: E32 F15 F36
    Date: 2012–07
  12. By: Wrede, Matthias
    Abstract: Combining a spatial equilibrium model with a search-matching unemployment model, this paper analyzes the willingness to pay for regional amenities and the regional quality of life when wages, rents, and unemployment risk compensate for local amenities and disamenities. The results are compared with those obtained from the Rosen-Roback approach. Furthermore, the paper shows that the wage curve is negatively sloped for quasi-linear utility. Specifically, the wage rate increases and the unemployment ratio decreases in response to an increase in the amenity level if the amenity is marginally more beneficial to producers than to consumers. As an illustration of the unemployment-adjusted quality-of-life measure, the quality of life in West German counties is estimated. --
    Keywords: quality of life,residential mobility,unemployment,job search,matching
    JEL: R12 R13 R14 H73 J61 J64
    Date: 2012
  13. By: Usui, Emiko
    Abstract: This paper develops an equilibrium search model to explain gender asymmetry in occupational distribution. Workers’ utility depends on salary and working hours, and women have a greater aversion to market hours than men. Simulations indicate that women crowd into shorter-hour, lower-paying jobs than men. If employers discriminate against women, offers are tailored more toward men’s preferences; employers require longer working hours, and fewer women work at these jobs. Similarly, if women have a disutility factor in their utility toward positions with a higher proportion of men, fewer women work at these jobs. In both cases, gender segregation is reinforced
    Keywords: Equilibrium Search, Gender preferences, Employer discrimination, Employee discrimination
    JEL: E24 J16 J64 J71
    Date: 2012–06
  14. By: Zhiyang Jia and Weizhen Zhu (Statistics Norway)
    Abstract: An extended life cycle model is used to investigate how variation in the level of expected pensions influences non-pension wealth accumulation. We try to explain why the offset effects between pension wealth and private savings are not one to one by accounting for different risks and market imperfections, which includes uninsured risk on earnings, mortality risk, borrowing constraints and bequest motive. The model is calibrated on Norwegian household data from 1992 to 2005. Based on the calibrated model, simulations are performed to explore consequences of introducing these factors. The result shows that by simply accounting these risks and constraints, we can explain most of the departure between empirical findings and theoretical prediction.
    Keywords: Life cycle model; Offset effect; pension wealth; private savings
    JEL: D91
    Date: 2012–07
  15. By: Matthew Hoelle; Marina Pireddu; Antonio Villanacci
    Abstract: In this paper we analyze the effects of restricted participation in a two-period gen- eral equilibrium model with uncertainty in the second period and real assets. Similar to certain arrangements in the market for bank loans, household borrowing is restricted by a household-specific wealth dependent upper bound on credit lines in all states of uncertainty in the second period. We first establish that, generically in the set of the economies, equilibria exist and are finite and regular. We then show that equilibria are generically suboptimal. Finally, we provide a robust example demonstrating that the equilibrium allocations can be Pareto improved through a tightening of the participation constraints.
    Keywords: general equilibrium; restricted participation; financial markets; generic regularity; real assets; Pareto suboptimality
    JEL: D50 D53 D61
    Date: 2012–06
  16. By: Angelo Marsiglia Fasolo
    Abstract: This paper compares the properties of two particle filters – the Bootstrap Filter and the Auxiliary Particle Filter – applied to the computation of the likelihood of artificial data simulated from a basic DSGE model with nominal and real rigidities. Particle filters are compared in terms of speed, quality of the approximation of the probability density function of data and tracking of state variables. Results show that there is a case for the use of the Auxiliary Particle Filter only when the researcher uses a large number of observable variables and the number of particles used to characterize the likelihood is relatively low. Simulations also show that the largest gains in tracking state variables in the model are found when the number of particles is between 20,000 and 30,000, suggesting a boundary for this number.
    Date: 2012–06

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