nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒08‒23
forty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Measuring the Tax Revenue Elasticity to Output in Dynamic Stochastic General Equilibrium Model By Kazuki Hiraga
  2. Dissecting the dynamics of the US trade balance in an estimated equilibrium model By Punnoose Jacob; Gert Peersman
  3. The Evolution of Endogenous Business Cycles By Roger E.A. Farmer
  4. Global banks, financial shocks and international business cycles: evidence from an estimated model By Robert Kollmann
  5. Macro-prudential Policy in a Fisherian Model of Financial Innovation By Emine Boz; Javier Bianchi; Enrique G. Mendoza
  6. The dynamics of catch-up and skill and technology upgrading in China By Michael Funke; Xi Chen
  7. Efficient Simulation of DSGE Models with Inequality Constraints By Tom Holden; Michael Paetz
  8. Steady state Laffer curve with the underground economy By Francesco Busato; Bruno Chiarini
  9. A DSGE-based assessment of nonlinear loan-to-Value policies: Evidence from Hong Kong By Michael Funke; Michael Paetz
  10. Growth and welfare effects of health care in knowledge based economies By Michael Kuhn; Klaus Prettner
  11. Business Cycles and Financial Crises: A Model of Entrepreneurs and Financiers By Kunieda, Takuma; Shibata, Akihisa
  12. Homework in Monetary Economics: Inflation, Home Production, and the Production of Homes By S. Boragan Aruoba; Morris A. Davis; Randall Wright
  13. A model of price swings in the housing market By Carlos Garriga; Rodolfo E. Manuelli; Adrian Peralta-Alva
  14. Earnings losses and labor mobility over the life-cycle By Jung, Philip; Kuhn, Moritz
  15. Growth and Welfare Effects of Health Care in Knowledge Based Economies By Michael Kuhn; Klaus Prettner
  16. Future Changes of the Industrial Structure due to Aging and Soaring Demands for Healthcare Services in Japan - an Analysis Using a Multi-Sector OLG Model in an Open Economy - By Daisuke Ishikawa; Junji Ueda; Real Arai
  17. Market and Non-Market Monetary Policy Tools in a Calibrated DSGE Model for Mainland China By Michael Funke; Michael Paetz; Qianying Chen,
  18. Welfare cost of business cycles in economies with individual consumption risk By Ellison, Martin; Sargent, Thomas J.
  19. Steady-State Equilibrium in a Model of Short-Term Wage-Posting By Alan Manning
  20. Did housing policies cause the postwar boom in homeownership? By Carlos Garriga; Matthew Chambers; Don Schlagenhauf
  21. Estimating Equilibrium Effects of Job Search Assistance By Pieter Gautier; Paul Muller; Bas van der Klaauw; Michael Rosholm; Michael Svarer
  22. Prince-setting, monetary policy and the contractionary effects of productivity improvements By Francesco Giuli; Massimiliano Tancioni
  23. Housing Market Dynamics: Any News? By Sandra Gomes; Caterina Mendicino
  24. On the inherent instability of private money By Daniel R. Sanches
  25. Economic growth with incomplete financial discipline By Bessenyei, István; Horváth, Márton
  26. Banks, Sovereign Debt and the International Transmission of Business Cycles By Luca Guerrieri; Matteo Iacoviello; Raoul Minetti
  27. Neoclassical Growth and the Natural Resource Curse Puzzle By Guilló, María Dolores; Pérez-Sebastián, Fidel
  28. Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children's Abilities Depend on Parents' Resources By Alexander Gelber; Matthew Weinzierl
  29. Social Infrastructure and the Preservation of Physical Capital: Equilibria and Transitional Dynamics By Helena Soares; Tiago Neves Sequeira; Pedro Macias Marques; Orlando Gomes; Alexandra Ferreira-Lopes
  30. Capital Regulation and Credit Fluctuations By Gersbach, Hans; Rochet, Jean-Charles
  31. Exponential Discounting Bias By Orlando Gomes; Alexandra Ferreira-Lopes; Tiago Neves Sequeira
  32. Intergenerational Implications of Fiscal Consolidation in Japan By Kiichi Tokuoka
  33. Careers in firms: estimating a model of learning, job assignment, and human capital aquisition By Elena Pastorino
  34. Growth and Non-Regular Employment By Hiroaki Miyamoto
  35. Information frictions and housing market dynamics By Elliot Anenberg
  36. Unemployment insurance fraud and optimal monitoring By David L. Fuller; B. Ravikumar; Yuzhe Zhang
  37. Modelling the sectoral allocation of labour in open economy models By Povoledo, Laura
  38. House Prices and Monetary Policy By Paulo Brito; Giancarlo Marini; Alessandro Piergallini
  39. Money is an experience good: competition and trust in the private provision of money By Ramon Marimon; Juan Pablo Nicolini; Pedro Teles
  40. The zero lower bound and the dual mandate By William T. Gavin; Benjamin D. Keen
  41. Cycles of Distrust: An Economic Model By Daron Acemoglu; Alexander Wolitzky

  1. By: Kazuki Hiraga (Faculty of Economics, Keio University)
    Abstract: We use structural method, that is, Dynamic Stochastic General Equilibrium (DSGE) model with fiscal stabilization rules, for calculating the tax revenue elasticity rate and estimate more plausible value of it. In the short-run, the tax revenue elasticity to output takes negative value and, in medium-run, it takes quite large positive values (from 2.3 to 4) in both permanent and temporary positive productivity shocks. On the other hand, in the long-run, under permanent positive productivity shock remains nearly the value of the tax revenue elasticity converses to about 2.3. But, under temporary one, it decreases and reverses it.
    Date: 2012–07
  2. By: Punnoose Jacob (École Polytechnique Fédérale de Lausanne); Gert Peersman (Ghent University)
    Abstract: In an estimated two-country DSGE model, we find that shocks to the marginal efficiency of investment account for more than half of the forecast variance of cyclical fluctuations in the US trade balance. Both domestic and foreign marginal efficiency shocks have a substantial impact on the variability of the imbalance. On the other hand, while traditional technology shocks can generate counter-cyclical trade balance dynamics, they matter very little for the overall forecast variance.
    Keywords: Open Economy Macroeconomics, US Trade Balance, Investment Shocks, Bayesian Estimation of DSGE Models
    JEL: C11 F41
    Date: 2012–08
  3. By: Roger E.A. Farmer
    Abstract: This paper distinguishes between two kinds of Endogenous Business Cycle models, and discusses the evolution from first generation EBC1 models to second generation EBC2 models. I argue that EBC1 models, which display dynamic indeterminacy, are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models, which display steady-state indeterminacy, are a more radical departure from the classical Real Business Cycle model; they represent a return to one of the most important ideas to emerge from Keynes' (1936) General Theory; that high involuntary unemployment can persist as part of the steady-state equilibrium of a market economy.
    JEL: B22 E0 E3
    Date: 2012–08
  4. By: Robert Kollmann
    Abstract: This paper estimates a two-country model with a global bank, using U.S. and Euro area (EA) data, and Bayesian methods. The estimated model matches key U.S. 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 U.S. real activity. During the Great Recession (2007–09), banking shocks accounted for about 20 percent of the fall in U.S. and EA GDP, and for more than half of the fall in EA investment and employment.
    Keywords: International finance ; Financial markets
    Date: 2012
  5. By: Emine Boz; Javier Bianchi; Enrique G. Mendoza
    Abstract: The interaction between credit frictions, financial innovation, and a switch from optimistic to pessimistic beliefs played a central role in the 2008 financial crisis. This paper develops a quantitative general equilibrium framework in which this interaction drives the financial amplification mechanism to study the effects of macro-prudential policy. Financial innovation enhances the ability of agents to collateralize assets into debt, but the riskiness of this new regime can only be learned over time. Beliefs about transition probabilities across states with high and low ability to borrow change as agents learn from observed realizations of financial conditions. At the same time, the collateral constraint introduces a pecuniary externality, because agents fail to internalize the effect of their borrowing decisions on asset prices. Quantitative analysis shows that the effectiveness of macro-prudential policy in this environment depends on the government's information set, the tightness of credit constraints and the pace at which optimism surges in the early stages of financial innovation. The policy is least effective when the government is as uninformed as private agents, credit constraints are tight, and optimism builds quickly.
    Keywords: Economic models , Financial crisis , Macroprudential policy ,
    Date: 2012–07–09
  6. By: Michael Funke; Xi Chen
    Abstract: This paper accounts for China?s economic growth since 1980 in a uni-fied endogenous growth model in which a sequencing of physical capital accumula-tion, human capital ac-cumulation and innovation drives the rise in China?s aggre-gate income. The first stage is characterized by physical capital accumulation. The second stage includes both physical and human capital accumulation, and in the final stage innovation is added to the mix. Model calibrations indicate that the growth model can generate a trajectory that accords well with the different stages of development in China.
    Keywords: China, economic growth, transitional dynamics
    JEL: D90 O31 O33 O41
    Date: 2012–06
  7. By: Tom Holden; Michael Paetz
    Abstract: This paper presents a fast, simple and intuitive algorithm for simulation of linear dynamic stochastic general equilibrium models with inequality constraints. The algorithm handles both the computation of impulse responses, and stochastic simulation, and can deal with arbitrarily many bounded variables. To illustrate the usefulness and efficiency of this algorithm we provide two applications according to the zero lower bound (ZLB) on nominal interest rates. Our solution principle is much faster than comparable methods. We therefore expect this algorithm to be very helpful also for estimation procedures, and for a wide range of applications apart from monetary policy analysis.
    Keywords: inequality constraints, zero lower bound, DSGE model, New Keynesian framework, two-country models
    Date: 2012–07
  8. By: Francesco Busato; Bruno Chiarini
    Abstract: This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. In particular, we show that a dynamic general equilibrium with tax evasion may give a rational justification for a variant of the Laffer curve for a plausible parameterization. In this respect, the paper also identifies the different parameterization of the model formulation with tax evasion under which a Laffer curve exist. From a revenue maximizing perspective, the key policy messages are that bringing tax payers to compliance would be better than announcing to punish them if convicted, and that an economy without problems of compliance is much more sensitive to myopic behavior.
    Keywords: Two-sector Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and Underground Activities
    JEL: E32 E13 H20 E26
    Date: 2012–07
  9. By: Michael Funke; Michael Paetz
    Abstract: In the wake of the 2008-2009 global financial crisis, the macroeconom-ic discussion has returned to the topic of proactive macroprudential policies. One proactive approach, the use of loan-to-value (LTV) policies to curb booming proper-ty 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 ana-lyse 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: DSGE models, housing, open economy, Hong Kong
    JEL: D91 E21 E44 F41
    Date: 2012–04
  10. By: Michael Kuhn (Vienna Institute of Demography); Klaus Prettner (Georg-August-University Göttingen)
    Abstract: We study the effects of a labor-intensive health care sector within an R&D-driven growth model with overlapping generations. Health care increases longevity and labor participation/productivity. We examine under which conditions expanding health care enhances growth and welfare. Even if the provision of health care diverts labor from productive activities, it may still fuel R&D and economic growth if the additional wealth that comes with expanding longevity translates into a more capital/machine- intensive final goods production and, thereby, raises the return to developing new machines. We establish mild conditions under which an expansion of health care beyond the growth-maximizing level is Pareto-improving.
    Keywords: endogenous growth; mortality; (Blanchard) overlapping generations; health care; research and development; sectoral composition
    JEL: I15 I18 O11 O41 O43
    Date: 2012–08–08
  11. By: Kunieda, Takuma; Shibata, Akihisa
    Abstract: A dynamic general equilibrium model with infinitely lived entrepreneurs and financiers is developed to investigate a possible mechanism that explains business cycles and a financial crisis. The highest growth rate is achievable only if financiers coexist with entrepreneurs, given a certain extent of financial market imperfections. However, if financiers coexist with entrepreneurs, the economy is highly likely to go into a financial crisis for some parameter values. These two-sided implications of the coexistence of entrepreneurs and financiers explain why both instability and high growth are frequently observed in modern economies.
    Keywords: Endogenous business cycles; Financial crisis; Economic boom; Financial market imperfections
    JEL: E32 O16 O40
    Date: 2012–07–12
  12. By: S. Boragan Aruoba; Morris A. Davis; Randall Wright
    Abstract: We study models incorporating money, household production, and investment in housing. Inflation, as a tax on market activity, encourages substitution into household production, and thus investment in household capital. Hence, inflation increases the (appropriately deflated) value of the housing stock. This is documented in various data sources. A calibrated model accounts for a fifth to a half of the observed relationships. While this leaves much to be explained, it demonstrates the channel is economically relevant. We also show models with home production imply higher costs of inflation than models without it, especially when home and market goods are close substitutes.
    JEL: E41 E52 R21
    Date: 2012–08
  13. By: Carlos Garriga; Rodolfo E. Manuelli; Adrian Peralta-Alva
    Abstract: In this paper we use a standard neoclassical model supplemented by some frictions to understand large price swings in the housing market. We construct a two good general equilibrium model in which housing is a composite good produced using structures and land. We revisit the connection between changes in interest rates, credit conditions as measured by maximum loan-to-value ratios and expectations in influencing housing prices in a setting in which the stock of housing can be used as collateral for borrowing and credit markets are segmented. We find that changes in interest rates and credit conditions can generate significant price swings. Under rational expectations (perfect foresight) our model is able to explain 50% of the recent movements in U.S. house prices. When we allow shocks to expectations, the model’s ability to match the evidence increases significantly. Contrary to conventional wisdom, we show that standard asset pricing formulas seem to correctly describe the behavior of house prices if the appropriate pricing kernel is used.
    Keywords: Mortgages ; Housing - Prices
    Date: 2012
  14. By: Jung, Philip; Kuhn, Moritz
    Abstract: An extensive empirical literature has documented that workers with high tenure suffer large and persistent earnings losses when they get displaced. We study the reasons behind these losses in a tractable search model with a life-cycle dimension, endogenous job mobility, worker- and match-heterogeneity. The model reconciles key characteristics of the U.S. labor market: large average transition rates, a large share of stable jobs, and the earnings losses from displacement. We decompose the earnings losses and find that only 50% result from skill losses. Endogenous reactions and selection account for the remainder. Our findings have important implications for the welfare costs of displacement and labor market policy.
    Keywords: Earnings Losses; Life-Cycle; Labor-Market Transitions; Turbulence
    JEL: E24 J63 J64
    Date: 2012–07–27
  15. By: Michael Kuhn; Klaus Prettner
    Abstract: We consider an endogenous growth model with Blanchard-Yaari-type overlapping generations that is built around four sectors: final and intermediate goods production, an R&D sector and a health care sector. Health care serves to lower mortality and morbidity, the latter being related to participation/productivity in the labor market. We show that, regardless of its finance, the impact of health care on economic growth crucially depends on whether or not it increases employment in the R&D sector. Even if an increasing health care sector reduces the (effective) labor available for production and R&D, it may still fuel R&D employment and economic growth if the increase in aggregate wealth that comes with expanding longevity raises the capital intensity in the final goods sector to an extent that labor shifts to alternative employment in R&D. While numerical assessment indicates that the health sectors of the Euro area economies are too large from a growth perspective, we can establish mild conditions under which an expansion of health care beyond the growth-maximizing level constitutes a Pareto-improvement.
    Keywords: Endogenous growth, mortality, (Blanchard) overlapping generations, health care, research and development, sectoral composition
    Date: 2012–08
  16. By: Daisuke Ishikawa (Policy Research Institute, Ministry of Finance Japan); Junji Ueda (Policy Research Institute, Ministry of Finance Japan); Real Arai (Graduate School of Social Sciences, Hiroshima University)
    Abstract: In order to quantify the effects of declining birthrate and changing demographic structure on the Japanese economy, we show the results of simulations by using a multi-sector dynamic general equilibrium model with overlapping generations (OLG) in an open economy. The model is constructed to incorporate substitutability between domestic products and imports and show the evolution of the industrial structure, reflecting the impacts of aging population from both supply and demand sides of the economy. Based on the scenario of increasing public demands for healthcare services, the share of healthcare sector expands to almost 2.5 times in 2050 relative to the base year 1985. The result of a simulation based on an alternative scenario where the government increases net transfer to the elderly shows smaller labor participation and GDP per capita, due to the income effects and crowding out of private capital by the increase of government debt outstanding in the long run.
    Keywords: multi-sector OLG model, demographic change, soaring public healthcare spending
    JEL: J11 H51 H68
    Date: 2012–07
  17. By: Michael Funke; Michael Paetz; Qianying Chen,
    Abstract: Monetary policy in mainland China differs from conventional central bank- ing in several respects. The central bank regulates retail lending and deposit rates, influences the credit supply via window guidance, and, in recent years has even used the required reserve ratio as a tool for fine-tuning monetary pol- icy. This paper develops a New Keynesian DSGE model to captures China’s unconventional monetary policy toolkit. We find that credit quotas are impor- tant as the interest-rate corridor distorts the efficient reactions of the economy. Moreover, for China’s central bankers the choice of a particular monetary pol- icy tool or a the appropriate combination of instruments depends on the source of the shock.
    Keywords: DSGE models, monetary policy, China, macroprudential policy
    JEL: E42 E52 E58
    Date: 2012–07
  18. By: Ellison, Martin (University of Oxford); Sargent, Thomas J. (New York University)
    Abstract: The welfare cost of random consumption fluctuations is known from De Santis (2007) to be increasing in the level of individual consumption risk in the economy. It is also known from Barillas et al. (2009) to increase if agents in the economy care about robustness to model misspecification. In this paper, we combine these two effects and calculate the cost of business cycles in an economy with consumers who face individual consumption risk and who fear model misspecification. We find that individual risk has a greater impact on the cost of business cycles if agents already have a preference for robustness. Correspondingly, we find that endowing agents with concerns about a preference for robustness is more costly if there is already individual risk in the economy. The combined effect exceeds the sum of the individual effects.
    Keywords: cost of business cycles; idiosyncratic risk; model uncertainty; robustness
    JEL: D81 E32 E63
    Date: 2012–07–30
  19. By: Alan Manning
    Abstract: This paper takes the canonical Burdett-Mortensen model of wage- posting and relaxes the assumption that wages are set once-for-all, instead assuming they can only be committed one period at a time. It derives a closed-form solution for a steady-state Markov Rank-Preserving Equilibrium and shows how this relates to the canonical model and performs some comparative statics on it. By means of example it is shown that a Rank-Preserving Equilibrium may fail to exist and that this non-existence can be a problem for plausible parameter values. The paper discusses how the model can be modified to ensure existence of a Rank-Preserving equilibrium. It is also shown, by means of example, how the opposite, a Rank-Inverting Equilibrium may exist.
    Keywords: Wage-posting, search
    JEL: J31 J42
    Date: 2012–07
  20. By: Carlos Garriga; Matthew Chambers; Don Schlagenhauf
    Abstract: After the collapse of housing markets during the Great Depression, the U.S. government played a large role in shaping the future of housing finance and policy. Soon thereafter, housing markets witnessed the largest boom in recent history. The objective in this paper is to quantify the contribution of government interventions in housing markets in the expansion of U.S. homeownership using an equilibrium model of tenure choice. In the model, home buyers have access to a menu of mort- gage choices to finance the acquisition of a house. The government also provides special programs through provisions of the tax code. The parameterized model is consistent with key aggregate and distributional features observed in the 1940 U.S. economy and is capable of accounting for the boom in homeownership in 1960. The decomposition suggests that government policies have significant importance. For example, the expansion in maturity of the fixed-rate mortgage to 30 years can account for 25 percent of the increase. Housing policies, such as the introduction of the mortgage interest deduction, can account for 13 percent of the increase in homeownership.
    Keywords: Housing ; Home ownership
    Date: 2012
  21. By: Pieter Gautier (VU University Amsterdam); Paul Muller (VU University Amsterdam); Bas van der Klaauw (VU University Amsterdam); Michael Rosholm (Aarhus University); Michael Svarer (Aarhus University)
    Abstract: Randomized experiments provide policy relevant treatment effects if there are no spillovers between participants and nonparticipants. We show that this assumption is violated for a Danish activation program for unemployed workers. Using a difference-in-difference model we show that the nonparticipants in the experiment regions find jobs slower after the introduction of the activation program (relative to workers in other regions). We then estimate an equilibrium search model. This model shows that a large scale role out of the activation program decreases welfare, while a standard partial microeconometric cost-benefit analysis would conclude the opposite.
    Keywords: randomized experiment; policy-relevant treatment effects; job search,
    JEL: C21 E24 J64
    Date: 2012–07–18
  22. By: Francesco Giuli; Massimiliano Tancioni
    Abstract: This paper adds to the large literature on the e¤ects of technology shocks empirically and theoretically. Using a SVEC model, we …rst show that not only hours but also investment decline temporarily following a technology improvement. This result is robust with respect to important data and identi…cation issues addressed in the literature. We then show that the negative response of inputs is consistent with an estimated monetary DSGE model in which the presence of strategic complementarity in price setting, in addition to nominal rigidities, lowers the sensitivity of prices to marginal costs, and monetary policy does not fully accommodate the shock.
    Keywords: Technology shocks, Inputs dynamics, Structural Vector Error Correction model, New-Keynesian DSGE model, Bayesian inference
    JEL: C11 C32 E22 E32 E52
    Date: 2012–07
  23. By: Sandra Gomes; Caterina Mendicino
    Abstract: This paper quanti?es the importance of news shocks for housing market ?uctuations. To this purpose, we extend Iacoviello and Neri (2010)?s model of the housing market to include news shocks and estimate it using Bayesian methods and U.S. data. We ?nd that news shocks: (1) account for a sizable fraction of the variability in house prices and other macroeconomic variables over the business cycle and (2) signi?cantly contributed to booms and busts episodes in house prices over the last three decades. By linking news shocks to agents?expectations, we ?nd that house price growth was positively related to in?ation expectations during the boom of the late 1970?s while it was negatively related to interest rate expectations during the housing boom that peaked in the mid-2000?s. JEL Classication: C50, E32, E44.
    Keywords: bayesian estimation, news shocks, local identi?cation, housing market, ?nancial frictions, in?ation and interest rate expectations.
    Date: 2012–07
  24. By: Daniel R. Sanches
    Abstract: We show the existence of an inherent instability associated with a purely private monetary system due to the role of endogenous debt limits in the creation of private money. Because the bankers’ ability to issue liabilities that circulate as a medium of exchange depends on beliefs about future credit conditions, there can be multiple equilibria. Some of these equilibria have undesirable properties: Self-fulfilling collapses of the banking system and persistent fluctuations in the aggregate supply of bank liabilities are possible. In response to this inherent instability of private money, we formulate a government intervention that guarantees that the economy remains arbitrarily close to the constrained efficient allocation. In particular, we define an operational procedure for a central bank capable of ensuring the stability of the monetary system.
    Keywords: Banks and banking, Central
    Date: 2012
  25. By: Bessenyei, István; Horváth, Márton
    Abstract: We introduce soft budget constraint and stop-go policy into a stable two-sector AK macro-model. As the extended model does not have any fixed point, we use computer-simulation to examine the dynamic behaviour of the model. We show that depending on the starting position and the parameter values, the economy can follow a path leading to the collapse or moves oscillatory avoiding the downfall. Further on, we demonstrate that the partial shortage of financial discipline leads to wrong investment decisions which slow the process of capital accumulation. The macroeconomic path directed to the collapse can be reversed by strengthening the financial discipline, keeping down corruption, modification of preferences in investment policy or exogenous technological change.
    Keywords: chaotic dynamics; simulation; bribe
    JEL: H54 C63 E63
    Date: 2012
  26. By: Luca Guerrieri; Matteo Iacoviello; Raoul Minetti
    Abstract: This paper studies the international propagation of sovereign debt default. We posit a two-country economy where capital constrained banks grant loans to firms and invest in bonds issued by the domestic and the foreign government. The model economy is calibrated to data from Europe, with the two countries representing the Periphery (Greece, Italy, Portugal and Spain) and the Core, respectively. Large contractionary shocks in the Periphery trigger sovereign default. We find sizable spillover effects of default from Periphery to the Core through a drop in the volume of credit extended by the banking sector.
    JEL: F4 G21 H63
    Date: 2012–08
  27. By: Guilló, María Dolores (Departamento de Métodos Cuantitativos y Teoría Económica y IUDESP); Pérez-Sebastián, Fidel (Departamento de Fundamentos del Análisis Económico)
    Abstract: The traditional view that natural riches increase the wealth of nations has been recently challenged by empirical findings that point out that natural inputs are negatively related to growth. This paper shows, within a two-sector neo-classical growth model with international trade in goods, that these two views can be reconciled. Natural inputs directly affect both long-run income and transitional growth. These two effects can be positive or negative depending on input elasticities. Furthermore, they go in opposite directions, creating a tension that complicates the interpretation of estimated-coefficient signs in growth regressions. Quantitative results show that the two effects can be significant.
    Keywords: neoclassical growth; resource curse; convergence
    JEL: F11 F43 O11 O13 O41
    Date: 2012–07–26
  28. By: Alexander Gelber (Wharton School, University of Pennsylvania); Matthew Weinzierl (Harvard Business School, Business, Government and the International Economy Unit)
    Abstract: Empirical research suggests that parents' economic resources affect their children's future earnings abilities. Optimal tax policy therefore will treat future ability distributions as endogenous to current taxes. We model this endogeneity, calibrate the model to match estimates of the intergenerational transmission of earnings ability in the United States, and use the model to simulate optimal policy numerically. Optimal policy is more redistributive toward low-income parents than existing U.S. tax policy. The optimal policy increases the probability that low-income children move up the economic ladder, generating a present-value welfare gain of 1.28% of consumption in our baseline case.
    Date: 2012–08
  29. By: Helena Soares (ISCTE-IUL, Business School, Quantitative Methods Department and BRU-IUL); Tiago Neves Sequeira (Universidade da Beira Interior, Management and Economics Department and CEFAGE - UBI); Pedro Macias Marques (University of Évora, CIMA – Research Centre in Mathematics and Applications); Orlando Gomes (ISCAL - Lisbon Polytechnic Institute and BRU-IUL); Alexandra Ferreira-Lopes (ISCTE-IUL, Business School, Department of Economics and BRU-IUL and CEFAGE - UBI)
    Abstract: We study the mechanisms according to which social infrastructure influences the preservation of physical capital and, consequently, economic growth. The model considers that social infrastructure is a specific type of human capital, which acts in order to preserve already existing physical capital, by, e.g., reducing the incentive for rent seeking or corruption. Using an innovative methodology in economics, the Gröbner bases, we study the equilibrium of our model and conclude for the existence of two feasible steady-states or of unicity according to different combinations of parameters, highlighting a trade-off between consumption and production on one hand and social infrastructure and physical capital accumulation, on the other. We also present sufficient conditions for saddle-path stability. Finally, we describe transitional dynamics and calculate welfare effects from which we show that strengthening social infrastructure increases welfare.
    Keywords: Social Infrastructure, Physical Capital Depreciation, Endogenous Growth, Equilibrium Multiplicity, Gröbner Bases
    JEL: C02 C62 O41 O43
    Date: 2012–07–15
  30. By: Gersbach, Hans; Rochet, Jean-Charles
    Abstract: We provide a rationale for imposing counter-cyclical capital ratios on banks. In our simple model, bankers cannot pledge the entire future revenues to investors, which limits borrowing in good and bad times. Complete markets do not sufficiently stabilize credit fluctuations, as banks allocate too much borrowing capacity to good states and too little to bad states. As a consequence, bank credit, output, capital prices or wages are excessively volatile. Imposing a (stricter) capital ratio in good states corrects the misallocation of the borrowing capacity, increases expected output and can be beneficial to all agents in the economy. Although in our economy, all agents are risk-neutral, counter-cyclical capital ratios are an effective stabilization tool. To ensure this effectiveness, capital ratios have to be based on ex ante equity capital, as classical capital ratios can be bypassed.
    Keywords: Complete Markets; Credit Fluctuations; Macroprudential Regulation; Misallocation of Borrowing Capacity
    JEL: D86 G21 G28
    Date: 2012–08
  31. By: Orlando Gomes (ISCAL - Lisbon Polytechnic Institute and BRU-IUL); Alexandra Ferreira-Lopes (ISCTE-IUL, Business School, Department of Economics and BRU-IUL and CEFAGE - UBI); Tiago Neves Sequeira (Universidade da Beira Interior, Management and Economics Department and CEFAGE - UBI)
    Abstract: We address intertemporal utility maximization under a general discount function that nests the exponential discounting and the quasi-hyperbolic discounting cases as particular specifi?cations. The suggested framework intends to capture one important anomaly typically found when addressing the way agents discount the future, namely the evidence pointing to the prevalence of decreasing impatience. The referred anomaly can be perceived as a bias relatively to what would be a benchmark exponential discounting setting, and is modeled as such. The general discounting framework is used to address a standard optimal growth model in discrete time. Transitional dynamics and stability properties of the corresponding dynamic setup are studied. An extension of the standard growth model to the case of habit persistence is also considered.
    Keywords: Intertemporal Preferences, Exponential Discounting, Quasi-hyperbolic Discounting, Optimal Growth, Habit Persistence, Transitional Dynamics
    JEL: C61 D91 O4
    Date: 2012–07–15
  32. By: Kiichi Tokuoka
    Abstract: In Japan, intergenerational inequality in lifetime resources is substantial, with a heavier fiscal burden on the young than the old. Moreover, given the need for fiscal consolidation, the inequality is even worse than existing policy would suggest. However, this does not mean that fiscal consolidation would make the young worse off. Lack of fiscal consolidation would eventually increase interest rates, which would reduce output and hit young generations harder. Simulations using an overlapping generations model indicate that, from the perspective of intergenerational fairness, it would be desirable to include both social security spending reforms and revenue measures in a fiscal consolidation package. The simulations also show that delaying fiscal consolidation could be costly and worsen intergenerational resource inequality.
    Date: 2012–08–01
  33. By: Elena Pastorino
    Abstract: This paper develops and structurally estimates an equilibrium model of the labor market that integrates learning, job assignment, and human capital acquisition to account for the main patterns of job and wage mobility characteristic of careers in firms. A key innovation is the modeling of firms’ incentives to experiment that arise from the ability of firms, through job assignment, to affect the rate at which they acquire information about workers. The resulting trade-off between output and information implies that a firm’s retention and job assignment policy solves an experimentation problem: a so-called multi-armed bandit with dependent arms. The model is estimated using longitudinal administrative data from one U.S. firm in a service industry (the same data used by Baker, Gibbs, and Holmström (1994a,b)) and fits the data remarkably well. My estimates indicate that learning during employment accounts for a significant fraction of measured wage growth on the job, whereas experimentation through job assignment primarily contributes to explaining the patterns of job mobility within the firm. Since learning is gradual, however, persistent uncertainty about workers’ abilities is responsible for a substantial compression of wage growth with tenure.
    Keywords: Wages
    Date: 2012
  34. By: Hiroaki Miyamoto (International University of Japan)
    Abstract: The share of non-regular employment has been increasing in many developed countries during the past two decades. The objective of this paper is to study a cause of the upward trend in non-regular employment by focusing on productivity growth. Data from Japan shows that productivity growth reduces both unemployment and the proportion of nonregular workers to total employed workers. In order to study the impact of long-run productivity growth on unemployment and non-regular employment, I develop a search and matchingmodel with disembodied technological progress and two types of jobs, regular and non-regular jobs. The numerical analysis demonstrates that faster growth reduces the share of non-regular employment, but the effect of faster growth on unemployment is ambiguous.
    Keywords: Growth, Unemployment,Non-regular employment, Search, matching model
    JEL: E24 J64 O40
    Date: 2012–07
  35. By: Elliot Anenberg
    Abstract: This paper examines the effects of seller uncertainty over their home value on the housing market. Using evidence from a new dataset on home listings and transactions, I first show that sellers do not have full information about current period demand conditions for their homes. I incorporate this type of uncertainty into a dynamic search model of the home selling problem with Bayesian learning. Simulations of the estimated model show that information frictions help explain short-run persistence in price appreciation rates and a positive (negative) correlation between price changes and sales volume (time on market).
    Date: 2012
  36. By: David L. Fuller; B. Ravikumar; Yuzhe Zhang
    Abstract: The most prevalent incentive problem in the U.S. unemployment insurance system is that individuals collect unemployment benefits while being gainfully employed. We show how the unemployment insurance authority can efficiently use a combination of tax/subsidy and monitoring to prevent such fraud. The optimal policy monitors the unemployed at fixed intervals. Employment tax is nonmonotonic: it increases between verifications but decreases after a verification. Unemployment benefits are relatively flat between verifications but decrease sharply after a verification.
    Keywords: Unemployment ; Insurance
    Date: 2012
  37. By: Povoledo, Laura
    Abstract: This paper presents an open economy model with tradeable and nontradeable sectors in which individuals cannot supply labour in both sectors at the same time. In this economy, the Frisch elasticity of labour supply is infinite. I analyse how the infinite labour supply elasticity interacts with the Producer Currency Pricing (PCP) and Local Currency Pricing (LCP) assumptions, and I find that it does not significantly alter the empirical performance of the model with respect to a broad range of statistics.
    Keywords: New open economy models; Tradeable and nontradeable sectors; International business cycles; Labour supply elasticity
    JEL: E32 E24 F41
    Date: 2012–06–06
  38. By: Paulo Brito (Universidade Técnica de Lisboa, and UECE); Giancarlo Marini (Faculty of Economics, University of Rome "Tor Vergata"); Alessandro Piergallini (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper analyzes global dynamics in an overlapping generations general equilibrium model with housing-wealth effects. It shows that monetary policy cannot burst rational bubbles in the housing market. Under monetary policy rules of the Taylor-type, there exist global self-fulfilling paths of house prices along a heteroclinic orbit connecting multiple equilibria. From bifurcation analysis, the orbit features a boom (bust) in house prices when monetary policy is more (less) active. The paper also demonstrates that boom or busts cannot be ruled out by interest-rate feedback rules responding to both inflation and house prices
    Keywords: House Prices; Housing-Wealth Effects; Monetary Policy Rules; Global Determinacy; Heteroclinic Orbits.
    JEL: E62 H60 C20
    Date: 2012–08–01
  39. By: Ramon Marimon; Juan Pablo Nicolini; Pedro Teles
    Abstract: The interplay between competition and trust as efficiency-enhancing mechanisms in the private provision of money is studied. 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 be observed only after its purchasing capacity is realized. In this sense, money is an experience good.
    Keywords: Inflation (Finance)
    Date: 2012
  40. By: William T. Gavin; Benjamin D. Keen
    Abstract: This article uses a DSGE framework to evaluate the role of monetary policy in determining the likelihood of encountering the zero lower bound. We find that the probability of experiencing episodes of being at zero lower bound depends almost exclusively on the monetary policy rule. A policy rule, such as the one proposed by Taylor (1993) which is based on the dual mandate is highly likely to lead to episodes of zero short-term interest rates if the central bank is not committed to its inflation target. Our results on nominal interest rate and inflation dynamics do not depend on the particular mechanism that makes monetary policy have real effects. The key and necessary assumption is that expectations are forward looking. The bottom line in models in which monetary policy can influence the real economy is that a central bank must be committed to a long-run average-inflation objective if it wishes to achieve a dual mandate while avoiding the zero lower bound.
    Keywords: Interest rates ; Monetary policy
    Date: 2012
  41. By: Daron Acemoglu; Alexander Wolitzky
    Abstract: We propose a model of cycles of distrust and conflict. Overlapping generations of agents from two groups sequentially play coordination games under incomplete information about whether the other side consists of “extremists” who will never take the good/trusting action. Good actions may be mistakenly perceived as bad/distrusting actions. We also assume that there is limited information about the history of past actions, so that an agent is unable to ascertain exactly when and how a sequence of bad actions originated. Assuming that both sides are not extremists, spirals of distrust and conflict get started as a result of a misperception, and continue because the other side interprets the bad action as evidence that it is facing extremists. However, such spirals contain the seeds of their own dissolution: after a while, Bayesian agents correctly conclude that the probability of a spiral having started by mistake is sufficiently high, and bad actions are no longer interpreted as evidence of extremism. At this point, one party experiments with a good action, and the cycle restarts. We show how this mechanism can be useful in interpreting cycles of ethnic conflict and international war, and how it also emerges in models of political participation, dynamic inter-group trade, and communication - leading to cycles of political polarization, breakdown of trade, and breakdown of communication.
    JEL: D72 D74
    Date: 2012–07

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