nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒09‒22
eighteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Rapid estimation of nonlinear DSGE models By Hall, Jamie
  2. The impact of TFP growth on the unemployment rate: does on-the-job training matter? By Moreno-Galbis, Eva
  3. Required Reserves as a Credit Policy Tool By Yasin Mimir; Enes Sunel; Temel Taskin
  4. Estimating Dynamic Equilibrium Models with Stochastic Volatility By Jesus Fernandez-Villaverde; Pablo A. Guerrón-Quintana; Juan Rubio-Ramírez
  5. O desempenho recente da política monetária brasileira sob a ótica da modelagem DSGE. By Bruno Freitas Boynard de Vasconcelos; José Angelo Divino
  6. The Business Cycle Human Capital Accumulation Nexus and its Effect on Labor Supply Volatility By Diana Alessandrini; Stephen Kosempel; Thanasis Stengos
  7. Dynamic risk management: investment, capital structure, and hedging in the presence of financial frictions By Amaya, Diego; Gauthier, Geneviève; Léautier, Thomas-Olivier
  8. Entrepreneurs, Managers and Inequality By Lee, Sang Yoon Tim
  9. Understanding the Effect of Technology Shocks in SVARs with Long-Run Restrictions By Chaudourne, Jeremy; Fève, Patrick; Gay, Alain
  10. Information stickiness in general equilibrium and endogenous cycles By Gomes, Orlando
  11. Quantitative analysis of health insurance reform: separating regulation from redistribution By Pashchenko, Svetlana; Porapakkarm, Ponpoje
  12. Determinants of Precautionary Savings : Elasticity of Intertemporal Substitution vs. Risk Aversion By Arif Oduncu
  13. Expected Currency Excess Returns and International Business Cycles By Sanglim Lee
  14. The Impact of Population Ageing on the Labour Market: Evidence from Overlapping Generations Computable General Equilibrium (OLG-CGE) Model of Scotland (*) By Katerina Lisenkova; Marcel Merette; Robert Wright
  15. Dynastic Accumulation of Wealth By Degan, Arianna; Thibault, Emmanuel
  16. Financial innovation, macroeconomic volatility and the great moderation By Zaghini, Andrea; Bencivelli, Lorenzo
  17. Equilibrium earning premium and pension schemes: The long-run macroeconomic effects of the union By Bruno Chiarini; Paolo Piselli
  18. To be or not to be informal?: A Structural Simulation By Vargas, Jose P Mauricio

  1. By: Hall, Jamie
    Abstract: This article describes a new approximation method for dynamic stochastic general equilibrium (DSGE) models. The method allows nonlinear models to be estimated efficiently and relatively quickly with the fully-adapted particle filter. The article demonstrates the method by estimating, on US data, a nonlinear New Keynesian model with a zero lower bound on the nominal interest rate.
    Keywords: DSGE; nonlinear; particle filter
    JEL: E0 C1
    Date: 2012–09–11
  2. By: Moreno-Galbis, Eva
    Abstract: This paper seeks to gain insights into the relationship between growth and unemployment in a setting with heterogeneous skills, human capital accumulation, on-the-job training and capital-skill complementarity. We use an endogenous job destruction framework in the style of Mortensen and Pissarides (1998) with directed search. We show that, when growth accelerates, a larger share of unskilled workers seeks training, increasing firms’ incentives to update job-specific technology (rather than destroying it). By magnifying the impact of growth on employment, the introduction of human capital issues allows the model to more closely match the estimated sensitivity of unemployment with respect to growth. When calibrated, the model manages to reproduce the aggregate capitalization effect estimated using OECD data. We find that growth reduces unemployment for individuals receiving training, while it increases the unemployment rate of unskilled workers without training (creative destruction effect).
    Keywords: growth; unemployment; training; capital-skill complementarity; human capital depreciation; capitalization; creative destruction effect
    JEL: J23 J24 O33
    Date: 2012–09
  3. By: Yasin Mimir; Enes Sunel; Temel Taskin
    Abstract: This paper conducts a quantitative investigation of the role of reserve requirements as a macroprudential policy tool. We build a monetary DSGE model with a banking sector in which (i) an agency problem between households and banks leads to endogenous capital constraints for banks in obtaining funds from households, (ii) banks are subject to time-varying reserve requirements that countercyclically respond to expected credit growth, (iii) households face cash-in-advance constraints, requiring them to hold real balances, and (iv) standard productivity and money growth shocks are two sources of aggregate uncertainty. We calibrate the model to the Turkish economy which is representative of using reserve requirements as a macroprudential policy tool recently. We also consider the impact of financial shocks that affect the net worth of financial intermediaries. We find that (i) the time-varying required reserve ratio rule countervails the negative effects of the financial accelerator mechanism triggered by adverse macroeconomic and financial shocks, (ii) in response to TFP and money growth shocks, countercyclical reserves policy reduces the volatilities of key real macroeconomic and financial variables compared to fixed reserves policy over the business cycle, and (iii) a time-varying reserve requirement policy is welfare superior to a fixed reserve requirement policy. The credit policy is most effective when the economy is hit by a financial shock. Time-varying required reserves policy reduces the intertemporal distortions created by the credit spreads at expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability.
    Keywords: Banking sector, time-varying reserve requirements, macroeconomic and financial shocks
    JEL: E44 E51 G21 G28
    Date: 2012
  4. By: Jesus Fernandez-Villaverde; Pablo A. Guerrón-Quintana; Juan Rubio-Ramírez
    Abstract: We propose a novel method to estimate dynamic equilibrium models with stochastic volatility. First, we characterize the properties of the solution to this class of models. Second, we take advantage of the results about the structure of the solution to build a sequential Monte Carlo algorithm to evaluate the likelihood function of the model. The approach, which exploits the profusion of shocks in stochastic volatility models, is versatile and computationally tractable even in large-scale models, such as those often employed by policy-making institutions. As an application, we use our algorithm and Bayesian methods to estimate a business cycle model of the U.S. economy with both stochastic volatility and parameter drifting in monetary policy. Our application shows the importance of stochastic volatility in accounting for the dynamics of the data.
    JEL: C1 E30
    Date: 2012–09
  5. By: Bruno Freitas Boynard de Vasconcelos; José Angelo Divino
    Abstract: This paper has estimated the DSGE model proposed by Smets and Wouters (2007) for the Brazilian economy, using Bayesian techniques, aiming at analyzing the recent performance of the inflation targeting monetary policy. It was obtained estimates of barely known structural parameters and the dynamics of the economy under distinct exogenous shocks was revealed. Among the major results, one can mention the antiinflationary feature of the monetary policy in the period, the role of the inflation expectation over the interest rates and the negative relationship between technological shock and hours worked. In general, the behavior of the Brazilian monetary policy is compatible with international practices, as observed in developed economies.
    Date: 2012–09
  6. By: Diana Alessandrini (Department of Economics and finance, University of Guelph, Canada); Stephen Kosempel (Department of Economics and finance, University of Guelph, Canada); Thanasis Stengos (Department of Economics and finance, University of Guelph, Canada)
    Abstract: This paper studies the cyclicality of human capital accumulation by using a lifecycle RBC model with two types of heterogeneity: age and productivity in learning. Results show that individuals invest more in human capital during economic downturns. In particular, schooling acts as a buffer sector and allows agents to compensate for the shock by accumulating more human capital. However, human capital accumulation is more countercyclical for young and low-productivity individuals because they face lower opportunity costs of education and a higher marginal product of human capital. These results are confirmed empirically using US data from the Current Population Survey.
    Keywords: human capital accumulation, business cycles, labor supply
    JEL: J24 E32 J22
    Date: 2012–08
  7. By: Amaya, Diego (UQAM); Gauthier, Geneviève (HEC Montréal); Léautier, Thomas-Olivier (TSE,IAE)
    Abstract: This paper develops a dynamic risk management model to determine a firm's optimal risk management strategy. The risk management strategy has two elements: first, until leverage is very high, the firm fully hedges its operating cash how exposure, due to the convexity in its cost of capital. When leverage exceeds a very high threshold, the firm gambles for resurrection and stops hedging. Second, the firm manages its capital structure through dividend distributions and investment. When leverage is very low, the firm fully replaces depreciated assets, fully invests in opportunities if they arise, and distribute dividends to reach its optimal capital structure. As leverage increases, the firm stops paying dividends, while fully investing. After a certain leverage, the firm also reduces investment, until it stop investing completely. The model predictions are consistent with empirical observations.
    JEL: C61 G32
    Date: 2012–04
  8. By: Lee, Sang Yoon Tim
    Abstract: Since the 1980s, the U.S. income distribution has become considerably more concentrated toward the top while the wealth distribution has not. I argue that this can be accounted for by occupational shifts caused by the decline in tax progressivity. To show this, I construct a dynamic general equilibrium model of occupational choice which distinguishes between entrepreneurs, who run their own firms, and managers, who run publicly owned firms. Collateral constraints induce entrepreneurs to hold more wealth, while managers earn higher wages as a result of competitive assignments to firms. Feeding observed tax policy changes from 1970 to 2000 into the model, I find that (i) less progressive taxation increases the relative mass of managers in equilibrium, and explains approximately 30% of the observed increase in the concentrations of earnings and income without increasing that of wealth, and (ii) reverting to historical tax policies has only a negligible impact on consumption equivalent welfare.
    JEL: C68 E21 E62 J3
    Date: 2012
  9. By: Chaudourne, Jeremy (UQAM); Fève, Patrick (TSE (GREMAQ, IUF, IDEI et Banque de France)); Gay, Alain (UQAM)
    Abstract: This paper studies the statistical properties of impulse response functions in structural vector autoregressions (SVARs) with a highly persistent variable as hours worked and long-run identifying restrictions. The highly persistent variable is specified as a nearly stationary persistent process. Such process appears particularly well suited to characterized the dynamics of hours worked because it implies a unit root in finite sample but is asymptotically stationary and persistent. This is typically the case for per capita hours worked which are included in SVARs. Theoretical results derived from this specification allow to explain most of the empirical findings from SVARs which include U.S. hours worked. Simulation experiments from an estimated DSGE model confirm theoretical results.
    Keywords: , , , , , , , SVARs, long-run restrictions, locally nonstationary process, technology shocks, hours worked
    JEL: C32 E32
    Date: 2012–08
  10. By: Gomes, Orlando
    Abstract: Traditionally, observed fluctuations in aggregate economic time series have been mainly modelled as being the result of exogenous disturbances. A better understanding of macroeconomic phenomena, however, surely requires looking directly at the relations between variables that may trigger endogenous nonlinearities. Several attempts to justify endogenous business cycles have appeared in the literature in the last few years, involving many types of different settings. This paper intends to contribute to such literature by investigating how we can modify the well-known information stickiness macro model, through the introduction of a couple of reasonable new assumptions, in order to trigger the emergence of endogenous fluctuations. --
    Keywords: endogenous cycles,information stickiness,macroeconomic fluctuations,general equilibrium,periodicity and chaos
    JEL: E10 C62 E32 C61
    Date: 2012
  11. By: Pashchenko, Svetlana; Porapakkarm, Ponpoje
    Abstract: Two key components of the upcoming health reform in the U.S. are a new regulation of the individual health insurance market and an increase in income redistribution in the economy. Which component contributes more to the welfare outcome of the reform? We address this question by constructing a general equilibrium life cycle model that incorporates both medical expenses and labor income risks. We replicate the key features of the current health insurance system in the U.S. and calibrate the model using the Medical Expenditures Panel Survey dataset. We find that the reform decreases the number of uninsured more than twice and generates substantial welfare gains. However, these welfare gains mostly come from the redistributive measures embedded in the reform. If the reform only reorganizes the individual market, introduces individual mandates but does not include any income-based transfers, the welfare gains are much smaller. This result is mostly driven by the fact that most uninsured people have low income.
    Keywords: health insurance; health reform; risk sharing; general equilibrium
    JEL: E65 D91 D52 E21 I10
    Date: 2012–08–17
  12. By: Arif Oduncu
    Abstract: The purpose of this paper is to understand the effects of the elasticity of intertemporal substitution (EIS) and risk aversion on savings separately and determine which coefficient is more important factor for precautionary savings. This is an important question since a significant fraction of the capital accumulation is due to precautionary savings according to literature. Thus, knowing the important determinant of precautionary savings will be helpful to understand the capital accumulation mechanism. This paper uses an Epstein-Zin utility function, which permits risk attitudes to be disentangled from the degree of intertemporal substitutability, in the model in order to study the effects of EIS and risk aversion separately. It is shown that saving increases as EIS increases. Similarly, saving increases as the coefficient of risk aversion increases. More importantly, it is observed that EIS is a more important factor for precautionary savings than risk aversion because saving is more responsive to changes in EIS than changes in risk aversion.
    Keywords: Precautionary Savings, Epstein-Zin Utility, Risk Aversion, Elasticity of Intertemporal Substitution
    JEL: C61 C63 E21 E27
    Date: 2012
  13. By: Sanglim Lee (University of Connecticut)
    Abstract: It is well known that the uncovered interest parity condition does not hold empirically, implying that investments in high-interest rate currencies in foreign currency markets result in a positive expected excess return. Verdelhan (2010) successfully explains this phenomenon by referring to exogenous consumption processes and external habit formation. In this paper, I extend his model by using an international real business cycle model (Backus, Kehoe, and Kydland 1994) with internal habit formation. When the production-based stochastic discount factor is used, this benchmark model, driven by total factor productivity, accounts for this empirical evidence as well. JEL Classification: E32, E44, F31, F44 Key words: Currency Excess Return, Real Business Cycle, Forward Premium Puzzle
    Date: 2012–09
  14. By: Katerina Lisenkova (National Institute of Economic and Social Research); Marcel Merette (University of Ottawa); Robert Wright (Department of Economics, University of Strathclyde)
    Abstract: This paper presents a dynamic Overlapping Generations Computable General Equilibrium (OLG-CGE) model of Scotland. The model is used to examine the impact of population ageing on the labour market. More specifically, it is used to evaluate the effects of labour force decline and labour force ageing on key macro-economic variables. The second effect is assumed to operate through age-specific productivity and labour force participation. In the analysis, particular attention is paid to how population ageing impinges on the government expenditure constraint. The basic structure of the model follows in the Auerbach and Kotlikoff tradition. However, the model takes into consideration directly age-specific mortality. This is analogous to “building in†a cohort-component population projection structure to the model, which allows more complex and more realistic demographic scenarios to be considered.
    Keywords: CGE modelling, population ageing, Scotland
    JEL: J11
    Date: 2012–09
  15. By: Degan, Arianna (UQAM); Thibault, Emmanuel (TSE)
    Abstract: Why do some dynasties maintain the fortune of their founders while others completely squander it in few generations? To address this question, we use a simple deterministic microfounded model based on two main elements: the “hunger for accumulation” and the “willingness to exert effort”. Contrary to models with capital market imperfections, our setting points to the crucial role of our two key ingredients, rather than of initial wealth or transitory shocks to wealth or inflation, on the long-run process of wealth accumulation within a family lineage. In addition, in a context with heterogeneous dynasties, we show that our model can provide a novel interpretation for some macroeconomics issues such as the demise of the rich bourgeoisie, class structure, social mobility, and wealthy inequalities. For example it predicts that those who take the effort to innovate and take advantage of new profitable opportunities are agents who are neither too poor nor too rich. Obviously, this simple framework is a great starting point for further empirical analysis.
    JEL: D10 D64 D91 E21
    Date: 2012–07–25
  16. By: Zaghini, Andrea; Bencivelli, Lorenzo
    Abstract: In the paper we propose an assessment of the role of financial innovation in shaping US macroeconomic dynamics. We extend an existing model by Christiano, Eichenbaum and Evans which studied the transmission of monetary policy impulses to business and corporate sector financing variables just before the Great Moderation period. By investigating the properties of the model over a longer time span we show that in the later period a change in the monetary policy transmission mechanism is likely to have occurred. In particular, we argue that the role of financial innovation has significantly altered the transmission of shocks
    Keywords: Great Moderation; Monetary policy; Financial Innovation
    JEL: C32 E32 E52
    Date: 2012–09–01
  17. By: Bruno Chiarini; Paolo Piselli (-)
    Abstract: Using the theoretical framework based on the monopoly union model described in Kidd and Oswald (1987) and Jones (1987), this paper provides an explicit framework to assess the role of wage moderation in Italy in the last twenty years. There are two crucial ingredients to the model: the composition of union membership and the pension system. We show that the increase in pensioners' membership in the presence of a pay-as-you-go (PAYG) pension scheme has led unions to moderate wage claims. However, this result is reversed when we shift from a PAYG system to a fully-funded (FF) regime (recently adopted in Italy): in this case, the model predicts a rise in wages with respect to the standard model, regardless of the share of pensioners in the membership.
    Keywords: Union membership, Pensioners, Wage-pension trade-off
    JEL: J11 J51
    Date: 2012–09–10
  18. By: Vargas, Jose P Mauricio
    Abstract: The paper presents estimations of the informal economy size in Bolivia from an application of a Dynamic General Equilibrium Model. The parameter estimation is performed using maximum likelihood method to obtain, as an intermediate result, a latent variable estimation of the informal economy size. This procedure is new, as the estimate of the size of the informal economy using a dynamic structural model represents an alternative study area to latent variable models which assume relationships without a strong support in theory (MIMIC models). The results suggest that the size of the informal economy represents 60% of Bolivian GDP in 2010 and that the trend has been decreasing in the last decade. In addition, we simulated four alternative policies to reduce the size of the underground economy. Some of them allow to identify surprising response mechanisms which allows to analyze the flow of workers from the informal sector into the formal sector and vice versa. The research, besides quantifying the informal economy size, tries to provide a tool and methodology for evaluating alternative policy scenarios related to fiscal policy and labor mobility in a framework of an economy with a large informal sector and evasion.
    Keywords: Informal Economy; Kalman filter; Structural Model; Underground Economy
    JEL: E62 O43 C61 E26
    Date: 2012–05–18

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