nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒09‒30
33 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Self-Fulfilling Credit Cycles By Costas Azariadis; Leo Kaas
  2. Heterogeneous workers, optimal job seeking, and aggregate labor market dynamics By Brendan Epstein
  3. Long Run Productivity Risk and Aggregate Investment By Favilukis, Jack; Lin, Xiaoji
  4. Intermediary leverage cycles and financial stability By Tobias Adrian; Nina Boyarchenko
  5. Estimating Dynamic Equilibrium Models with Stochastic Volatility By Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.; Rubio-Ramírez, Juan Francisco
  6. Sharing high growth across generations:pensions and demographic transition in China By Zheng Song; Kjetil Storesletten; Yikai Wang; Fabrizio Zilibotti
  7. Sentiments and Aggregate Demand Fluctuations By Jess Benhabib; Pengfei Wang; Yi Wen
  8. Deriving the Taylor Principle when the Central Bank Supplies Money By Davies, Ceri; Gillman, Max; Kejak, Michal
  9. Monetary policy with heterogeneous agents By Nils Gornemann; Keith Kuester; Makoto Nakajima
  10. On the Time Inconsistency of Optimal Monetary and Fiscal Policies With Many Consumer Goods By Begoña Dominguez; Pedro Gomis-Porqueras
  11. The Labor Market Consequences of Adverse Financial Shocks By Boeri, Tito; Garibaldi, Pietro; Moen, Espen R.
  12. Endogenous Liquidity and Defaultable Bonds By Zhiguo He; Konstantin Milbradt
  13. Dynamic risk management: investment, capital structure, and hedging in the presence of financial frictions By Amaya, Diego; Gauthier, Geneviève; Léautier, Thomas-Olivier
  14. Demographics, Redistribution, and Optimal Inflation By James Bullard; Carlos Garriga; Christopher J. Waller
  15. Endogenous Credit Limits with Small Default Costs By Costas Azariadis; Leo Kaas
  16. Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects By Christopher Carroll; Jiri Slacalek; Martin Sommer
  17. On financing retirement with an aging population By Ellen R. McGrattan; Edward C. Prescott
  18. Re-Examining the Role of Sticky Wages in the U.S. Great Contraction: A Multi-sector Approach By Pedro S. Amaral; James C. MacGee
  19. A Macroeconomic Model of Endogenous Systemic Risk Taking By Martinez-Miera, David; Suarez, Javier
  20. Earnings Losses and Labor Mobility over the Lifecycle By Jung, Philip; Kuhn, Moritz
  21. Essays on Sovereign Default and the Link with the Domestic Economy. By ANDREASEN, Eugenia
  22. Commodity price movements in a general equilibrium model of storage By David M. Arseneau; Sylvain Leduc
  23. Emissions Cap or Emissions Tax? A Multi-sector Business Cycle Analysis By Yazid Dissou; Lilia Karnizova
  24. Persistent Productivity Decline Due to Corporate Default By KOBAYASHI Keiichiro
  25. Does Size Matter? Scale, Corruption and Uncertainty By Gonzalo F. Forgues-Puccio; Ibrahim M. Okumu
  26. Banking in the Lagos-Wright Monetary Economy By KOBAYASHI Keiichiro
  27. La modélisation en équilibre général et stochastique des cycles économiques en Afrique Sub-saharienne : une revue de la littérature By Claude Francis Naoussi; Fabien Tripier
  28. Career concerns: A human capital perspective By Camargo, Braz; Pastorino, Elena
  29. Behavioral Effects of Social Security Policies on Benefit Claiming, Retirement and Saving By Alan L. Gustman; Thomas L. Steinmeier
  30. Sticky Information Models in Dynare By Verona, Fabio; Wolters, Maik H.
  31. Housing tenure choices with private information By Jonathan Halket; Matteo Pignatti
  32. Does It Pay for Women to Volunteer? By Sauer, Robert M.
  33. New Results in Recursive Contract Theory By Ramon Marimon

  1. By: Costas Azariadis (Washington University, Department of Economics, USA); Leo Kaas (University of Konstanz, Department Economics, Germany)
    Abstract: This paper argues that self-fulfilling beliefs in credit conditions can generate endogenously persistent business cycle dynamics. We develop a tractable dynamic general equilibrium model with idiosyncratic firm productivity shocks. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation. A dynamic complementarity between current and future credit constraints permits uncorrelated sunspot shocks to trigger persistent aggregate fluctuations in debt, factor productivity and output. In a calibrated version we compare the features of sunspot cycles with those generated by shocks to economic fundamentals.
    Keywords: Limited enforcement; Credit cycles; Sunspots
    JEL: D92 E32
    Date: 2012–09–20
  2. By: Brendan Epstein
    Abstract: In the United States, the aggregate vacancy-unemployment (V/U) ratio is strongly procyclical, and a large fraction of its adjustment associated with changes in productivity is sluggish. The latter is entirely unexplained by the benchmark homogeneous-agent model of equilibrium unemployment theory. I show that endogenous search and worker-side horizontal heterogeneity in production capacity can be important in accounting for this propagation puzzle. Driven by differences in unemployed and on-the-job seekers' search incentives, the probability that any given firm with a job opening matches with a worker endowed with a comparative advantage in that job exhibits a stage of procyclical slow-moving adjustment. Consequently, so do the expected gains from posting vacancies and, hence, the V/U ratio. The model has channels through which the majority of both the V/U ratio's sluggish-adjustment properties and its elasticity with respect to output per worker can be accounted for.
    Date: 2012
  3. By: Favilukis, Jack (London School of Economics and Political Science); Lin, Xiaoji (OH State University)
    Abstract: We study the implications of long-run risk type shocks--shocks to the growth rate of productivity--for aggregate investment in a DSGE model. Our model offers an alternative to microfrictions explanation of aggregate investment non-linearities, in particular the heteroscedasticity of investment rate. Additionally, consistent with the data, these shocks imply that investment rate is history dependent (rising through an expansion), investment rate growth is positively autocorrelated, and is positively correlated with output growth at various leads and lags. A standard model with shocks to the level of productivity either predicts the opposite or fails to quantitatively capture these features in the data.
    JEL: E22 E23 E44
    Date: 2012–07
  4. By: Tobias Adrian; Nina Boyarchenko
    Abstract: We develop a theory of financial intermediary leverage cycles in the context of a dynamic model of the macroeconomy. The interaction between a production sector, a financial intermediation sector, and a household sector gives rise to amplification of fundamental shocks that affect real economic activity. The model features two state variables that represent the dynamics of the economy: the net worth and the leverage of financial intermediaries. The leverage of the intermediaries is procyclical, owing to risk-sensitive funding constraints. Relative to an economy with constant leverage, financial intermediaries generate higher output and consumption growth and lower consumption volatility in normal times, but at the cost of systemic solvency and liquidity risks. We show that tightening intermediaries’ risk constraints affects the systemic risk-return trade-off by lowering the likelihood of systemic crises at the cost of higher pricing of risk. Our model thus represents a conceptual framework for cyclical macroprudential policies within a dynamic stochastic general equilibrium model.
    Keywords: Intermediation (Finance) ; Financial leverage ; Systemic risk ; Liquidity (Economics)
    Date: 2012
  5. By: Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.; Rubio-Ramírez, Juan Francisco
    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.
    Keywords: Bayesian methods.; Dynamic equilibrium models; Parameter drifting; Stochastic volatility
    JEL: C11 E10 E30
    Date: 2012–09
  6. By: Zheng Song (Department of Economics, University of Chicago Booth, Chicago, Illinois, United States); Kjetil Storesletten (Federal Reserve Bank of Minneapolis, Minnesota, United States); Yikai Wang (Department of Economics, University of Zurich, Switzerland); Fabrizio Zilibotti (CEPRA, Institute of Economics, Universita' della Svizzera Italiana)
    Abstract: Intergenerational inequality and old-age poverty are salient isuues in contemporary China. China's aging population threatens the fiscal sustainability of its pension system, a key vehicle for intergenerational redistribution. We analyze the positive and normative effects of alternative pension reforms, using a dynamic general equilibrium model that incorporates population dynamics and productivity growth. Although a reform is necessary, delaying its implementation implies large welfare gains for the (poorer) current generations, imposing only small costs on (richer) future generations. In contrast, a fully funded reform harms current generations, with small gains to future generations. High wage growth is key for these results.
    Keywords: China, credit market imperfections, demographic transition, economic growth, fully funded system, inequality, intergenerational redistribution, labor supply, migration, pensions, poverty, rural-urban reallocation, total fertility rate, wage growth
    JEL: E21 E24 G23 H55 J11 J13 O43 R23
    Date: 2012–07
  7. By: Jess Benhabib; Pengfei Wang; Yi Wen
    Abstract: We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic self-fulfillng rational expectations equilibria in standard economies without aggregate shocks, externalities, persistent informational frictions, or even any strategic complementarity. Our general equilibrium model is deliberately simple, but could serve as a benchmark for more complicated equilibrium models with additional features.
    JEL: D8 D84 E3 E32
    Date: 2012–09
  8. By: Davies, Ceri; Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The paper presents a human-capital-based endogenous growth, cash-in-advance economy with endogenous velocity where exchange credit is produced in a decentralized banking sector, and money is supplied stochastically by the central bank. From this it derives an exact functional form for a general equilibrium “Taylor rule”. The inflation coefficient is always greater than one when the velocity of money exceeds one; velocity growth enters the equilibrium condition as a separate variable. The paper then successfully estimates the magnitude of the coefficient on inflation from 1000 samples of Monte Carlo simulated data. This shows that it would be spurious to conclude that the central bank has a reaction function with a strong response to inflation in a ‘Taylor principle’ sense, since it is only meeting fiscal needs through the inflation tax. The paper also estimates several deliberately misspecified models to show how an inflation coefficient of less than one can result from model misspecification. An inflation coefficient greater than one holds theoretically along the balanced growth path equilibrium, making it a sharply robust principle based on the economy’s underlying structural parameters.
    Keywords: Taylor rule; velocity; forward-looking; misspecification bias
    JEL: E13 E31 E43 E52
    Date: 2012–08
  9. By: Nils Gornemann; Keith Kuester; Makoto Nakajima
    Abstract: We build a New Keynesian model in which heterogeneous workers differ with regard to their employment status due to search and matching frictions in the labor market, their potential labor income, and their amount of savings. We use this laboratory to quantitatively assess who stands to win or lose from unanticipated monetary accommodation and who benefits most from systematic monetary stabilization policy. We find substantial redistribution effects of monetary policy shocks; a contractionary monetary policy shock increases income and welfare of the wealthiest 5 percent, while the remaining 95 percent experience lower income and welfare. Consequently, the negative effect of a contractionary monetary policy shock to social welfare is larger if heterogeneity is taken into account.
    Keywords: Monetary policy ; Unemployment
    Date: 2012
  10. By: Begoña Dominguez; Pedro Gomis-Porqueras
    Abstract: This paper studies optimal monetary and fiscal policies in an economy à la Lucas and Stokey (1983) and Lagos and Wright (2005) with multiple cash and credit goods. We show that optimal policies are in general time inconsistent due to insufficient number of instruments to influence future government decisions. There are two important cases where time consistency can be restored. First, if taxes in the decentralized anonymous markets are not available, the multipliers on the decentralization constraints can be utilized as additional instruments to ensure time consistency. Second, if taxes in decentralized markets are available, time consistency arises when the different cash goods satisfy the conditions necessary for optimal uniform taxation.
    Keywords: optimal policy; time consistency; taxation; money; inflation; search.
    JEL: C70 E40 E61 E62 H21
    Date: 2012–09
  11. By: Boeri, Tito (Bocconi University); Garibaldi, Pietro (University of Turin); Moen, Espen R. (Norwegian Business School (BI))
    Abstract: The recent financial crises, alongside a dramatic rise in unemployment on both sides of the Atlantic, suggest that financial shocks do translate into the labor markets. In this paper we first document that financial recessions amplify labor market volatility and Okun's elasticity over the business cycle. Second, we highlight a key mechanism linking financial shocks to job destruction, presenting and solving a simple model of labor market search and endogenous finance. While finance increases job creation and net output in normal times, it also augments their aggregate response in the aftermath of a financial shock. Third, we present evidence coherent with the idea that more leveraged sectors experience larger employment volatility during financial recessions. Theoretically, the job destruction effect of finance works as follows. Leveraged firms may find themselves in a position in which their liquidity is suddenly called back by the lender. This has direct consequences on a firm ability to run and manage existing jobs. As a result, firms may be obliged to shut down part of their operations and destroy existing jobs. We argue that with well-developed capital markets, firms will have an incentive to rely more on liquidity, and in normal times deep capital markets lead to tight labor markets. After an adverse liquidity shock, firms that rely much on liquidity are hit disproportionally hard. This may explain why the unemployment rate in the US during the Great Recession increased more than in European countries experiencing larger output losses. Empirically, the paper uses a variety of datasets to test the implications of the model. At first we identify crises that, just like in the model, caused a sudden reduction of liquidity to firms. Next we draw on sector-level data on employment and leverage in a number of OECD countries at quarterly frequencies to assess whether highly leveraged equilibria originate more employment adjustment under financial recessions. We find that highly leveraged sectors and periods are associated with higher employment- to-output elasticities during banking crises and this effect explains the observation of higher Okun's elasticities during financial recessions. We also argue that the effect of leverage on employment adjustment can be interpreted as a causal effect, if our identification assumptions are considered plausible. All this amounts essentially for a test of the labor demand channel of adjustment.
    Keywords: financial shocks, matching, Okun's elasticities
    JEL: G1 J2 J6
    Date: 2012–08
  12. By: Zhiguo He; Konstantin Milbradt
    Abstract: This paper studies the interaction between fundamental and liquidity for defaultable corporate bonds that are traded in an over-the-counter secondary market with search frictions. Bargaining with dealers determines a bond's endogenous liquidity, which depends on both the firm fundamental and the time-to-maturity of the bond. Corporate default decisions interact with the endogenous secondary market liquidity via the rollover channel. A default-liquidity loop arises: Earlier endogenous default worsens a bond's secondary market liquidity, which amplifies equity holders' rollover losses, which in turn leads to earlier endogenous default. Besides characterizing in closed form the full inter-dependence between liquidity premium and default premium for credit spreads, we also study the optimal maturity implied by the model based on the tradeoff between liquidity provision and inefficient default.
    JEL: E44 G01 G12
    Date: 2012–09
  13. 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
  14. By: James Bullard (President and Chief Executive Officer, Federal Reserve Bank of St. Louis); Carlos Garriga (Research Officer, Federal Reserve Bank of St. Louis); Christopher J. Waller (Senior Vice President and Director of Research, Federal Reserve Bank of St. Louis (E-mail:
    Abstract: We study the interaction between population demographics, the desire for redistribution in the economy, and the optimal inflation rate in a deterministic economy with capital. The intergenerational redistribution tension is intrinsic in the general equilibrium life-cycle models we use. Young cohorts do not initially have any assets and wages are the main source of income; they prefer relatively low real interest rates, relatively high wages, and relatively high rates of inflation. Older generations work less and prefer higher rates of return from their savings, relatively low wages, and relatively low inflation. In the absence of intergenerational redistribution via lump-sum taxes and transfers, the constrained efficient competitive equilibrium entails optimal distortions on relative prices. We allow the planner to use inflation to try to achieve the optimal distortions. In the economy changes in the population structure are interpreted as the ability of a particular cohort to influence the redistributive policy. When the old have more influence on the redistributive policy, the economy has a relatively low steady state level of capital and a relatively low steady state rate of inflation. The opposite happens as young cohorts have more control of policy. These results suggest that aging population structures like those in Japan may contribute to observed low rates of inflation or even deflation.
    Keywords: monetary policy, inflation bias, deflation, central bank design
    JEL: E4 E5 D7
    Date: 2012–09
  15. By: Costas Azariadis (Washington University, Department of Economics, USA); Leo Kaas (University of Konstanz, Department Economics, Germany)
    Abstract: We analyze an exchange economy of unsecured credit where borrowers have the option to declare bankruptcy in which case they are temporarily excluded from financial markets. Endogenous credit limits are imposed that are just tight enough to prevent default. Economies with temporary exclusion differ from their permanent exclusion counterparts in two important properties. If households are extremely patient, then the first–best allocation is an equilibrium in the latter economies but not necessarily in the former. In addition, temporary exclusion permits multiple stationary equilibria, with both complete and with incomplete consumption smoothing.
    Keywords: Bankruptcy; Endogenous solvency constraints
    JEL: D51 D91 G33
    Date: 2012–09–20
  16. By: Christopher Carroll; Jiri Slacalek; Martin Sommer
    Abstract: We argue that the U.S. personal saving rate’s long stability (1960s–1980s), subsequent steady decline (1980s–2007), and recent substantial rise (2008–2011) can be interpreted using a parsimonious 'buffer stock' model of consumption in the presence of labor income uncertainty and credit constraints. Saving in the model is affected by the gap between 'target' and actual wealth, with the target determined by credit conditions and uncertainty. An estimated structural version of the model suggests that increased credit availability accounts for most of the long-term saving decline, while fluctuations in wealth and uncertainty capture the bulk of the business-cycle variation.
    Date: 2012–09
  17. By: Ellen R. McGrattan; Edward C. Prescott
    Abstract: A problem facing the United States and many other countries is how to finance retirement consumption as the number of their workers per retiree falls. Policy analysts are increasingly advocating a move to a savings-for-retirement system. An apparent problem with this move is the shortage of good savings opportunities given the limited ability of government to honor its debt. We find that there is no problem because there is much more productive capital than commonly assumed in macroeconomic modeling. We also find that eliminating capital income taxes will greatly increase savings opportunities and make a savings-for-retirement system feasible with only a modest amount of government debt. The tax policy changes we consider are phased in smoothly and are relatively modest. The switch from a system close to the current U.S. retirement system, which relies heavily on taxing workers’ incomes and making lump-sum transfers to retirees, to one without capital income taxes will increase the welfare of all birth-year cohorts alive today and particularly the welfare of the yet unborn cohorts.
    Keywords: Debt - United States ; Taxation
    Date: 2012
  18. By: Pedro S. Amaral (Federal Reserve Bank of Cleveland); James C. MacGee (University of Western Ontario)
    Abstract: We quantify the role of contractionary monetary shocks and wage rigidities in the U.S. Great Contraction. While the average economy-wide real wage varied little over 1929-33, real wages rose significantly in some industries. We calibrate a two-sector model with intermediates to the 1929 U.S. economy where wages in one sector adjust slowly. We find that nominal wage rigidities can account for less than a fifth of the fall in GDP over 1929-33. Intermediate linkages play a key role, as the output decline in our benchmark is roughly half as large as in our two-sector model without intermediates.
    Keywords: Great Depression; Sectoral Models; Sticky Wages
    JEL: E20 E30 E50
    Date: 2012
  19. By: Martinez-Miera, David; Suarez, Javier
    Abstract: We analyze banks' systemic risk taking in a simple dynamic general equilibrium model. Banks collect funds from savers and make loans to firms. Banks are owned by risk-neutral bankers who provide the equity needed to comply with capital requirements. Bankers decide their (unobservable) exposure to systemic shocks by trading off risk-shifting gains with the value of preserving their capital after a systemic shock. Capital requirements reduce credit and output in
    Keywords: Capital requirements; Credit cycles; Financial crises; Macroprudential policies; Risk shifting; Systemic risk
    JEL: E44 G21 G28
    Date: 2012–09
  20. By: Jung, Philip (University of Bonn); Kuhn, Moritz (University of Bonn)
    Abstract: Extensive literature demonstrates that workers with high tenure suffer large and persistent earnings losses when they are displaced. We study the reasons behind these losses in a tractable search model that includes a lifecycle dimension, endogenous job mobility, and worker- and match-heterogeneity. The model jointly explains key characteristics of the U.S. labor market such as large average transition rates, a large share of stable jobs, and earnings losses after displacement. We decompose earnings losses and find that only 50% result from wage loss, and endogenous reactions and selection account for the remainder. These findings have important implications for welfare costs of displacement and labor market policies.
    Keywords: earnings losses, lifecycle, labor-market transitions, turbulence
    JEL: E24 J63 J64
    Date: 2012–09
  21. By: ANDREASEN, Eugenia
    Abstract: This thesis studies the causes and consequences of sovereign defaults focusing on non traditional links between sovereign default and the domestic economy: the impact of sovereign defaults on the external financial conditions for the private sector and the ex-ante implications of the redistributive effects of default and repayment on the political support that the government requires to implement either of these decisions. In the first chapter of my thesis I analyze the worsening of the external financial conditions for the private sector that follows sovereign defaults. To explore the issue I develop a signaling model in which sovereign defaults reveal negative information to foreign lenders regarding the institutional quality in the country. Foreign lenders care about institutional quality because it affects the expected repayment of loans. Therefore, if foreign lenders receive negative information on the institutional quality from the sovereign default they worsen the financial conditions they offer to local firms triggering a sharp reduction in credit and investment ( updating effect ). The model can rationalize the worsened financial conditions in international capital markets for the private sector observed after default episodes. In the second chapter, a joint work with Guido Sandleris and Alejandro Van der Ghote, we analyze how the presence of political constraints affects sovereign governmentsborrowing and default decisions. We do so in a standard DSGE model with endogenous default risk where we introduce two novel features: heterogeneous agents in the domestic private sector and a requirement that the government obtains some of their support to implement the fiscal program needed to repay the debt. In this framework, we demonstrate that sovereign default can also arise due to insufficient political support and we explore the implications of different income distribution, political systems and tax systems over the repayment decision.
    Date: 2012
  22. By: David M. Arseneau; Sylvain Leduc
    Abstract: We embed the canonical rational expectations competitive storage model into a general equilibrium framework thereby allowing the non-linear commodity price dynamics implied by the competitive storage model to interact with the broader macroeconomy. Our main result is that the endogenous movement in interest rates implied under general equilibrium enhances the effects of competitive storage on commodity prices. Compared to a model in which the real interest rate is fixed, we find that storage in general equilibrium leads to more persistence in commodity prices and somewhat lower volatility. Moreover, the frequency of stockouts is lower in general equilibrium. A key mechanism driving this result is a link between the ability of the household to smooth consumption over time and the level of storage in the stochasic equilibrium. Finally, the model is used to examine the macroeconomic effects of both biofuel subsidies for ethanol producers and, separately, subsidies designed to insulate households from high food prices.
    Date: 2012
  23. By: Yazid Dissou (Department of Economics, University of Ottawa, 120 University St., Ottawa,Ontario); Lilia Karnizova (Department of Economics, University of Ottawa, 120 University St., Ottawa,Ontario)
    Abstract: In contrast to previous studies, this paper uses a multi-sector setting to assess aggregate and sectoral impacts of reducing carbon dioxide emissions in the presence of stochastic productivity shocks. We develop a multi-sector dynamic stochastic general equilibrium model, calibrated to the U.S. economy, to compare the economic implications of reducing carbon emissions with an emissions cap and with an emission tax. As in previous studies, we find that an emission cap predicts lower volatility of aggregate variables than an emission tax. Still, our results point to the importance of going beyond a single-sector analysis in evaluating the relative merits of the cap and the tax policies. The ranking of the welfare costs under the two regimes depends on the sources of productivity shocks. While there is no difference in the welfare costs of the two regimes for productivity shocks originating from non-energy sectors, we find that an emissions cap policy is more costly than an emission tax policy for shocks that originate from the energy sectors. Moreover, we find that non-energy shocks have distinct sectoral impacts under the two regimes even though there are no significant differences between the two regimes for the aggregate variables.
    Keywords: cap-and-trade; carbon tax; emissions; business cycle; multiple sectors
    JEL: E32 Q43 Q54 Q58
    Date: 2012
  24. By: KOBAYASHI Keiichiro
    Abstract: Low economic growth tends to be seen a decade after financial crises. To explain this fact, we construct general equilibrium models based on a simplified version of Jermann and Quadrini (2012), in which exogenous shocks cause a substantial number of firms to default on their debts. Lenders cannot pre-commit to debt forgiveness, forcing them to allow "debt-ridden'' firms, which are defined as firms whose lenders have a unilateral right to liquidate them, to continue. Although debt-ridden firms are under the control of their lenders, their borrowing constraints are tighter than those of normal firms. This implies that the emergence of debt-ridden borrowers may be a cause of the "financial shocks" seen in the recent macroeconomic literature.<br />Tightened borrowing constraints due to the emergence of debt-ridden firms lower aggregate productivity and may worsen the labor wedge.
    Date: 2012–09
  25. By: Gonzalo F. Forgues-Puccio; Ibrahim M. Okumu
    Abstract: We study the role of the size of the economy in mitigating the impact of public sector corruption on economic development. The analysis is based on a dynamic general equilibrium model in which growth occurs endogenously through the invention and manufacture of new intermediate goods that are used in the production of output. Potential innovators decide to enter the market considering the fraction of future profits that may be lost to corruption. We find that depending on the predictability of bribes, the size of the economy may be an important factor in determining the effects of corruption on innovation and economic growth.
    Keywords: Corruption, population size, innovation, growth, uncertainty
    JEL: D73 O11 O31 O41
    Date: 2012–07–01
  26. By: KOBAYASHI Keiichiro
    Abstract: We introduce banks in a monetary economy and analyze the effect of monetary friction on the banking sector. The basic model is a cash-in-advance economy which is a simplified version of Lagos and Wright's (2005) model. We introduce the banks using Diamond and Rajan (2001) in this economy: Bankers can produce goods more efficiently than depositors but cannot pre-commit to the use of human capital on behalf of the latter. Demand deposit contracts work as a commitment device for bankers, while leaving banks susceptible to bank runs. We show that as the inflation rate increases, the size of the banking sector expands, and the probability of bank runs occurring rises.
    Date: 2012–09
  27. By: Claude Francis Naoussi (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Fabien Tripier (CLERSE - Centre lillois d'études et de recherches sociologiques et économiques - CNRS : UMR8019 - Université Lille 1 - Sciences et Technologies)
    Abstract: Cet article propose une revue de la littérature sur les modèles d'équilibre général dynamique et stochastique appliqués aux pays d'Afrique Sub-saharienne. Cette littérature a pour double objectif (i) d'identifier les facteurs spécifiques à ces économies susceptibles d'expliquer leur très forte instabilité et (ii) d'évaluer les politiques monétaires et fiscales adéquates face à ces facteurs. Nous présentons les avancées de cette littérature à l'aune de ces deux objectifs et en soulignons les limites.
    Keywords: Développement ; Cycle ; Afrique ; Équilibre général ; DSGE
    Date: 2012–09–18
  28. By: Camargo, Braz; Pastorino, Elena
    Abstract: We introduce human capital accumulation, in the form of learning by doing, in a life cycle model of career concerns and analyze how human capital acquisition a ects implicit incentives for performance. We show that standard results from the career concerns literature can be reversed in the presence of human capital accumulation.Namely, implicit incentives need not decrease over time and may decrease with thedegree of uncertainty about an individual's talent. Furthermore, increasing the pre-cision of output measurement can weaken rather than strengthen implicit incentives.Overall, our results contribute to shed new light on the ability of markets to disciplinemoral hazard in the absence of explicit contracts linking pay to performance.
    Date: 2012–09–12
  29. By: Alan L. Gustman (Dartmouth College); Thomas L. Steinmeier (Texas Tech University)
    Abstract: This paper specifies three behavioral variants of a structural model of retirement and saving to bring predicted Social Security claiming rates closer to the rates observed in the data. The model, estimated with Health and Retirement Study data, is used to examine three potential policies: increasing early entitlement age, increasing normal retirement age, and eliminating payroll taxes after normal retirement age. Behavioral responses to increasing early entitlement age and eliminating the payroll tax are not affected by the behavioral variant used. Predicted effects of increasing the normal retirement age exhibit more sensitivity. Heterogeneity shapes the responses to these policy changes.
    Date: 2012–08
  30. By: Verona, Fabio; Wolters, Maik H.
    Abstract: Sticky information models as developed by Mankiw and Reis in a series of papers starting with Mankiw and Reis (2002) include an infinite number of lagged expectation terms. It is therefore not straightforward to solve these models under rational expectations. Several authors have developed specialized solution algorithms that are able to solve these models quickly and with high precision. We demonstrate that it is also possible to implement sticky information models in Dynare - a widely used software package for solving dynamic stochastic general equilibrium models. We demonstrate the usage of the Dynare macro language to easily construct the required large number of lagged expectation terms. We compare simulations with different truncation points for the lagged expectations terms. The solution computed with Dynare is very precise even for moderate truncation points. The advantage over the usage of solution algorithms specifically developed for sticky information models is that the large number of tools of the Dynare software can be used for further analysis of sticky information models. Examples include the computation of optimal policy rules, the estimation of model parameters and the computation of forecasts.
    Keywords: sticky information; Dynare; macro-processor; lagged expectations
    Date: 2012–09
  31. By: Jonathan Halket; Matteo Pignatti
    Abstract: We model the provision of owner-occupied versus rental housing services as a competitive search economy where households have private information over their expected duration. Owning solves the private information problem at the cost of double search. With public information, households with low vacancy hazard rates pay lower rents and search in thicker markets. With private information, housing is under-provided to long-duration households to discourage short-duration households from searching there. If a household has a high enough expected duration, rental distortions become large enough that she prefers to own. Customizing a house ameliorates the information problem while rent control exacerbates it.
    Date: 2012–07–20
  32. By: Sauer, Robert M. (Royal Holloway, University of London)
    Abstract: This paper estimates the economic and non-economic returns to volunteering for prime-aged women. A woman's decision to engage in unpaid work, and to marry and have children, is formulated as a forward-looking discrete choice dynamic programming problem. Simulated maximum likelihood estimates of the model indicate that an extra year of volunteer experience increases wage offers in part-time work by 8.3% and wage offers in full-time work by 2.4%. The behavioral model also reveals an adverse selection mechanism which is consistent with the negative returns to volunteering found in reduced-form wage regressions. The negative selection is driven by differential unobserved market-productivity and heterogeneous marginal utilities of future consumption. The structural estimates also imply that the economic returns to volunteering are relatively more important than non-economic returns, and introduction of a tax-credit for volunteering-related childcare expenses would substantially increase volunteer labor supply and female lifetime earnings.
    Keywords: female labor supply, marriage, fertility, negative selection, attrition, dynamic programming, structural estimation, simulated maximum likelihood, volunteering
    JEL: C35 C53 C61 D91 J12 J13 J22 J24 J31 J64
    Date: 2012–08
  33. By: Ramon Marimon (European University Institute and UPF-BarcelonaGSE)
    Abstract: Presentation of some new results showing how, under very general conditions, the recursive saddle-point method, pioneered by Marcet and Marimon, delivers the appropriate solution for contracting problems with intertemporal incentive constraints, with or without unique solutions. These results summarize work from: Marimon and Marcet "Recursive Contracts" (2011) and Marimon, Messner and Pavoni "Solving Recursive Contracts with Non-unique Solutions" (2011), as well as from ongoing work with Jan Werner: "On the Envelope Theorem without Differentiability" (2010).
    Date: 2011

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