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on Dynamic General Equilibrium |
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Issue of 2012‒10‒13
28 papers chosen by |
| By: | Uluc Aysun (University of Central Florida, Orlando, FL); Sami Alpanda (Bank of Canada, Ottawa, Ontario, Canada) |
| Abstract: | This paper investigates the transmission mechanism of financial shocks across large economies. To quantify these effects, we construct and estimate a two-region open economy DSGE model with nominal and real rigidities. We model the financial side of the economies using the financial accelerator mechanism of Bernanke et al. (1999). We find that the baseline model fails to generate the high degree of macroeconomic correlation between the U.S. and Euro Area economies. Allowing for an ad hoc, cross-regional correlation in financial shocks considerably improves the model’s ability to replicate the spill-over effects of U.S. financial shocks. We then extend the baseline model by including global banking and generate an endogenous, crossregional correlation of cost of capital. Simulations demonstrate a larger Euro Area response to U.S. shocks and highlight the importance of including frictions in international financial contracts, and not only in domestic financial contracts, for more accurately capturing the international transmission of domestic shocks. |
| Keywords: | DSGE, financial accelerator, international business cycles, global banks |
| JEL: | E32 E44 F33 F44 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfl:wpaper:2012-06&r=dge |
| By: | Song, Zheng Michael; Storesletten, Kjetil; Wang, Yikai; Zilibotti, Fabrizio |
| Abstract: | Intergenerational inequality and old-age poverty are salient issues 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 |
| JEL: | E21 E24 G23 H55 J11 O43 R23 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9156&r=dge |
| By: | Erceg, Christopher; Lindé, Jesper |
| Abstract: | This paper uses a two country DSGE model to examine the effects of tax-based versus expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-term, though is more costly in the longer-run. Second, a large expenditure-based consolidation may be counterproductive in the near-term if the zero lower bound is binding, reflecting that output losses rise at the margin. Third, a "mixed strategy" that combines a sharp but temporary rise in taxes with gradual spending cuts may be desirable in minimizing the output costs of fiscal consolidation. |
| Keywords: | DSGE Model; Fiscal Policy; Liquidity Trap; Monetary Policy; Open Economy Macroeconomics; Zero Bound Constraint |
| JEL: | E32 F41 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9155&r=dge |
| By: | Moritz Ritter (Department of Economics, Temple University) |
| Abstract: | A competitive search model of the labor market is embedded into a small open economy with firm and worker heterogeneity. Search frictions generate equilibrium unemployment and income inequality between identical workers, in addition to income differences between skill groups. Numerical simulations of the model reveal that an increase in trade is likely to increase within-group inequality and decrease unemployment, while the effect on the skill premium is ambiguous. Overall the effect of trade on the labor market is minor if only a small fraction of the labor force is employed in exporting and import-competing industries. |
| Keywords: | Directed Search, Inequality, International Trade |
| JEL: | E25 F16 J64 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:tem:wpaper:1204&r=dge |
| By: | Fabio C. Bagliano (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Carolina Fugazza (Department of Economics, University of Milan-Bicocca); Giovanna Nicodano (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy) |
| Abstract: | Household portfolios include risky bonds, beyond stocks, and respond to permanent labour income shocks. This paper brings these features into a life-cycle setting, and shows that optimal stock investment is constant or increasing in age before retirement for realistic parameter combinations. The driver of such inversion in the life-cycle profile is the resolution of uncertainty regarding social security pension, which increases the investor's risk appetite. This occurs if a small positive contemporaneous correlation between permanent labour income shocks and stock returns is matched by a realistically high variance of such shocks and/or risk aversion. Absent this combination, the typical downward sloping profile obtains. Overlooking differences in optimal investment profiles across heterogeneous workers results in large welfare losses, in the order of 17-26% of lifetime consumption. |
| Keywords: | Life-cycle portfolio choice, background risk, age rule, investor heterogeneity, stock market participation |
| JEL: | G11 D91 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:tur:wpapnw:012&r=dge |
| By: | Paolo Gelain (Norges Bank (Central Bank of Norway)); Kevin J. Lansing (FRB San Francisco and Norges Bank (Central Bank of Norway)); Caterina Mendicino (Bank of Portugal) |
| Abstract: | Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt thatresemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. Specifically, we show that theintroduction of simple moving-average forecast rules for a subset of households can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank's interest rate rule, the imposition of more restrictive loan-to-value ratios, and the use of a modified collateral constraint that takes into account the borrower's loan-to-income ratio. Of these, we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy. We find that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation. |
| Keywords: | Asset pricing, Excess volatility, Credit cycles, Housing bubbles, Monetary policy, Macroprudential policy |
| JEL: | E32 E44 G12 O40 |
| Date: | 2012–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2012_08&r=dge |
| By: | Miguel Angel Iraola (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)); Juan Pablo Torres-Martinez (Department of Economics, Universidad de Chile) |
| Abstract: | This paper presents a dynamic general equilibrium model with default and collateral requirements. In contrast with previous literature, our model allows for liquidity contractions and general prepayment specifications. We show that liquidity substantially affects credit and prepayment risks, and that different borrowers may follow differentiated payment strategies: whereas some pay, others prepay or default. The lack of liquidity increases debtors' willingness to continue paying, even thought prepayment cost could be higher than the collateral value. This mechanism rationalizes underwater mortgages. We prove existence of equilibrium, and provide a numerical example illustrating the main determinants of optimal payment strategies. |
| Keywords: | Collaterized asset markets, Liquidity constraints, prepayment risk |
| JEL: | D50 D52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:1204&r=dge |
| By: | Adrian Masters |
| Abstract: | Wage dispersion is generated in a sequential search environment through heterogeneity in firm productivity along with an individual wage-effort trade-off. For a given degree of TFP dispersion, the framework can generate any amount of wage dispersion. Calibrated to generate realistic gains from trade, it is able to generate the kind of wage dispersion observed in data. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:12-07&r=dge |
| By: | Holger Strulik; Katharina Werner |
| Abstract: | We set up a simple overlapping generation model that allows us to distinguish between life expectancy and active life expectancy. We show that individuals optimally adjust to a longer active life by educating more and, if the labor supply elasticity is high enough, by supplying less labor. When calibrated to US data the model explains the historical evolution of increasing education and declining labor supply (of cohorts born 1850-1950) as an optimal response to increasing active life expectancy. We integrate the theory into a unified growth model and reestablish increasing life expectancy as an engine of long-run economic development. |
| Keywords: | longevity, active life expectancy, education, hours worked, economic growth |
| JEL: | E20 I25 J22 O10 O40 |
| Date: | 2012–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:141&r=dge |
| By: | Miguel A. Iraola; Juan Pablo Torres-Martínez |
| Abstract: | This paper presents a dynamic general equilibrium model with default and collateral requirements. In contrast with previous literature, our model allows for liquidity contractions and general prepayment specifications. We show that liquidity substantially affects credit and prepayment risks, and that different borrowers may follow differentiated payment strategies: whereas some pay, others prepay or default. The lack of liquidity increases debtors' willingness to continue paying, even thought prepayment cost could be higher than the collateral value. This mechanism rationalizes underwater mortgages. We prove existence of equilibrium, and provide a numerical example illustrating the main determinants of optimal payment strategies. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:udc:wpaper:wp364&r=dge |
| By: | Lloyd-Braga, Teresa (Católica Lisbon); Modesto, Leonor (Universidade Catolica Portuguesa, Lisbon) |
| Abstract: | Considering a finance constrained economy, we discuss the stabilization role of variable labour and capital income taxes under a balanced-budget rule in the presence of consumption externalities of the "keeping up with the Joneses" type. We find that sufficiently procyclical labor and/or capital income taxes are able to ensure saddle path stability eliminating belief-driven cyclical fluctuations. Moreover, for higher values of consumption externalities, saddle path stability can only be reached with more procyclical labor or capital income taxation. We therefore conclude that finance constrained models with "keeping up with the Joneses" preferences call for traditional Keynesian demand-management policies in order to stabilize business cycle fluctuations. |
| Keywords: | indeterminacy, consumption externalities, capital and labor income taxation |
| JEL: | E32 E62 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6876&r=dge |
| By: | Finn E. Kydland; Peter Rupert; Roman Sustek |
| Abstract: | Over the U.S. business cycle, fluctuations in residential investment are well known to systematically lead GDP. These dynamics are documented here to be specific to the U.S. and Canada. In other developed economies residential investment is broadly coincident with GDP. Nonresidential investment has the opposite dynamics, being coincident with or lagging GDP. These observations are in sharp contrast with the properties of nearly all business cycle models with disaggregated investment. Including mortgages and interest rate dynamics aligns the theory more closely with U.S. observations. Longer time to build in housing construction makes residential investment coincident with output. |
| JEL: | E22 E32 R21 R31 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18432&r=dge |
| By: | Farmer, Roger E A |
| Abstract: | This paper is about the effectiveness of qualitative easing; a government policy that is designed to mitigate risk through central bank purchases of privately held risky assets and their replacement by government debt, with a return that is guaranteed by the taxpayer. Policies of this kind have recently been carried out by national central banks, backed by implicit guarantees from national treasuries. I construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where agents are unable to participate in financial markets that open before they are born. I show that a change in the asset composition of the central bank’s balance sheet will change equilibrium asset prices. Further, I prove that a policy in which the central bank stabilizes fluctuations in the stock market is Pareto improving and is costless to implement. |
| Keywords: | fiscal policy; monetary policy; qualitative easing |
| JEL: | E0 E5 E52 E62 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9153&r=dge |
| By: | Luis Felipe Céspedes; Roberto Chang; Andrés Velasco |
| Abstract: | This paper develops an open economy model in which financial intermediation is subject to occasionally binding collateral constraints, and uses the model to study unconventional policies such as credit facilities and foreign exchange intervention. The model highlights the interaction between the real exchange rate, interest rates, and financial frictions. The exchange rate can affect the financial intermediaries' international credit limit via a net worth effect and a leverage ratio effect; the latter is novel and depends on the equilibrium link between exchange rates and interest spreads. Unconventional policies are nonneutral if and only if financial constraints are binding in equilibrium. Credit programs are more effective if targeted towards financial intermediaries rather than the corporate sector. Sterilized foreign exchange interventions matter because the increased availability of tradables, resulting from the sterilizing credit, can relax financial frictions; this perspective is new in the literature. Finally, self fulfilling expectations can lead to the coexistence of financially constrained and unconstrained equilibria, justifying a policy of defending the exchange rate and the accumulation of international reserves. |
| JEL: | E58 F34 F41 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18431&r=dge |
| By: | Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); Mario Solís-García (Macalester College, St. Paul, USA) |
| Abstract: | We apply the business cycle methodology proposed by Chari, Kehoe, and McGrattan (2007) to identify the sources of Spanish business fluctuations during two outstanding cyclical episodes: the recession alongside the inception of democracy on 1977, and the recession of 2008. We find that the labor wedge is the key element behind these fluctuations, and that both taxes and labor market institutions are likely behind the wedge movements. Our conclusion suggests that any model that tries to understand the causes of the recessions occurred in the last three decades should focus on the labor wedge. This conclusion holds regardless the framework assumes a closed economy or an open economy. |
| Keywords: | Business cycle accounting, efficiency wedge, labor wedge, investment wedge |
| JEL: | E32 O11 O41 O47 O53 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:12.05&r=dge |
| By: | Eric Aldrich (Federal Reserve Bank of Atlanta) |
| Abstract: | This paper investigates asset trade in a general-equilibrium complete-markets endowment economy with heterogeneous agents. It shows that standard no-trade results cease to hold when agents have heterogeneous beliefs and that substantial trade volume is generated, even in the presence of a spanning set of assets. Further, trade volume and price movements have a positive relationship in the model, as is well documented in the empirical literature. This paper also develops a computational algorithm for solving finite-period heterogeneous-beliefs economies and demonstrates how the problem is well suited for large-scale parallel computing methods, such as GPU computing. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:36&r=dge |
| By: | Eric T. Swanson |
| Abstract: | A flexible labor margin allows households to absorb shocks to asset values with changes in hours worked as well as changes in consumption. This ability to absorb shocks along either or both margins greatly alters the household’s attitudes toward risk, as shown by Swanson (2012). The present paper extends that work to the case of generalized recursive preferences, as in Epstein and Zin (1989) and Weil (1989), which are increasingly being used to bring macroeconomic models into closer agreement with basic asset pricing facts. Measures of risk aversion commonly used in the literature show no stable relationship to the equity premium in a standard RBC model, while the closed-form expressions derived in this paper match the equity premium closely. Thus, measuring risk aversion correctly is crucial for understanding asset prices in the model. |
| Keywords: | Households - Economic aspects ; Risk assessment |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2012-17&r=dge |
| By: | Johanna Wallenius (Stockholm School of Economics); Richard Rogerson (Princeton University) |
| Abstract: | We show that a life cycle model with home production implies a tight relationship between key preference parameters and the changes in time allocated to home production and leisure at retirement. We derive this relationship and use data from the ATUS to explore its quantitative implications. Our method implies that the intertemporal elasticity of substitution for leisure is quite large, in excess of one and possibly as high as two. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:41&r=dge |
| By: | Richard Blundell; Luigi Pistaferri; Itay Saporta-Eksten |
| Abstract: | In this paper we examine the link between wage inequality and consumption inequality using a life cycle model that incorporates household consumption and family labor supply decisions. We derive analytical expressions based on approximations for the dynamics of consumption, hours, and earnings of two earners in the presence of correlated wage shocks, non-separability and asset accumulation decisions. We show how the model can be estimated and identified using panel data for hours, earnings, assets and consumption. We focus on the importance of family labour supply as an insurance mechanism to wage shocks and find strong evidence of smoothing of males and females permanent shocks to wages. Once family labor supply, assets and taxes are properly accounted for their is little evidence of additional insurance. |
| JEL: | E21 J22 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18445&r=dge |
| By: | Ana Santacreu (INSEAD) |
| Abstract: | Countries that trade more with each other tend to have more correlated business cycles. Yet, traditional international business cycle models predict a much weaker link between trade and business cycle comovement. We propose that the international diffusion of technology through trade in varieties may be driving the observed comovement by increasing the correlation of total factor productivity (TFP). Our hypothesis is that business cycles should be more correlated between countries that trade a wider variety of goods. We find empirical support for this hypothesis. After decomposing trade into its extensive and intensive margins, we find that the extensive margin explains most of the trade–TFP and trade–output comovement. This result is striking because the extensive margin accounts for only a third of total trade. We then develop a three-country model of technology innovation and international diffusion through trade, in which TFP correlation increases with trade in varieties. A numerical exercise shows that the proposed mechanism increases business cycle synchronization relative to traditional models. Impulse responses to a TFP shock in one country reveal a strong positive effect on the output of its trading partner. Finally, our model implies a trade–output coefficient that is 40% of that observed in the data and 5 times higher than that predicted by standard models. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:34&r=dge |
| By: | Moritz Ritter (Department of Economics, Temple University) |
| Abstract: | This paper integrates the insight that exporting firms are typically more productive and employ higher skilled workers into a directed search model of the labor market. The model generates a skill premium as well as residual wage inequality among identical workers. A trade liberalization will cause a reallocation of workers both within and across industries. The within industry reallocation increases the skill premium, increases residual inequality for low-skilled workers, and decreases residual inequality for high-skilled workers. The across industry reallocation induces the well-known Stolper-Samuleson effect. The calibrated model generates results consistent with the prior literature examining the effect of the Canada-U.S. Free Trade Agreement on the Canadian labor market: a signiï¬cant decrease in employment in manufacturing, but only a small change in wages. |
| Keywords: | Directed Search, Inequality, International Trade |
| JEL: | E25 F16 J64 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tem:wpaper:1202&r=dge |
| By: | Yiyong Cai (Complex Systems Science, CSIRO, Australia); Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); John Stachurski (Research School of Economics, Australian National University, Australia) |
| Abstract: | Production takes time, and labor supply and profit maximization decisions that relate to current production are typically made before all shocks affecting that production have been realized. In this paper we re-examine the problem of stochastic optimal growth with aggregate risk where the timing of the model conforms to this information structure. We provide a set of conditions under which the economy has a unique, nontrivial and stable stationary distribution. In addition, we verify key optimality properties in the presence of unbounded shocks and rewards, and provide the sample path laws necessary for consistent estimation and simulation. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2012-24&r=dge |
| By: | Holger Strulik; Klaus Prettner; Alexia Prskawetz |
| Abstract: | Conventional R&D-based growth theory argues that productivity growth is driven by population growth but the data suggest that the erstwhile positive correlation between population and productivity turned negative during the 20th century. In order to resolve this problem we integrate R&D-based innovations into a unified growth framework with micro-founded fertility and schooling behavior. The model explains the historical emergence of R&D-based growth and the subsequent emergence of mass education and the demographic transition. The ongoing child quality-quantity trade-off during the transition explains why in modern economies high growth of productivity and income is associated with low or negative population growth. Because growth in modern economies is based on the education of the workforce, the medium-run prospects for future economic growth – when fertility is going to be below replacement level in virtually all developed countries – are much better than suggested by conventional R&D-based growth theories. |
| Keywords: | R&D, declining population, fertility, schooling, human capital |
| JEL: | J13 J24 O10 O30 O40 |
| Date: | 2012–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:140&r=dge |
| By: | Carlos Eduardo Gonçalves; Bernardo Guimarães |
| Abstract: | This paper studies fiscal policy in a model of sovereign debt and default. A time-inconsistency problem arises: since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates, debtor countries choose suboptimally low fiscal adjustments. An international lender of last resort, capable of designing an implicit contract that coax debtors into a tougher fiscal stance via the provision of cheap (but senior) lending in times of crisis, can work as a commitment device and improve social welfare. |
| Keywords: | fiscal adjustment, sovereign debt, sovereign default; time inconsistency; IMF |
| JEL: | F33 F34 |
| Date: | 2012–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2012wpecon23&r=dge |
| By: | Andrle, Michal |
| Abstract: | The paper introduces methods that allow analysts to (i) decompose the estimates of unobserved quantities into observed data and (ii) impose subjective prior constraints on path estimates of unobserved shocks in structural economic models. For instance, decomposition of output gap to output, inflation, interest rates and other observables contribution is feasible. The intuitive nature and the analytical clarity of procedures suggested are appealing for policy-related and forecasting models. The paper brings some of the power embodied in the theory of linear multivariate filters, namely relatinship between Kalman and Wiener-Kolmogorov filtering, into the area of structural multivariate models, expressed in linear state-space form. |
| Keywords: | filter; DSGE; state-space; observables decomposition; judgement |
| JEL: | C10 E50 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:016&r=dge |
| By: | Luca Guerrieri (Federal Reserve Board); Martin Bodenstein (Asian Development Bank and Federal Reserve Board) |
| Abstract: | The macroeconomic implications of oil price fluctuations vary according to their sources. Our estimated two-country DSGE model distinguishes between country-specific oil supply shocks, various domestic and foreign activity shocks, and oil efficiency shocks. Changes in foreign oil efficiency, modeled as factor-augmenting technology, were the key driver of fluctuations in oil prices between 1984 and 2008, but had modest effects on U.S. activity. A pickup in foreign activity played an important role in the 2003-2008 oil price runup. Beyond quantifying the responses of oil prices and economic activity, our model informs about the propagation mechanisms. We find evidence that nonoil trade linkages are an important transmission channel for shocks that affect oil prices. Conversely, nominal rigidities and monetary policy are not. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:25&r=dge |
| By: | Bick, Alexander; Choi, Sekyu |
| Abstract: | Although the link between household size and consumption has a strong empirical support, there is no consistent way in which demographics are dealt with in standard life-cycle models. We study the relationship between the predictions of the Single Agent model (the standard in the literature) versus a simple model extension where deterministic changes in household size and composition affect optimal consumption decisions. We provide theoretical results comparing both approaches and quantify the differences in predictions across models. |
| Keywords: | Consumption; Life-Cycle Models |
| JEL: | D12 J10 D91 E21 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41756&r=dge |
| By: | Klaus Prettner; Timo Trimborn |
| Abstract: | In recent decades, most industrialized countries experienced declining population growth rates caused by declining fertility and associated with rising life expectancy. We analyze the effect of continuing demographic change on medium- and long-run economic growth by setting forth an R&D-based growth model including an analytically tractable demographic structure. Our results show that, in response to demographic change, technological progress and economic growth accelerate in the medium run but slow down in the long run. Numerical investigation reveals that the time period during which technological progress and economic growth are faster than without demographic change can be very long. Since the theoretical predictions for the medium run are consistent with the negative association between population growth and economic growth found in the empirical literature, the present framework can reconcile R&D-based growth theory with the available empirical evidence. |
| Keywords: | demographic change, technological progress, economic growth, semiendogenous growth theory, transitional dynamics |
| JEL: | J11 O30 O41 |
| Date: | 2012–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:139&r=dge |