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on Dynamic General Equilibrium |
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Issue of 2012‒11‒03
28 papers chosen by |
| By: | Tom Holden (University of Surrey) |
| Abstract: | This paper builds a dynamic stochastic general equilibrium (DSGE) model of endogenous growth that generates large medium-frequency cycles while robustly matching the near trend-stationary path of observed output. This requires a model in which standard business cycle shocks lead to highly persistent movements around trend, without significantly altering the trend itself. The robustness of the trend also requires that we eliminate the scale effects and knife edge assumptions that plague most growth models. In our model, when products go out of patent protection, the rush of entry into their production destroys incentives for process improvements. Consequently, old production processes are enshrined in industries producing non-protected products, and shocks that affect invention rates change the proportion of industries with advanced technologies. In an estimated version of our model, a financial-type shock to the stock of ideas emerges as the key driver of the medium frequency cycle. |
| JEL: | E32 E37 L16 O31 O33 O34 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1412&r=dge |
| By: | Luciano Fanti |
| Abstract: | We extend the two-period-lived-agent overlapping generations model with endogenous fertility and demand for money to understand whether and how the introduction of a money sector modifies what we have so far learned about fertility behaviours. It is shown that the existence of money may tend to exacerbate existing problems of either under-population or over-population. |
| Keywords: | Fertility; Money; Overlapping generations. |
| JEL: | J13 E41 O41 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/145&r=dge |
| By: | Goenka, A.; Jafarey, S.; Pouliot, W. |
| Abstract: | We study an overlapping generations economy in which environmental degradation results from economic activity and affects agents' uncertain lifetimes. Life expectancy depends positively on economic activity and negatively on the stock of pollution. This can make the growth-survival relationship convex over some region and lead to two non-trivial steady states, with one a poverty trap. Uniform abatement taxes can cause the poverty trap to widen while increasing incomes at the high steady state. We also study the properties and dynamics of an optimal second-best abatement tax. It is non-homogeneous and increasing in the capital stock, and leads to a variety of dynamic possibilities, including non-existence and multiplicity of steady states, and cycles around some of the steady states, where there were none under exogenous taxes. Thus, optimal taxes can be an independent source of non-linearities. |
| Keywords: | Overlapping generations model; poverty traps; non-convexities; multiple steady states; pollution; optimal environmental policy; optimal abatement tax |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:12/07&r=dge |
| By: | T. BUYSE; F. HEYLEN; R. VAN DE KERCKHOVE |
| Abstract: | We study the effects of pension reform in a four-period OLG model for an open economy where hours worked by three active generations, education of the young, the retirement decision of older workers, and aggregate growth, are all endogenous. Within each generation we distinguish individuals with high, medium or low ability to build human capital. This extension allows to investigate also the effects of pension reform on the income and welfare levels of different ability groups. Particular attention goes to the income at old-age and the welfare level of low-ability individuals. Our simulation results prefer an intelligent pay-as-you-go pension system above a fully-funded private system. When it comes to promoting employment, human capital, growth, and aggregate welfare, positive effects in a pay-as-you-go system are the strongest when it includes a tight link between individual labor income (and contributions) and the pension, and when it attaches a high weight to labor income earned as an older worker to compute the pension assessment base. Such a regime does, however, imply welfare losses for the current low-ability generations, and rising inequality in welfare. Complementing or replacing this ‘intelligent’ pay-as-you-go system by basic and/or minimum pension components is negative for aggregate welfare, employment and growth. Better is to maintain the tight link between individual labor income and the pension also for low-ability individuals, but to strongly raise their replacement rate. |
| Keywords: | employment by age; endogenous growth; retirement; pension reform; heterogeneous abilities; overlapping generations |
| JEL: | E62 H55 J22 J24 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:12/810&r=dge |
| By: | Olivier Cardi; Romain Restout |
| Abstract: | We use a two-sector neoclassical open economy model with traded and non-traded goods and endogenous markups to investigate both the aggregate and the sectoral ef- fects of temporary fiscal shocks. One central finding is that both the sectoral capital intensities and endogenous markups matter in determining the response of key eco- nomic variables. In particular, the model can produce a drop in investment and in the current account, in line with empirical evidence, only if the traded sector is more capital intensive than the non-traded sector. Irrespective of sectoral capital intensities, a fiscal shock raises the relative size of the non-traded sector substantially in the short-run. Additionally, allowing for the markup to depend on the number of competitors, the two-sector model can account for the real exchange rate depreciation found in the data. Finally, markup variations triggered by firm entry can raise the real wage, albeit under certain circumstances, and modify substantially the sectoral composition of GDP in the short-run. |
| Keywords: | Non-traded Goods; Fiscal Shocks; Investment; Current Account. |
| JEL: | F41 E62 E22 F32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2012-17&r=dge |
| By: | Edgar Vogel (European Central Bank); Alexander Ludwig (CMR, Department of Economics and Social Sciences, University of Cologne); Axel Börsch-Supan (Max Planck Institute for Social Law and Social Policy, Munich Center for the Economics of Aging) |
| Abstract: | Projected demographic changes in industrialized countries will reduce the share of the working-age population. Analyses based on standard OLG models predict that these changes will increase the capital- labor ratio. Hence, rates of return to capital decrease and wages increase with adverse welfare consequences for current middle aged asset rich agents. This paper addresses three important adjustments channels to dampen these detrimental effects of demographic change: investing abroad, endogenous human capital formation and increasing the retirement age. Our quantitative finding is that openness has a relatively mild effect. In contrast, endogenous human capital formation in combination with an increase in the retirement age has strong effects. Under these adjustments maximum welfare losses of demographic change for households alive in 2010 are reduced by about 3 percentage points. JEL Classification: C68, E17, E25, J11, J24 |
| Keywords: | Population aging, human capital, welfare, pension reform, retirement age, open economy |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121476&r=dge |
| By: | Luciano Fanti |
| Abstract: | In a simple OLG small open economy with endogenous fertility, endogenous labour supply and intra-family old-age support, we show, in contrast with the preceding literature, that the saving rate is always reduced by an increasing longevity, while fertility is unaffected. As a consequence population ageing lead to an unambiguous increase in the long-run per capita foreign debt. Moreover transfers from children to parents are increasing (decreasing) for low (high) longevity rates. |
| Keywords: | Intra-family old-age support; Overlapping generations; Longevity; Labour supply. |
| JEL: | H52 J13 O41 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/144&r=dge |
| By: | Olivier J. Blanchard (IMF, MIT and NBER); Jean-Paul L’Huillier (EIEF); Guido Lorenzoni (Northwestern University and NBER) |
| Abstract: | We explore empirically models of aggregate fluctuations with two basic ingredients: agents form anticipations about the future based on noisy sources of information and these anticipations affect spending and output in the short run. Our objective is to separate fluctuations due to actual changes in fundamentals (news) from those due to temporary errors in agents’ estimates of these fundamentals (noise). We use a simple forward-looking model of consumption to address some methodological issues: structural VARs cannot be used to identify news and noise shocks in the data, but identification is possible via a method of moments or maximum likelihood. Next, we use U.S. data to estimate both our simple model and a richer DSGE model with the same information structure. Our estimates suggest that noise shocks play an important role in short-run consumption fluctuations. |
| Keywords: | Exportaciones, Aggregate shocks, business cycles, vector autoregression, invertibility |
| JEL: | E32 C32 D83 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:adv:wpaper:201209&r=dge |
| By: | Luciano Fanti |
| Abstract: | Motivated by the increasing literature on endogenous preferences, this paper investigates the implications of the introduction of habit and aspiration formation when labour supply is endogenous, in an OLG small open economy. In contrast with models with exogenous labour supply where aspirations always reduce economic performance, we show that in a model with endogenous labour supply greater aspirations lead to a higher long run savings and economic performance, through their impact on the labour/leisure choice. |
| Keywords: | Endogenous preferences; Fertility; OLG model. |
| JEL: | J22 O41 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/143&r=dge |
| By: | Tom Holden (University of Surrey); Michael Paetz (University of Hamburg) |
| Abstract: | This paper presents a fast, simple and intuitive algorithm for simulation of linear dynamic stochastic general equilibrium models with inequality constraints. The algorithm handles both the computation of impulse responses, and stochastic simulation, and can deal with arbitrarily many bounded variables. Furthermore, the algorithm is able to capture the precautionary motive associated with the risk of hitting such a bound. To illustrate the usefulness and efficiency of this algorithm we provide a variety of applications including to models incorporating a zero lower bound (ZLB) on nominal interest rates. Our procedure is much faster than comparable methods and can readily handle large models. We therefore expect this algorithm to be useful in a wide variety of applications. |
| JEL: | C63 E32 E43 E52 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1612&r=dge |
| By: | Luciano Fanti |
| Abstract: | Motivated by the increasing literature on endogenous preferences as well as on endogenous fertility, this paper investigates the implications of the interaction of the endogenous determination of the number of children with habit and aspiration formation in an OLG model. In contrast with the previous literature, we show that greater aspirations may lead to higher savings, and more interestingly, always increase the neoclassical economic growth. |
| Keywords: | Endogenous preferences; Fertility; OLG model. |
| JEL: | J13 O41 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/142&r=dge |
| By: | Luciano Fanti |
| Abstract: | Since in many countries - plagued by low fertility - significant increases of the mandatory retirement age have been recently introduced with the declared objective to sustain PAYG pension budgets, then in this paper we investigate whether and how such boosts are effective. It is shown - in the basic two-period overlapping generations model of endogenous growth, which is maybe the toy-model most used for pension policy analyses - that the postponement of the retirement age is always harmful for growth and even for pension payments. Therefore this result suggests that the effects of boosts of mandatory retirement ages for sustaining PAYG pension budgets may not be warranted. |
| Keywords: | Retirement age; Pensions; OLG model |
| JEL: | J26 O41 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/153&r=dge |
| By: | Christopher Carroll (Johns Hopkins University and National Bureau of Economic Research); Jiri Slacalek (European Central Bank); Martin Sommer (International Monetary Fund) |
| Abstract: | We argue that the U.S. personal saving rate's long stability (from the 1960s through the early 1980s), subsequent steady decline (1980s-2007), and recent substantial increase (2008-2011) can all be interpreted using a parsimonious `buffer stock' model of optimal 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 wealth determined by credit conditions and uncertainty. An estimated structural version of the model suggests that increased credit availability accounts for most of the saving rate's long-term decline, while fluctuations in net wealth and uncertainty capture the bulk of the business-cycle variation. JEL Classification: E21, E32 |
| Keywords: | Consumption, saving, wealth, credit availability, uncertainty |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121474&r=dge |
| By: | Gianluca Benigno; Huigang Chen; Chris Otrok; Alessandro Rebucci; Eric Young |
| Abstract: | In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of an occasionally binding borrowing constraint as in Mendoza (2010). First, we show that the same set of taxes that replicates the constrained social planner allocation could be used optimally by a Ramsey planner to achieve the first best unconstrained equilibrium: in both cases without any precautionary intervention. Second, we show that the extent to which policymakers should intervene in a preemptive manner depends critically on the set of policy tools available and what these instruments can achieve when a crisis strikes. For example, in the context of our model, we find that, if the policy tools is constrained so that the first best cannot be achieved and the policy make r has access to only one tax instrument, it is always desirable to intervene before the crisis regardless of the instrument used. If however the policy maker has access to two instruments, it is optimal to act only during crisis times. Third and finally, we propose a computational algorithm to solve Markov-Perfect optimal policy for problems in which the policy function is not differentiable. |
| Keywords: | Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macro-financial stability, macro-prudential policies |
| JEL: | E52 F37 F41 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1172&r=dge |
| By: | Elizabeth M. Caucutt; Lance Lochner |
| Abstract: | This paper investigates the importance of family borrowing constraints in determining human capital investments in children at early and late ages. We begin by providing new evidence from the Children of the NLSY (CNLSY) which suggests that borrowing constraints bind for at least some families with young children. Next, we develop an intergenerational model of lifecycle human capital accumulation to study the role of early versus late investments in children when credit markets are imperfect. We analytically establish the importance of dynamic complementarity in investment for the qualitative nature of investment responses to income and policy changes. We extend the framework to incorporate dynasties and use data from the CNLSY to calibrate the model. Our benchmark steady state suggests that roughly half of young parents and 12% of old parents are borrowing constrained, while older children are unconstrained. We also identify strong complementarity between early and late investments, suggesting that policies targeted to one stage of development tend to have similar effects on investment in both stages. We use this calibrated model to study the effects of education subsidies, loans and transfers offered at different ages on early and late human capital investments and subsequent earnings in the short-run and long-run. A key lesson is that the interaction between dynamic complementarity and early borrowing constraints means that early interventions tend to be more successful than later interventions at improving human capital outcomes. |
| JEL: | D14 E24 H52 I22 I24 J24 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18493&r=dge |
| By: | Peter Broer |
| Abstract: | <p>This paper studies the interaction between macro-economic risk and paygo social security. For this, it uses an applied general equilibrium model with overlapping generations of risk-averse households. </p><p>The sources of risk are productivity shocks and depreciation shocks. The risk profile of pensions differs from that of financial assets because pensions are linked partially to future wage rates and productivity. The model is used to discuss the effects of changes in the social security system on labor supply, private saving, and welfare in a closed economy. The author finds that switching from Defined Benefit to Defined Contribution is generally welfare improving, if current generations are compensated, while a switch from a wage-indexed Defined Benefit system to a price-indexed system is generally welfare deteriorating. A reduction in the size of the pay-as-you-go system does not yield clear results: if current generations are compensated, some future generations lose, and others gain.</p> |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:221&r=dge |
| By: | Luciano Fanti |
| Abstract: | In this paper we study the effects of a boost of the mandatory retirement age, which is largely advocated in most countries facing with both the decline in the labour force participation of elderly workers and the increasing population ageing. It is shown, in the basic two-period overlapping generations model of growth (Diamond, 1965), that the postponement of the retirement age may be harmful for long run income and when the capital’s share is sufficiently high even PAYG pensions are reduced. In conclusion, since it is shown that the age of retirement might be reduced obtaining a higher income and even higher pension benefits, then our results suggest that the idea that a higher mandatory age of retirement is always beneficial in the long run for income and pension payments is theoretically controversial. |
| Keywords: | Retirement age; Pensions; OLG model |
| JEL: | J26 O41 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/149&r=dge |
| By: | Zhang, Cathy |
| Abstract: | This paper develops an information-based theory of international currency based on search frictions, private trading histories, and imperfect recognizability of assets. Using an open-economy search model with multiple competing currencies, the value of each currency is determined without requiring agents to use a particular currency to purchase a country's goods. Strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements. While some inflation can benefit the country issuing an international currency, the threat of losing international status puts an inflation discipline on the issuing country. When monetary authorities interact in a simple policy game, the temptation to inflate can lead optimal policy to deviate from the Friedman rule. A calibration of the generalized model shows that for the U.S. dollar, the welfare cost of losing international status ranges from 1.3% to 2.1% of GDP per year. |
| Keywords: | international currencies; monetary search; liquidity; information frictions |
| JEL: | E42 E4 |
| Date: | 2013–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42114&r=dge |
| By: | Massimo Franchi ("Sapienza" Universita' di Roma); Anna Vidotto (Universita' di Roma "Tor Vergata") |
| Abstract: | The present paper shows that there is a simple way to check whether a DSGE model can be represented by a finite order VAR. This consists in verifying that the eigenvalues of a certain matrix defined in Fernandez-Villaverde et al. (2007) are all equal to zero. Further we show that this condition is equivalent to the one in Ravenna (2007), which is, however, not easily applicable. |
| Keywords: | DSGE; VAR; invertibility; non-fundamentalness. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:sas:wpaper:20125&r=dge |
| By: | Luciano Fanti |
| Abstract: | We examine how subsidy policies to support child-rearing affect the fertility rate in a standard OLG small open economy with life uncertainty and involuntary bequests. It is shown the counter-intuitive result that increasing the child grant may actually reduce the long-run fertility rate. |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/148&r=dge |
| By: | Kevin J. Lansing (Federal reserve Bank of San Francisco and Norges Bank (Central Bank of Norway)); Agnieszka Markiewicz (Erasmus University Rotterdam) |
| Abstract: | This paper develops a general-equilibrium model of skill-biased technological change that approximates the observed shifts in the shares of wage and non-wage income going to the top decile of U.S. households since 1980. Under realistic assumptions, we find that all agents can benefit from the technology change, provided that the observed rise in redistributive transfers over this period is taken into account. We show that the increase in capital’s share of total income and the presence of capital-entrepreneurial skill complementarity are two key features that help support the wages of ordinary workers as the new technology diffuses. |
| Keywords: | Income inequality, Skill-biased technological change, Capital-skill complementarity, Redistribution, Welfare. |
| JEL: | E32 E44 H23 O33 |
| Date: | 2012–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2012_10&r=dge |
| By: | Paolo Angelini (Banca d’Italia); Stefano Neri (Banca d’Italia); Fabio Panetta (Banca d’Italia) |
| Abstract: | We use a dynamic general equilibrium model featuring a banking sector to assess the interaction between macroprudential policy and monetary policy. We find that in “normal” times (when the economic cycle is driven by supply shocks) macroprudential policy generates only modest benefits for macroeconomic stability over a “monetary-policy-only” world. And lack of cooperation between the macroprudential authority and the central bank may even result in conflicting policies, hence suboptimal results. The benefits of introducing macroprudential policy tend to be sizeable when financial shocks, which affect the supply of loans, are important drivers of economic dynamics. In these cases a cooperative central bank will “lend a hand” to the macroprudential authority, working for broader objectives than just price stability in order to improve overall economic stability. From a welfare perspective, the results do not yield a uniform ranking of the regimes and, at the same time, highlight important redistributive effects of both supply and financial shocks. JEL Classification: E44, E58, E61 |
| Keywords: | Macroprudential policy, monetary policy, capital requirements |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121449&r=dge |
| By: | Lionel de Boisdeffre (Centre d'Economie de la Sorbonne) |
| Abstract: | We consider a pure exchange financial economy, where agents, possibly asymetrically informed, face an "exogenous uncertainty", on the future state of nature, and an "endogenous uncertainty", on the future price in each random state. Namely, every agent forms private price anticipations on every prospective market, distributed along an idiosyncratic probability law. At a sequential equilibrium, all agents expect the "true" price as a possible outcome and elect optimal strategies at the first period, which clear on all markets at every time period. We show that, provided the endogenous uncertainty is large enough, a sequential equilibrium exists under standard conditions for all types of financial structures and information signals across agents. This result suggests that standard existence problems of sequential equilibrium models, following Hart (1975), stem from the perfect foresight assumption. |
| Keywords: | Sequential equilibrium, temporary equilibrium, perfect foresight, existence, rational expectations, financial markets, asymmetric information, arbitrage. |
| JEL: | D52 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12055&r=dge |
| By: | Timothy Kam; Yingying Lu |
| Abstract: | We study an overlapping-generations model with private externalities on a public good (e.g. the environment). Emergent politico-economic equilibria, depending on model primitives (e.g. the degree of externality), imply that average income and environmental outcomes may be related positively or negatively, or not at all. Qualitatively, these equilibria provide a cross-country interpretation for existing disagreements in empirical findings on average income and environment. Normatively, inefficiently excessive environmental outcomes may emerge. These are partly explained by a politico-economic redistributive tension along a taxation Laffer curve. However, with externalities, this tension is further modified, resulting in these excesses being non-monotonic in the degree of externality. |
| JEL: | D72 D78 E62 H21 H23 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2012-589&r=dge |
| By: | Luciano Fanti |
| Abstract: | Motivated by the recent population aging process as well as the tendency towards the substitution of PAYG with Fully Funded pension systems, we analyze the different features of both funded and unfunded pensions under the pressure of population aging. While virtually all previous work in this literature has predicted a reduction in pension benefits as well as a greater relative immunization of FF systems in the face of population aging, this paper shows that the former prediction only holds for specific assumptions relating to technology (i.e. sufficiently low capital shares), while the latter prediction is more likely to be reverted (i.e. the current dramatic aging could be more harmful (less beneficial) for FF pension systems than for PAYG pension systems). |
| Keywords: | Demographic change; unfunded and funded pensions; OLG model. |
| JEL: | J14 J18 O41 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/147&r=dge |
| By: | Luciano Fanti |
| Abstract: | This paper explores whether the common belief that the currently observed fertility drop is a threat (or, conversely, the invoked fertility recovery is beneficial) for PAYG pensions is really always validated by the basic accounting of the PAYG pension budget. It is shown, through a simple arithmetic, that, rather surprisingly, in the long run a fertility drop may be beneficial, while, conversely, a fertility recovery may be harmful for pensions, under rather realistic conditions as regards both fertility changes and time costs of childrearing. Furthermore, this result also holds a fortiori in the short run. |
| Keywords: | Fertility; PAYG pension; OLG model. |
| JEL: | J26 O41 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/146&r=dge |
| By: | William A. Brock (Department of Economics, University of Wisconsin, USA); Anastasios Xepapadeas (Department of International and European Economic Studies, Greece); Athanasios N. Yannacopoulos (Department of Statistics Athens University of Economics and Business, Greece) |
| Abstract: | We study rational expectations equilibrium problems and social optimum problems in infinite horizon spatial economies in the con- text of a Ramsey type capital accumulation problem with geographical spillovers. We identify sufficient local and global conditions for the emergence (or not) of optimal agglomeration, using techniques from monotone operator theory and spectral theory in infinite dimensional Hilbert spaces. Our analytical methods can be used to systematically study optimal potential agglomeration and clustering in dynamic economics. |
| Keywords: | Agglomeration, Spatial Spillovers, Spillover Induced Instability, Rational Expectations Equilibrium, Social Optimum, Monotone Operators |
| JEL: | C61 R11 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2012.64&r=dge |
| By: | K.Vela Velupillai |
| Abstract: | The theory of economic policy, in its mathematical modes, may be said to have had two incarnations, identified in terms of pre-Lucasian and ultra-Lucasian on a time-scale, whose origin can be traced to the Scandinavian works of the 1920s and early 1930s, beginning with Lindahl (1924, 1929), Frisch (1933) and Myrdal (1933). The end - mercifully (meant perversely) - of the ultra-Lucasian period, in Frances Fukuyama senses, might well have been the date of Prescott's Nobel Prize Lecture (Prescott, 2004). The codification of what may be called the `classical' theory of economic policy was initiated in the pioneering formalisations by Frisch (1949, a, b), and Tinbergen (1952), elegantly summarised in Bent Hansen's early, advanced, text book (Hansen, 1955). The launching pads for the ultra-Lucasian period were the Lucas Critique (Lucas, 1975), the elementary saddle-point dynamics based policy ineffectiveness `theorem' in a Rational Expectations context by Sargent and Wallace (1976) and the Dynamic Programming based Time-Invariance proposition in Kydland and Prescott(1977). In this essay I try, first of all, to trace a path of the mathematisation of the theory of economic policy, from this specific origin to the stated culminating point. Secondly, an attempt is made to expose the nature of the Emperor's New (Mathematical) Clothes in which the mathematisation of the theory of economic policy was attired. Finally, it is shown that the obfuscation by the mathematics of efficiency, equilibrium and the fundamental theorems of welfare economics can be dispelled by an enlightened, alternative, mathematisation that makes it possible to resurrect the poetic tradition in economics and ‘connect the prose in us with the passion’ for policy in the manner in which Geoff Harcourt has `connected' them. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpas:1217&r=dge |