nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒11‒17
23 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Sources of Macroeconomic Fluctuations in Subsaharan African Economies: An application to Côte d'Ivoire By Jidoud, Ahmat
  2. Fiscal Austerity Measures: Spending Cuts vs. Tax Increases By Gerhard Glomm; Juergen Jung; Chung Tran
  3. Health Insurance Reform: The Impact of a Medicare Buy-In By Gary D. Hansen; Minchung Hsu; Junsang Lee
  4. Monetary Policy Neutrality: Sign Restrictions Go to Monte Carlo. By Efrem Castelnuovo
  5. Monetary policy, informality and business cycle fluctuations in a developing economy vulnerable to external shocks By Haider, Adnan; Din, Musleh-ud; Ghani, Ejaz
  6. The macroeconomic effects of large-scale asset purchase programs By Han Chen; Vasco Cúrdia; Andrea Ferrero
  7. Sovereign default risk and uncertainty premia By Demian Pouzo; Ignacio Presno
  8. Assortative matching through signals By Poeschel, Friedrich
  9. Loan Regulation and Child Labor in Rural India By Dasgupta, Basab; Zimmermann, Christian
  10. Top incomes, rising inequality, and welfare By Kevin Lansing; Agnieszka Markiewicz
  11. Signaling effects of monetary policy By Leonardo Melosi
  12. Fitting U.S. Trend Inflation: A Rolling-Window Approach. By Efrem Castelnuovo
  13. Wages and Informality in Developing Countries By Meghir, Costas; Narita, Renata; Robin, Jean-Marc
  14. Climate Change Skepticism in the Face of Catastrophe By Mark Kagan
  15. Top Incomes, Rising Inequality, and Welfare By Kevin J. Lansing; Agnieszka Markiewicz
  16. The dynamics of hours worked and technology By Cristiano Cantore; Filippo Ferroni; Miguel A. León-Ledesma
  17. Fair Accumulation under Risky Lifetime By Grégory Ponthière
  18. DGEP - A Dynamic General Equilibrium Model of the Portuguese Economy: Model Documentation By Alfredo Marvão Pereira; Rui M. Pereira
  19. Fiscal Policy as a Temptation Control Device By Chung Tran
  20. Debt-Deflation versus the Liquidity Trap : the Dilemma of Nonconventional Monetary Policy By Gaël Giraud; Antonin Pottier
  21. Carbon Sequestration, Economic Policies and Growth By Grimaud, André; Rougé, Luc
  22. Foreign firms and the diffusion of knowledge By Alexander Monge-Naranjo
  23. The time trend in the matching function By Poeschel, Friedrich

  1. By: Jidoud, Ahmat
    Abstract: This paper quantifies the empirical importance of various types of relevant shocks in explaining macroeconomic uctuations in a typical Sub{saharan African economy (C^ote d'Ivoire) in the context of a Dynamic Stochastic General Equilibrium (DSGE) model and Bayesian techniques. Our analysis first documents that transitory but persistent productivity shocks are the dominant sources of macroeconomic volatility as they explain more than half of aggregate uctuations. Second, world interest rate shocks are found to be non{negligible especially in driving uctuations in consumption growth. Third, while fiscal policy is found to be procyclical, fiscal shocks play a minor role in this economy. In addition, negative productivity shocks coupled with positive world interest rate shocks are at the origins of the poor macroeconomic performances of the economy in the 80s. These findings are in line with the business cycle literature on African economies and also robust to various perturbations of the benchmark set-up.
    Keywords: Aggregate fluctuations,Subsaharan economies, DSGE model, Bayesian method, transitory and permanent shocks.
    JEL: C11 C51 E32
    Date: 2012–10
  2. By: Gerhard Glomm; Juergen Jung; Chung Tran
    Abstract: We study the macroeconomic and welfare effects of decumulating government debt in an overlapping generations model with skill heterogeneity and productive and non-productive government programs. Our results are: First, in the small open economy model calibrated to Greece, the spending-based austerity reform dominates the tax-based reform with respect to income effects but not with respect to the welfare effect. A mixed reform combining the tax-based and spending-based measures results in the largest welfare effects of up to 1.8 percent of pre-reform consumption. Second, the welfare effects vary significantly along the transition to the post reform steady state, depending not only on fiscal austerity measures, but also on skill types, working sectors and generations. When consumption taxes adjust the aggregate welfare effects are positive but the current old and middle age generations experience welfare losses while current young workers and future generations are beneficiaries. Third, interactions between fiscal distortions and the risk premium as well as accessibility to international capital markets strongly influence the effects of fiscal austerity. Larger growth and welfare effects are observed when the risk premium is larger than zero and when access to international capital markets is restricted.
    JEL: E21 E63 H55 J26 J45
    Date: 2012–11
  3. By: Gary D. Hansen; Minchung Hsu; Junsang Lee
    Abstract: The steady state general equilibrium and welfare consequences of health insurance reform are evaluated in a calibrated life-cycle economy with incomplete markets and endogenous labor supply. Individuals face uncertainty each period about their future health status, medical expenditures, labor productivity, access to employer provided group health insurance, and the length of their life. In this environment, incomplete markets and adverse selection, which restricts the type of insurance contracts available in equilibrium, creates a potential role for health insurance reform. In particular, we consider a policy reform that would allow older workers (aged 55-64) to purchase insurance similar to Medicare coverage. We find that adverse selection eliminates any market for a Medicare buy-in if it is offered as an unsubsidized option to individual private health insurance. Hence, we compare the equilibrium properties of the current insurance system with those that obtain with an optional buy-in subsidized by the government, as well as with several types of health insurance mandates.
    JEL: E6 H51
    Date: 2012–11
  4. By: Efrem Castelnuovo (University of Padova)
    Abstract: A new-Keynesian DSGE model in which contractionary monetary policy shocks generate recessions is estimated with U.S. data. It is then used in a Monte Carlo exercise to generate artificial data with which VARs are estimated. VAR monetary policy shocks are identified via sign restrictions. Our VAR impulse responses replicate UhligÕs (2005, Journal of Monetary Economics) evidence on unexpected interest rate hikes having ambiguous effects on output. The mismatch between the true (DSGE-consistent) responses and those produced with sign-restriction VARs is shown to be due to the low relative strength of the signal of the monetary policy shock. We conclude that UhligÕs (2005) finding is not inconsistent with monetary policy non-neutrality.
    Keywords: Monetary policy shocks, VARs, sign restrictions, dynamic stochastic general equilibrium models, monetary neutrality.
    JEL: C3 E4 E5
    Date: 2012–10
  5. By: Haider, Adnan; Din, Musleh-ud; Ghani, Ejaz
    Abstract: This paper develops an open economy dynamic stochastic general equilibrium (DSGE) model based on New-Keynesian micro-foundations. Alongside standard features of emerging economies, such as a combination of producer and local currency pricing for exporters, foreign capital inflow in terms of foreign direct investment and oil imports, this model also incorporates informal labor and production sectors. This customization intensifies the exposure of a developing economy to internal and external shocks in a manner consistent with the stylized facts of Business Cycle Fluctuations. We then focus on optimal monetary policy analysis by evaluating alternative interest rate rules and calibrate the model using data from Pakistan economy. The learning and determinacy analysis suggest monetary authority in developing economies to follow Taylor principle in large and to put some weight on exchange rate fluctuations even if there is relatively less inertia in the setting of policy interest rate.
    Keywords: Monetary Policy; Informal Economy; Business Cycles; DSGE
    JEL: E32 E52 E26 E37
    Date: 2012–10–14
  6. By: Han Chen; Vasco Cúrdia; Andrea Ferrero
    Abstract: We simulate the Federal Reserve second Large-Scale Asset Purchase program in a DSGE model with bond market segmentation estimated on U.S. data. GDP growth increases by less than a third of a percentage point and inflation barely changes relative to the absence of intervention. The key reasons behind our findings are small estimates for both the elasticity of the risk premium to the quantity of long-term debt and the degree of financial market segmentation. Absent the commitment to keep the nominal interest rate at its lower bound for an extended period, the effects of asset purchase programs would be even smaller.
    Keywords: Open market operations ; Monetary policy
    Date: 2012
  7. By: Demian Pouzo; Ignacio Presno
    Abstract: This paper studies how foreign investors' concerns about model misspecification affect sovereign bond spreads. We develop a general equilibrium model of sovereign debt with endogenous default wherein investors fear that the probability model of the underlying state of the borrowing economy is misspecified. Consequently, investors demand higher returns on their bond holdings to compensate for the default risk in the context of uncertainty. In contrast with the existing literature on sovereign default, we explain the bond spreads dynamics observed in the data as well as other business cycle features for Argentina, while preserving the default frequency at historical low levels.
    Keywords: Bonds ; Debts, External
    Date: 2012
  8. By: Poeschel, Friedrich (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "The matching of likes is a frequently observed phenomenon. However, for such assortative matching to arise in a search model, often implausibly strong conditions are required. This paper shows that, once signals are introduced, a search model can generate even perfect assortative matching under weak conditions: supermodularity of the match production function is a necessary and sufficient condition. It simultaneously drives sorting and functions as a single-crossing property ensuring that agents choose truthful signals. The information thereby transmitted allows agents to avoid all unnecessary costs of random search, which creates in effect an almost frictionless environment. Hence the unique separating equilibrium in the model achieves nearly unconstrained efficiency despite frictions." (Author's abstract, IAB-Doku) ((en))
    Keywords: Arbeitsuche, Produktionsfunktion, Suchverfahren, Strukturierung, ökonomische Theorie
    JEL: J64 D83 C78
    Date: 2012–06–29
  9. By: Dasgupta, Basab (World Bank); Zimmermann, Christian (Federal Reserve Bank of St. Louis)
    Abstract: We study the impact of loan regulation in rural India on child labor with an overlapping-generations model of formal and informal lending, human capital accumulation, adverse selection, and differentiated risk types. Specifically, we build a model economy that replicates the current outcome with a loan rate cap and no lender discrimination by risk using a survey of rural lenders. Households borrow primarily from informal moneylenders and use child labor. Removing the rate cap and allowing lender discrimination markedly increases capital use, eliminates child labor, and improves welfare of all household types.
    Keywords: child labor, India, informal lending, lending discrimination, interest rate caps
    JEL: O16 O17 E26
    Date: 2012–10
  10. By: Kevin Lansing; Agnieszka Markiewicz
    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.
    Date: 2012
  11. By: Leonardo Melosi
    Abstract: We develop a DSGE model in which the policy rate signals the central bank's view about macroeconomic developments to incompletely informed price setters. The model is estimated with likelihood methods on a U.S. data set including the Survey of Professional Forecasters as a measure of price setters' expectations. The signaling effects of monetary policy are found to be empirically important and dampen the effects of monetary disturbances on inflation. While the signaling effects enhance the Federal Reserve's ability to stabilize the economy in the face of demand shocks, they play a small role in stabilizing the economy after technology shocks.
    Keywords: Monetary policy ; Federal Reserve System ; Technology - Economic aspects
    Date: 2012
  12. By: Efrem Castelnuovo (University of Padova)
    Abstract: The role of trend inflation shocks for the U.S. macroeconomic dynamics is investigated by estimating two DSGE models of the business cycle. Policymakers are assumed to be concerned with a time-varying inflation target, which is modeled as a persistent and stochastic process. The identification of trend inflation shocks (as opposed to a number of alternative innovations) is achieved by exploiting the measure of trend inflation recently proposed by Arouba and Schorfheide (2011, American Economic Journal: Macroeconomics). Our main findings point to a substantial contribution of trend inflation shocks for the volatility of inflation and the policy rate. Such contribution is found to be time-dependent and highest during the mid-1970s to mid-1980s.
    Keywords: trend inflation shocks, new-keynesian DSGE models, rolling-window approach great moderation.
    JEL: E31 E32 E52
    Date: 2012–10
  13. By: Meghir, Costas (Yale University and IFS, London); Narita, Renata (World Bank); Robin, Jean-Marc (Sciences Po, Paris and U College London)
    Abstract: It is often argued that informal labor markets in developing countries promote growth by reducing the impact of regulation. On the other hand informality may reduce the amount of social protection offered to workers. We extend the wage-posting framework of Burdett and Mortensen (1998) to allow heterogeneous firms to decide whether to locate in the formal or the informal sector, as well as set wages. Workers engage in both off the job and on the job search. We estimate the model using Brazilian micro data and evaluate the labor market and welfare effects of policies towards informality.
    JEL: J24 J30 J42 J60 O17
    Date: 2012–09
  14. By: Mark Kagan (VU University Amsterdam)
    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 benefi…t 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: 2012–10–25
  15. By: Kevin J. Lansing (Federal Reserve Bank of San Francisco, and Norges Bank); 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
    JEL: E32 E44 H23 O33
    Date: 2012–10–26
  16. By: Cristiano Cantore (University of Surrey); Filippo Ferroni (Banque de France, University of Surrey); Miguel A. León-Ledesma (University of Kent)
    Abstract: We study the relationship between hours worked and technology during the postwar period in the US. We show that the responses of hours to technological improvements have increased over time, and that the patterns captured by the SVAR are consistent with those obtained from an RBC model with a less than unitary elasticity of substitution between capital and labor. Data supports the hypothesis that the observed changes in the response of hours to a technology shock are attributable to changes in the magnitude of the degree of capital-labor substitution. We argue that the observed time-variation in can arise from changes in the structural composition of sectors (or factors) in a heterogeneous inputs production function or from biases in technological change
    Keywords: Real Business Cycles models, Constant Elasticity of Substitution production function, Hours worked, technology shocks
    JEL: E32 E37 C53
    Date: 2012–11
  17. By: Grégory Ponthière (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: Individuals save for their old days, but not all of them enjoy the old age. This paper characterizes the optimal capital accumulation in a two-period OLG model where lifetime is risky and varies across individuals. We compare two long-run social optima: (1) the average utilitarian optimum, where steady-state average welfare is maximized; (2) the egalitarian optimum, where the welfare of the worst-o¤ at the steady-state is maximized. It is shown that, under plausible conditions, the egalitarian optimum involves a higher capital and a lower fertility than the utilitarian optimum. Those inequalities hold also in a second-best framework where survival conditions are exogenously linked to the capital level.
    Keywords: Egalitarianism ; Differentiated Mortality ; Optimal Capital Accumulation ; Golden Rule ; Fertility
    Date: 2012–10
  18. By: Alfredo Marvão Pereira (Department of Economics, The College of William and Mary); Rui M. Pereira (Department of Economics, The College of William and Mary)
    Abstract: In this paper we describe the model structure, data, and implementation procedures for the Dynamic General Equilibrium model of the Portuguese Economy, DGEP for short. Previous versions of this model have been used to evaluate the impact of tax policy and social security reform in Portugal. More recent applications, which are the focus of this document, deal with energy and environmental policy issues.
    Date: 2012–11–05
  19. By: Chung Tran
    Abstract: We formulate an overlapping generations model with temptation and self-control preferences and incomplete market for commitment devices to study the role of two fiscal programs: social security and saving subsidy. In our environment, the distortions created by such fiscal programs work as a corrective tool that mitigates the adverse effect of succumbing to temptation on inter-temporal allocation and releases severity of self-control problem. Our results indicate that both fiscal programs potentially lead to welfare gains; however, the driving mechanisms are different. Welfare gains associated with a social security program result mainly from releasing self-control costs while welfare gains associated with a saving subsidy program are mainly driven by mitigating inter-temporal allocation distortion. In addition, we also find that the direction and size of welfare effects vary substantially when allowing for different tax-financing instruments as well as when accounting for general equilibrium price adjustments.
    JEL: D1 E2 H3
    Date: 2012–11
  20. By: Gaël Giraud (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Antonin Pottier (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CIRAD : UMR56 - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - AgroParisTech)
    Abstract: This paper examines quantity-targeting monetary policy in a two-period economy with fiat money, endogenously incomplete markets of financial securities, durable goods and production. Short positions in financial assets and long-term loans are backed by collateral, the value of which depends on monetary policy. The decision to default is endogenous and depends on the relative value of the collateral to the loan. We show that Collateral Monetary Equilibria exist and prove there is also a refinement of the Quantity Theory of Money that turns out to be compatible with the long-run non-neutrality of money. Moreover, only three scenarios are compatible with the equilibrium condition : 1) either the economy enters a liquidity trap in the first period ; 2) or a credible ex-pansionary monetary policy accompanies the orderly functioning of markets at the cost of running an inflationary risk ; 3) else the money injected by the Central Bank increases the leverage of indebted investors, fueling a financial bubble whose bursting leads to debt-deflation in the next period with a non-zero probability. This dilemma of monetary policy highlights the default channel affecting trades and production, and provides a rigorous foundation to Fisher's debt deflation theory as being distinct from Keynes' liquidity trap.
    Keywords: Central Bank; liquidity trap; collateral; default; deflation; quantitative easing; debt-deflation.
    Date: 2012–10
  21. By: Grimaud, André (TSE,IDEI,LERNA); Rougé, Luc (TBS)
    Abstract: The possibility of capturing and sequestering some fraction of the CO2 emissions arising from fossil fuel combustion, often labeled as carbon capture and storage (CCS), is drawing an increasing amount of attention in the business and academic communities. We present here a model of endogenous growth in which the use of a non-renewable resource in production yields flows of pollution whose accumulated stock negatively a¤ects welfare. A CCS technology allows, via some effort, for the partial reduction of CO2 emissions in the atmosphere. We characterize the social optimum and how the availability of the CCS technology affects it, and we study the decentralized economy's trajectories. We then analyze economic policies. We first characterize the first-best policy. We derive the expression of the Pigovian carbon tax, and we give a full interpretation of its level, which is unique. We then study the impacts of three different second-best policies: a carbon tax, a subsidy to sequestered carbon, and a subsidy to labor in CCS. The first two tools foster CCS activity; so does the third, but only if it is coupled with one of the other two. While the tax postpones resource extraction, the two subsidies accelerate it's possibly yielding a rise in short-term CO2 emissions. The effects on growth are more complex. If the weight of the CCS sector in the economy is high, the tax will generally be detrimental to output growth, while the subsidies can foster it in the long-term. Finally, the carbon tax has a negative impact on the output level in the short-term, contrary to the subsidies.
    Keywords: carbon capture and storage (CCS), endogenous growth, polluting non-resources, carbon tax, subsidy to CCS.
    JEL: O3 Q3
    Date: 2012–10–28
  22. By: Alexander Monge-Naranjo
    Abstract: This paper constructs a model to examine the impact of foreign firms on a developing Country’s own accumulation of entrepreneurial knowledge. In the model, entrepreneurial skills are built up on the basis of productive ideas that diffuse internally (at the inside of firms) and externally (spillovers.) Openness to foreign firms enhances the aggregate exposure to ideas but also reduces the returns to investing in entrepreneurial skills. When externalities are present, openness can be welfare reducing. However, regardless of the relative importance of externalities, simple quantitative exercises suggest that the gains of openness are positive and can be large.
    Keywords: International business enterprises ; Technology - Economic aspects
    Date: 2012
  23. By: Poeschel, Friedrich (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "We revisit the puzzling finding that labour market performance appears to deteriorate, as suggested by negative time trends in empirical matching functions. We investigate whether these trends simply arise from omitted variable bias. Concretely, we consider the omission of job seekers beyond the unemployed, the omission of inflows as opposed to stocks, and the failure to account for vacancy dynamics. We first build a model of all labour market flows and use it to construct series for these flows from aggregate data on the U.S. labour market. Using these series, we obtain a measure for employed and non-participating job seekers. When we thus include all job seekers, the estimated time trend remains unchanged. We similarly obtain measures for inflows into unemployment and vacancies. When these are included, the magnitude of the time trend is halved but remains significant. When we account for basic vacancy dynamics, the estimated time trend can be fully explained by omitted variable bias. As suggested by this result, we present evidence that empirical matching functions can be interpreted as versions of the law of motion for vacancies: the coefficients in matching functions coincide with the coefficients in the law of motion after correcting for omitted variable bias." (Author's abstract, IAB-Doku) ((en))
    Keywords: Zeitreihenanalyse, matching, Arbeitsmarktindikatoren, offene Stellen, Arbeitsuchende, Arbeitslose, Nichterwerbstätige, USA, Bundesrepublik Deutschland, Bundesrepublik Deutschland
    JEL: J63 J64
    Date: 2012–02–29

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