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on Dynamic General Equilibrium |
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Issue of 2012‒11‒24
seventeen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Yongsung Chang (University of Rochester, Yonsei University); Sun-Bin Kim (Yonsei University); Frank Schorfheide (University of Pennsylvania CEPR and NBER) |
| Abstract: | Data from a heterogeneous-agents economy with incomplete asset markets and indivisible labor supply are simulated under various scal policy regimes and an approximating representative-agent model is estimated. Preference and technology parameter estimates of the representative-agent model are not invariant to policy changes and the bias in the representative-agent model's policy predictions is large compared to predictive intervals that re ect parameter uncertainty. Since it is not always feasible to account for heterogeneity explicitly, it is important to recognize the possibility that the parameters of a highly aggregated model may not be invariant with respect to policy changes. |
| Keywords: | Aggregation, DSGE Models, Fiscal Policy, Heterogeneous-Agents Economy, Policy Predictions, Representative-Agent Models |
| JEL: | C11 C32 E32 E62 |
| Date: | 2012–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2012rwp-51&r=dge |
| By: | Ryuta Ray Kato (International University of Japan); Hiroaki Miyamoto (International University of Japan) |
| Abstract: | The paper studies effects of fiscal expansion on the Japanese labor market. First, using a structural VAR model, we find that the unemployment rate falls and employment rises following an increase in government spending. We also find that fiscal expansion affects flows in and out of unemployment. While an increase in government spending increases the job-finding rate, it reduces the separation rate. We then incorporate search and matching frictions into a standard dynamic general equilibrium model, and study whether the model can explain what we observed in data. While the model fails to predict the exact size of the impact of the government spending shock on the Japanese labor market variables, it can consistently capture the empirical pattern of responses of labor market variables to the shock. |
| Keywords: | Policy, Unemployment, Labor market, Search and matching |
| JEL: | E24 E62 J64 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:iuj:wpaper:ems_2012_19&r=dge |
| By: | Yonsung Chang (University of Rochester, Yonsei University); Sun-Bin Kim (Yonsei University); Kyooho Kwon (University of Rochester) |
| Abstract: | We develop a heterogeneous-agent general equilibrium model that incorporates both intensive and extensive margins of labor supply. A nonconvexity in the mapping between time devoted to work and labor services distinguishes between extensive and intensive margins. We consider calibrated versions of this model that dier in the value of a key preference parameter for labor supply and the extent of heterogeneity. The model is able to capture the key features of the empirical hours worked distribution, including how individuals transit within this distribution. We then study how the various specications in uence labor supply responses to temporary shocks and permanent tax changes, with a particular focus on the intensive and extensive margin elasticities in response to these changes. We nd important interactions between heterogeneity and the extent of curvature in preferences. |
| Keywords: | Hours, Employment, Cross-section, Business Cycles |
| Date: | 2012–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2012rwp-48&r=dge |
| By: | Yongsung Chang (University of Rochester and Yonsei University); Sun-Bin Kim (Yonsei University); Jaewoo Lee (International Monetary Fund) |
| Abstract: | We develop a multi-country quantitative model of the global distribution of current account and external balances. Countries accumulate domestic capital and foreign assets to smooth consumption over time against exogenous productivity shocks in the presence of liquidity constraints. In equilibrium, optimal consumption and investment responses to persistent productivity shocks imply a degree of intertemporal substitution across countries that can explain up to one-third of the current account dispersion in the data. |
| Keywords: | Dispersion of Current Accounts, Incomplete Markets, Frictions |
| JEL: | F32 F34 F44 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2012rwp-44&r=dge |
| By: | O.A. Carboni; P. Russu |
| Abstract: | This paper studies the equilibrium dynamics of a growth model with public finance where two different allocations of public resources are considered. The model simultaneously determines the optimal shares of consumption, capital accumulation, taxes and composition of the two different public expenditures which maximize a representative household s lifetime utilities in a centralized economy. The analysis supplies a closed form solution. Moreover, with one restriction on the parameters (?=?) we fully determine the solutions path for all variables of the model and determine the conditions for balanced growth. |
| Keywords: | Growth models; Fiscal policy; Public spending composition |
| JEL: | H50 E13 O40 H20 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201229&r=dge |
| By: | Giorgio Motta; Patrizio Tirelli |
| Abstract: | We reconsider the issue of equilibrium determinacy under the limited asset market participation hypothesis in a medium-scale model which accounts for external consumption habits. This allows to characterize concern for relative consumption in the preferences of agents which are heterogeneous in their wealth holdings. We find that external habits and consumption inequality have mutually reinforcing adverse e¤ects on determinacy. We therefore uncover a causality link between long-run inequality and macroeconomic volatility in a New-Keynesian DSGE model. In our framework, redistributive polices targeting consumption inequality have beneficial implications for macroeconomic stability.. |
| Keywords: | Limited Asset Market Participation, DSGE, Determinacy, Consumption Habits |
| JEL: | E52 E63 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:219&r=dge |
| By: | Belo, Frederico (University of MN); Lin, Xiaoji (OH State University); Bazdresch, Santiago (University of MN) |
| Abstract: | We study the impact of labor market frictions on asset prices in the cross section of US publicly traded firms. On average, firms with low hiring rates have higher future stock returns than firms with high hiring rates, a difference of 5.2% per annum. Interpreting a hiring decision as analogous to an investment decision, we propose a dynamic neoclassical investment-based model with labor and capital adjustment costs to explain this hiring return spread. Firms that are hiring relatively more have lower macroeconomic risk which explains why high hiring rates predicts low stock returns. The model matches the observed levels of the hiring return spread, key properties of the firm-level hiring and investment rates, and other empirical regularities. Our analysis suggest that labor market frictions can have a significant impact on asset prices in financial markets. |
| JEL: | E22 E23 E44 G12 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2012-17&r=dge |
| By: | Muto, Ichiro; Oda, Takemasa; Sudo, Nao |
| Abstract: | Due to a sharp decline in the fertility rate and a rapid increase in longevity, Japan's population aging is the furthest advanced in the world. In this study we explore the macroeconomic impact of population aging using a full-fledged overlapping generations model. Our model replicates well the time paths of Japan’s macroeconomic variables from the 1980s to the 2000s and yields future paths for these variables over a long horizon. We find that Japan’s population aging as a whole adversely affects GNP growth by dampening factor inputs. It also negatively impacts on GNP per capita, especially in the future, mainly due to the decline in the fraction of the population of working-age. For these findings, fertility rate decline plays a dominant role as it reduces both labor force and saver populations. The effects of increased longevity are expansionary, but relatively minor. Our simulations predict that the adverse effects will expand during the next few decades. In addition to closed economy simulations, we examine the consequences of population aging in a small open economy setting. In this case a decline in the domestic capital return encourages investment in foreign capital, mitigating the adverse effects of population aging on GNP. |
| Keywords: | Population Aging; Overlapping Generations Model; Capital Flow |
| JEL: | E20 J11 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42550&r=dge |
| By: | Nina Boberg-Fazlic (University of Copenhagen, Department of Economics) |
| Abstract: | It is often conjectured that higher life expectancy leads to longer schooling. The reasoning behind this notion is that a longer lifespan increases the recovery period of human capital investment and thus, makes it more profitable to invest in education. This notion goes back to Ben-Porath (1967) and is therefore often termed the Ben-Porath mechanism. However, the original Ben-Porath mechanism concerns the length of economic life and not the length of life per se. This distinction is important in the presence of retirement and especially so as earlier retirement ages are observed in many western countries. This paper presents an overlapping generations model including both an educational and a retirement decision, thereby being able to test the Ben-Porath mechanism using the correct denition of length of working life. It is found that an increase in life expectancy does not necessarily increase the expected length of economic life as also early retirement can occur. Schooling still increases, however not due to the increase in the recovery horizon but due to an increase in the probability of surviving the recovery period. |
| Keywords: | longevity, human capital, retirement, overlapping generations |
| JEL: | D91 I20 J10 J26 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1215&r=dge |
| By: | Pieter Gautier (Free, University, Amsterdam); Paul Muller (Free, University, Amsterdam); Bas van der Klaauw, (Free, University, Amsterdam); Michael Rosholm (Department of Economics and Business, Aarhus University, Denmark); Michael Svarer (Department of Economics and Business, Aarhus University, Denmark) |
| Abstract: | Randomized experiments provide policy relevant treatment effects if there are no spillovers between participants and nonparticipants. We show that this assumption is violated for a Danish activation program for unemployed workers. Using a difference-in-difference model e show that the nonparticipants in the experiment regions find jobs slower after the introduction of the activation program (relative to workers in other regions). We then estimate an equilibrium search model. This model shows that a large scale role out of the activation program decreases welfare, while a standard partial microeconometric cost-benefit analysis would conclude the opposite. |
| Keywords: | randomized experiment, policy-relevant treatment |
| JEL: | C21 E24 J64 |
| Date: | 2012–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2012-27&r=dge |
| By: | Singh, Rajesh; Lahiri, Amartya; Vegh, Carlos A |
| Abstract: | This paper studies optimal monetary policy in a small open economy under flexible prices. The paper's key innovation is to analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented). In this environment, we study three rules: the optimal state contingent monetary policy; the optimal non-state contingent money growth rule; and the optimal non-state contingent devaluation rate rule. We compare welfare and the volatility of macro aggegates like consumption, exchange rate, and money under the different rules. One of our key findings is that amongst non-state contingent rules, policies targeting the exchange rate are, in general, welfare dominated by policies which target monetary aggregates. Crucially, we find that fixed exchange rates are almost never optimal. On the other hand, under some conditions, a non-state contingent rule like a fixed money rule can even implement the first-best allocation. |
| Keywords: | Optimal Monetary Policy; Asset Market Segmentation |
| JEL: | E42 E60 F F30 |
| Date: | 2012–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:35649&r=dge |
| By: | Xiaohong Chen (Institute for Fiscal Studies and Yale University); Jack Favilukis; Sydney Ludvigson |
| Abstract: | This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) (EZW) recursive utility model, evaluates the models ability to fit asset return data relative to other asset pricing models, and investigates the implications of such estimates for the unobservable aggregate wealth return. Our empirical results indicate that the estimated relative risk aversion parameter ranges from 17-60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above one. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the CRSP value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return. |
| JEL: | G12 E21 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:32/12&r=dge |
| By: | Hübler, Michael; Baumstark, Lavinia; Leimbach, Marian; Edenhofer, Ottmar; Bauer, Nico |
| Abstract: | We introduce endogenous directed technical change into numerical integrated climate and development policy assessment. We distinguish expenditures on innovation (R&D) and imitation (international technology spillovers) and consider the role of capital investment in creating and implementing new technologies. Our main contribution is to calibrate and numerically solve the model and to examine the model's sensitivity. As an application, we assess a carbon budget-based climate policy and vary the beginning of energy-saving technology transfer. Accordingly, China is a main beneficiary of early technology transfer. Herein, our results highlight the importance of timely international technology transfer for efficiently meeting global emission targets. Most of the consumption gains from endogenous growth are captured in the baseline. Moreover, mitigation costs turn out to be insensitive to changes in most of the parameters of endogenous growth. A higher effectivity of energy-specific relative to labor-specific expenditures on innovation and imitation reduces mitigation costs, though. -- |
| Keywords: | endogenous growth,directed technical change,technology transfer,integrated assessment,carbon budget,China |
| JEL: | O11 O30 O44 O47 Q32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:12054&r=dge |
| By: | Vladislav Damjanovic |
| Abstract: | We consider a model of financial intermediation with a monopolistic competition market structure. A non-monotonic relationship between the risk measured as a probability of default and the degree of competition is established. |
| Keywords: | Competition and Risk, Risk in DSGE models, Bank competition; Bank failure, Default correlation, Risk-shifting effect, Margin effect. |
| JEL: | G21 G24 D43 E13 E43 |
| Date: | 2012–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1210&r=dge |
| By: | O.A. Carboni; P. Russu |
| Abstract: | This article develops a dynamic optimising macro model of a open economy specialised in tourism based on natural resources. Environmental externalities are explicitly introduced in the production function. Global dynamic analysis shows that, under some conditions on the parameters, if the initial values of the state variables are close enough to the coordinates of Pa, then there exists a continuum of equilibrium trajectories approaching Pa and one trajectory approaching Pb. Therefore, the model exhibits global indeterminacy, since either Pa or Pb can be selected according to agent expectations. |
| Keywords: | global and local indeterminacy; environmental externalities; history versus expectations; Hopf bifurcation |
| JEL: | O13 O41 Q22 C62 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201230&r=dge |
| By: | Andrea Vindigni (IMT Lucca Institute for Advanced Studies); Cristina Tealdi (IMT Lucca Institute for Advanced Studies) |
| Abstract: | This paper investigates the social preferences over labor market flexibility, in a general equilibrium model of dynamic labor demand where the productivity of active firms evolves as a Geometric Brownian motion. A key result demonstrated is that how the economy responds to shocks, i.e. unexpected changes in the drift and standard deviation of the stochastic process describing the dynamics of productivity, depends on the power of labor to extract rents and on the status quo level of firing costs. In particular, we show that when firing costs are initially relatively low, a transition to a rigid labor market is favored by all and only the employed workers with idiosyncratic productivity below some threshold value. A more volatile environment, and a lower rate of productivity growth, i.e. "bad times," increase the political support for more labor market rigidity only where labor appropriates of relatively large rents. Moreover, we demonstrate that when the status quo level of firing costs is relatively high, the preservation of a rigid labor market is favored by the employed with intermediate productivity, whereas all other workers favor more flexibility. The coming of better economic conditions need not favor the demise of high firing costs in rigid high-rents economies, because "good times" cut down the support for flexibility among the least productive employed workers. The model described provides some new insights on the comparative dynamics of labor market institutions in the U.S. and in Europe over the last few decades, shedding some new light both on the reasons for the original build-up of "Eurosclerosis," and for its relative persistence until the present day. |
| Keywords: | employment protection, job creation and destruction, ?ring costs, idiosyncratic productivity, volatility, growth, political economy, voting, rents, status quo, path depen- dency, institutional divergence. |
| JEL: | D71 D72 E24 J41 J63 J65 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ial:wpaper:6&r=dge |
| By: | George W. Evans; Kaushik Mitra |
| Abstract: | Analytical expectational stability results are obtained for both Euler-equation and infinitehorizon adaptive learning in a simple stochastic growth model. The rational expectations equilibrium is stable under both types of learning, though there are differences in the learning dynamics. |
| Keywords: | Euler-equation learning, Infinite-horizon learning, expectational stability. |
| JEL: | E62 D84 E21 E43 |
| Date: | 2012–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1209&r=dge |