nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒12‒10
thirteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Uniqueness of Markov equilibrium in stochastic OLG models with nonclassical production By Hillebrand, Marten
  2. A Note on the Uniqueness of Solutions to Rational Expectations Models By Christopher Heiberger; Torben Klarl; Alfred Maussner
  3. Social capital as an engine of growth: Multisectoral modelling and implications By Youyou Baende Bofota, Raouf Boucekkine and Alain Pholo Bala
  4. Public Debt and Functional Finance in an OLG Model with Imperfect Competition By Peter Skott; Soon Ryoo
  5. Fluctuaciones sectoriales y su impacto en el crecimiento económico By Valdivia, Daney
  6. Monetary Policy Response to Capital Inflows in Form of Foreign Aid in Malawi By Manoel Bittencourt; Chance Mwabutwa; Nicola Viegi
  7. Growth Models with Exogenous Saving Rates, Unemployment and Wage Inertia By Xavier Raurich (Universitat de Barcelona); Valeri Sorolla (Universitat Autonoma de Barcelona)
  8. Growth Over the Very Long-Run: Implications of a Specific Factors Model of Economic Development With Endogenous Technological Change By Caspari, Volker; Eschenhof-Kammer, Sabine; Pertz, Klaus
  9. Learning and occupational sorting By Jonathan James
  10. Long-run consequences of debt in a stock-flow consistent network economy By Desiderio, Saul; Chen, Siyan
  11. Accounting for non-annuitization By Pashchenko, Svetlana
  12. Characterization of a Risk Sharing Contract with One-Sided Commitment By Zhang, Yuzhe
  13. Analyzing the Effects of Insuring Health Risks: On the Trade-off between Short Run Insurance Benefits vs. Long Run Incentive Costs By Harold L. Cole; Soojin Kim; Dirk Krueger

  1. By: Hillebrand, Marten
    Abstract: This paper studies Markov Equilibria (ME) corresponding to recursive equilibria on natural state space in the stochastic OLG model extended to include non-additive utility, nonclassical production, and Markovian production shocks. Specifically, we provide sufficient conditions under which the ME in unique. It turns out that uniqueness for a large class of economies and that restrictions either on the consumption side or the production side alone are sufficient to garantuee this result. We also discuss additional properties such as continuity or smoothness of the equilibrium mappings and whether additional recursive or non-recursive euilibria exist. --
    Keywords: Markov equilibrium : Uniqueness,Overlapping generations,Nonclassical production,Markovian production shocks
    JEL: C62 D51 E32
    Date: 2012
  2. By: Christopher Heiberger (University of Augsburg, Department of Economics); Torben Klarl (University of Augsburg, Department of Economics); Alfred Maussner (University of Augsburg, Department of Economics)
    Abstract: Klein (2000) advocates the use of the Schur decomposition of a matrix pencil o solve linear rational expectations (RE) models. Meanwhile his algorithm has ecome a center piece in several computer codes that provide approximate olutions to (non-linear) dynamic stochastic general equilibrium (DSGE) models. A ubtlety not resolved by Klein is whether or not a certain Schur decompostion ould fail to solve the model while a second one would provide a solution. We how that this cannot happen.
    Keywords: Linear Rational Expectations Models, Schur Decomposition, DSGE Models
    JEL: C63 C88 E37
    Date: 2012–12
  3. By: Youyou Baende Bofota, Raouf Boucekkine and Alain Pholo Bala
    Abstract: We propose a multisector endogenous growth model incorporating social capital. Social capital only serves as an input in the production of human capital and it involves a cost in terms of the final good. We show that in contrast to existing alternative specifications, this setting assures that social capital enhances productivity gains by playing the role of a timing belt driving the transmission and propagation of all productivity shocks throughout society whatever the sectoral origin of the shocks. Further econometric work is conducted in order to estimate the contribution of social capital to human capital formation. We find that depending on the measure of social capital considered, the elasticity of human capital to social capital varies from 6% to 10%. Finally we investigate the short-term dynamics and imbalance effects properties of the models depending on the value of this elasticity (taking the Lucas-Uzawa model as a limit case). In particular, it's shown that when the substitutability of social capital to human capital increases, the economy is better equipped to surmount initial imbalances as individuals may allocate more working time in the final goods sector without impeding economic growth.
    Keywords: social capital, Human Capital, economic growth, imbalance effects
    JEL: C61 E20 E22 E24 O41
    Date: 2012
  4. By: Peter Skott (University of Massachusetts, Amherst); Soon Ryoo (Adelphi University)
    Abstract: This paper examines the role of fiscal policy in the long run. We show that (i) dynamic inefficiency may be empirically relevant in a modified Diamond OLG model with imperfect competition, (ii) fiscal policy may be needed to avoid inefficiency (if investment adjusts passively to saving) and maintain full employment (if investment and saving decisions are taken separately), (iii) a simple and distributionally neutral tax scheme can maintain full employment in the face of variations in 'household confidence', and (iv) the debt ratio is inversely related to both the growth rate and government consumption. JEL Categories: E62, E22
    Keywords: Public debt, Keynesian OLG model, dynamic efficiency, confidence, sustainability
  5. By: Valdivia, Daney
    Abstract: This paper analyses the dynamics and significance of supply sectors in planning the economic policy, in particular the impact (manufacturing, agriculture and services) on economic growth through 1970 – 2011 and three cohorts. In these sense, it uses the following tools: co-movements and multi sectorial DSGE model for the Bolivian economy. The results support the hypothesis that the manufacturing sector boosts economic growth more than the others. This sector shows high persistence during expansion business cycle phases than service. The last effect is also applicable to agricultural sector, explained by its small technification that supports its low contribution to economic growth previous to 2001 – 2011.
    Keywords: business cycles; growth; multi sectorial DSGE model
    JEL: E32 E20
    Date: 2012–08–25
  6. By: Manoel Bittencourt (Department of Economics, University of Pretoria); Chance Mwabutwa (Department of Economics, University of Pretoria); Nicola Viegi (Department of Economics, University of Pretoria)
    Abstract: This paper estimates the Bayesian dynamic stochastic general equilibrium (DSGE) model and uses the model to account for the short-run monetary policy response to increased aid inflows in Malawi. The estimates reveal that the monetary authorities reacted to increased foreign aid inflows the same way as was experienced in other African countries. The model also suggests that there was non-existence of the threats of the ‘Dutch Disease’ in contrast to what was found in Mozambique. The country can continue to receive aid by targeting the supply side of the economy with an aim of improving the competiveness of the export sector. Evidently, the conduct of monetary policy performs better under the assumption of full accessibility of financial assets. In addition, the impact of aid inflows on depreciation and inflation are much smaller when monetary authorities indulge in money targeting other than following the Taylor rule and incomplete sterilisation. On the small note, the study suggests that actual spending of aid should be aligned with the actual absorption of increased aid. Nevertheless, the outcome of the aid effects has been clouded out by the limitation of the exchange rate management in Malawi.
    Keywords: Taylor Rule, DSGE Model, Rule-of-Thumb, Spending, Absorption, Foreign Exchange Rate, Bayesian Methods
    JEL: C11 C13 E52 E62 F31 F35
    Date: 2012–12
  7. By: Xavier Raurich (Universitat de Barcelona); Valeri Sorolla (Universitat Autonoma de Barcelona) (Universitat de Barcelona)
    Abstract: The purpose of this paper is to introduce a noncompetitive labor market and unemployment into the growth models with exogenous saving rates found in economic growth textbooks (SalaiMartin, 2000; Barro and SalaiMartin, 2003; Romer, 2006). We first derive a general framework with a neoclassical production function to analyze the relationship between growth and employment. We use this framework to study the joint dynamics of growth and employment when different wage setting rules are considered
    Keywords: wage inertia., growth, unemployment
    JEL: E24 O41
    Date: 2012
  8. By: Caspari, Volker; Eschenhof-Kammer, Sabine; Pertz, Klaus
    Abstract: We use the two-sector specific factors model, which is known from the theory of international trade, in a growth context to describe major trends of long-run economic development. The endogenous technical progress functions establish the link between the agricultural and the manufacturing sector through the ratio of agricultural to total employment, which is determined by the savings propensities of wage-earners, landlords and capitalists, and by the investment ratio in manufacturing. Without reference to more complicated micro-based models of human capital accumulation highlighting changes in preferences of households and/ or shifts in attitudes of firms towards education, the calibrated two-sector specific factors model can replicate major historical trends and structural turnarounds.
    Keywords: Economic growth, technical change, distribution of income, Industrial Revolution
    Date: 2012–11–01
  9. By: Jonathan James
    Abstract: This paper develops and estimates a model of occupational choice and learning that allows for correlated learning across occupation specificabilities. In the labor market, workers learn about their potential outcomes in all occupations, not just their current occupation. Based on what they learn, workers engage in directed search across occupations. The estimates indicate that sorting occurs in multiple dimensions. Workers discovering a low ability in their current occupation are significantly more likely to move to a new occupation. At the same time, workers discovering a high ability in some occupations are more likely to move up the occupational ladder into managerial occupations. By age 28 this sorting process leads to an aggregate increase in wages similar to what would occur if all workers were endowed with an additional year of education.
    Keywords: Labor market ; Occupational training
    Date: 2012
  10. By: Desiderio, Saul; Chen, Siyan
    Abstract: In this paper we develop a theoretical framework to analyze the long-run behavior of an economy characterized by a regime of persistent debt. We introduce a stock-flow consistent dynamic model where the economic system is represented by a network of trading relationships among agents. Debt contracts are one of such relationships. The model is characterized by a unique and stable steady-state, which predicts that (i) aggregate income is always limited from the above by the money supply and that (ii) debts cause a redistribution of borrowers' wealth and income in favor of lenders. In the aggregate this may also lower nominal income, as empirical evidence suggests.
    Keywords: Debt; stock-flow consistency; dynamic systems
    JEL: D31 E51 C61
    Date: 2012–11
  11. By: Pashchenko, Svetlana
    Abstract: Why don't people buy annuities? Several explanations have been provided by the previous literature: large fraction of preannuitized wealth in retirees' portfolios; adverse selection; bequest motives; and medical expense uncertainty. This paper uses a quantitative model to assess the importance of these impediments to annuitization and also studies three newer explanations: government safety net in terms of means-tested transfers; illiquidity of housing wealth; and restrictions on minimum amount of investment in annuities. This paper shows that quantitatively four explanations play a big role in reducing annuity demand: preannuitized wealth, minimum annuity purchase requirement, illiquidity of housing wealth, and bequest motives. The annuity purchase involves big upfront investment, especially if there is a minimum purchase restriction. This is binding for many, especially if housing is illiquid and part of wealth is preannuitized. While bequest motives significantly reduce the overall annuity demand, the model with a strong bequest motive cannot match the empirical fact that high-income people have the highest demand for annuities.
    Keywords: annuity puzzle; longevity insurance; adverse selection
    JEL: G11 G22 D91
    Date: 2012–11–19
  12. By: Zhang, Yuzhe
    Abstract: In this paper I provide a stopping-time-based solution to a long-term contracting problem between a risk-neutral principal and a risk-averse agent. The agent faces a stochastic income stream and cannot commit to the long-term contracting relationship. To compute the optimal contract, I also design an algorithm that is more efficient than value-function iteration.
    Keywords: Limited commitment; Risk sharing; Stopping time; Value-function iteration
    JEL: D86 C63
    Date: 2012–11
  13. By: Harold L. Cole (Department of Economics, University of Pennsylvania); Soojin Kim (Department of Economics, University of Pennsylvania); Dirk Krueger (Department of Economics, University of Pennsylvania)
    Abstract: This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period, it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time. This is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to only implementing wage nondiscrimination legislation.
    Keywords: Health, Insurance, Incentive
    JEL: E61 H31 I18
    Date: 2012–11–29

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