nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒12‒22
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Equilibrium in the growth model with an endogenous labor-leisure choice By Goenka, Aditya; Nguyen, Manh-Hung
  2. Indeterminacy in a Dynamic Small Open Economy with International Migration By Carmelo Pierpaolo Parello
  3. The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery By Schmitt-Grohé, Stephanie; Uribe, Martín
  4. A Theory of Optimal Inheritance Taxation By Piketty, Thomas; Saez, Emmanuel
  5. A Search-Equilibrium Approach to the Effects of Immigration on Labor Market Outcomes By Andri Chassamboulli; Theodore Palivos
  6. The Impact of Debt Levels and Debt Maturity on Inflation By Faraglia, Elisa; Marcet, Albert; Oikonomou, Rigas; Scott, Andrew
  7. The Fossile Episode By Hassler, John; Sinn, Hans-Werner
  8. Income Risk, Income Mobility and Welfare By Krebs, Tom; Krishna, Pravin; Maloney, William F.
  9. Analyzing the Effects of Insuring Health Risks: On the Trade-off between Short Run Insurance Benefits vs. Long Run Incentive Costs By Cole, Harold; Kim, Soojin; Krueger, Dirk
  10. A Model of Comparative Advantage with Matching in the Urban Tanzanian Labour Market. By Andrew Kerr
  11. Valuation Risk and Asset Pricing By Rui Albuquerque; Martin S. Eichenbaum; Sergio Rebelo
  12. On the optimal timing of switching from non-renewable to renewable resources: dirty vs clean energy sources and the relative efficiency of generators By E. Agliardi; L. Sereno
  13. The Time-Inconsistency Factor: How Banks Adapt to their Mix of Savers By Carolina Laureti; Ariane Szafarz
  14. The Risk Premium and Long-Run Global Imbalances By YiLi Chien; Kanda Naknoi

  1. By: Goenka, Aditya; Nguyen, Manh-Hung
    Date: 2011–03
  2. By: Carmelo Pierpaolo Parello
    Abstract: In this paper we present a dynamic small open economy version of the standard neoclassical model of exogenous growth where we allow for international migration. We consider both the case of perfect world capital markets and the case of imperfect capital markets and show that local indeterminacy always arises independently of the capital market regime. Also, we show that the competitive equilibrium fails to reach the social optimum and that the only policy capable of establishing the …rst best is tax capital earnings. Our analysis thus supports the view that all the policy actions that aim at restricting migration ‡ows are always ine¤ective to achieve the …rst best.
    Keywords: Small Open Economy, Indeterminacy, International Migration, Capital Adjustment Costs, First Best
    JEL: C61 C62 F22 F43 O41
    Date: 2012–11
  3. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: The great contraction of 2008 pushed the U.S. economy into a protracted liquidity trap (i.e., a long period with zero nominal interest rates and inflationary expectations below target). In addition, the recovery was jobless (i.e., output growth recovered but unemployment lingered). This paper presents a model that captures these three facts. The key elements of the model are downward nominal wage rigidity, a Taylor-type interest-rate feedback rule, the zero bound on nominal rates, and a confidence shock. Lack-of-confidence shocks play a central role in generating jobless recoveries, for fundamental shocks, such as disturbances to the natural rate, are shown to generate recessions featuring recoveries with job growth. The paper considers a monetary policy that can lift the economy out of the slump. Specifically, it shows that raising the nominal interest rate to its intended target for an extended period of time, rather than exacerbating the recession as conventional wisdom would have it, can boost inflationary expectations and thereby foster employment.
    Keywords: Confidence shock; Jobless Recoveries; Liquidity Traps; Taylor Rule; Wage rigidity
    JEL: E32
    Date: 2012–12
  4. By: Piketty, Thomas; Saez, Emmanuel
    Abstract: This paper derives optimal inheritance tax formulas that (a) capture the key equity-efficiency trade-off, (b) are expressed in terms of estimable sucient statistics, (c) are robust to the underlying structure of preferences. We consider dynamic stochastic models with general and heterogeneous bequest tastes and labor productivities. We limit ourselves to simple but realistic linear or two-bracket tax structures to obtain tractable formulas. We show that long-run optimal inheritance tax rates can always be expressed in terms of distributional parameters, aggregate behavioral elasticities and social preferences for redistribution. Importantly, those results carry over with tractable modifications to (a)the case with social discounting (instead of steady-state welfare maximization), (b) the case with partly accidental bequests, (c) the standard Barro-Becker dynastic model. In all cases, the optimal inheritance tax rate increases with the concentration of bequest received and decreases with the elasticity of aggregate bequests to the net-of-tax rate. The optimal tax rate is positive and quantitatively large if concentration is high, the elasticity is low and society cares mostly about those receiving little inheritance. In contrast, the optimal tax rate is negative when society cares mostly about inheritors. We propose a calibration using micro-data for France and the United States. We find that for realistic parameters the optimal inheritance tax rate might be as large as 50%-60% - or even higher for top bequests, in line with historical experience.
    Keywords: Inheritance; Optimal taxation; Wealth
    JEL: H10
    Date: 2012–12
  5. By: Andri Chassamboulli; Theodore Palivos
    Abstract: We analyze the impact of the skill-biased immigration influx that took place during the years 2000-2009 in the United States, within a search and matching model that allows for skill heterogeneity, differential search cost between immigrants and natives, capital-skill complementarity and possibly endogenous skill acquisition. Within such a framework, we find that although the skill-biased immigration raised the overall net income to natives, it may have had distributional effects. Specifically, unskilled native workers gained in terms of both employment and wages. Skilled native workers, on the other hand, gained in terms of employment but may have lost in terms of wages. Nevertheless, in one extension of the model, where skilled workers and immigrants are imperfect substitutes, we find that even the skilled wage may have risen.
    Keywords: Immigration, Search, Unemployment, Skill-heterogeneity
    Date: 2012–12
  6. By: Faraglia, Elisa; Marcet, Albert; Oikonomou, Rigas; Scott, Andrew
    Abstract: In the context of a sticky price DSGE model subject to government expenditure and preference shocks where governments issue only nominal non-contingent bonds we examine the implications for optimal inflation of changes in the level and average maturity of government debt. We analyse these relationships under two different institutional settings. In one case government pursues optimal monetary and fiscal policy in a coordinated way whereas in the alternative we assume an independent monetary authority that sets interest rates according to a Taylor rule and where the fiscal authority treats bond prices as a given. We identify the main mechanisms through which inflation is affected by debt and debt maturity (a real balance effect and an implicit profit tax) and also study additional channels through which the government achieves fiscal sustainability (tax smoothing, interest rate twisting and endogenous fluctuations in bond prices). In the case of optimal coordinated monetary and fiscal policy we find that the persistence and volatility of inflation depends on the sign, size and maturity structure of government debt. High levels of government debt do lead to higher inflation and longer maturity debt leads to more persistent inflation. However even in the presence of modest price stickiness the role of inflation is minor with the majority of fiscal adjustment achieved through changes in taxes and the primary surplus. However in the case of an independent monetary authority where debt management, monetary policy and fiscal policy are not coordinated then inflation has a much more substantial and more persistent role to play. Inflation is higher, more volatile and more persistent especially in response to preference shocks and plays a major role in achieving fiscal solvency.
    Keywords: fiscal insurance; fiscal sustainability; government debt; inflation; interest rates; maturity
    JEL: E52 E62 H21 H63
    Date: 2012–12
  7. By: Hassler, John; Sinn, Hans-Werner
    Abstract: We build a two-sector dynamic general equilibrium model with one-sided substitutability between fossil carbon and biocarbon. One shock only, the discovery of the technology to use fossil fuels, leads to a transition from an inital pre-industrial phase to three following phases: a pure fossil carbon phase, a mixed fossil and biocarbon phase and an absorbing biocarbon phase. The increased competition for biocarbon during phase 3 and 4 leads to increasing food prices. We provide closed form expressions for this price increase. Our calibration leads to a price increase of 40% if capital and labor are allowed to move to the biocarbon sector. Otherwise, the price increase is much higher. We also use the model to analyze the consequences of restrictions on using biocarbon as fuel. We show that such restrictions can lead to a substantially slower global warming due to an endogenous slowdown of fossil fuel extraction.
    Keywords: biocarbon; climate change; fossil fuel
    JEL: O41 Q32 Q54
    Date: 2012–12
  8. By: Krebs, Tom (University of Mannheim); Krishna, Pravin (Johns Hopkins University); Maloney, William F. (World Bank)
    Abstract: This paper develops a framework for the quantitative analysis of individual income dynamics, mobility and welfare. Individual income is assumed to follow a stochastic process with two (unobserved) components, an i.i.d. component representing measurement error or transitory income shocks and an AR(1) component representing persistent changes in income. We use a tractable consumption-saving model with labor income risk and incomplete markets to relate income dynamics to consumption and welfare, and derive analytical expressions for income mobility and welfare as a function of the various parameters of the underlying income process. The empirical application of our framework using data on individual incomes from Mexico provides striking results. Much of measured income mobility is driven by measurement error or transitory income shocks and therefore (almost) welfare-neutral. A smaller part of measured income mobility is due to either welfare-reducing income risk or welfare-enhancing catching-up of low-income individuals with high-income individuals, both of which have economically significant effects on social welfare. Decomposing mobility into its fundamental components is thus seen to be crucial from the standpoint of welfare evaluation.
    Keywords: income mobility, labor market risk, social welfare
    JEL: J6 E2
    Date: 2012–11
  9. By: Cole, Harold; Kim, Soojin; Krueger, Dirk
    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; Incentives; Insurance; No-Prior-Condition-Legislation; Wage Discrimination
    JEL: E61 H31 I18
    Date: 2012–12
  10. By: Andrew Kerr
    Abstract: In this paper I build an equilibrium search model of the urban Tanzanian labour market that explains the choice between wage and self-employment and the variation in earnings across and within these sectors. Self-employment is very common in urban Tanzania and survey data show both that there are large overlaps in the distribution of earnings in private wage employment and self-employment and that there is little movement between wage and self-employment. This suggests that self-employment represents a worthwhile alternative to wage employment in small, low-productivity firms for the majority of urban Tanzanians, in contrast to the traditional view of African labour markets in which wage employment in small firms and self-employment are lumped together as the informal sector.
    Date: 2012
  11. By: Rui Albuquerque; Martin S. Eichenbaum; Sergio Rebelo
    Abstract: Standard representative-agent models have difficulty in accounting for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing underlies virtually all modern asset-pricing puzzles. The correlation puzzle arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.
    JEL: G12
    Date: 2012–12
  12. By: E. Agliardi; L. Sereno
    Abstract: We develop a model on the optimal timing of switching from non-renewable to renewable energy sources with endogenous extraction choices under emission taxes and abatement costs. We assume that non-renewable resources are "dirty" inputs and create environmental degradation, while renewable resources are more environmentally friendly, although they may be more or less productive than the exhaustible resources. The value of the switching option from non-renewable to renewable resources is characterized. Numerical applications show that an increase in emission taxes, abatement costs or demand elasticity slows down the adoption of substitutable renewable resources, while an increase in the natural rate of resource regeneration, the stock of renewable resources or the relative productivity parameter speeds up the investment in the green technology.
    JEL: D81 H23 Q28 Q38 Q40 Q50
    Date: 2012–11
  13. By: Carolina Laureti; Ariane Szafarz
    Abstract: This paper starts from a puzzle. On the one hand, the literature documents that a large proportion of poor people are ready to forgo interest on rigid – or commitment – savings accounts to discipline their future selves. On the other, our stylized facts from Bangladesh show that microfinance institutions pay a premium on commitment savings with respect to flexible savings. To address this puzzle, we build an equilibrium model in which a monopolistic bank offers flexible and commitment savings accounts to both rational and time-inconsistent agents. Two factors concur to explain why the bank may find it optimal to pay a commitment premium even though time-inconsistent savers do not necessarily demand one. First, the bank needs commitment accounts to meet its reserve requirements. Second, it cannot segment its clientele ex ante, and rational savers demand compensation for commitment. Last, we discuss the consequences of our findings from a regulatory perspective.
    Keywords: Savings; banks; microfinance; commitment; flexibility; present-bias; hyperbolic discounting; Bangladesh
    JEL: D82 D91 G21 O12
    Date: 2012–12–06
  14. By: YiLi Chien (University of Connecticut); Kanda Naknoi (University of Connecticut)
    Abstract: This study proposes that heterogeneous household portfolio choices within a country and across countries offer an explanation for global imbalances. We construct a stochastic growth multi-country model in which heterogeneous agents face the following restrictions on asset trade. First, the degree of US equity market participation is higher than that of the rest of the world. Second, a fraction of households in every country maintains a fixed share of equity in their portfolios. In our calibrated model, which matches the US net foreign asset position and the equity premium, the average US household loads up more aggregate risk than the average foreign household by investing in a risky asset abroad and issuing a risk-free asset. As a result, the US is compensated by a high risk premium and runs trade deficits even as a debtor country. The long-run average trade deficit in our model accounts for more than 50% of the observed US trade deficit.
    Keywords: Global Imbalances, Current Account, Risk Premium, Asset Pricing, Limited Participation
    JEL: E21 F32 F41 G12
    Date: 2012–11

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