|
on Dynamic General Equilibrium |
|
Issue of 2013‒01‒07
fifty-six papers chosen by |
| By: | Keith Kuester (Federal Reserve Bank of Philadelphia); Philip Jung (Mannheim University) |
| Abstract: | We examine the optimal labor market-policy mix over the business cycle. In a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort we first show how to decentralize the constrained-efficient allocation. This can be achieved by a combination of a production tax and three labor-market policy instruments, namely, a vacancy subsidy, a layoff tax and unemployment benefits. We derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Our propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. We find this confirmed in a calibration targeted to the U.S. economy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:186&r=dge |
| By: | Ansgar Rannenberg (Macroeconomic Policy Institute) |
| Abstract: | I add a moral hazard problem between banks and depositors as in Gertler and Karadi (2009) to a DSGE model with a costly state verification problem between entrepreneurs and banks as in Bernanke et al. (1999) (BGG). This modification amplifies the response of the external finance premium and the overall economy to monetary policy and productivity shocks. It allows my model to match the volatility and correlation with output of the external finance premium, bank leverage, entrepreneurial leverage and other variables in US data better than a BGG-type model. A reasonably calibrated combination of balance sheet shocks produces a downturn of a magnitude similar to the "Great Recession". JEL Classification: E44, E43, E32 |
| Keywords: | Leverage cycle, bank capital, financial accelerator, output effects of financial shock |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121487&r=dge |
| By: | Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chia-Hui Lu (Department of Economics, National Taipei University) |
| Abstract: | This paper studies the optimal factor tax incidence in a standard two-sector, human capital-based endogenous growth model elucidated by Lucas (1988). Capital income taxes generate dynamic inefficiency for capital accumulation and labor income taxes create dynamic inefficiency for human capital accumulation. A factor tax incidence is a tradeoff between these two inefficiencies. A switch from capital income taxes to labor income taxes reduces the long-run welfare coming from lower leisure and increases the long-run welfare originated from higher economic growth and higher consumption. Because the representative agent’s learning time and human capital are inseparable and thus affect learning activities at the same degree, we find that based on the current US income tax code, it is optimal to first tax capital income, and to resort to taxing labor income only when tax revenue is insufficient to cover government expenditure. |
| Keywords: | two-sector model, human capital, optimal factor tax incidence |
| JEL: | E62 H22 O41 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:sin:wpaper:12-a018&r=dge |
| By: | Martin M. Andreasen (Aarhus University); Marcelo Ferman (LSE - London School of Economics and Political Science); Pawel Zabczyk (Bank of England) |
| Abstract: | This paper develops a DSGE model where banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. Within an RBC framework, we show that maturity transformation in the banking sector dampens the consumption and investment response to a technology shock. Our model also implies that the average deposit rate is less persistent than the average long-term loan rate, which we show is in line with corporate interest rate data in the US. JEL Classification: E32, E44, E22, G21 |
| Keywords: | Banks, DSGE model, Financial frictions, Long-term credit, Maturity transformation |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121489&r=dge |
| By: | Patrick Fève (Toulouse School of Economics) |
| Abstract: | This paper examines quantitative issues related to the Laffer curve in a neoclassical growth model with endogenous labor supply and complete or incomplete financial markets where distortionary taxes on labor, capital and consumption are used to finance government consumption, lump-sum transfers and debt repayments. We show that the shape of the Laffer curve related to each type of taxation differs a lot for the two model versions, especially when public debt is adjusted to fulfill the government budget constraint. In the incomplete markets setup, a given level of the fiscal revenues can be associated to three different levels of labor or capital income taxes. This finding occurs because the tax rates change non monotonically with public debt when markets are incomplete. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:215&r=dge |
| By: | Roger Myerson (University of Chicago) |
| Abstract: | We consider a simple overlapping-generations model with risk-averse financial agents subject to moral hazard. Efficient contracts for such financial intermediaries involve back-loaded late-career rewards. Compared to the analogous model with risk-neutral agents, risk aversion tends to reduce the growth of agents' responsibilities over their careers. This moderation of career growth rates can reduce the amplitude of the widest credit cycles, but it also can cause small deviations from steady state to amplify over time in rational-expectations equilibria. We find equilibria in which fluctuations increase until the economy enters a boom/bust cycle where no financial agents are hired in booms. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:182&r=dge |
| By: | Takashi Kano; James M. Nason |
| Abstract: | We study the implications of internal consumption habit for new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian Monte Carlo methods are employed to evaluate NKDSGE model fit. Simulation experiments show that internal consumption habit often improves the ability of NKDSGE models to match the spectra of output and consumption growth. Nonetheless, the fit of NKDSGE models with internal consumption habit is susceptible to the sources of nominal rigidity, to spectra identified by permanent productivity shocks, to the choice of monetary policy rule, and to the frequencies used for evaluation. These vulnerabilities indicate that the specification of NKDSGE models is fragile. |
| Keywords: | Consumption (Economics) ; Keynesian economics |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:12-30&r=dge |
| By: | Didem Tuzemen |
| Abstract: | Empirical evidence shows that worker flows in the U.S. labor market are very large. Previous studies have mainly focused on documenting and modeling worker flows between employment and unemployment only. However, these studies ignore other important labor flows including movements in and out of the labor force, and worker flows from one job directly to another job. Improving our understanding of this broader set of labor market flows is critical for assessing the merits of labor market policies such as unemployment insurance and minimum wage. ; This paper focuses on the broader set of worker flows. In terms of magnitude, flows into and out of the labor force are as large as flows between employment and unemployment. And worker flows from one job directly to another job, termed job-to-job flows, account for the vast majority of worker separations from employment. More specifically, job-to-job flows constitute almost 40 percent of all separations from employment, and they are twice as large as flows from employment to unemployment. ; The main contribution of this paper is to develop a framework in which labor market flows between employment, unemployment and out of the labor force can be studied. Earlier attempts to incorporate the participation margin in the standard real business cycle framework have been discouraging in the sense that the model generated counterfactual results. This paper presents an alternative general equilibrium real business cycle model that features search and matching frictions, and endogenous labor force participation. The model additionally features on-the-job search to capture job-to-job flows, which are crucial for the U.S. labor market dynamics. The model successfully generates countercyclical unemployment and the negative correlation between unemployment and vacancies, also known as the Beveridge Curve, observed in the data. The business cycle statistics reproduced by the model are in line with their empirical counterparts. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp12-07&r=dge |
| By: | Ayse Imrohoroglu (University of Southern California); Kaiji Chen (Emory University) |
| Abstract: | In this paper we incorporate these different policy proposals in a fully calibrated general equilibrium model. This framework allows us to model the reactions of labor and capital due to changes in policy which impact the projected debt to GDP ratios. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:229&r=dge |
| By: | Gelain, Paolo; Lansing, Kevin J.; Mendicino, Caterina |
| Abstract: | Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. Specifically, we show that the introduction of simple moving-average forecast rules for a subset of households can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank’s interest rate rule, the imposition of more restrictive loan-to-value ratios, and the use of a modified collateral constraint that takes into account the borrower’s loan-to-income ratio. Of these, we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy. We find that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation. |
| Keywords: | asset pricing; excess volatility; credit cycles; housing bubbles; monetary policy; macroprudential policy |
| JEL: | E32 E44 G12 O40 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:021&r=dge |
| By: | Di Pace, Federico; Hertweck, Matthias S. |
| Abstract: | The standard two-sector monetary business cycle model suffers from an important deficiency. Since durable good prices are more flexible than non-durable good prices, optimising households build up the stock of durable goods at low cost after a monetary contraction. Consequently, sectoral outputs move in opposite directions. This paper finds that labour market frictions help to understand the so-called sectoral “comovement puzzle”. Our benchmark model with staggered Right-to-Manage wage bargaining closely matches the empirical elasticities of output, employment and hours per worker across sectors. The model with Nash bargaining, in contrast, predicts that firms adjust employment exclusively along the extensive margin. |
| Keywords: | durable production; labour market frictions; sectoral comovement; monetary policy |
| JEL: | E21 E23 E31 E52 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:020&r=dge |
| By: | Susanto Basu; Brent Bundick |
| Abstract: | This paper examines the role of uncertainty shocks in a one-sector, representative-agent dynamic stochastic general equilibrium model. When prices are flexible, uncertainty shocks are not capable of producing business cycle comovements among key macro variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate fluctuations that are consistent with business cycles. Monetary policy usually plays a key role in offsetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then monetary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative effects on the economy. Calibrating the size of uncertainty shocks using fluctuations in the VIX, the authors find that increased uncertainty about the future may indeed have played a significant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the financial press. |
| Keywords: | Monetary policy ; Uncertainty ; Business cycles |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:12-15&r=dge |
| By: | Lilia Cavallari (Università degli Studi di Roma Tre) |
| Abstract: | This paper studies the business cycle implications of entry costs in a dynamic stochastic general equilibrium model with firm entry and nominal rigidity. Simulations show that my baseline model matches the dynamics observed in the data fairly well. Remarkably, it overcomes the well-known di¢ culties of business cycle models in reproducing the persistence, smoothness and cyclicality of macroeconomic aggregates. I stress that capital entry costs are essential for these results. |
| Keywords: | entry costs, firm entry, business cycle, investment costs. |
| JEL: | E31 E32 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:rcr:wpaper:07_12&r=dge |
| By: | Perendia, George; Tsoukis, Chris |
| Abstract: | We extend the standard Smets-Wouters (2007) medium-sized DSGE model in two directions, namely to analyse the effects of news and the Keynesian multiplier, and secondly to incorporate a fiscal policy rule. We show that both the news channel and the government spending fiscal policy rule significantly improve the model fit to data. News shows up significantly, but most of its contribution comes from the fiscal rule as opposed to consumption. We then calculate the fiscal multipliers which appear more Keynesian (with a higher effect on output and a positive effect on consumption, more persistent) than argued in much preceding literature. |
| Keywords: | DSGE model; news; fiscal policy; Taylor rule; Keynesian multiplier |
| JEL: | E12 E62 O23 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:025&r=dge |
| By: | Magalhaes, Manuela (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica); Hellström, Christian (Aalto University) |
| Abstract: | We develop a dynamic general-equilibrium model in which growth is driven by a skill-biased technology diffusion to reproduce trends in the income inequality, and the labor and skills supplies of the United States between 1969 and 1996. We incorporate education and leisure–labor decisions, and human-capital accumulation. We provide an explanation to why individuals invest in human capital when the investment premium is going down and why the skill-premium is going up when the skills supply is increasing. In addition, our model is the first general-equilibrium model, to our knowledge, that is consistent with a decline of unskilled wages and low growth of productivity in which the effects of a skill-biased technology diffusion on social inequalities are studied. We show that the effects of labor supply decisions on the skill premium cannot be neglected in a diffusion model. |
| Keywords: | Heterogeneous agents; Inequality; Skill-Biased Technical Change |
| JEL: | J22 J23 J24 J31 |
| Date: | 2012–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:ris:qmetal:2012_017&r=dge |
| By: | Rubio, Margarita; Carrasco-Gallego, José A. |
| Abstract: | The recent financial crisis has raised the discussion among policy makers and researchers on the need of macroprudential policies to avoid systemic risks in financial markets. However, these new measures need to be combined with the traditional ones, namely monetary policy. The aim of this paper is to study how the interaction of macroprudential and monetary policies a¤ect the economy. We take as a baseline a dynamic stochastic general equilibrium (DSGE) model which features a housing market in order to evaluate the performance of a rule on the loan-to-value ratio (LTV) interacting with the traditional monetary policy conducted by central banks. We find that, introducing the macroprudential rule mitigates the effects of booms on the economy by restricting credit. Furthermore, when both policies are active, interest-rate shocks have weaker effects on the economy. From a normative perspective, results show that the combination of monetary policy and the macroprudential rule is unambiguously welfare enhancing, especially when monetary policy does not respond to output and house prices and only to inflation. |
| Keywords: | macroprudential; monetary policy; collateral constraint; credit |
| JEL: | E32 E44 E58 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:023&r=dge |
| By: | Mankart, Jochen; Oikonomou, Rigas |
| Abstract: | Sharing risks is one of the essential economic roles of families. The importance of this role increases in the amount of uncertainty that households face in the labor market and in the degree of incompleteness of financial markets. We develop a theory of joint household search in frictional labor markets under incomplete financial markets. Households can insure themselves by savings and by timing their labor market participation. We show that this theory can match one aspect of the US data that conventional search models, which do not incorporate joint household search, cannot match. In the data, aggregate employment is pro-cyclical and unemployment counter-cyclical, but their sum, the labor force, is acyclical. In our model, and in the US data, when a family member loses his job in a recession, the other family member joins the labor force to provide insurance. |
| Keywords: | Heterogeneous Agents, Family Self Insurance, Labor Market Search, Aggregate Fluctuations |
| JEL: | E24 E25 E32 J10 J64 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2012:25&r=dge |
| By: | Moritz Kuhn (University of Bonn); Mark Wright (UCLA); Tom Krebs (University of Mannheim) |
| Abstract: | We develop a macroeconomic model with physical and human capital, human capital risk, and limited contract enforcement. We show analytically that young (high-return) households are the most exposed to human capital risk and are also the least insured. We document this risk-insurance pattern in data on life-insurance drawn from the Survey of Consumer Finance. A calibrated version of the model can quantitatively account for the life-cycle variation of insurance observed in the US data and implies welfare costs of under-insurance for young households that are equivalent to a 4 percent reduction in lifetime consumption. A policy reform that makes consumer bankruptcy more costly leads to a substantial increase in the volume of credit and insurance. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:159&r=dge |
| By: | Paulina Restrepo-Echavarria (The Ohio State University); Antonella Tutino (Federal Reserve Bank of Dallas); Anton Cheremukhin (Federal Reserve Bank of Dallas) |
| Abstract: | We present a model where information processing constraints on workers and firms lead to an endogenous matching function. We provide conditions under which the matching process has a unique equilibrium computable in closed-form. The main ÃÂfinding is that equilibrium matching is generally inefficient. This result does not depend on the form of heterogeneity, the distribution of surplus or bargaining rules. It is driven by information processing constraints which weaken the strategic complementarities and enhance the negative externalities in search efforts of workers and firms. A closed-form solution of the model provides a bound on the size of this inefficiency. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:164&r=dge |
| By: | William Peterman (Federal Reserve Board of Governors) |
| Abstract: | This paper considers the impact of endogenous human capital accumulation on optimal tax policy in a life cycle model. Including endogenous human capital accumulation, either through learning-by-doing or learning-or-doing, is analytically shown to create a motive for the government to use age-dependent labor income taxes. If the government cannot condition taxes on age, then it is optimal to use a tax on capital in order to mimic such taxes. Quantitatively, introducing learning-by-doing or learning-or-doing increases the optimal tax on capital by forty or four percent, respectively. Overall, the optimal tax on capital is thirty five percent higher in the model with learning-by-doing compared to the model with learning-or-doing implying that how human capital accumulates is of significant importance when determining the optimal tax policy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:204&r=dge |
| By: | Christopher Gust; David Lopez-Salido; Matthew E. Smith |
| Abstract: | Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the U.S. economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. Compared with the hypothetical situation in which monetary policy can act in an unconstrained fashion, our estimates imply that U.S. output was more than 1 percent lower, on average, over the 2009-2011 period. Moreover, around 20 percent of the drop in U.S. GDP during the recession of 2008-2009 was due to the interest-rate lower bound. We show that the estimated model generates lower bound episodes that resemble salient characteristics of the observed U.S. episode, including its expected duration. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-83&r=dge |
| By: | Kalin Nikolov (European Central Bank) |
| Abstract: | In this paper, we build a Kiyotaki-Moore style collateral amplification framework which generates large endogenous fluctuations in the leverage available to investing firms. We assume that defaulting borrowers lose not only their tangible collateral but also their future debt market access. The possibility of such market exclusion can lead to the emergence of intangible collateral in equilibrium alongside the tangible collateral which is usually studied in the literature. Fluctuations in the value of intangible collateral are isomorphic to fluctuations in the downpayments they need to make in their purchases of productive assets. This modification of the Kiyotaki-Moore model substantially increases its amplification of exogenous shocks. JEL Classification: E44 |
| Keywords: | Collateral constraints, aggregate fluctuations |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121490&r=dge |
| By: | Christopher J. Erceg; Jesper Lindé |
| Abstract: | This paper uses a two country DSGE model to examine the effects of tax-based versus expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-term, though is more costly in the longer-run. Second, a large expenditure-based consolidation may be counterproductive in the near-term if the zero lower bound is binding, reflecting that output losses rise at the margin. Third, a "mixed strategy" that combines a sharp but temporary rise in taxes with gradual spending cuts may be desirable in minimizing the output costs of fiscal consolidation. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1063&r=dge |
| By: | M. Emranul Haque |
| Abstract: | This paper presents a dynamic general equilibrium analysis of education, public sector corruption and economic growth. In an economy with government intervention along with physical and human capital accumulation, state-appointed bureaucrats are responsible for procuring public goods, which contribute to productive efficiency. Corruption arises because of an opportunity for bureaucrats to embezzle public funds. Education has two opposing effects, a positive productivity enhancing effect and a negative corruption efficiency of bureaucrats. If the latter dominates the former, the incentive for bureaucrats to acquire education rises. The net effect may result in an insignificant (or even negative) effect of human capital on growth. Our results are straightforward. First, corruption and development are determined jointly in a relationship that is two-way causal: bureaucratic malfeasance both influences and is influenced by economic activity and human capital accumulation. Second, this two-way causality gives rise to threshold effects and multiple development regimes with very different equilibrium properties: in low stages of development there is a unique equilibrium with high corruption where higher human capital cannot get the economy out of poverty trap, in high stages of development there is a unique equilibrium with low corruption where human capital can exert its influence, and in intermediate stages of development there are both types of equilibrium. Third, transition between regimes may or may not be feasible and it is possible for a development trap to occur. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:178&r=dge |
| By: | Javier Bianchi (NYU and Wisconsin) |
| Abstract: | This paper develops a non-linear DSGE model to assess the interaction between ex-post interventions in credit markets and the build-up of risk ex ante. During a systemic crisis, bailouts to the financial sector relax balance sheet constraints and accelerate the economic recovery. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. We find that the optimal intervention in the economy requires a bailout of around two percentage points of GDP during a credit crunch. We also show how bailouts may increase financial fragility in the absence of prudential policy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:162&r=dge |
| By: | Natacha Raffin (University Paris Ouest Nanterre la Défense, EconomiX and Climate Economics Chair.); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS and EHESS.) |
| Abstract: | We analyze the interplay between longevity, pollution and growth. We develop an OLG model where longevity, pollution and growth are endogenous. The authorities may provide two types of public services, public health and environmental maintenance, that participate to increase agents’ life expectancy and to sustain growth in the long term. We show that global dynamics might be featured by a high growth rate equilibrium, associated with longer life expectancy and a environmental poverty trap. We examine changes in public policies: increasing public intervention on health or environmental maintenance display opposite effects on global dynamics, i.e. on the size of the trap and on the level of the stable balanced growth path. On the contrary, each type of public policy induces a negative leverage on the long run rate of growth. |
| Keywords: | Life expectancy; Pollution; Health; Growth. |
| JEL: | I15 O44 Q56 |
| Date: | 2012–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1230&r=dge |
| By: | Zhen Huo; Jose-Victor Rios-Rull |
| Abstract: | We build a variation of the neoclassical growth model in which financial shocks to households or wealth shocks (in the sense of wealth destruction) generate recessions. Two standard ingredients that are necessary are (1) the existence of adjustment costs that make the expansion of the tradable goods sector difficult and (2) the existence of some frictions in the labor market that prevent enormous reductions in real wages (Nash bargaining in Mortensen-Pissarides labor markets is enough). We pose a new ingredient that greatly magnifies the recession: a reduction in consumption expenditures reduces measured productivity, while technology is unchanged due to reduced utilization of production capacity. Our model provides a novel, quantitative theory of the current recessions in southern Europe. |
| Keywords: | Recessions |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:478&r=dge |
| By: | Funke , Michael (BOFIT); Paetz , Michael (BOFIT) |
| Abstract: | This paper evaluates various financial system reform initiatives and proposals in China in a DSGE modelling setting. The key reform steps analysed include phasing out benchmark interest rates, deepening the direct finance market, reducing government’s quantity-based intervention on financial institutions. Our counterfactual model simulation results suggest that the reforms will be beneficial only, if Chinese monetary policy continues to rely on quantity-based interventions on financial institutions or tightens the interest rate rule. |
| Keywords: | DSGE model; financial sector reform; monetary policy; China |
| JEL: | E42 E52 E58 |
| Date: | 2012–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2012_030&r=dge |
| By: | Jeff Fuhrer |
| Abstract: | This paper examines the implications of changing the expectations assumption that is embedded in nearly all current macroeconomic models. The paper substitutes measured or "real" expectations for rational expectations in an array of standard macroeconomic relationships, as well as in a DSGE model. The author finds that the use of survey measures of expectations — for near-term inflation, long-term inflation, unemployment, and short-term interest rates — improves performance along a variety of dimensions. Survey expectations exhibit strong correlations to key macroeconomic variables. Those correlations may be given a structural interpretation in a DSGE context. Including survey expectations helps to identify key slope parameters in standard relationships, and eliminates the need for having lagged dependent variables in structural models that is often motivated by indexation for prices and habit formation for consumption. Including survey expectations also obviates the need for autocorrelated structural shocks in the key equations. In a head-to-head empirical test, the weight placed on the DSGE model's rational expectations is essentially zero and the weight on survey expectations is one. The paper also discusses the modeling complications that arise once the rational expectations assumption is abandoned, and proposes methods for endogenizing survey expectations in a general equilibrium macro model. |
| Keywords: | Rational expectations (Economic theory) |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:12-19&r=dge |
| By: | Vasco Cúrdia; Marco Del Negro; Daniel L. Greenwald |
| Abstract: | We estimate a DSGE model where rare large shocks can occur, but replace the commonly used Gaussian assumption with a Student´s t-distribution. Results from the Smets and Wouters (2007) model estimated on the usual set of macroeconomic time series over the 1964-2011 period indicate that 1) the Student´s t specification is strongly favored by the data, even when we allow for low-frequency variation in the volatility of the shocks, and 2) the estimated degrees of freedom are quite low for several shocks that drive U.S. business cycles, implying an important role for rare large shocks. This result holds even if we exclude the Great Recession from the sample. We also show that inference about low-frequency changes in volatility—and, in particular, inference about the magnitude of the Great Moderation—is different once we allow for fat tails. |
| Keywords: | Equilibrium (Economics) ; Stochastic analysis ; Recessions ; Business cycles |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:585&r=dge |
| By: | Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani |
| Abstract: | Can there be too much trading in financial markets? To address this question, we construct a dynamic general equilibrium model, where agents face idiosyncratic preference and technology shocks. A financial market allows agents to adjust their portfolio of liquid and illiquid assets in response to these shocks. The opportunity to do so reduces the demand for the liquid asset and, hence, its value. The optimal policy response is to restrict (but not eliminate) access to the financial market. The reason for this result is that the portfolio choice exhibits a pecuniary externality: An agent does not take into account that by holding more of the liquid asset, he not only acquires additional insurance but also marginally increases the value of the liquid asset which improves insurance for other market participants. |
| Keywords: | Monetary policy, liquidity, financial markets |
| JEL: | E52 E58 E59 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:101&r=dge |
| By: | Pengfei Wang (Hong Kong University of Science and Tech); Jianjun Miao (Boston University) |
| Abstract: | Stock price bubbles are often on productive assets and occur in a sector of the economy. In addition, their occurence is often accompanied by credit booms. Incorporating these features, we provide a two-sector endogenous growth model with credit-driven stock price bubbles. Bubbles have a credit easing effect in that they relax collateral constraints and improve investment efficiency. Sectoral bubbles also have a capital reallocation effect in the sense that bubbles in a sector attract more capital to be reallocated to that sector. Their impact on economic growth depends on the interplay between these two effects. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:227&r=dge |
| By: | Tobias Cwik |
| Abstract: | After the run up in debt-to-GDP ratios around the world in the aftermath of the financial crisis and the associated lower fiscal space, the question of prudent fiscal consolidation is back on the agenda. In this paper, I study the macroeconomic implications of fiscal consolidation triggered by the newly introduced "debt brake" in Germany, which dampens the accumulation of debt. I address this question using a medium-size new Keynesian DSGE model for Germany. The model includes the government debt-to-GDP ratio, government transfers, labour income tax, consumption tax and capital tax revenues. I find that the "debt brake" enforces fiscal consolidation in times of economic expansions without constraining fiscal policy makers in times of recessions. I also find that the debt brake raises the government spending multiplier initially but not over time. Finally, the debt brake, with a fiscal consolidation on the government spending and transfers side, leads to a significant stabilization of the private sector without increasing the volatility of the fiscal instruments. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-80&r=dge |
| By: | Adrian Peralta-Alva; Manuel S. Santos |
| Abstract: | This paper provides a general framework for the quantitative analysis of stochastic dynamic models. We review convergence properties of some numerical algorithms and available methods to bound approximation errors. We then address convergence and accuracy properties of the simulated moments. Our purpose is to provide an asymptotic theory for the computation, simulation-based estimation, and testing of dynamic economies. The theoretical analysis is complemented with several illustrative examples. We study both optimal and non-optimal economies. Optimal economies generate smooth laws of motion defining Markov equilibria, and can be approximated by recursive methods with contractive properties. Non-optimal economies, however, lack existence of continuous Markov equilibria, and need to be computed by other algorithms with weaker approximation properties. |
| Keywords: | Error analysis (Mathematics) ; Markov processes |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-062&r=dge |
| By: | Makoto Watanabe (VU University Amsterdam) |
| Abstract: | This paper studies an intermediated market operated by middlemen with high inventory holdings. I present a directed search model in which middlemen are less likely to experience a stockout because they have the advantage of inventory capacity, relative to other sellers. The model explains why popular items are sold at a larger premium, and everyday items at a larger discount, by large-scaled intermediaries. The concentration of middlemen's market, i.e., few middlemen, each with large capacity, can lead to a higher matching efficiency, but with a lower total welfare, compared to having many middlemen, each with small capacity. |
| Keywords: | Directed Search; Intermediation; Inventory holdings |
| JEL: | D4 F1 G2 L1 L8 R1 |
| Date: | 2012–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120138&r=dge |
| By: | Stephen Williamson (Washington University in St. Louis); Francesca Carapella (Board of Governors of the Federal Reserv) |
| Abstract: | A model of credit and government debt with limited commitment is constructed, building on a Lagos-Wright construct. In the baseline equilibrium, global punishments support an efficient equilibrium in which government debt is neutral - there is Ricardian equivalence. In a symmetric equilibrium with individual punishments, trade in government debt essentially always serves to increase welfare by altering the incentive to default. In asymmetric equilibria, all borrowers are fundamentally identical, but some default in equilibrium, there is an adverse selection problem in a segment of the credit market, and good borrowers pay a default premium. Government debt, in addition to altering the incentive to default, serves to mitigate the adverse selection problem. Thus, government debt relaxes incentive constraints, working through an endogenous collateral effect. The model highlights the role of government debt in helping to solve the problem of a self-fulfilling breakdown in credit markets. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:226&r=dge |
| By: | Jianfeng Yu (University of Minnesota); Bin Wei (Federal Reserve Board); Zhiguo He (University of Chicago, Booth School of Business) |
| Abstract: | This paper introduces profitability uncertainty into an infinite-horizon variation of the classic Holmstrom and Milgrom (1987) model, and studies optimal dynamic contracting with endogenous learning. The agent's potential belief manipulation leads to the hidden information problem, which makes incentive provisions intertemporally linked in the optimal contract. We reduce the contracting problem into a dynamic programming problem with one state variable, and characterize the optimal contract with an ordinary differential equation. In the benchmark case of Holmstrom and Milgrom (1987) without learning, the optimal effort is constant, and the optimal contract is linear. In contrast, in our model with endogenous learning, the optimal effort policy becomes history dependent, and decreases over time on average. Moreover, we show that the optimal contract exhibits an option-like feature in that the incentives rise after good performance shocks. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:221&r=dge |
| 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: | Many algorithms that provide approximate solutions for dynamic stochastic general equilibrium (DSGE) models employ the generalized Schur factorization since it allows for a flexible formulation of the model and exempts the researcher from identifying equations that give raise to infinite eigenvalues. We show, by means of an example, that the policy functions obtained by this approach may differ from those obtained from the solution of a properly reduced system. As a consequence, simulation results may depend on the numeric values of parameters that are theoretically irrelevant. The source of this inaccuracy are ill-conditioned matrices as they emerge, e.g., in models with strong habits. Therefore, researchers should always cross-check their results and test the accuracy of the solution. |
| Keywords: | DSGE Models, Schur Factorization, System Reduction, Accuracy of Solutions |
| JEL: | C32 C63 E37 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:aug:augsbe:0320&r=dge |
| By: | Nancy L. Stokey |
| Abstract: | This paper studies the interaction between technology, a publicly available input that flows in from abroad, and human capital, a private input that is accumulated domestically, as the twin engines of growth in a developing economy. The model displays two types of long run behavior, depending on policies and initial conditions. One is sustained growth, where the economy keeps pace with the technology frontier. The other is stagnation, where the economy converges to a minimal technology level that is independent of the world frontier. In a calibrated version of the model, transition paths after a policy change can display rapid growth, as in modern growth 'miracles.' In these economies policies that promote technology inflows are much more effective than subsidies to human capital accumulation in accelerating growth. A policy reversal produces a 'lost decade,' a period of slow growth that permanently reduces the level of income and consumption. |
| JEL: | O38 O40 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18654&r=dge |
| By: | Iverson, Terrence |
| Abstract: | The paper derives an explicit formula for the near-term carbon price in a dynamic stochastic general equilibrium climate model in which agents employ arbitrary non-constant time preference rates. The paper uses a simplified version of the model in Golosov et al. (2011), though we argue that the added assumptions are unlikely to matter for our conclusions. The formula is derived first under the assumption that the initial decision-maker has a commitment device, then solving for the unique subgame perfect equilibrium. Somewhat remarkably, the near-term carbon price is the same in both cases. We further show that the near-term carbon price remains unchanged for all potential beliefs about the time preference structure of future generations. It follows that concerns about time inconsistency can be safely ignored when applying the derived formula. The carbon price is the same as the Pigouvian tax in the equilibrium with commitment, and it is bigger than the Pigouvian tax in the equilibrium without commitment provided damages are sufficiently persistent. The formula reduces to the carbon price formula in Golosov et al. (2011) when discounting is constant, and it reduces to the carbon price formula in Gerlagh and Liski (2012) when discounting is quasi-hyperbolic. |
| Keywords: | hyperbolic discounting; time inconsistency; optimal carbon price |
| JEL: | Q5 |
| Date: | 2012–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43264&r=dge |
| By: | Taisuke Nakata (New York University) |
| Abstract: | During the Great Recession, the government provided large fiscal stimulus in an economic environment characterized by a high degree of uncertainty on the future course of the economy while the nominal interest rate was constrained at the zero lower bound. While many papers have analyzed the effects of fiscal policy at the zero lower bound, they all do so in a deterministic environment. This paper studies optimal government spending and monetary policy when the nominal interest rate is subject to the zero lower bound constraint in a stochastic environment. In the presence of uncertainty, the government chooses to increase its spending when at the zero lower bound by a substantially larger amount than it would in the deterministic environment. The welfare effect of fiscal policy is nuanced in the stochastic environment if the government cannot commit. Although the access to government spending policy increases welfare in the face of a large deflationary shock, it can decrease welfare during normal times as the government reduces the nominal interest rate less aggressively before reaching the zero lower bound. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:181&r=dge |
| By: | Chassamboulli, Andri; Palivos , Theodore |
| 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 |
| JEL: | F22 J61 J64 |
| Date: | 2012–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43297&r=dge |
| By: | Tobias Adrian |
| Abstract: | A 2012 paper by Goodhart, Kashyap, Tsomocos, and Vardoulakis (GKTV) proposes a dynamic general equilibrium framework that provides a conceptual—and to some extent quantitative—framework for the analysis of macroprudential policies. The distinguishing feature of GKTV’s paper relative to any other on macroprudential policy is its study of a setting with multiple financial frictions that permits the analysis of multiple macroprudential policy tools at the same time. The modeling approach includes various market failures such as incomplete markets with heterogeneous agents, fire-sale externalities, and margin spirals, all of which provide rationales for policies designed to improve welfare. In GKTV’s model, liquidity ratios are found to be more efficient preemptive tools than capital ratios or loan-to-value ratios. However, these liquidity ratios need to be relaxed in times of crises in order to reduce adverse effects from fire-sale externalities. It remains to be seen how robust these findings are in alternative, fully dynamic settings. Furthermore, GKTV’s approach does not address the tension between micro- and macroprudential objectives, and the timing of the buildup and release of policies is not specified precisely. |
| Keywords: | Financial institutions - Law and legislation ; Systemic risk ; Equilibrium (Economics) - Mathematical models ; Econometric models ; Liquidity (Economics) ; Financial institutions |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:583&r=dge |
| By: | Telyukova, Irina A. |
| Abstract: | In the 2001 U.S. Survey of Consumer Finances (SCF), 27% of households report simultaneously revolving significant credit card debt and holding sizeable amounts of low-return liquid assets; this is known as the \credit card debt puzzle". In this paper, I quantitatively evaluate the role of liquidity demand in accounting for this puzzle: households that accumulate credit card debt may not pay it off using their money in the bank, because they anticipate needing that money in situations where credit cards cannot be used. I characterize the puzzle in survey data, and calibrate a dynamic stochastic heterogeneous-agent model of household portfolio choice, where consumer credit and liquidity coexist as means of consumption and saving, where households consume a cash good and a credit good, and where cash consumption is subject to uncertainty. The model accounts for between 44% and 56% of the households in the data who hold consumer debt and liquidity simultaneously, and for 100% of the liquidity held by a median such household. Under reasonable calibration alternatives, the model can capture the entire puzzle group size as well. One-half of money demand in the model is precautionary. |
| Keywords: | Economics, General, credit card debt, liquidity demand, stochastic heterogeneous-agent |
| Date: | 2012–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:qt0ww2c04z&r=dge |
| By: | Greg Kaplan (Department of Economics, Princeton University); Guido Menzio (Department of Economics, University of Pennsylvania) |
| Abstract: | We propose a novel theory of self-fulfilling fluctuations in the labor market. A firm employing an additional worker generates positive externalities on other firms, because employed workers have more income to spend and have less time to shop for low prices than unemployed workers. We quantify these shopping externalities and show that they are sufficiently strong to create strategic complementarities in the employment decisions of different firms and to generate multiple rational expectations equilibria. Equilibria differ with respect to the agents’ (rational) expectations about future unemployment. We show that negative shocks to agents’ expectations lead to fluctuations in vacancies, unemployment, labor productivity and the stock market that closely resemble those observed in the US during the Great Recession. |
| Keywords: | Self-fulfilling fluctuations, strategic complementarity, unemployment |
| JEL: | D11 D21 D43 E32 |
| Date: | 2012–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:12-048&r=dge |
| By: | Antonella Tutino (Federal Reserve Bank of Dallas); Anton Cheremukhin (Federal Reserve Bank of Dallas) |
| Abstract: | We document new evidence on the link between business failures, markups and business cycle asymmetry in the U.S. economy. We study a model where costly information-processing constraints affect exit decisions of heterogeneous firms in the presence of an aggregate demand externality. We show that such a model is capable of explaining both the novel and the classical empirical evidence on output growth asymmetry, the asymmetry between entry and exit rates, as well as counter-cyclical variations in profit margins. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:161&r=dge |
| By: | Fuentes-Albero, Cristina |
| Abstract: | I revisit the Great Inflation and the Great Moderation for nominal and real variables. I document that while financial price variables follow such a pattern; financial quantity variables experience a continuous immoderation. A model with financial frictions and financial shocks allowing for structural breaks in the size of shocks and the institutional framework is estimated. The paper shows that while the Great Inflation was driven by bad luck, the Great Moderation is mostly due to better financial institutions. Financial shocks arise as relevant drivers of US business cycle fluctuations. |
| Keywords: | Great Inflation; Great Moderation; immoderation; financial frictions; financial shocks; structural breaks; Bayesian methods |
| JEL: | E32 E44 C11 C13 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:018&r=dge |
| By: | Todd Keister (Federal Reserve Bank of New York); Huberto Ennis (Richmond Fed) |
| Abstract: | We study a finite-depositor version of the Diamond-Dybvig model of financial intermediation in which the bank and all depositors observe withdrawals as they occur. We derive the (constrained) efficient allocation of resources in closed-form and show that this allocation provides liquidity insurance to depositors. The contractual arrangement that decentralizes this allocation has debt-like features and resembles the type of demand deposits commonly offered by banking institutions. We provide examples where this arrangement admits another equilibrium in which some depositors run on the bank, withdrawing funds regardless of their liquidity needs. A bank run in our setting is always partial, with only those depositors who can withdraw sufficiently early participating. Depositors who are late to withdraw during a run suffer significant discounts from the face value of their deposits. The run, while partial, may involve a large number of depositors and result in significant inefficiencies. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:179&r=dge |
| By: | Stefania Albanesi (Federal Reserve Bank of New York) |
| Abstract: | This paper examines optimal taxation of capital and labor income in a dynamic model with occupational choice. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:213&r=dge |
| By: | Villemot, Sébastien |
| Abstract: | State-of-the-art algorithms for solving sovereign debt models with endogenous default rely on value function iterations. These algorithms are consequently very slow and quickly become intractable, even for a state space of dimension as low as three. This paper shows how to adapt the endogenous grid method for sovereign debt models, leading to a dramatic speed gain by a factor comprised between 5 and 10. A second contribution is to quantify and compare the accuracy of the computed solutions by both the value function iterations and the endogenous grid method. |
| Keywords: | sovereign debt; endogenous default; endogenous grid method; solution accuracy |
| JEL: | C63 F34 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:017&r=dge |
| By: | Albuquerque, Rui; Eichenbaum, Martin; Rebelo, Sérgio |
| 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. |
| Keywords: | bond yields; Equity premium; risk premium |
| JEL: | G12 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9262&r=dge |
| By: | Aspen Gorry (UC, Santa Cruz) |
| Abstract: | This paper studies a labor market where workers have incomplete information about the quality of their employment match. The model allows past experience to provide information about the quality of a new match. Allowing workers to learn from past job experience generates a decline in job ï¬Ânding and job separation rates with age that is consistent with patterns found in the data. To provide evidence of this learning mechanism, the model generates a prediction that wage volatility on a new job should decline with past job experience. This decline in wage volatility is documented in data from NLSY79. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:154&r=dge |
| By: | Miguel Casares (Departamento de Economía-UPNA); Jesús Vázquez (Departmento FAE II-UPV/EHU) |
| Abstract: | U.S. inflation has experienced a great moderation in the last two decades. This paper examines the factors behind this and other stylized facts, such as the weaker correlation ofinflation and nominal interest rate (Gibson paradox). Our findings point at lower exogenous variability of supply-side shocks and, to a lower extent, structural changes in money demand, monetary policy, and firms’ sticky pricing behavior as the main driving forces of the changes observed in recent U.S. business cycles. |
| Keywords: | DSGE monetary model, inflation moderation, structural changes. |
| JEL: | E32 E47 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nav:ecupna:1215&r=dge |
| By: | William B. Hawkins; Jose Mustre-del-Rio |
| Abstract: | An important risk faced by individuals is labor income risk associated with changes in demand for an individual’s selected occupation. This risk reflects uncertainty about future income on the current job. As an example, the declining competitiveness of the U.S. automobile or steel sectors are events that are unanticipated from the perspective of a worker, yet have a strong bearing on future labor income for these workers. One way to limit labor income risk is by switching occupations. This, however, is costly because of retraining costs, forgone earnings, and lost occupational specific experience. Hence, understanding when and which workers switch occupations is a non-trivial question. ; This paper examines the decision process through which individuals switch occupations as a way to limit labor income shocks. From a positive standpoint, understanding why and when individuals switch occupations is crucial for understanding the behavior of labor income. From a normative standpoint, if imperfect financial markets hinder occupational mobility, then there is a clear role for monetary policy to improve economic outcomes ; We quantify the importance of financial frictions for occupational mobility and for economic welfare. We consider a world where financial markets are incomplete, occupations receive shocks, and switching occupations is costly for the aforementioned reasons. In our benchmark model we find that occupational mobility is significantly lower than in a world with complete financial markets. This translates into reduced economic welfare for individuals as they cannot efficiently reallocate across occupations. We then assess the impact of policies aimed at increasing occupational mobility. In a simple example, we find that an across the board subsidy to switching occupations increases mobility but not economic welfare. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp12-06&r=dge |
| By: | Fabrizio Zilibotti (University of Zurich); Matthias Doepke (Northwestern University) |
| Abstract: | We develop a theory of the intergenerational transmission of risk preferences. Parents can instill either risk tolerance or risk aversion in their children, and face both altruistic and paternalistic motives in this process. Risk-tolerant children are more likely to benefit from profitable but risky opportunities, such as the career choice of being an entrepreneur. However, risk-tolerant children may also engage in other risky choices (such as smoking or riding motorcycles) that the parents disagree with. In our model, the transmission of risk preferences feeds back into the growth rate of the economy, because risk-taking entrepreneurs are essential for endogenous technological innovation. The theory has implications for how the extent and nature of risk in the economic environment affects the transmission of risk preferences, entrepreneurship, and growth. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:246&r=dge |
| By: | Alice Schoonbroodt (The University of Iowa) |
| Abstract: | Further, a combination of shifts in children’s market opportunities and the intro- duction of PAYG social security may help account for fertility patterns, living arrange- ments and intergenerational wealth flows over the past two centuries. The theoretical model we have in mind shows that the optimal living arrangement until the beginning of the 19th century may have been the farm and community based extended family in which parents had full control over their adult children, high fertility would follow naturally. During the 19th and early 20th century, child labor and compulsory edu- cation policies were introduced while adult children’s outside options (in emerging labor markets) increased significantly, which coincided with the fertility decline and an initial increase in education levels. The model also replicates this pattern. Given young adults’ increasing opportunities, parents and children may then have agreed to separate, the parent thereby foregoing transfers from the children which are no longer enforceable. In 1937 the U.S. government introduced a PAYG social security system. Such a system tends to decrease the desire of parents to take from their chil- dren. Hence, desired transfers to children increase. These may come in the form of educational investments, which were increasingly profitable. Hence, this combination may have generated Caldwell (1978)’s reversal of net transfers between parents and children. Whether these channels indeed played a quantitatively important role in U.S. fertility history is an additional question here. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:158&r=dge |