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on Dynamic General Equilibrium |
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Issue of 2013‒01‒12
twenty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Gerhard Glomm (Department of Economics, Towson University); Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University) |
| Abstract: | We study the macroeconomic and welfare effects of decumulating government debt in an overlapping generations model with skill heterogeneity and productive and non-productive government programs. Our results are: First, in the small open economy model calibrated to Greece, the spending-based austerity reform dominates the tax-based reform with respect to income effects but not with respect to the welfare effect. A mixed reform combining the tax-based and spending-based measures results in the largest welfare effects of up to 1.8 percent of pre-reform consumption. Second, the welfare effects vary significantly along the transition to the post reform steady state, depending not only on fiscal austerity measures, but also on skill types, working sectors and generations. When consumption taxes adjust the aggregate welfare effects are positive but the current old and middle age generations experience welfare losses while current young workers and future generations are beneficiaries. Third, interactions between fiscal distortions and the risk premium as well as accessibility to international capital markets strongly influence the effects of fiscal austerity. Larger growth and welfare effects are observed when the risk premium is larger than zero and when access to international capital markets is restricted. |
| Keywords: | Fiscal consolidation, welfare, distributional effects, overlapping generations, dynamic general equilibrium. |
| JEL: | E21 E63 H55 J26 J45 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2013-01&r=dge |
| By: | Poeschel, Friedrich |
| Abstract: | In a model of sequential search with transferable utility, we allow heterogeneous agents to strategically choose a costless signal of their type. Search frictions are included as discounting and explicit search costs. Through signals, if only they are truthful, agents can avoid the inefficiencies of random search. Then the situation effectively approaches a setting without search frictions. We identify the condition under which signals are truthful and a unique separating equilibrium with perfect sorting arises despite frictions. We find that supermodularity of the match production function is a necessary and sufficient condition. This is a weaker condition than is needed for sorting in models without signals, which may explain why sorting is much more widespread in reality than existing models would suggest. Supermodularity functions here as both a sorting condition and a single-crossing property. The unique separating equilibrium in our model achieves nearly unconstrained efficiency despite frictions: agents successfully conclude their search after a single meeting, a stable matching results, and overall match output is maximised. -- |
| JEL: | J64 D83 C78 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62061&r=dge |
| By: | Koehne, Sebastian; Kuhn, Moritz |
| Abstract: | Empirical studies show that job search behavior depends on the financial situation of the unemployed. Starting from this observation, we ask how unemployment insurance policy should take the individual financial situation into account. We use a quantitative model with a realistically calibrated unemployment insurance system, individual consumption-saving decision and moral hazard during job search to answer this question and find that the optimal policy provides unemployment benefits that increase with individual assets. By implicitly raising interest rates, asset-increasing benefits encourage self-insurance, which facilitates consumption smoothing during unemployment, but does not exacerbate moral hazard for job search. Asset-increasing benefits also have desirable properties from a dynamic perspective, because they emulate key features of the dynamics of constrained efficient allocations. The welfare gain from introducing asset-increasing benefits is substantial and amounts to 1.5 % of consumption when comparing steady states and 0.8 % of consumption when taking transition costs into account. More generous replacement rates or benefits targeted to asset-poor households, by contrast, have a negative effect on welfare. -- |
| JEL: | E21 H21 J65 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:66056&r=dge |
| By: | Annamaria Lusardi; Pierre-Carl Michaud; Olivia S. Mitchell |
| Abstract: | While financial knowledge is strongly positively related to household wealth, there is also considerable cross-sectional variation in both financial knowledge and net asset levels. To explore these patterns, we develop a calibrated stochastic life cycle model featuring endogenous financial knowledge accumulation. The model generates substantial wealth inequality, over and above that of standard life cycle models; this is because higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with precautionary saving motives, boost their need for private wealth accumulation and thus financial knowledge. Our simulations show that endogenous financial knowledge accumulation has the potential to account for a large proportion of wealth inequality. The fraction of the population which is rationally financially “ignorant” depends on the generosity of the retirement system and the level of means-tested benefits. Educational efforts to enhance financial savvy early in the life cycle so as to produce one percentage point excess return per year would be valued highly by people in all educational groups. |
| JEL: | D01 D1 D31 D83 D91 E21 G11 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18669&r=dge |
| By: | Luisito Bertinelli (University of Luxembourg CREA); Olivier Cardi (University Pantheon-Assas ERMES and Ecole Polytechnique); Partha Sen (Delhi School of Economics) |
| Abstract: | In a dynamic general equilibrium model with endogenous markups and labor market frictions, we investigate the effects of increased product market competition. Unlike most macroeconomic models of search, we endogenize the labor supply along the extensive mar- gin. We find numerically that a model with endogenous labor force participation decision produces a decline in the unemployment rate which is almost three times larger than that in a model with fixed labor force. For a calibration capturing alternatively European and the U.S. labor markets, a deregulation episode, which lowers the markup by 3 percent- age points, results in a fall in the unemployment rate by 0.17 and 0.07 percentage point, respectively, while the labor share is almost unaffected in the long-run. The sensitivity analysis reveals that product market deregulation is more effective in countries where labor market regulation is high, product markets are initially highly regulated, unemployment benefits are smaller and labor force is more responsive. |
| Keywords: | Imperfect competition; Endogenous markup; Search theory; Unemployment; Deregulation |
| JEL: | E24 J63 L16 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:12-04&r=dge |
| By: | Radde, Sören |
| Abstract: | This paper presents a dynamic stochastic general equilibrium model which studies the business-cycle implications of financial frictions and liquidity risk at the bank-level. Following Holmstr m and Tirole (1998), demand for liquidity reserves arises from the anticipation of idiosyncratic operating expenses during the execution phase of bank-financed investment projects. Banks react to adverse aggregate shocks by hoarding liquidity while being forced to decrease their leverage. Both effects amplify recessionary dynamics, since they crowd out funds available for investment financing. This mechanism is triggered by a market liquidity squeeze modelled as a shock to the collateral value of banks assets. This novel type of aggregate risk induces a credit crunch scenario which shares key features with the Great Recession such as strong output decline, pro-cyclical leverage and counter-cyclical liquidity hoarding. Unconventional credit policy in the form of a wealth transfer from households to credit constrained banks is shown to mitigate the credit crunch. -- |
| JEL: | E22 E32 E44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:65408&r=dge |
| By: | Kuhn, Michael; Prettner, Klaus |
| Abstract: | We study the effects of a labor-intensive health care sector within an R&D-driven growth model with overlapping generations. Health care increases longevity and labor participation/productivity. We examine under which conditions expanding health care enhances growth and welfare. Even if the provision of health care diverts labor from productive activities, it may still fuel R&D and economic growth if the additional wealth that comes with expanding longevity translates into a more capital/machine- intensive final goods production and, thereby, raises the return to developing new machines. We establish mild conditions under which an expansion of health care beyond the growth-maximizing level is Pareto-improving. -- |
| Keywords: | endogenous growth,mortality,(Blanchard) overlapping generations,health care,research and development,sectoral composition |
| JEL: | I15 I18 O11 O41 O43 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuweco:032012&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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62052&r=dge |
| By: | Rannenberg, Ansgar |
| 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: | E20 E44 E30 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62035&r=dge |
| By: | Haefke, Christian; Reiter, Michael |
| Abstract: | In this paper we use information on the cyclical variation of labor market participation to learn about the aggregate labor supply elasticity. For this purpose, we extend the standard labor market matching model to allow for endogenous participation. A model that is calibrated to replicate the variability of unemployment and participation, and the negative correlation of unemployment and GDP, implies an aggregate labor supply elasticity along the extensive margin of around 0.3 for men and 0.5 for women. This is in line with recent micro-econometric estimates. -- |
| JEL: | E24 E32 J21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62055&r=dge |
| By: | Hillebrand, Marten; Kikuchi, Tomoo |
| Abstract: | We study an exchange economy with overlapping generations of consumers who derive utility from consuming a non-durable commodity and housing. A banking sector offers loans to finance housing. We provide a complete characterization of the equilibrium dynamics which alternates between an expansive regime where housing prices increase and banks expand loans and a contractive regime associated with decreasing housing values and shrinking credit volume. Regime switches occur even under small but persistent income changes giving rise to large booms and busts in housing prices not reflecting changes in fundamentals. -- |
| JEL: | C62 E32 G21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62042&r=dge |
| By: | Prettner, Klaus |
| Abstract: | We introduce publicly funded education into R&D based economic growth theory. Our framework allows us to i) explicitly describe a realistic process of human capital accumulation within these types of growth models, ii) reconcile semi-endogenous growth theory with the empirical evidence on the relationship between economic development and population growth, iii) revise the policy invariance result of semi-endogenous growth frameworks. In particular, we show that the model supports a negative (positive) association between economic growth and population growth if the education sector is well (badly) developed and that changes of public investments into education crucially affect the long-run balanced growth path. -- |
| JEL: | J24 O11 O41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:65414&r=dge |
| By: | Hohberger, Stefan; Herz, Bernhard |
| Abstract: | The paper examines the stabilizing properties of fiscal policy for current account imbalances under alternative exchange rate regimes. Using a small open economy DSGE model with fiscal feedback rules, we investigate the dynamic responses of different shocks to macroeconomic variables and their implication for the current account. Our results imply that a fiscal response to the current account improves the stabilizing effect of most macroeconomic variables compared to a countercyclical response to output. The loss of national monetary policy when entering into a monetary union leads to higher variability and more persistence of the real exchange rate and the current account. Despite the stabilizing properties, fiscal policy intervention induces higher variability of output in the short-run and therefore faces a trade-off between stabilizing the external position and output -- |
| JEL: | E62 F41 E61 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:66054&r=dge |
| By: | Nicola Pavoni; Ofer Setty; Giovanni L. Violante |
| Abstract: | Some existing welfare programs (“work-first”) require participants to work in exchange for benefits. Others (“job search-first”) emphasize private job-search and provide assistance in finding and retaining a durable employment. This paper studies the optimal design of welfare programs when (i) the principal/government is unable to observe the agent’s effort, but can assist the agent’s job search and can mandate the agent to work, and (ii) agents’ skills depreciate during unemployment. In the optimal welfare program, assisted search is implemented between an initial spell of private search (unemployment insurance) and a final spell of pure income support where search effort is not elicited. To be effective, job-search assistance requires large reemployment subsidies. The optimal program features compulsory work activities for low levels of program’s generosity (i.e., its promised utility or available budget). The threat of mandatory work acts like a punishment that facilitates the provision of search incentives without compromising consumption smoothing too much. |
| JEL: | D82 H21 J24 J64 J65 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18666&r=dge |
| By: | M. Emranul Haque; Babar Hussain |
| Abstract: | This paper provides an explanation for recent empirical evidence on the heterogeneous effects of human capital on economic growth in developing countries. In a two-period overlapping generations economy with physical and capital accumulation, state-appointed bureaucrats are responsible for procuring productive public goods. Corruption arises because of an opportunity for bureaucrats to misappropriate public funds. The decision of the corruptible bureaucrat affects public finances and hence the capital accumulation in the economy. Alongside the positive productivity enhancing effect, human capital is assumed to increase the efficiency of corrupt bureaucrats in embezzlement. 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 main results are as follows: (1) corruption is always bad for economic development, but its effect is worse in the economy with (more) human capital; (2) the incidence of corruption may, itself, be affected by both the development and human capital level of the economy; (3) education is good for development when accompanied by good governance, but may be bad for development when governance is bad; and (4) corruption and poverty may co-exist as permanent, rather than just transitory, fixtures of an economy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:179&r=dge |
| By: | Prettner, Klaus |
| Abstract: | We introduce publicly funded education into R&D-based economic growth theory. Our framework allows us to i) explicitly describe a realistic process of human capital accumulation within these types of growth models, ii) reconcile semi-endogenous growth theory with the empirical evidence on the relationship between economic development and population growth, and iii) revise the policy invariance result of semi-endogenous growth frameworks. In particular, we show that the model supports a negative association between economic growth and population growth if the education sector is well developed and the population growth rate is low, that is, for modern industrialized countries. Furthermore, within our framework, changes in public educational investments have the potential to affect the long-run balanced growth rate. -- |
| Keywords: | public education,human capital accumulation,technological change,semi-endogenous economic growth |
| JEL: | I25 J24 O11 O31 O41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuweco:022012&r=dge |
| By: | Leonid Kogan; Dimitris Papanikolaou; Noah Stoffman |
| Abstract: | We analyze the effect of innovation on asset prices in a tractable, general equilibrium framework with heterogeneous households and firms. Innovation has a heterogenous impact on households and firms. Technological improvements embodied in new capital benefit workers, while displacing existing firms and their shareholders. This displacement process is uneven: newer generations of shareholders benefit at the expense of existing cohorts; and firms well positioned to take advantage of these opportunities benefit at the expense of firms unable to do so. Under standard preference parameters, the risk premium associated with innovation is negative. Our model delivers several stylized facts about asset returns, consumption and labor income. We derive and test new predictions of our framework using a direct measure of innovation. The model's predictions are supported by the data. |
| JEL: | E20 E32 G10 G12 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18671&r=dge |
| By: | Roeder, Kerstin; Habla, Wolfgang |
| Abstract: | We analyze the German ecotax package in a model of overlapping generations and majority voting. The package consists of the ecotax rate and the budgetary rule which assigns a fraction of the tax revenue to the reduction of pension contributions while holding pension benefits constant. The old and the young generation have different preferences with respect to the tax rate and the use of the tax revenue. Our theoretical model as well as the calibration of our model show that the median voter s preferred tax rate may well exceed the efficient tax rate whenever his income is sufficiently high. This is the likelier the more CO2 is degraded and removed from the atmosphere. Furthermore, the median voter prefers earmarking of tax revenue to reductions in pension contributions. The latter is quite an accurate prediction of the situation in Germany where the share of tax revenue devoted to the pension scheme amounts to more than 90%. -- |
| JEL: | H23 H55 D78 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62060&r=dge |
| By: | Föllmi, Reto; Hanslin, Sandra; Kohler, Andreas |
| Abstract: | This paper presents a dynamic North-South general equilibrium model with non- homothetic preferences. Innovation takes place in the rich North while firms in the poor South at random imitate products manufactured in the North. The model is able to generate endogenous product cycles as described by Vernon (1966) where the different stages of the product cycle are not only determined by supply side factors but also by the distribution of income between North and South. We simulate comparative statics results of changes in Southern labor productivity, changes in inequality across regions, and changes in the savings rate. We further provide suggestive evidence for the product cycle stages. -- |
| JEL: | O31 F10 O14 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62023&r=dge |
| By: | Fehr, Hans; Uhde, Johannes |
| Abstract: | The present paper aims to quantify efficiency properties of real world social security systems of various institutional designs in order to identify an optimal pension design. Starting from a benchmark economy without social security, we introduce alternative pension systems and compare the costs arising from liquidity constraints as well as labor and savings distortions versus the benefits from insurance provision against income and lifespan uncertainty. Our findings highlight strong efficiency losses arising from both means-testing pension benefits against private assets and restricting the contribution base while indicating a positive impact of means-testing flat benefits against earnings-related benefits within pension systems resting on several tiers. Furthermore, our results suggest that the negative correlation between pension progressivity and pension generosity may be justified on efficiency grounds. In our model a single-tier universal earnings-related pension system yields the highest efficiency gains dominating flat benefits as well as two-tier systems of any form. -- |
| JEL: | C68 H55 H31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62024&r=dge |
| By: | Kuhn, Michael; Wrzaczek, Stefan; Prskawetz, Alexia; Feichtinger, Gustav |
| Abstract: | We examine within a life-cycle set-up the simultaneous choice of health care and retirement (together with consumption), when health care contributes to both a reduction in mortality and in morbidity. Health tends to impact on retirement via morbidity, determining the disutility of work, and through longevity, determining the need to accumulate retirement wealth. In contrast, the age of retirement drives health through changes in the value of survival and the value of morbidity reductions. We apply our model to analyse the effects of moral hazard in the annuity market: While moral hazard always induces excessive health investments and an excessive duration of working life it also triggers an excessive level of consumption if the impact of health on the disutility of work is sufficiently large. We examine a transfer scheme and mandatory retirement as policies to curtail moral hazard. Numerical analysis illustrates the working of our model. -- |
| Keywords: | annuities,demand for health,moral hazard,life-cycle-model,optimal control,retirement,value of life |
| JEL: | D91 I12 J26 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuweco:012012&r=dge |