nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒03‒02
fifteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Oil Price Uncertainty in a Small Open Economy By Yusuf Soner Baskaya; Timur Hulagu; Hande Kucuk
  2. Optimal Public Debt Management and Liquidity Provision By George-Marios Angeletos; Fabrice Collard; Harris Dellas; Behzad Diba
  3. Solving Incomplete Markets Models by Derivative Aggregation By Tobias Grasl
  4. Ramsey Monetary Policy in a New Keynesian Model with Endogenous Growth By Barbara Annicchiarico; Lorenza Rossi
  5. Unemployment in the Estimated New Keynesian SoePL-2012 DSGE Model By Grzegorz Grabek; Bohdan Klos
  6. (In)determinacy, bargaining, and R&D policies in an economy with endogenous technological change By Lai, Chung-hui
  7. Fiscal Policy in a Small Open Economy with Oil Sector and non-Ricardian Agents By Andrés González; Martha Rosalba López Piñeros; Norberto Rodríguez; Santiago Téllez
  8. Trend Shocks and Economic Development By Claude Francis Naoussi; Fabien Tripier
  9. Public education, technological change and economic prosperity By Klaus Prettner
  10. Unconventional government debt purchases as a supplement to conventional monetary policy By Ellison , Martin; Tischbirek , Andreas
  11. Optimal Degree Of Funding Of Public Sector Pension Plans By Meijdam, A.C.; Ponds, E.H.M.
  12. Post schooling human capital investments and the life cycle variance of earnings By Magnac, Thierry; Pistolesi, Nicolas; Roux, Sébastien
  13. Project Heterogeneity and Growth: The Impact of Selection By Sina T. Ates; Felipe E. Saffie
  14. Career Progression, Economic Downturns, and Skills By Jerome Adda; Christian Dustmann; Costas Meghir; Jean-Marc Robin
  15. The Economic and Demographic Transition, Mortality, and Comparative Development By Cervellati, Matteo; Sunde, Uwe

  1. By: Yusuf Soner Baskaya; Timur Hulagu; Hande Kucuk
    Abstract: We analyze business cycle implications of oil price uncertainty in an oil-importing small open economy, where oil is used for both consumption and production. In our framework, higher volatility in oil prices works through two main channels. On the one hand, it makes the marginal product of capital riskier, creating an incentive to substitute away from capital. On the other hand, it increases the demand for precautionary savings, which might imply higher capital accumulation in response to a rise in oil price uncertainty depending on whether agents have access to an alternative asset, international bond in our model. We show that the fall in investment following a rise in the volatility of real oil prices in the case of financial integration is more than twice the fall in investment observed under financial autarky. Moreover, the interaction between shocks to the level and volatility of oil prices is quantitatively important: initial responses of investment, output and consumption to a rise in oil prices are almost doubled, when there is a simultaneous rise in the volatility of oil prices.
    Keywords: Oil price, stochastic volatility, financial market integration
    JEL: E20 E32 F32 F41 Q43
    Date: 2013
  2. By: George-Marios Angeletos; Fabrice Collard; Harris Dellas; Behzad Diba
    Abstract: We study the Ramsey policy problem in an economy in which firms face a collateral constraint. Issuing more public debt alleviates this friction by increasing the aggregate quantity of collateral. In so doing, however, the issuance of more debt also raises interest rates, which in turn increases the tax burden of servicing the entire outstanding debt. We first document how this trade-off upsets the optimality of tax smoothing and, in contrast to the standard paradigm, helps induce a unique and stable steady-state level of debt in the deterministic version of the model. We next study the optimal policy response to fiscal and financial shocks in the stochastic version. We finally show how the results extend to a variant model in which the financial friction afflicts consumers rather than firms.
    JEL: E4 E6 H6
    Date: 2013–02
  3. By: Tobias Grasl (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: This article presents a novel computational approach to solving models with both uninsurable idiosyncratic and aggregate risk that uses projection methods, simulation and perturbation. The approach is shown to be both as efficient and as accurate as existing methods on a model based on Krusell and Smith (1998), for which prior solutions exist. The approach has the advantage of extending straightforwardly, and with reasonable computational cost, to models with a greater range of diversity between agents, which is demonstrated by solving both a model with heterogeneity in discount-rates and a lifecycle model with incomplete markets.
    Keywords: Idiosyncratic Risk, Business Cycles, Numerical Methods
    JEL: C63 E21 E32
    Date: 2013–02
  4. By: Barbara Annicchiarico (University of Rome "Tor Vergata"); Lorenza Rossi (University of Pavia, Department of Economics and Business)
    Abstract: We study Ramsey monetary policy in a New Keynesian (NK) model with endogenous growth and knowledge spillovers external to each firm. We find that in contrast with the standard NK model, the Ramsey dynamics implies deviation from full inflation targeting in response to technology and government spending shocks
    Keywords: Monetary Policy, Endogenous Growth, Ramsey Problem
    JEL: E32 E52 O42
    Date: 2013–02–13
  5. By: Grzegorz Grabek (National Bank of Poland, Economic Institute); Bohdan Klos (National Bank of Poland, Economic Institute)
    Abstract: The paper shows some new features implemented in SoePL-2012 DSGE model, namely explicitly modeled unobserved labour supply and observed unemployment rate. Our approach to labour market in the New Keynesian DSGE model follows papers of Galí et al. (2011); Galí (2011b), see also Christiano et al. (2010b). The Galí’s idea has been implemented into medium-scale small open economy model estimated on Polish data. We analyze estimates of labour market shocks (the wage markup shock and the labour supply preference shock) and use the results to explain the evolution of unemployment in the period of 1999–2011.
    Keywords: estimated DSGE model, New Keynesian wage Phillips curve, unemployment, labour market shocks
    JEL: D58 E24 E31 E37 E52
    Date: 2013
  6. By: Lai, Chung-hui
    Abstract: In this paper, the author shows how the introduction of a bargaining game structure into a standard R&D endogenous growth model can be a potential source of local indeterminacy. He also shows that on a high-growth path, the government, by directly engaging in R&D activities and using R&D subsidies, may not enhance economic growth. On a low-growth path, the government, by directly engaging in R&D activities and using R&D subsidies, may enhance economic growth. --
    Keywords: government R&D,innovation,endogenous growth,bargaining,indeterminacy
    JEL: O30 O41 L00
    Date: 2013
  7. By: Andrés González; Martha Rosalba López Piñeros; Norberto Rodríguez; Santiago Téllez
    Abstract: In this paper we develop a dynamic stochastic general equilibrium fiscal model for the Colombian economy. The model has three main components: the existence of non-Ricardian households, price and wage rigidities, and a fiscal authority that finances government spending partly with public debt. The model is calibrated to capture the empirical evidence on the macroeconomic effects of government spending and it is used to study the effect of an oil price shock under different fiscal policy rules. Our results show that fiscal multipliers in Colombia are positive in a way consistent with the evidence. Our analysis also shows that a structural fiscal rule delivers a better outcome in terms of macroeconomic volatility relative to a balanced budget rule or a countercyclical fiscal rule.
    Date: 2013–02–17
  8. By: Claude Francis Naoussi; Fabien Tripier
    Abstract: This article explores the role of trend shocks in explaining the specificities of business cycles in developing countries using the methodology introduced by Aguiar and Gopinath (2007) [“Emerging Market Business Cycles: The Cycle Is the Trend” Journal of Political Economy 115(1)]. We specify a small open economy model with transitory and trend shocks on productivity to replicate the differences in the business cycle behavior observed between developed, emerging, and Sub-Saharan Africa countries. Our results suggest a strong relationship between the weight of trend shocks in the source of fluctuations and the level of economic development. The weight of trend shocks is (i) higher in Sub-Saharan Africa countries than in emerging and developed countries, (ii) negatively correlated with the level of income, the quality of institutions, and the size of the credit market, and (iii) uncorrelated with the volatility of aid received by countries, the inflation rate, and the trend in trade-openness.
    Keywords: Business Cycle;Permanent shocks;Growth;Africa;Small open economy
    JEL: E32 F41 O55
    Date: 2013–01
  9. By: Klaus Prettner
    Abstract: We introduce publicly funded education in R&D-based economic growth theory. The framework allows us to i) incorporate a realistic process of human capital accumulation for industrialized countries, ii) reconcile R&D-based growth theory with the empirical evidence on the relationship between economic prosperity and population growth, iii) revise the policy invariance result of semi-endogenous growth frameworks, and iv) show that the transitional effects of an education reform tend to be qualitatively different from its long-run impact.
    Keywords: human capital accumulation; technological progress; scale-free economic growth; public education policy
    JEL: I25 J24 O11 O31 O41
    Date: 2013–01–14
  10. By: Ellison , Martin (University of Oxford); Tischbirek , Andreas (University of Oxford)
    Abstract: In response to the Great Financial Crisis, the Federal Reserve and the Bank of England have adopted unconventional monetary policy instruments. We investigate if one of these, purchases of long-term government debt, could be a valuable addition to conventional short-term interest rate policy even if the main policy rate is not constrained by the zero lower bound. To do so we add a stylised financial sector and central bank asset purchases to an otherwise standard New Keynesian DSGE model. Asset quantities matter for interest rates through a preferred habitat channel. If conventional and unconventional monetary policy instruments are coordinated appropriately then the central bank is better able to stabilise both output and inflation.
    Keywords: quantitative easing; large-scale asset purchases; preferred habitat; optimal monetary policy
    JEL: E40 E43 E52 E58
    Date: 2013–02–18
  11. By: Meijdam, A.C.; Ponds, E.H.M. (Tilburg University, Center for Economic Research)
    Abstract: Abstract This paper explores the optimal degree of funding of public sector pension plans. It is assumed that a benevolent social planner decides on the contribution of current taxpayers to the funding of public sector pensions next period, weighing the interests of current and future tax payers. Two elements play a role in the optimal funding decision: the optimal-portfolio choice (i.e. the tradeoff between the expected excess return and the additional risk of funding vis-à-vis pay-as-you-go) and intergenerational redistribution (i.e. whether the current generation of tax payers is willing and capable to prefund the pension obligations of current public sector workers or shifts the burden to future generations via a pay-as-you-go scheme). The optimal degree of funding appears to vary over time, depending not only on the relative weight given to the current generation, risk aversion, and the distribution of financial risk and human capital risk, but also on the actual state of the economy, i.e. on wage income, funding in the past and the realization of the excess return on this funding.
    Keywords: public sector pension plans;funding;implicit debt;portfolio approach
    JEL: H55 H75
    Date: 2013
  12. By: Magnac, Thierry (TSE); Pistolesi, Nicolas (TSE); Roux, Sébastien (CREST INSEE, Paris)
    Abstract: We propose an original model of human capital investments after leaving school in which individuals di¤er in their initial human capital obtained at school, their rate of return, their costs of human capital investments and their terminal values of human capital at a fixed date in the future. We derive a tractable reduced form Mincerian model of log earnings profiles along the life cycle which is written as a linear factor model in which levels, growth and curvature of earnings profiles are individual-specific. Using panel data from a single cohort of French male wage earners observed over a long span of 30 years, a random effect model is estimated first by pseudo maximum likelihood methods. This step is followed by a simple second step fixed e¤ect method by which individual-specific structural parameters are estimated. This allows us to test restrictions, compute counterfactual profiles and evaluate how earnings inequality over the life-cycle is a¤ected by changes in structural parameters. Under some conditions, even small changes in life expectancy seem to imply large changes in earnings inequality.
    Keywords: human capital investment, earnings dynamics, post-schooling earnings growth, dynamic panel data
    JEL: C33 D91 J24 J31
    Date: 2013–01
  13. By: Sina T. Ates (Department of Economics, University of Pennsylvania); Felipe E. Saffie (Department of Economics, University of Pennsylvania)
    Abstract: In the classical literature of innovation-based endogenous growth, the main engine of long run economic growth is firm entry. Nevertheless, when projects are heterogeneous, and good ideas are scarce, a mass-composition trade off is introduced into this link: larger cohorts are characterized by a lower average quality. As one of the roles of the financial system is to screen the quality of projects, the ability of financial intermediaries to detect promising projects shapes the strength of this trade-off. In order to study this relationship, we build a general equilibrium endogenous growth model with project heterogeneity and financial screening. To illustrate the relevance of the mass and composition margins we apply this framework to two important debates in the growth literature. First, we show that corporate taxation has only a weak effect in growth, but a strong effect on firm entry, both well known empirical regularities. A second illustration studies the effects of financial development in growth. A word of caution arises: for economies that are characterized by high rates of firm creation, domestic credit should not be used as a proxy of financial development, in contrast to most of the empirical literature.
    Keywords: Growth, Firm Entry, Project Heterogeneity, Financial Selection, Entrepreneurship, Financial Development
    JEL: O3 O1 H3
    Date: 2013–02–05
  14. By: Jerome Adda (European University Institute); Christian Dustmann (University College London); Costas Meghir (Cowles Foundation, Yale University); Jean-Marc Robin (Sciences Po, Paris and University College London)
    Abstract: This paper analyzes the career progression of skilled and unskilled workers, with a focus on how careers are affected by economic downturns and whether formal skills, acquired early on, can shield workers from the effect of recessions. Using detailed administrative data for Germany for numerous birth cohorts across different regions, we follow workers from labor market entry onwards and estimate a dynamic life-cycle model of vocational training choice, labor supply, and wage progression. Most particularly, our model allows for labor market frictions that vary by skill group and over the business cycle. We find that sources of wage growth differ: learning-by-doing is an important component for unskilled workers early on in their careers, while job mobility is important for workers who acquire skills in an apprenticeship scheme before labor market entry. Likewise, economic downturns affect skill groups through very different channels: unskilled workers lose out from a decline in productivity and human capital, whereas skilled individuals suffer mainly from a lack of mobility.
    Keywords: Wage determination, Skills, Business cycles, Apprenticeship Training, Job Mobility, Human Capital
    JEL: J24 J31 J62 J63 I24
    Date: 2013–02
  15. By: Cervellati, Matteo (University of Bologna); Sunde, Uwe (University of Munich)
    Abstract: We propose a unified growth theory to investigate the mechanics generating the economic and demographic transition, and the role of mortality differences for comparative development. The framework can replicate the quantitative patterns in historical time series data and in contemporaneous cross-country panel data, including the bi-modal distribution of the endogenous variables across countries. The results suggest that differences in extrinsic mortality might explain a substantial part of the observed differences in the timing of the take-off across countries and the worldwide density distribution of the main variables of interest.
    Keywords: economic and demographic transition, adult mortality, child mortality, quantitative analysis, unified growth model, heterogeneous human capital, comparative development, development traps
    JEL: E10 J10 J13 N30 O10 O40
    Date: 2013–02

This nep-dge issue is ©2013 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.