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on Dynamic General Equilibrium |
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Issue of 2013‒03‒09
thirteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Andrés González; Martha Rosalba López Piñeros; Norberto Rodríguez Niño; 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. |
| Keywords: | Fiscal multipliers, fiscal policy rules, non-Ricardian households, DSGE model. Classification JEL: D91, E21, E62 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:759&r=dge |
| By: | Kazuo Nishimura (Institute of Economic Research, Kyoto University); Carine Nourry (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC) |
| Abstract: | We introduce public spending, financed through income taxation, in the Ramsey model with heterogeneous agents. Public spending as a source of welfare generates more complex dynamics. In contrast to previous contributions focusing on similar models but with wasteful public spending, limit cycles through Hopf bifurcation and expectation-driven fluctuations appear if the degree of capital-labor substitution is large enough to be compatible with capital income monotonicity. Moreover, unlike frameworks with a representative agent, our results do not require externalities in production and are compatible with a weakly elastic labor supply with respect to wage. |
| Keywords: | Endogenous cycles, indeterminacy, heterogeneous agents, public spending, endogenous labor supply, borrowing constraint. |
| JEL: | C62 E32 H23 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1314&r=dge |
| By: | Raouf Boucekkine (Aix-Marseille University (Aix-Marseille School of Economics, CNRS & EHESS, IRES and CORE, Université Catholique de Louvain.); Natali Hritonenko (Department of mathematics, Prairie View A&M University, USA.); Yuri Yatsenko (School of business, Houston Baptist University, USA) |
| Abstract: | We prove that the introduction of endogenous indivisible labor supply into the vintage capital growth model does not rule out the turnpike and optimal permanent regime properties, notably the non- monotonicity properties of optimal paths, inherent in this model. |
| Keywords: | Optimal control, integral equations with delays and advances, vintage capital, endogenous labor supply. |
| Date: | 2013–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1303&r=dge |
| By: | Pierre-Richard Agénor; Baris Alpaslan |
| Abstract: | This paper develops a three-period, gender-based overlapping generations model of endogenous growth with endogenous intra-household bargaining and child labor in home production by girls. Improved access to infrastructure reduces the amount of time parents find optimal for their daughters to spend on household chores, thereby allowing them to allocate more time to studying at home. The model is calibrated for a low-income country and various quantitative experiments are conducted, including an increase in the share of public spending on infrastructure, an increase in time allocated by mothers to their daughters, and a decrease in fathers' preference for girls' education. Our analysis shows that poor access by families to infrastructure may provide an endogenous explanation for the persistence in child labor at home and gender inequality in low-income countries. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:181&r=dge |
| By: | Nicholas Bloom; Max Floetotto; Nir Jaimovich; Itay Saporta-Eksten; Stephen Terry |
| Abstract: | We propose uncertainty shocks as a new shock that drives business cycles. First, we demonstrate that microeconomic uncertainty is robustly countercyclical, rising sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we quantify the impact of time-varying uncertainty on the economy in a dynamic stochastic general equilibrium model with heterogeneous firms. We find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3%. Moreover, we show that increased uncertainty alters the relative impact of government policies, making them initially less effective and then subsequently more effective. |
| Keywords: | uncertainty |
| JEL: | E3 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1195&r=dge |
| By: | Kazuo Nishimura (Institute of Economic Research, Kyoto University); Carine Nourry (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC) |
| Abstract: | We examine the impact of balanced-budget consumption taxes on the existence of expectations-driven business cycles in two-sector economies with infinitely-lived households. We prove that, whatever the relative capital intensity difference across sectors, aggregate instability can occur if the consumption tax rate is not too low. Moreover, we show through a numerical exercise based on empirically plausible tax rates that endogenous business-cycle fluctuations may be a source of instability for all OECD countries, including the US. |
| Keywords: | Aggregate instability, indeterminacy, expectations-driven fluctuations, consumption taxes, balanced-budget rule, infinite-horizon two-sector model. |
| JEL: | C62 E32 H20 O41 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1312&r=dge |
| By: | Kazuo Nishimura (Institute of Economic Research, Kyoto University); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC); Makoto Yano (Institute of Economic Research, Kyoto University) |
| Abstract: | In the present paper, we consider a two-country, two-good, two-factor general equilibrium model with CIES non-linear preferences, asymmetric technologies across countries and decreasing returns to scale. It is shown that aggregate instability and endogenous fluctuations may occur due to international trade. In particular, we prove that the integration into a common market on which countries trade the produced good and the capital input may lead to period-two cycles even when the closed-economy equilibrium is saddle-point stable in both countries. |
| Keywords: | Perfect foresight dynamic general equilibrium model, international trade, aggregate instability, endogenous fluctuations, non-linear preferences |
| JEL: | C62 E32 F11 F43 O41 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1313&r=dge |
| By: | Frédéric Dufourt (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France); Kazuo Nishimura (Institute of Economic Research, Kyoto University); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC) |
| Abstract: | We analyze sunspot-driven fluctuations in the standard 2-sector RBC model with moderate increasing returns to scale. We provide a detailed theoretical analysis enabling us to derive relevant bifurcation loci and to characterize the steady-state local stability properties as a function of various structural parameters. With GHH preferences, we show that local indeterminacy occurs through flip and Hopf bifurcations for a large set of values of the elasticity of intertemporal substitution in consumption if the labor supply is sufficiently inelastic. With additively-separable preferences, we prove that local indeterminacy occurs through flip and Hopf bifurcations for any value of the elasticity of the labor supply, and can even be compatible with an arbitrarily low elasticity of intertemporal substitution in consumption. Finally, we provide a detailed quantitative analysis of the model. Computing, on a quarterly basis, a new set of empirical moments related to two broadly defined consumption and investment sectors, we are able to identify, among the set of admissible calibrations consistent with sunspot equilibria, the ones that provide the best fit of the data. The model properly calibrated solves several empirical puzzles traditionally associated with 2-sector RBC models. |
| Keywords: | Indeterminacy, sunspots, two-sector model, sector-specific externalities, real business cycles. |
| JEL: | C62 E32 O41 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1315&r=dge |
| By: | Nabanita Datta Gupta (Department of Economics and Business, Aarhus University); Lene Kromann (CBS, Copenhagen, Denmark) |
| Abstract: | Using a search model for Danish labor market entrants, we are one of the first studies to test whether second-generation immigrants have the same job-offer arrival and layoff rates as ethnic Danes have. We contribute to the search literature by incorporating matching as a way to ensure sub-sample homogeneity. Thus, we match second-generation immigrants to their ethnic Danish twins on the basis of parental characteristics and informal network quality. There are big differences before matching, but after matching, second-generation immigrants perform as well or better than their ethnic Dane counterparts do on the labor market, though not with respect to layoffs. This result is mainly driven by the group of high school graduates and those with a primary school education only. Second generation immigrants with vocational education, males in particular, face both significantly lower arrival rates when unemployed and significantly higher layoff rates than those of their ethnic Danish twins. |
| Keywords: | J15, J61, J71 |
| Date: | 2013–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2013-04&r=dge |
| By: | Fischer, Carolyn (Resources for the Future); Heutel, Garth (University of North Carolina at Greensboro, Department of Economics) |
| Abstract: | Environmental economics has traditionally fallen in the domain of microeconomics, but recently approaches from macroeconomics have been applied to studying environmental policy. We focus on two macroeconomic tools and their application to environmental economics. First, real business cycle models can incorporate pollution and pollution policy and be used to answer several questions. How can environmental policy adjust to business cycles? How do different types of policies fare in a context with business cycles? Second, endogenous technological growth is an important component of environmental policy. Several studies ask how policy can be designed to both tackle emissions directly and influence the adoption of clean technologies. We focus on these two aspects of environmental macroeconomics but emphasize that there are many other potential applications. |
| Keywords: | Real business cycles; Endogenous technological change; Pollution |
| JEL: | E32 O44 Q50 Q55 |
| Date: | 2013–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:ris:uncgec:2013_002&r=dge |
| By: | Roger E.A. Farmer (UCLA Economics); Carine Nourry (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC) |
| Abstract: | Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a simple stochastic representative agent model by allowing for birth and death and by allowing for heterogeneity in agents’ discount factors. We show that these two minor and realistic changes to the timeless Arrow-Debreu paradigm are sufficient to invalidate the implication that competitive financial markets efficiently allocate risk. Our work demonstrates that financial markets, by their very nature, cannot be Pareto efficient, except by chance. Although individuals in our model are rational; markets are not. |
| Keywords: | Inefficient markets, heterogeneous agents, overlapping generations, sunspots, extrinsic uncertainty, excess volatility. |
| Date: | 2013–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1311&r=dge |
| By: | Tom Krebs; Pravin Krishna; William F. Maloney |
| Abstract: | This paper develops a framework for the quantitative analysis of individual income dynamics, mobility and welfare. Individual income is assumed to follow a stochastic process with two (unobserved) components, an i.i.d. component representing measurement error or transitory income shocks and an AR(1) component representing persistent changes in income. We use a tractable consumption-saving model with labor income risk and incomplete markets to relate income dynamics to consumption and welfare, and derive analytical expressions for income mobility and welfare as a function of the various parameters of the underlying income process. The empirical application of our framework using data on individual incomes from Mexico provides striking results. Much of measured income mobility is driven by measurement error or transitory income shocks and therefore (almost) welfare-neutral. A smaller part of measured income mobility is due to either welfare-reducing income risk or welfare-enhancing catching-up of low-income individuals with high-income individuals, both of which have economically significant effects on social welfare. Decomposing mobility into its fundamental components is thus seen to be crucial from the standpoint of welfare evaluation. |
| Date: | 2013–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:010495&r=dge |
| By: | Kevin Hoover |
| Abstract: | Modern growth theory derives mostly from Robert Solow’s “A Contribution to the Theory of Economic Growth” (1956). Solow’s own interpretation locates the origins of his “Contribution” in his view that the growth model of Roy Harrod implied a tendency toward progressive collapse of the economy. He formulates his view in terms of Harrod invoking a fixed-coefficients production function. This paper, first, challenges Solow’s reading of Harrod, arguing that Harrod’s object in providing a “dynamic” theory had little to do with the problem of long-run growth as Solow understood it, but instead addressed the medium run fluctuations. It was an attempt to isolate conditions under which the economy might tend to run below potential. In making this argument, Harrod does not appeal to a fixed-coefficients production function – or to any production function at all, as that term is understood by Solow. The paper next traces the history of the dominance of Solow’s interpretation among growth economists. These tasks belong to the history of economics. The paper’s final task belongs to economic history. It offers an informal reexamination of economic history through the lens of Harrod’s dynamic model, asking whether there is a prima facie case in favor of Harrod’s model properly understood. |
| Keywords: | economic growth, Roy Harrod, Robert Solow, dynamics, dynamic instability, dnife-edge, warranted rate of growth, natural rate of growth |
| JEL: | B22 O4 E12 E13 N1 B31 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2013-02&r=dge |