|
on Dynamic General Equilibrium |
| By: | Yasin Mimir |
| Abstract: | I document key business cycle facts of aggregate financial flows in the U.S. banking sector : (i) Bank credit, deposits and loan spread are less volatile than output, while net worth and leverage ratio are more volatile, (ii) bank credit and net worth are procyclical, while deposits, leverage ratio and loan spread are countercyclical, and (iii) financial variables lead the output fluctuations by one to three quarters. I then present an equilibrium real business cycle model with a financial sector, that is capable of matching these newly documented stylized facts. An agency problem between banks and their depositors induces endogenous capital constraints for banks in obtaining funds from households. Empirically-disciplined shocks to bank net worth alter the ability of banks to borrow and to extend credit to firms. I find that these financial shocks are important not only for explaining the dynamics of financial flows but also for the dynamics of standard macroeconomic aggregates. They play a major role in driving real fluctuations due to their impact on the tightness of bank capital constraint and the credit spread. The tightness measure of credit conditions in the model tracks the index of tightening credit standards constructed by the Federal Reserve Board quite well. |
| Keywords: | Banks, Financial Fluctuations, Credit Frictions, Bank Equity, Financial Shocks |
| JEL: | E10 E20 E32 E44 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1313&r=dge |
| By: | Canan Yuksel |
| Abstract: | This paper aims to understand the role of investment shocks in explaining output fluctuations observed in Turkish economy. For this purpose a small open economy DSGE model is estimated on Turkish data for 2002:1-2012:2 period by Bayesian methods. Variance decomposition analysis shows that permanent technology shock is the key driving force of business cycles in Turkish economy and the role of investment shock is less spelled. |
| Keywords: | Open economy, Bayesian estimation, Business cycle |
| JEL: | E3 F4 C11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1312&r=dge |
| By: | Kazuo Nishimura (Institute of Economic Research, Kyoto University - Kyoto University); Carine Nourry (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), IUF - Institut Universitaire de France - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique); Thomas Seegmuller (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Alain Venditti (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), EDHEC Business School - Département Comptabilité, Droit, Finance et Economie) |
| 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 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00796698&r=dge |
| By: | Emilio Colombo; Luisanna Onnis; Patrizio Tirelli |
| Abstract: | This paper investigates the response of the shadow economy to banking crises. Our empirical analysis, based on a large sample of countries, suggests that the informal sector is a powerful buffer, which expands at times of banking crises and absorbs a large proportion of the fall in official output. To rationalise our evidence, we build a dynamic stochastic general equilibrium model which accounts for financial frictions and nominal rigidities. In line with the empirical literature on the shadow economy, we assume that in the informal sector access to external finance is limited, and the production technology is relatively more labour intensive. Following a banking shock in the official sector, the model predicts a large negative transmission to the unofficial economy: about 60% of the official sector contraction is absorbed by the growth of the shadow economy. |
| Keywords: | Financial crises, shadow economy, DSGE models |
| JEL: | E26 E32 E44 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:234&r=dge |
| By: | Raouf Boucekkine (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), IRES-CORE - Université Catholique de Louvain); Natali Hritonenko (Prairie View - A&M University); Yuri Yatsenko (School of business, Houston Baptist University - Houston Baptist University) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00796184&r=dge |
| By: | Grossmann, Volker; Schäfer, Andreas; Steger, Thomas M. |
| Abstract: | We investigate the effects of interregional labor market integration in a two-sector, overlapping-generations model with land-intensive production in the non-tradable goods sector (housing). To capture the response to migration on housing supply, capital formation is endogenous, assuming that firms face capital adjustment costs. Our analysis highlights heterogeneous welfare effects of labor market integration. Whereas individuals without residential property lose from immigration due to increased housing costs, landowners may win. Moreover, we show how the relationship between migration and capital formation depends on initial conditions at the time of labor market integration. Our model is also capable to explain the reversal of migration during the transition to the steady state, like observed in East Germany after unification in 1990. It is also consistent with a gradually rising migration stock and house prices in high-productivity countries like Switzerland. |
| Keywords: | Capital formation; House prices; Land distribution; Migration; Welfare |
| JEL: | D90 F20 O10 |
| Date: | 2013–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:fri:fribow:fribow00441&r=dge |
| By: | Fanti, Luciano; Gori, Luca |
| Abstract: | We examine the effects of child policies on both transitional dynamics and long-term demo-economic outcomes in an overlapping-generations neoclassical growth model à la Chakraborty (2004) extended with endogenous fertility under the assumption of weak altruism towards children. The government invests in public health, and an individual’s survival probability at the end of youth depends on health expenditure. We show that multiple development regimes can exist. However, poverty or prosperity do not necessarily depend on the initial conditions, since they are the result of how child policy is designed. A child tax for example can be used effectively to enable those economies that were entrapped in poverty to prosper. There is also a long-term welfare-maximising level of the child tax. We show that, a child tax can be used to increase capital accumulation, escape from poverty and maximise long-term welfare also when (i) a public pay-as-you-go pension system is in place, (ii) the government issues an amount of public debt. Interestingly, there also exists a couple child tax-health tax that can be used to find the second-best optimum optimorum. In addition, we show that results are robust to the inclusion of decisions regarding the child quantity-quality trade off under the assumption of impure altruism. In particular, there exists a threshold value of the child tax below (resp. above) which child quality spending is unaffordable (resp. affordable) and different scenarios are in existence. |
| Keywords: | Child policy; Endogenous fertility; Health; Life expectancy; OLG model |
| JEL: | I1 J13 O4 |
| Date: | 2013–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:44898&r=dge |
| By: | M. Casares; Luca Deidda; JE. Galdon-Sanchez |
| Abstract: | We examine business cycle fluctuations in a dynamic macroeconomic model that incorporates a financial accelerator mechanism, borrowing constraints, and frictions on both setting prices and wages. After an adverse financial shock, the slow-adjustment process on wage cuts results in higher production marginal costs, lower firm earnings, and a subsequent reduction in equity that explains the increase in the cost of borrowing and the credit crunch. The real effects of adverse financial shocks are significantly amplified when either considering greater rigidities for price/wage setting or a low elasticity of substitution in loan production (real rigidities in the financial sector). In the monetary policy analysis, a Taylor (1983)-style rule performs slightly better when incorporating a small response coefficient to the spread between borrowing and saving interest rates. |
| Keywords: | financial accelerator; nominal rigidities; real rigidities |
| JEL: | E44 E32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201301&r=dge |
| By: | Kazuo Nishimura (Institute of Economic Research, Kyoto University - Kyoto University); Alain Venditti (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), EDHEC Business School - Département Comptabilité, Droit, Finance et Economie); Makoto Yano (Institute of Economic Research, Kyoto University - 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 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00796692&r=dge |
| By: | Frederic Dufourt (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Kazuo Nishimura (Kyoto University - Kyoto University); Alain Venditti (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)) |
| 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 su fficiently 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 de fined 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 fi t 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-specifi c externalities; real business cycles |
| Date: | 2013–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00796236&r=dge |
| By: | Pascal Michaillat; Emmanuel Saez |
| Abstract: | This paper presents a parsimonious equilibrium business cycle model with trade frictions in the product and labor markets. The model features unemployment and unsold production and its general equilibrium can be represented very simply: as the intersection of an aggregate supply and an aggregate demand, with product market tightness acting as a price. The aggregate supply represents the expected amount of sales by firms given product market tightness and optimal hiring on the labor market. The aggregate demand represents optimal product consumption given product market tightness—consumers can also spend their income on an unproduced good. We use a search-and-matching structure to realistically represent trade frictions in the product and labor markets. In such a structure, it is not price or wage but market tightness that equalizes supply to demand. In fact, the frictions create situations of bilateral monopoly in price and wage setting that make price and wage indeterminate. To resolve this indeterminacy, we take price and wage as parameters, thus disconnecting price and wage determination from our analysis. Since the equilibrium representation is very transparent and tractable, we are able to obtain a broad range of comparative statics with respect to demand and supply shocks. The model is also suited to think about inventories, labor hoarding, income and wealth inequality. It can be extended to a dynamic environment. |
| JEL: | E12 E24 E32 E63 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18826&r=dge |
| By: | Chu, Angus C.; Cozzi, Guido |
| Abstract: | R&D investment has well-known liquidity problems, with potentially important consequences. In this paper, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian model with cash-in-advance (CIA) constraints on consumption, R&D investment, and manufacturing. Our results are as follows. Under the CIA constraints on consumption and R&D (manufacturing), an increase in the nominal interest rate would decrease (increase) R&D and economic growth. So long as the effect of cash requirements in R&D is relatively more important than in manufacturing, the nominal interest rate would have an overall negative effect on R&D and economic growth as documented in recent empirical studies. We also analyze the optimality of Friedman rule and find that Friedman rule can be suboptimal due to a unique feature of the Schumpeterian model. Specifically, we find that the suboptimality or optimality of Friedman rule is closely related to a seemingly unrelated issue that is the overinvestment versus underinvestment of R&D in the market economy, and this result is robust to alternative versions of the Schumpeterian model. |
| Keywords: | Economic growth, R&D, quality ladders, cash-in-advance, monetary policy, Friedman rule |
| JEL: | O30 O40 E41 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2013:08&r=dge |
| By: | Wang, Min; Zhao, Jinhua; Bhattacharya, Joydeep |
| Abstract: | This paper shows how policies aimed at insuring health risks and those intended to improve the environment are (and should be) deeply intertwined. In the model economy, inspired by recent Chinese experience, pollution raises the likelihood of poor health in the future prompting agents to self insure against anticipated, rising medical expenses. The increased saving generates more capital while capital use by firms generates more pollution. Along the transition, sucha pollution-growth nexus may be attractive from a capital-accumulation perspective; however, rising pollution, via the health channel, definitely hurts welfare. Availability of private health insurance to top up pay-as-you-go coverage of medical bills together with a Pigouvian tax on emissions can replicate the first best. |
| Keywords: | pollution; health; overlapping generations model; saving |
| JEL: | E2 O13 |
| Date: | 2013–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:35994&r=dge |
| By: | Barañano Mentxaka, Ilaski; Romero-Avila, Diego |
| Abstract: | Previous research has shown a strong positive correlation between short-term persistence and long-term output growth as well as between depreciation rates and long-term output growth. This evidence, therefore, contradicts the standard predictions from traditional neoclassical or AK-type growth models with exogenous depreciation. In this paper, we first confirm these findings for a larger sample of 101 countries. We then study the dynamics of growth and persistence in a model where both the depreciation rate and growth are endogenous and procyclical. We find that the model s predictions become consistent with the empirical evidence on persistence, long-term growth and depreciation rates. |
| Keywords: | real business cycle models, endogenous growth, stochastic trends, persistence, capital utilization, dynamic panel data models |
| JEL: | C22 C23 E32 O40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:ikerla:9547&r=dge |
| By: | Matthew Chambers; Carlos Garriga; Donald E. Schlagenhauf |
| Abstract: | After the collapse of housing markets during the Great Depression, the U.S. government played a large role in shaping the future of housing finance and policy. Soon thereafter, housing markets witnessed the largest boom in recent history. The objective in this paper is to quantify the contribution of government interventions in housing markets in the expansion of U.S. homeownership using an equilibrium model of tenure choice. In the model, home buyers have access to a menu of mortgage choices to finance the acquisition of a house. The government also provides special programs through provisions of the tax code. The parameterized model is consistent with key aggregate and distributional features observed in the 1940 U.S. economy and is capable of accounting for the boom in homeownership in 1960. The decomposition suggests that government policies have significant importance. For example, the expansion in maturity of the fixed-rate mortgage to 30 years can account for 12 percent of the increase. Housing policies, such as the introduction of the mortgage interest deduction or the taxation of housing services can have significant effects on homeownership. |
| JEL: | E32 N1 R20 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18821&r=dge |
| By: | Harold L. Cole; Lee E. Ohanian |
| Abstract: | This study exploits panel data from 18 countries to assess the contributions of cartelization policies, monetary shocks, and productivity shocks on macroeconomic activity during the Great Depression. To construct a parsimonious and common model framework, we use the fact that many cartel policies are observationally equivalent to a country-specific labor tax wedge. We estimate a monetary DSGE model with cartel wedges along with productivity and monetary shocks. Our main finding is that cartel policy shocks account for the bulk of the Depression in the countries that adopted significant cartel policies, including the large depressions in the U.S., Germany, Italy, and Australia, and that the estimated cartel policy shocks plausibly coincide with the actual evolution of policies in these countries. In contrast, cartel policy shocks in the countries that did not significantly change policies were small and account for little of their Depressions. |
| JEL: | F1 N12 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18823&r=dge |
| By: | Eisei Ohtaki (Faculty of Economics, Keio University); Hiroyuki Ozaki (Faculty of Economics, Keio University) |
| Abstract: | This article considers a pure-endowment stationary stochastic overlapping generations economy, in which agents have maximin expected utility preferences. Two main results are obtained. First, we show that multiple stationary monetary equilibria exist, and hence real as well as price indeterminacy arises under the assumption that aggregate shock exists. Second, we show that each of these stationary monetary equilibria is conditionally Pareto optimal; i.e., no other stationary allocations strictly Pareto dominate the equilibrium allocations. |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:kei:dpaper:2012-032&r=dge |
| By: | Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus,via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Kevin Kotze (The School of Economics, Faculty of Commerce, University of Cape Town) |
| Abstract: | This paper considers the forecasting performance of a nonlinear dynamic stochastic general equilibrium (DSGE) model. The results are compared to a wide selection of competing models, which include a linear DSGE model and a variety of vector autoregressive (VAR) models. The parameters in the VAR models are estimated with classical and Bayesian techniques; where some of the Bayesian models are augmented with stochastic-variable-selection, time-varying parameters, endogenous structural breaks and various forms of prior-shrinkage (which includes the Minnesota prior as well). The structure of the DSGE models follows that of New-Keynesian varieties, which allow for several nominal and real rigidities. The nonlinear DSGE model makes use of the second-order solution method of Schmitt-Grohe and Uribe (2004) and a particle filter to generate values for the unobserved variables. Most of the parameters in the models are estimated using maximum likelihood techniques. The models are applied to South African macroeconomic data, with an initial in-sample period of 1960Q1 to 1999Q4. The models are then estimated recursively, by extending the in-sample period by a quarter, to generate successive forecasts over the out-of-sample period, 2000Q1 to 2011Q4. We find that the forecasting performance of the nonlinear DSGE model is almost always significantly superior to that of it's linear counterpart; particularly over longer forecasting horizons. The nonlinear DSGE model also outperforms the selection of VAR models in most cases. |
| Keywords: | Macroeconomic Forecasting, Linear and Nonlinear New-Keynesian DSGE, Vector Autoregressions, Bayesian Methods |
| JEL: | E0 C5 C11 C61 C63 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201313&r=dge |
| By: | Prettner, Klaus |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:149&r=dge |
| By: | Edgar Vogel; Alexander Ludwig; Axel Börsch-Supan |
| Abstract: | Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged agents with assets accumulated for retirement. This paper addresses three important adjustments channels to dampen these detrimental effects of ageing: investing abroad, endogenous human capital formation and increasing the retirement age. Although non of these suggestions is new in itself, we examine their effects jointly in one coherent model. Our quantitative finding is that openness has a relatively mild effect. In contrast, endogenous human capital formation in combination with an increase in the retirement age has strong effects. Under these adjustments maximum welfare losses of demographic change for households alive in 2010 are reduced by about 3 percentage points. |
| JEL: | C68 E17 E25 J11 J24 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18856&r=dge |
| By: | Walid Oueslati (Centre for Rural Economy, Newcastle University) |
| Abstract: | This paper examines the macroeconomic effects of an environmental tax reform in a growing economy. A model of endogenous growth based on human capital accumulation is used to numerically simulate the growth effects of different environmental tax reforms and compute their impact on welfare in the short and the long-term. Our results suggest that the magnitude of these effects depends on the type of tax reform. Thus, only environmental tax reform that aims to use the revenue from environmental tax to reduce wage tax and increase the proportion of public spending within GDP, enhances both growth and welfare in the long-term. However, the short-term effect remains negative. |
| Keywords: | Tax reform, Endogenous Growth, Human Capital, Environmental Externality, Transitional Dynamics, Welfare cost |
| JEL: | E62 I21 H22 Q28 O41 D62 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2013.09&r=dge |
| By: | Raad, Rodrigo Jardim |
| Abstract: | This paper shows existence of approximate recursive equilibrium with minimal state space in an environment of incomplete markets. We prove that the approximate recursive equilibrium implements an approximate sequential equilibrium which is always close to a Magill and Quinzii equilibrium without short sales for arbitrarily small errors. This implies that the competitive equilibrium can be implemented by using forecast statistics with minimal state space provided that agents will reduce errors in their estimates in the long run. We have also developed an alternative algorithm to compute the approximate recursive equilibrium with incomplete markets and heterogeneous agents through a procedure of iterating functional equations and without using the first order conditions of optimality. |
| Date: | 2013–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:737&r=dge |
| By: | Roger E.A. Farmer (UCLA Economics - University of California, Los Angeles); Carine Nourry (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), IUF - Institut Universitaire de France - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique); Alain Venditti (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), EDHEC Business School - Département Comptabilité, Droit, Finance et Economie) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00796672&r=dge |
| By: | Jensen, Christian |
| Abstract: | Assuming a production process with returns to scale that vary with the intensity it is operated at, an AK-model of endogenous growth with constant returns to scale in production is shown to arise due to replication driven by profit-maximization. If replication occurs at the efficiency-maximizing scale, the result applies also when the number of production processes must be discrete, thus overcoming the so-called integer problem. When competition is imperfect, there is only convergence toward the AK-model for large enough input use, so an economy is more prone to stalling in a steady-state without growth, the smaller and less competitive it is. Inefficient scaling also raises the risk of stalling. |
| Keywords: | Economic growth; AK-model; Replication; Returns to scale in production; Integer problem |
| JEL: | O11 O40 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:44487&r=dge |
| By: | Julio Carrillo (University of Ghent); Celine Poilly (University of Lausanne) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:12-54&r=dge |
| By: | Thomas Wiseman (Department of Economics, The University of Texas at Austin) |
| Abstract: | I study a simplified version of Trejos and Wright’s (1995) random matching environment. If histories are observable, then full efficiency is achievable in equilibrium in the limit as agents become patient. In contrast, if histories are not observed, then payoffs in any monetary equilibrium (one in which agents exchange a good for an indivisible unit of fiat money) with a fixed stock of money are bounded away from efficiency. The gap disappears as the stock of money grows, but for any fixed level of patience, efficiency falls to zero if the stock of money is too high. The key insight is that the fraction of agents with zero money holdings in steady state converges to a positive level as patience increases. |
| Keywords: | fiat money, memory, random matching |
| JEL: | C73 D82 E4 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:tex:wpaper:130313&r=dge |
| By: | Stelios Bekiros; Alessia Paccagnini |
| Abstract: | Micro-founded dynamic stochastic general equilibrium (DSGE) models appear to be particularly suited for evaluating the consequences of alternative macroeconomic policies. Recently, increasing efforts have been undertaken by policymakers to use these models for forecasting, although this proved to be problematic due to estimation and identi.cation issues. Hybrid DSGE models have become popular for dealing with some of model misspeci.cations and the trade-off between theoretical coherence and empirical fit, thus allowing them to compete in terms of predictability with VAR models. However, DSGE and VAR models are still linear and they do not consider time-variation in parameters that could account for inherent nonlinearities and capture the adaptive underlying structure of the economy in a robust manner. This study conducts a comparative evaluation of the out-of-sample predictive performance of many different specifications of DSGE models and various classes of VAR models, using datasets for the real GDP, the harmonized CPI and the nominal short-term interest rate series in the Euro area. Simple and hybrid DSGE models were implemented including DSGE-VAR and Factor Augmented DGSE, and tested against standard, Bayesian and Factor Augmented VARs. Moreover, a new state-space time-varying VAR model is presented. The total period spanned from 1970:1 to 2010:4 with an out-of-sample testing period of 2006:1-2010:4, which covers the global financial crisis and the EU debt crisis. The results of this study can be useful in conducting monetary policy analysis and macro-forecasting in the Euro area. |
| Keywords: | Model validation, Forecasting, Factor Augmented DSGE, Time-varying parameter VAR, DGSE-VAR, Bayesian analysis |
| JEL: | C11 C15 C32 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:236&r=dge |
| By: | Tamas Papp (Institute for Advanced Studies, Vienna) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:09-187&r=dge |
| By: | Siddharth Kothari (Stanford University); Itay Saporta Eksten (Stanford University); Edison Yu (Stanford University) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:12-205&r=dge |