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on Dynamic General Equilibrium |
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Issue of 2013‒04‒13
39 papers chosen by |
| By: | Karine Gente; Miguel A. León-Ledesma; Carine Nourry |
| Abstract: | Empirical evidence on the growth benefits of capital inflows is mixed. The growth benefits accruing from capital inflows also appear to be larger for high savings countries. We explain this phenomenon using an OLG model of endogenous growth in open economies with borrowing constraints that can generate both positive and negative growth effects of capital inflows. The amount an economy can borrow is restricted by an endogenous enforcement constraint. In our setting, with physical capital and a pay-as-you-go pensions system, the steady state is unique. However, it can either be constrained or unconstrained. In a constrained economy, opening up to equity and FDI inflows can be bad for growth because it makes the domestic interest rate too low, which endogenously tightens borrowing constraints. Agents decrease savings and investment in productivity-enhancing activities resulting in lower growth. Results are reversed in an unconstrained economy. We also provide a quantitative analysis of these constraints and some policy implications. |
| Keywords: | overlapping generations; endogenous credit constraint; capital flows; endogenous growth |
| JEL: | F43 F34 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1304&r=dge |
| By: | Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy); Pundit, Madhavi (Economics Research Department, Asian Development Bank) |
| Abstract: | This paper analyses the extent to which financial integration impacts the manner in which terms of trade affct business cycles in emerging economies. Using a small open economy model, we show that as capital account openness increases in an economy that faces trade shocks, business cycle volatility reduces. For an economy with limited financial openness, and a relatively open trade account, a model with exogenous terms of trade shocks is able to replicate the features of the business cycle. |
| Keywords: | Macroeconomics ; Real business cycles ; Emerging market DSGE models ; Volatility ; Terms of trade |
| JEL: | F4 E32 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:13/120&r=dge |
| By: | fang yang (SUNY albany); Wenli Li (Federal Reserve Bank of Philadelphia); Michael Dotsey (Federal Reserve Bank of Philadelphia) |
| Abstract: | This paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study Social Security reforms. As such, the model differentiates both consumption goods and labor effort according to their respective roles in home production and market activities. Using a calibrated model, we find that eliminating the current pay-as-you-go Social Security system has important implications for both labor supply and consumption decisions and that these decisions are influenced by the presence of a home production technology. Specifically, without Social Security benefits households work much more in the market, especially in old age, while young households also engage more in home production. For consumption, households increase their consumption of housing services -- an input for home production -- to a greater extent than for other market-produced goods. Comparing our benchmark economy to one with differentiated goods but no home production, we find that eliminating Social Security benefits generates larger welfare gains in the presence of home production. This result is due to the self insurance aspects generated by the presence of home production. Comparing our economy to a one-good economy without home production, we show that the welfare gains of eliminating Social Security are magnified even further. These policy analyses suggest the importance of modeling home production and distinguishing between both time use and consumption goods depending on whether they are involved in market or home production. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:469&r=dge |
| By: | Ananth Seshadri (University of Wisconsin); Nicolas Roys (University of Wisconsin Madison) |
| Abstract: | How important is managerial talent in accounting for cross country income differences? We address this question using a model that distinguishes between workers human capital and managers human capital. In our model, the ablest people leverage their talent and this has important consequences for a country’s standard of livings. A key object for the existing literature argument is the returns to schooling. Once we distinguish between workers and managers: returns to schooling appear as profits rather than wages. We consider an overlapping generations economy where each individual chooses to be a manager or a worker depending on its human capital (as in Lucas, 1978), individual accumulate human capital both in school and on the job (as in Ben-Porath, 1967), and production occurs in teams where there is sorting between workers and managers (as in Garicano and Rossi-Hansberg, 2006). By nesting a model of managerial occupational choice and endogenous skill accumulation in a framework in which the span of control is endogenous, we develop a rich framework that yields a number of empirical implications. We find that (1) aggregate output is more sensitive to managerial talent than worker talent, (2) the span of control of managers is constrained by workers human capital, and (3) small variations in human capital can have large effects on wages and profits so that incentives to accumulate human capital at the top of the distribution are large. We calibrate the model to the US economy and show that it can rationalize simultaneously the life-cycle of wages of managers and workers as well as the life-cycle of firms. We then ask how much variations do we need to account for output per capita differences? Preliminary results show that modest distortions can lead to large income differences. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:456&r=dge |
| By: | Yuliy Sannikov (Princeton University); Markus Brunnermeier (Princeton University) |
| Abstract: | This paper studies the full equilibrium dynamics of an economy with financial frictions. Due to highly non-linear amplication effects, the economy is prone to instability and occasionally enters volatile episodes. Risk is endogenous and asset price correlations are high in downturns. In an environment of low exogenous risk experts assume higher leverage making the system more prone to systemic volatility spikes - a volatility paradox. Securitization and derivatives contracts leads to better sharing of exogenous risk but to higher endogenous systemic risk. Financial experts may impose a negative externality on each other by not maintaining adequate capital cushion. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:507&r=dge |
| By: | Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy) |
| Abstract: | How does access to credit impact consumption volatility? Theory and evidence from advanced economies suggests that greater household access to finance smooths consumption. Evidence from emerging markets, where consumption is usually more volatile than income, indicates that financial reform further increases the volatility of consumption relative to output. We address this puzzle in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are credit constrained. Unconstrained households can respond to shocks to trend growth by raising current consumption more than rise in current income. Financial reform increases the share of such households, leading to greater relative consumption volatility. Calibration of the model for pre and post financial reform in India provides support for the model's key predictions. |
| Keywords: | Macroeconomics ; Real business cycles ; Emerging market business cycle stylized facts ; Financial development |
| JEL: | E10 E32 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:13/121&r=dge |
| By: | Le, Vo Phuong Mai; Minford, Patrick; Wickens, Michael R. |
| Abstract: | We propose a numerical method, based on indirect inference, for checking the identification of a DSGE model. Monte Carlo samples are generated from the model's true structural parameters and a VAR approximation to the reduced form estimated for each sample. We then search for a different set of structural parameters that could potentially also generate these VAR parameters. If we can find such a set, the model is not identified. |
| Keywords: | DSGE Model; Indirect Inference; Monte Carlo |
| JEL: | C13 C51 C52 E32 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9411&r=dge |
| By: | Felix Kubler (University of Zurich and SFI); Piero Gottardi (European University Institute) |
| Abstract: | In this paper we examine the competitive equilibria of a dynamic stochastic economy with complete markets. We show that the completeness of the market requires both the set of asset payoffs and collateral levels to be sufficiently rich, so as to allow to decentralize the equilibrium allocations obtained in Arrow-Debreu markets subject to a series of appropriate limited pledgeability constraints. We provide then sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the existence of Markov equilibria and show that they often have finite support. The model is then tractable and its equilibria can be computed with arbitrary accuracy. We carry out on this basis a quantitative assessment of the risk sharing and efficiency properties of equilibria. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:467&r=dge |
| By: | Shigeru Fujita; Makoto Nakajima |
| Abstract: | This paper studies the quantitative properties of a multiple-worker firm matching model with on-the-job search where heterogeneous firms operate decreasing-returns-to-scale production technology. We focus on the model's ability to replicate the business cycle features of job flows, worker flows between employment and unemployment, and job-to-job transitions. The calibrated model successfully replicates (i) countercyclical worker flows between employment and unemployment, (ii) procyclical job-to-job transitions, and (iii) opposite movements of job creation and destruction rates over the business cycle. The cyclical properties of worker flows between employment and unemployment differ from those of job flows, partly because of the presence of job-to-job transitions. We also show, however, that job flows measured by net employment changes differ significantly from total worker separation and accession rates, because separations also occur at firms with positive net employment changes, and similarly firms that are shrinking on net may hire workers to partially offset attritions. The presence of job-to-job transitions is the key to producing these differences. |
| Keywords: | Employment ; Unemployment |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-09&r=dge |
| By: | Grossmann, Volker; Schäfer, Andreas; Steger, Thomas M. |
| Abstract: | We investigate the effects of interregional labor market integration in a twosector,overlapping-generations model with land-intensive production in the nontradable 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 mark etintegration. 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:leiwps:116&r=dge |
| By: | Jesse Perla (NYU); Christopher Tonetti (New York University) |
| Abstract: | While much of recent growth literature has focused on innovation in the technology frontier, less attention has been paid to the role of the least productive agents in generating growth. We develop an analytically tractable model where growth is created as a positive externality from risk taking by individuals at the bottom of the productivity distribution learning from more productive agents. Heterogeneous firms choose to produce or pay a cost and search for a better opportunity within the economy. Sustained growth comes from the feedback between the endogenously determined distribution of productivity, as evolved by past search decisions, and an optimal forward looking search policy. The growth rate depends on characteristics of the productivity distribution, with a thicker tailed distribution leading to more growth. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:479&r=dge |
| By: | Canova, Fabio |
| Abstract: | A method to estimate DSGE models using the raw data is proposed. The approach links the observables to the model counterparts via a flexible specification which does not require the model-based component to be solely located at business cycle frequencies, allows the non model-based component to take various time series patterns, and permits model misspecification. Applying standard data transformations induce biases in structural estimates and distortions in the policy conclusions. The proposed approach recovers important model-based features in selected experimental designs. Two widely discussed issues are used to illustrate its practical use. |
| Keywords: | business cycles; DSGE models; filters; structural estimation |
| JEL: | C3 E3 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9379&r=dge |
| By: | Reichlin, Pietro |
| Abstract: | We construct an overlapping generations model with unemployment risk where wages, employment and severance payments are set through efficient bargaining between risk averse Unions and risk neutral firms. Assuming that a First Best cannot be achieved due to workers' shirking incentives, we characterize a Second Best allocation and show how this can be implemented in a market economy. We prove that the latter generates too little employment and consumption smoothing, an excessive young age consumption and too much saving with respect to the Second Best. This inefficiency can be reduced by increasing the intensity of a pay-as-you-go social security system even if the economy is dynamically efficient. |
| Keywords: | Labor Markets; Risk; Social Security; Unemployment |
| JEL: | A1 H2 J5 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9336&r=dge |
| By: | Moen, Espen R; Yashiv, Eran |
| Abstract: | This paper studies the hiring and firing decisions of firms and their effects on firm value. This is done in an environment where the productivity of workers depends on how well they match with their co-workers and the firm acts as a coordinating device. Match quality derives from a production technology whereby workers are randomly located on the Salop circle, and depends negatively on the distance between the workers. It is shown that a worker's contribution in a given firm changes over time in a nontrivial way as co-workers are replaced with new workers. The paper derives optimal hiring and replacement policies, including an optimal stopping rule, and characterizes the resulting equilibrium in terms of employment, firm output and the distribution of firm values. The paper stresses the role of horizontal differences in worker productivity, as opposed to vertical, assortative matching issues. Simulations of the model reveal a rich pattern of worker turnover dynamics and their connections to the resulting firm value and age distributions. |
| Keywords: | complementarity; firing; firm value; hiring; match quality; optimal stopping; Salop circle; worker value |
| JEL: | E23 J62 J63 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9375&r=dge |
| By: | Anna Zaharieva (Bielefeld University) |
| Abstract: | This paper develops a labour market matching model with heterogeneous firms, on-thejob search and referrals. Social capital is endogenous, so that better connected workers bargain higher wages for a given level of productivity. This is a positive effect of referrals on reservation wages. At the same time, employees accept job offers from more productive employers and forward other offers to their unemployed social contacts. Therefore, the average productivity of a referred worker is lower than the average productivity in the market. This is a negative selection effect of referrals on wages. In the equilibrium, wage premiums (penalties) associated with referrals are more likely in labour markets with lower (higher) productivity heterogeneity and lower (higher) worker’s bargaining power. Next, the model is extended to allow workers help each other climb a wage ladder. On-the-job search is then intensified and wage inequality is reduced as workers employed in high paid jobs pool their less successful contacts towards the middle range of the productivity distribution. |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:473&r=dge |
| By: | Strulik, Holger; Werner, Katharina |
| Abstract: | Workers in the US and other developed countries retire no later than a century ago and spend a significantly longer part of their life in school, implying that they stay less years in the work force. The facts of longer schooling and simultaneously shorter working life are seemingly hard to square with the rationality of the standard economic life cycle model. In this paper we propose a novel theory, based on health and aging, that explains these long-run trends. Workers optimally respond to a longer stay in a healthy state of high productivity by obtaining more education and supplying less labor. Better health increases productivity and amplifies the return on education. The health accelerator allows workers to finance educational efforts with less forgone labor supply than in the previous state of shorter healthy life expectancy. When both life-span and healthy life expectancy increase, the health effect is dominating and the working life gets shorter if the preference for leisure is sufficiently strong or the return on education is sufficiently large. We calibrate an extended version of the model and show that it is capable to predict the historical trends of schooling and retirement. -- |
| Keywords: | healthy life expectancy,longevity,education,retirement,labor supply,compression of morbidity |
| JEL: | E20 I25 J22 O10 O40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:152&r=dge |
| By: | Nora Traum (North Carolina State University); Michael Plante (Research Department) |
| Abstract: | We illustrate the theoretical relation among output, consumption, investment, and oil price volatility in a real business cycle model. The model incorporates demand for oil by a firm, as an intermediate input, and by a household, used in conjunction with a durable good. We estimate a stochastic volatility process for the real price of oil over the period 1986-2011 and utilize the estimated process in a non-linear approximation of the model. For realistic calibrations, an increase in oil price volatility produces a temporary decrease in durable spending, while precautionary savings motives lead investment and real GDP to rise. Irreversible capital and durable investment decisions do not overturn this result. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:455&r=dge |
| By: | Raphael Schoenle (Brandeis University); Gauti Eggertsson (Federal Reserve Bank of New York); Saroj Bhattarai (Penn State University) |
| Abstract: | We study the implications of increased price flexibility on aggregate output volatility in a dynamic stochastic general equilibrium (DSGE) model. First, using a simplified version of the model, we show analytically that the results depend on the shocks driving the economy and the systematic response of monetary policy to inflation: More flexible prices amplify the effect of demand shocks on output if interest rates do not respond strongly to inflation, while higher flexibility amplifies the effect of supply shocks on output if interest rates are very responsive to inflation. Next, we estimate a medium-scale DSGE model using post-WWII U.S. data and Bayesian methods and, conditional on the estimates of structural parameters and shocks, ask: Would the U.S. economy have been more or less stable had prices been more flexible than historically? Our main finding is that increased price flexibility would have been destabilizing for output and employment. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:487&r=dge |
| By: | Hui He (Shanghai University of Finance and Economics); Kevin x.d. Huang (Vanderbilt University) |
| Abstract: | Empirical evidence suggests that both leisure time and medical care are important for maintaining health. We develop a general equilibrium macroeconomic model in which taxation is a key determinant of the composition of these two inputs in the endogenous accumulation of health capital. In our model, higher taxes lead to using relatively more leisure time and less medical care in maintaining health. We find that the difference in taxation can account for a large fraction of the difference in health expenditure-GDP ratio and almost all of the difference in time input for health production between the US and Europe. |
| Keywords: | Taxation, Time allocation, Health expenditure, Macroeconomics, General equilibrium |
| JEL: | E0 H0 |
| Date: | 2013–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-13-00005&r=dge |
| By: | Canova, Fabio; Ferroni, Filippo; Matthes, Christian |
| Abstract: | We propose two methods to choose the variables to be used in the estimation of the structural parameters of a singular DSGE model. The first selects the vector of observables that optimizes parameter identification; the second the vector that minimizes the informational discrepancy between the singular and non-singular model. An application to a standard model is discussed and the estimation properties of different setups compared. Practical suggestions for applied researchers are provided. |
| Keywords: | ABCD representation; Density ratio; DSGE models.; Identification |
| JEL: | C10 E27 E32 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9381&r=dge |
| By: | Cecilia Parlatore Siritto (NYU) |
| Abstract: | I study a model in which banks need to borrow to make risky loans whose return is private information known only by the bank who made the loan. To raise funds, banks can either sell assets or pledge them as collateral. I show that collateral contracts arise in equilibrium even though all agents would value the asset the same in autarky. The persistence in the role as borrowers or lenders and the banks' ability to make a profits from loans imply that banks will value the asset more than lenders. On top of paying dividends, the asset resolves the banks' maturity mismatch problem and, since it is used as collateral, it relaxes a borrowing constraint. The amount that can be borrowed against the asset is determined in equilibrium. I show that increases in risk may decrease the asset's debt capacity and, thus, the level of intermediation in the economy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:492&r=dge |
| By: | Andreas Stathopoulos (University of Southern California) |
| Abstract: | This paper explores international portfolio choice in a multi-country, multi-good general equilibrium setting which features time-varying risk aversion generated by external habit formation. It is shown that time variation in conditional risk aversion generates time variation in the countries' relative consumption expenditure. As a result, financing equilibrium consumption entails hedging against adverse fluctuations in risk aversion. In equilibrium, an increase in home risk aversion tends to appreciate the home equity and depreciate the foreign equity, so each agent hedges by shifting her equity portfolio towards the home equity claim. Furthermore, the model is able to generate realistic asset price and exchange rate dynamics, satisfying a long-standing need of the general equilibrium literature in international finance. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:502&r=dge |
| By: | Driffill, John |
| Abstract: | This paper is based on presentation given at the June 2011 Conference of the Centre for Growth and Business Cycle Research at the University of Manchester. It reviews key features of the 2007-08 financial crisis, the subsequent 'great recession' and the European public debt problems; in the light of these it discusses new avenues of research that have been opened up in response to recent events. |
| Keywords: | DSGE models; financial shocks; fiscal policy; macroeconomics; quantitative easing; unemployment |
| JEL: | E30 E44 E60 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9321&r=dge |
| By: | Luigi Bocola; Nils Gornemann |
| Abstract: | This paper documents a strong association between total factor productivity (TFP) growth and the value of U.S. corporations (measured as the value of equities and net debt for the U.S. corporate sector) throughout the postwar period. Persistent fluctuations in the first two moments of TFP growth predict two-thirds of the medium-term variation in the value of U.S. corporations relative to gross domestic product (hence-forth value-output ratio). An increase in the conditional mean of TFP growth by1% is associated to a 21% increase in the value-output ratio, while this indicator declines by 12% following a 1% increase in the standard deviation of TFP growth. A possible explanation for these findings is that movements in the first two moments of aggregate productivity affect the expectations that investors have regarding future corporate payouts as well as their perceived risk. We develop a dynamic stochastic general equilibrium model with the aim of verifying how sensible this interpretation is. The model features recursive preferences for the households, Markov-Switching regimes in the first two moments of TFP growth, incomplete information and monopolistic rents. Under a plausible calibration and including all these features, the model can account for a sizable fraction of the elasticity of the value-output ratio to the first two moments of TFP growth. |
| Keywords: | Corporations ; Economic growth ; Risk ; Asset pricing |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-10&r=dge |
| By: | Josep Pijoan-Mas (CEMFI); Claudio Michelacci (CEMFI) |
| Abstract: | We consider a competitive equilibrium matching model where technological progress is embodied in new jobs. Jobs are slowly created over time and in equilibrium there is dispersion in job technologies. Workers can be employed in at most one job. They decide on whether to participate in the labor market and on how many hours to work when assigned to a job. This endogenously generates inequality in wages and in labor supply. When the pace of technological progress accelerates differences in job technologies widen and the technology gap with respect to the frontier increases more in worse jobs. As a result, the balance of income and substitution effects on labor supply is asymmetric across jobs and it becomes optimal to work longer hours in the top jobs and work less hours in the worst ones. With a fixed cost of labor supply this implies that the participation rate falls as workers work less often in order to avoid the worst jobs, and they supply longer hours on average when employed. This model can explain the simultaneous fall in labor force participation and the increase in working hours experienced by US male workers since the mid 70s in a context of raising wage inequality. In addition, it can ex- plain the differences across education groups. In the data, less educated workers see both participation and hours fall. Our model predicts assortative matching, and hence, less educated individuals have access to the worst jobs in the economy, those that worsen the most with the increase in the speed of embodied technical change. Hence, for these workers the returns on market work fall disproportionately and they reduce labor supply in both margins |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:482&r=dge |
| By: | Gersbach, Hans; Haller, Hans; Müller, Jürg |
| Abstract: | We examine the validity of a macroeconomic version of the Modigliani-Miller theorem. For this purpose, we develop a general equilibrium model with two production sectors, risk-averse households and financial intermediation by banks. Banks are funded by deposits and (outside) equity and monitor borrowers in lending. We impose favorable manifestations of the underlying frictions and distortions. We obtain two classes of equilibria. In the first class, the debt-equity ratio of banks is low. The first-best allocation obtains and banks' capital structure is irrelevant for welfare: a macroeconomic version of the Modigliani-Miller theorem. However, there exists a second class of equilibria with high debt-equity ratios. Banks are larger and invest more in risky technologies. Default and bailouts financed by lump sum taxation occur with positive probability and welfare is lower. Imposing minimum equity capital requirements eliminates all inefficient equilibria and guarantees the global validity of the macroeconomic version of the Modigliani-Miller theorem. |
| Keywords: | Banking; Capital Requirements; Capital Structure; Financial intermediation; General Equilibrium; Modigliani-Miller |
| JEL: | D53 E44 G2 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9402&r=dge |
| By: | Elena Sochirca (FEP); Oscar Afonso (FEP); Sandra Silva (FEP) |
| Abstract: | Abstract We propose an endogenous growth model with elements of new political economy in order to study the effects of political institutions and political rivalry on human capital accumulation and income inequality. Relating to the increasing literature on the relationship between income redistribution, inequality and growth, and on the political economy of growth, our model shows that (i) non-distortionary redistribution via public education equalizes income levels and increases human capital accumulation; (ii) political rivalry produces negative outcomes in all dimensions of the considered economic interactions. In particular, we find that occurring episodes of political rivalry reduce human capital accumulation through their negative impact on public investments in education, workers' wages and individual learning choice, and increase income inequality. As regards the role of political institutions, our analysis suggests that the elasticities of human capital accumulation with respect to public and private investments have crucial implications for public policies and require particular attention to the political rivalry effects. |
| Keywords: | political rivalry, institutions, human capital accumulation, public education, inequality, efficient redistribution, economic growth. |
| JEL: | H21 H40 H52 E24 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:466&r=dge |
| By: | Raouf Boucekkine (Aix-Marseille University (Aix-Marseille School of Economics)); Giorgio Fabbri (EPEE, Université d’Evry-Val-d’Essonne (TEPP, FR-CNRS 3126)); Patrick A. Pintus (Aix-Marseille University (Aix-Marseille School of Economics), Institut Universitaire de France) |
| Abstract: | This paper aims at clarifying the conditions under which financial globalization originates welfare gains in a simple endogenous growth setting. We focus on the capital-deepening effect of financial globalization in an open-economy AK model and we show that collateral-constrained borrowing triggers substantial welfare gains, even at small levels of international financial integration, provided that the autarkic growth rate is larger than the world interest rate. Such conditional welfare benefits boosted by stronger growth - long-run gain - are shown to be robust to relaxing the assumption of investment commitment, which generates growth breaks and hampers welfare. For reasonable parameter values and relative to autarky, welfare gains range from about 2% in middle-income countries to about 13% in OECD-type countries under international Financial integration. Sizeable benefits emerge despite the fact that consumption falls when the economy switches from autarky to financial integration - short-run pain - which is however shown not to dwarf positive welfare changes. |
| Keywords: | International Financial Integration, Collateral-Constrained Borrowing, Welfare Gains, Growth Breaks, Leapfrogging |
| JEL: | F34 F43 O40 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:eve:wpaper:12-14&r=dge |
| By: | Jonathan Heathcote; Fabrizio Perri |
| Abstract: | This chapter is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of resources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow faster in the long run also tend to save more both domestically and internationally. These facts suggest that either the long-run allocation of resources across countries is inefficient, or that there is a systematic relation between fast growth and preference for delayed consumption. The third part applies the methodology to the allocation of resources across developed countries at the business cycle frequency. Here we discuss how evidence on international quantity comovement, exchange rates, asset prices, and international portfolio holdings can be used to assess efficiency. Overall, quantities and portfolios appear consistent with efficiency, while evidence from prices is difficult to interpret using standard models. The welfare costs associated with an inefficient allocation of resources over the business cycle can be significant if shocks to relative country permanent income are large. In those cases partial financial liberalization can lower welfare. |
| Keywords: | Risk ; Business cycles |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:480&r=dge |
| By: | Nan Yang (Tilburg University); Jeffrey Campbell (Federal Reserve Bank of Chicago); Jaap Abbring (Tilburg University) |
| Abstract: | This paper develops a tractable model for the computational and empirical analysis of infinite-horizon oligopoly dynamics. It features aggregate demand uncertainty, sunk entry costs, stochastic idiosyncratic technological progress, and irreversible exit. We develop an algorithm for computing a symmetric Markov-perfect equilibrium quickly by finding the fixed points to a finite sequence of low-dimensional contraction mappings. If at most two heterogenous firms serve the industry, the resuilt is the unique "natural" equilibrium in which a high protability firm never exits leaving behind a low protability competitor. With more than two firms, the algorithm always finds a natural equilibrium. We present a simple rule for checking ex post whether the calculated equilibrium is unique, and we illustrate the model's application by assessing the robustness of Fershtman and Pakes' (2000) finding that collusive pricing can increase consumer surplus by stimulating product development. The hundreds of equilibrium calculations this requires take only a few minutes on an off-the-shelf laptop computer. We also present a feasible algorithm for the model's estimation using the generalized method of moments. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:506&r=dge |
| By: | Michelacci, Claudio; Pijoan-Mas, Josep |
| Abstract: | We consider a competitive equilibrium growth model where technological progress is embodied into new jobs that are assigned to workers of different skills. In every period workers decide whether to actively participate in the labor market and if so how many hours to work on the job. Balanced growth requires that the job technology is complementary with the worker’s total labor input in the job, which is jointly determined by his skill and his working hours. Since lower skilled workers can supply longer hours, we show that the equilibrium features positive assortative matching (higher skilled workers are assigned to better jobs) only if differences in consump- tion are small relative to differences in worker skills. When the pace of technological progress accelerates, wage inequality increases and workers participate less often in the labor market but supply longer hours on the job. This mechanism can explain why, as male wage inequality has increased in the US, labor force participation of male workers of different skills has fallen while their working hours have increased. |
| Keywords: | job heterogeneity; participation; wage inequality; working hours |
| JEL: | E24 G31 J31 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9296&r=dge |
| By: | Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Ou, Zhirong |
| Abstract: | We add the Bernanke-Gertler-Gilchrist model to a world model consisting of the US, the Euro-zone and the Rest of the World in order to explore the causes of the banking crisis. We test the model against linear-detrended data and reestimate it by indirect inference; the resulting model passes the Wald test only on outputs in the two countries. We then extract the model’s implied residuals on unfi…ltered data to replicate how the model predicts the crisis. Banking shocks worsen the crisis but ‘traditional’ shocks explain the bulk of the crisis; the non-stationarity of the productivity shocks plays a key role. Crises occur when there is a ‘run’ of bad shocks; based on this sample Great Recessions occur on average once every quarter century. Financial shocks on their own, even when extreme, do not cause crises — provided the government acts swiftly to counteract such a shock as happened in this sample. |
| Keywords: | Banking; DSGE; Indirect Inference |
| JEL: | E0 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9392&r=dge |
| By: | Jeremy Greenwood (University of Pennsylvania); Philipp Kircher (University of Edinburgh); Cezar Santos (University of Mannheim); Michele Tertilt (University of Mannheim) |
| Abstract: | Eleven percent of the Malawian population is HIV infected. Eighteen percent of sexual encounters are casual. A condom is used one quarter of the time. A choice-theoretic general equilibrium search model is constructed to analyze the Malawian epidemic. In the developed framework, people select between different sexual practices while knowing the inherent risk. The analysis suggests that the efficacy of public policy depends upon the induced behavioral changes and general equilibrium effects that are typically absent in epidemiological studies and small-scale field experiments. For some interventions (some forms of promoting condoms or marriage), the quantitative exercise suggests that these effects may increase HIV prevalence, while for others (such as male circumcision or increased incomes) they strengthen the effectiveness of the intervention. The underlying channels giving rise to these effects are discussed in detail. |
| Keywords: | Bayesian learning, circumcision, condoms, disease transmission,HIV/AIDS, homo economicus, Malawi, marriage, policy intervention, sex markets, search, STDs |
| JEL: | D10 D50 E10 I10 O11 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:eag:rereps:20&r=dge |
| By: | M. Ali Choudhary (University of Surrey and State Bank of Pakistan); Farooq Pasha (State Bank of Pakistan) |
| Abstract: | In this paper, we establish the nature of short-run fluctuations of the Pakistani economy over the period of 1981-2010. There have been significant changes in the nature of the Pakistani economy over the last few decades. Therefore, we focus our detailed analysis on the last few decades where it seems more appropriate to investigate the nature and causes of business cycles in Pakistan. Furthermore, we evaluate the performance of a typical RBC and an augmented RBC model with an exogenous FDI shock in explaining cyclical fluctuations experienced by the Pakistani economy. We find that a simple RBC model performs poorly in terms of matching relevant second- order moments of short run fluctuations as depicted by the data. However, augmented RBC model performs better compared to the simple RBC model. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0413&r=dge |
| By: | Herrendorf, Berthold; Rogerson, Richard; Valentinyi, Akos |
| Abstract: | Structural transformation refers to the reallocation of economic activity across the broad sectors agriculture, manufacturing and services. This review article synthesizes and evaluates recent advances in the research on structural transformation. We begin by presenting the stylized facts of structural transformation across time and space. We then develop a multi--sector extension of the one--sector growth model that encompasses the main existing theories of structural transformation. We argue that this multi--sector model serves as a natural benchmark to study structural transformation and that it is able to account for many salient features of structural transformation. We also argue that this multi--sector model delivers new and sharper insights for understanding economic development, regional income convergence, aggregate productivity trends, hours worked, business cycles, and wage inequality. We conclude by suggesting several directions for future research on structural transformation. |
| Keywords: | approximate balanced growth; multi-sector growth model; structural transformation; stylized facts |
| JEL: | O11 O14 O41 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9370&r=dge |
| By: | James Bullard (Federal Reserve Bank of St. Louis); Jacek Suda (Banque de France - Paris School of Economics); Aarti Singh (University of Sydney); Costas Azariadis (Dept of Economics) |
| Abstract: | The U.S economy has accumulated in recent years seemingly excessive levels of household debt. U.S monetary policy has responded to the situation by keeping real interest rates low. Critics of the low real interest rate policy contend that such a policy helps borrowers and punishes savers, thus delaying the necessary adjustment needed to return to balanced growth. We consider a macroeconomic setting which gives voice to these concerns. In the model, lifecycle considerations lead to a natural interaction between young borrowers and middle-aged lenders. Optimism concerning future income prospects will raise borrowing, but if the optimism later turns out to be unwarranted, households will have borrowed too much. We show that, in this setting, overhang drives real interest rates up, not down, and that policy attempts to keep rates lower may drag out the necessary adjustment to the balanced growth path, and lower lifecycle welfare. We compare these findings to recent contributions on debt overhang emphasizing exogenous debt constraints due to Eggertsson and Krugman(2010) and Guerrierri and Lorenzoni(2010). |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:504&r=dge |
| By: | Chen, Xiaoshan; Kirsanova, Tatiana; Leith, Campbell |
| Abstract: | Most of the literature estimating DSGE models for monetary policy analysis assume that policy follows a simple rule. In this paper we allow policy to be described by various forms of optimal policy - commitment, discretion and quasi-commitment. We find that, even after allowing for Markov switching in shock variances, the inflation target and/or rule parameters, the data preferred description of policy is that the US Fed operates under discretion with a marked increase in conservatism after the 1970s. Parameter estimates are similar to those obtained under simple rules, except that the degree of habits is significantly lower and the prevalence of cost-push shocks greater. Moreover, we find that the greatest welfare gain sfrom the 'Great Moderation' arose from the reduction in the variances in shocks hitting the economy, rather than increased inflation aversion. However, much of the high inflation of the 1970s could have been avoided had policy makers been able to commit, even without adopting stronger anti-inflation objectives. More recently the Fed appears to have temporarily relaxed policy following the 1987 stock market crash, and has lost, without regaining, its post-Volcker conservatism following the bursting of the dot-com bubble in 2000. |
| Keywords: | Discretion; Commitment; Great Moderation; Optimal Monetary Policy; Interest Rate Rules; Bayesian Estimation |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2013-05&r=dge |
| By: | Cervellati, Matteo; Sunde, Uwe |
| 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: | adult mortality; child mortality; comparative development; development traps; economic and demographic transition; heterogeneous human capital; quantitative analysis; unified growth model |
| JEL: | E10 J10 J13 N30 O10 O40 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9337&r=dge |
| By: | Sephorah Mangin (Becker-Friedman Institute, University of Chicago) |
| Abstract: | This paper develops microfoundations for a unified aggregate production function. Labor market frictions are naturally built into the aggregate production function because matching and production are two aspects of a single process. Entrepreneurs with heterogeneous productivity levels hire capital and compete for workers. If no entrepreneurs approach a given worker he is unemployed, otherwise the entrepreneur with the highest productivity hires the worker. The model provides new insights into the behavior of factor shares. If the entrepreneurs' productivity distribution is Pareto, the aggregate production function is Cobb-Douglas only in the limit as frictional unemployment disappears. In this limiting case, factors are paid their marginal product and factor shares are constant. Outside this limit, factor shares are not generally constant, enabling us to examine their behavior. A key prediction of the model is that labor's share is counter-cyclical provided that workers' outside option is sufficiently high. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:500&r=dge |