nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒04‒27
nineteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Dynamic stochastic general equilibrium model with banks and endogenous defaults of firms By Sergei Ivashchenko
  2. The Costs of Increasing the Fertility Rate in an Endogenous Growth Model By Stauvermann, Peter J.; Ky , Sereyvath; Nam, Gi-Yu
  3. Progressive Taxation and Macroeconomic (In)stability with Utility-Generating Government Spending By Jang-Ting Guo; Shu-Hua Chen
  4. Structural and Cyclical Effects of Tax Progression By Jana Kremer; Nikolai Stähler
  5. Demographic Transition and Economic Welfare: The Role of Humanitarian Aid By Kyriakos C. Neanidis; Stephen M. Miller
  6. Endogenous Sources of Volatility in Housing Markets: The Joint Buyer-Seller Problem By Elliot Anenberg; Patrick Bayer
  7. Sticky Information Models in Dynare By Fabio Verona; Maik H. Wolters
  8. Optimal sovereign default By Adam, Klaus; Grill, Michael
  9. Endogenous growth and intellectual property rights: a North-South modelling proposal By Mónica L. Azevedo; Óscar Afonso; Sandra T. Silva
  10. The Pruned State-Space System for Non-Linear DSGE Models: Theory and Empirical Applications By Martin M. Andreasen; Jesús Fernández-Villaverde; Juan Rubio-Ramírez
  11. Credit frictions and the cleansing effect of recessions By Sophie Osotimehin; Francesco Pappada
  12. The expectations-driven US current account By Hoffmann, Mathias; Krause, Michael U.; Laubach, Thomas
  13. Essays in macro-finance. Essais de macro-finance . By Isore, Marlène
  14. A Note on Information Flows and Identification of News Shocks Models By Marco M. Sorge
  15. Firm-Level Monopsony and the Gender Pay Gap By Webber, Douglas A.
  16. Trade Integration and Business Cycle Synchronization in the EMU: the Negative Effect of New Trade Flows By Jean-Sébastien Pentecôte; Jean-Christophe Poutineau; Fabien Rondeau
  17. Dynamic Selection and the New Gains from Trade with Heterogeneous Firms By Thomas Sampson
  18. Sticky Price Models, Durable Goods, and Real Wage Rigidities By M. Alper Çenesiz; Luís Guimarães
  19. Rationalizability and Interactivity in Evolutionary OLG Models By Grégory Ponthière

  1. By: Sergei Ivashchenko (St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences (RAS))
    Abstract: A dynamic stochastic general equilibrium (DSGE) model with endogenous defaults of firms is developed. Proposed mechanism of defaults is very flexible. It takes into account amount of assets owned by firms. It suggests that banks receive some payment from firm after default. The model is estimated for USA and for Russia.
    Keywords: DSGE, endogenous defaults of firms
    JEL: E32 E43 E44 E47 G21
    Date: 2013–01–25
  2. By: Stauvermann, Peter J.; Ky , Sereyvath; Nam, Gi-Yu
    Abstract: In this paper, we apply an Overlapping Generations (OLG) model with endogenous fertility and a pay as you go (PAYG) pension system to find out what are the economic consequences of different policy measures to increase the number of children. Especially, we take into account the introduction of a child dependent PAYG pension system, child allowances financed by a labor income tax, and a reduction of the child rearing costs. Some authors have shown that in small open economies with exogenous growth it is possible to increase the fertility without harming any generation. Here we show that this is impossible in a model with endogenous growth.
    Keywords: Fertility, endogenous growth, pay-as-you-go pension, child allowances
    JEL: D10 H5 J13
    Date: 2013–01
  3. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Shu-Hua Chen (National Taipei University)
    Abstract: We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector real business cycle model with utility-generating government purchases of goods and services. When private and public consumption expenditures are complements in the household utility and the tax schedule is progressive, we analytically show that the economy exhibits indeterminacy and sunspots if and only if the degree of government-spending preference externality is higher than a critical threshold. Unlike traditional Keynesian-type stabilization policies, raising the tax progressivity may destabilize this version of our model by generating endogenous cyclical áuctuations. Moreover, the economy always displays saddle-path stability and equilibrium uniqueness under utility substitutability between private and public consumptions and progressive taxation.
    Keywords: Progressive Income Taxation; Equilibrium (In)determinacy; Utility-Generating.
    JEL: E32 E62
    Date: 2013–04
  4. By: Jana Kremer (Deutsche Bundesbank, Economics Department, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany); Nikolai Stähler (Deutsche Bundesbank, Economics Department, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany)
    Abstract: In a real business cycle model with labor market frictions, we find that a more progressive tax schedule reduces structural unemployment as it fosters long-run incentives for job creation. Because there exists an optimal level of unemployment in a matching environment (“Hosios condition”), tax progression improves steady-state welfare up to a certain threshold and harms it beyond that. However, tax progression increases the costs of business cycles for those consumers who can save and borrow, while it reduces the business cycle costs for households with limited asset market participation (“rule-of-thumb” consumers). Our analysis suggests that business cycle effects dominate steady-state effects. On the aggregate level, tax progression is welfare-enhancing up to a certain threshold and always shifts relative utility from optimizing to rule-of-thumb consumers. These findings are quite robust to alternative calibrations of our model.
    Keywords: Tax Progression, Business Cycles, Automatic Stabilizers, Welfare
    JEL: H2 J6 E32 E62
    Date: 2013–04
  5. By: Kyriakos C. Neanidis (Department of Economics, University of Manchester); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas)
    Abstract: This paper considers the effects of humanitarian aid on economic welfare through a demographic transition channel. We develop a two-period overlapping generations model where reproductive agents face a non-zero probability of death in childhood. As adults, agents allocate their time to work, leisure, and child rearing activities. Health status in adulthood exhibits “state dependence,” as it depends on health in childhood. In this framework, we examine the effects of changes in in-kind and monetary humanitarian aid on economic welfare. We conclude that if parents strongly value children, giving monetary aid produces more children and yields higher welfare. This positive welfare effect dominates an indirect negative welfare effect due to a lower growth rate. But, if parents value the quality of their children (health status), they achieve greater utility by in-kind aid, which also lowers fertility and augments economic growth.
    Keywords: aid; fertility; health; growth; welfare
    JEL: C23 F35 F43 I12 O41
    Date: 2012–04
  6. By: Elliot Anenberg; Patrick Bayer
    Abstract: This paper presents new empirical evidence that internal movement - selling one home and buying another - by existing homeowners within a metropolitan housing market is especially volatile and the main driver of fluctuations in transaction volume over the housing market cycle. We develop a dynamic search equilibrium model that shows that the strong pro-cyclicality of internal movement is driven by the cost of simultaneously holding two homes, which varies endogenously over the cycle. We estimate the model using data on prices, volume, time-on-market, and internal moves drawn from Los Angeles from 1988-2008 and use the fitted model to show that frictions related to the joint buyer-seller problem: (i) substantially amplify booms and busts in the housing market, (ii) create counter-cyclical build-ups of mismatch of existing owners with their homes, and (iii) generate externalities that induce significant welfare loss and excess price volatility.
    JEL: E32 R0 R21 R3 R31
    Date: 2013–04
  7. By: Fabio Verona (Bank of Finland, Monetary Policy and Research Department, and cef.up, University of Porto); Maik H. Wolters (University of Kiel and Kiel Institute for the World Economy)
    Abstract: Macroeconomic models with sticky information include an infinite number of lagged expectations. Several authors have developed specialized solutions algorithms to solve these models under rational expectations. We demonstrate that it is also possible to implement this class of models in Dynare ? a widely used software package for solving dynamic stochastic general equilibrium (DSGE) models. Using the Dynare macro language one can easily construct and change the required large number of lagged expectation terms. We assess the accuracy of simulations run with different truncation points for the lagged expectations terms and find that the solution is reasonably precise even for moderate truncation points.
    Keywords: sticky information, Dynare, macro-processor, lagged expectations
    Date: 2013–04
  8. By: Adam, Klaus; Grill, Michael
    Abstract: When is it optimal for a government to default on its legal repayment obligations? We answer this question for a small open economy with domestic production risk in which contracting frictions make it optimal for the government to finance itself by issuing non-contingent debt. We show that Ramsey optimal policies occasionally deviate from the legal repayment obligation and repay debt only partially, even if such deviations give rise to significant 'default costs'. Optimal default improves the international diversification of domestic output risk, increases the efficiency of domestic investment and - for a wide range of default costs - significantly increases welfare relative to a situation where default is simply ruled out from Ramsey optimal plans. We show analytically that default is optimal following adverse shocks to domestic output, especially for very negative international wealth positions. A quantitative analysis reveals that for empirically plausible wealth levels, default is optimal only in response to disaster-like shocks to domestic output, and that following such shocks default can be Ramsey optimal even if the net foreign asset position is positive. --
    Keywords: Fiscal Policy,Sovereign Risk
    JEL: E62 F34
    Date: 2013
  9. By: Mónica L. Azevedo (Faculdade de Economia, Universidade do Porto); Óscar Afonso (CEF.UP, Faculdade de Economia, Universidade do Porto); Sandra T. Silva (CEF.UP, Faculdade de Economia, Universidade do Porto)
    Abstract: In what form should the Intellectual Property Rights (IPR) be treated in an endogenous growth model? What are the effects of introducing IPR into a North-South endogenous growth model? In this paper, we develop a general equilibrium endogenous growth model that emphasizes the IPR enforcement effects on growth, in a scenario of North-South technological knowledge diffusion. The economy consists of three sectors, and firms are engaged in step-by-step innovation. In line with the literature, we introduce an IPR parameter that makes imitation more difficult. We find that, in steady state, the increases in IPR protection result in decreases in the growth rate. This result is in line with the literature, which argues that the enforcement of IPR does not always have a positive effect on economic growth and highlights that there is much more work to be done in this field of study, given that the existing results are not consensual. To sum up, we present some suggestions for future research which can help to clarify the relationship between IPR and endogenous growth.
    Keywords: Intellectual Property Rights (IPR), economic growth, North-South model
    JEL: O33 O34 O41
    Date: 2013–04
  10. By: Martin M. Andreasen; Jesús Fernández-Villaverde; Juan Rubio-Ramírez
    Abstract: This paper studies the pruned state-space system for higher-order approximations to the solutions of DSGE models. For second- and third-order approximations, we derive the statistical properties of this system and provide closed-form expressions for first and second unconditional moments and impulse response functions. Thus, our analysis introduces GMM estimation for DSGE models approximated up to third-order and provides the foundation for indirect inference and SMM when simulation is required. We illustrate the usefulness of our approach by estimating a New Keynesian model with habits and Epstein-Zin preferences by GMM when using first and second unconditional moments of macroeconomic and financial data and by SMM when using additional third and fourth unconditional moments and non-Gaussian innovations.
    JEL: C15 C53 E30
    Date: 2013–04
  11. By: Sophie Osotimehin; Francesco Pappada
    Abstract: Recessions are conventionally considered as times when the least productive rms are driven out of the market. Do credit frictions hamper this cleansing eect of recessions? We build and calibrate a model of rm dynamics with endogenous exit and credit frictions to investigate this question. We nd that, despite their distortionary eect on the selection of exiting rms, credit frictions do not reverse the cleansing eect of recession. Average idiosyncratic productivity rises following an adverse aggregate shock. Our results also suggest that recessions have a modest impact on average productivity whatever the level of credit frictions
    Keywords: cleansing, business cycles, rm dynamics, credit frictions
    JEL: E32 E44 D21
  12. By: Hoffmann, Mathias; Krause, Michael U.; Laubach, Thomas
    Abstract: Since 1991, survey expectations of long-run output growth for the U.S. relative to the rest of the world exhibit a pattern strikingly similar to that of the U.S. current account, and thus also to global imbalances. We show that this finding can to a large extent be rationalized in a two-region stochastic growth model simulated using expected trend growth filtered from observed productivity. In line with the intertemporal approach to the current account, a major part of the buildup of the U.S. current account deficit appears to be driven by the optimal response of households and firms to improved growth prospects. --
    Keywords: open economy,stochastic trend growth,Kalman filter,news shocks
    JEL: F32 E13 E32 D83 O40
    Date: 2013
  13. By: Isore, Marlène
    Abstract: This dissertation consists of three essays in financial macroeconomics. The methodological approach common to the first two articles is the application of the search and matching theory to financial markets. The third essay builds on the literature on rare events. In the first article, I develop a tractable two-country model in which financial contagion may arise despite a flexible exchange rate regime and substitutability between home and foreign financial assets, contrary to the open-economy standard results under these two conditions. While monetary contractions imply negative output co-movements, in line with the literature, non-walrasian shocks to banks’ funding costs do generate the contagion. The second essay analyzes the role of bankers’ behavior in bank default. The model accounts for heterogeneity in entrepreneurs’ productivity and information asymmetry at the expense of capital holders. Moral hazard arises following a productivity shock: bankers tend to choose investments that are more profitable in the short-run but whose risk is borne by the financiers. This mechanism magnifies credit rationing in the economy and contributes to bank default. The third article examines the macroeconomic impact of a change in the probability of rare events in a New Keynesian model. A rise in the probability of disaster is sufficient to generate a recession without effective occurrence of the disaster. After accounting for monopolistic competition and price stickiness, the responses of consumption and wages are also reminiscent of distressed times. The article thus provides a framework of the dynamic effects of rare events, particularly suitable for further policy analysis.
    Abstract: Cette thèse comprend trois articles en macroéconomie financière. L’approche méthodologique commune aux deux premiers est l’application des modèles d’appariement aux marchés financiers. Le troisième contribue à l’étude des événements rares. Le premier article démontre qu’une contagion financière internationale est susceptible d’émerger malgré un régime de taux de change flexible et une substituabilité entre les actifs financiers nationaux et étrangers, contrairement aux résultats standards sous ces deux conditions. A l’inverse des contractions monétaires traditionnelles, des chocs non-walrasiens de coûts de capitalisation bancaire génèrent une contagion internationale. Le deuxième article étudie le rôle du comportement des banquiers dans le défaut bancaire. Le modèle tient compte de l’hétérogénéité des emprunteurs et incorpore une asymétrie d’information au détriment des détenteurs de capitaux. Un aléa moral survient à la suite d’un choc de productivité : les banquiers tendent à choisir les investissements plus rentables à court terme mais dont le risque est supporté par les investisseurs. Ce mécanisme amplifie le rationnement du crédit dans l’économie et alimente le défaut bancaire. Le troisième article étudie l’impact macroéconomique d’une variation de la probabilité d’un événement rare dans un modèle néo-keynésien. Une hausse de la probabilité suffit notamment à générer une récession sans réelle occurrence du « désastre » et produit, en concurrence monopolistique, des réactions de la consommation et des salaires cohérentes. Nous proposons ainsi un cadre d’analyse des effets dynamiques des événements rares, préalable à l’investigation du rôle de la politique monétaire.
    Keywords: Crise financière, frictions, appariement, contagion, banques, aléa moral, événement rare, désastre économique;
    Date: 2012–09
  14. By: Marco M. Sorge
    Abstract: This note points out a hitherto unrecognised identification issue in a class of rational expectations (RE) models with news shocks. We show that different degrees of anticipation (information flows) have strikingly different implications for the identifiability of the underlying structural model, irrespective of its non-fundamental time-series representation. In particular, under full shock anticipation equilibrium reduced forms behave as noisy perfect foresight state motions, which are non-identifiable. As a consequence, the underlying news shocks model fails to be (first-order) identified. The identification failure is illustrated with a New Keynesian model that can be solved analytically.
    Keywords: Rational expectations, perfect foresight, news shocks, identification.
    JEL: C1 E32
    Date: 2013–04–08
  15. By: Webber, Douglas A. (Temple University)
    Abstract: Using a dynamic labor supply model and linked employer-employee data, I find evidence of substantial search frictions, with females facing a higher level of frictions than males. However, the majority of the gender gap in labor supply elasticities is driven by across firm sorting rather than within firm differences, a feature predicted in the search theory literature, but which has not been previously documented. The gender differential in supply elasticities leads to 3.3% lower earnings for women. Roughly 60% of the elasticity differential can be explained by marriage and children penalties faced by women but not men.
    Keywords: monopsony, discrimination
    JEL: J42 J71
    Date: 2013–04
  16. By: Jean-Sébastien Pentecôte (University of Rennes 1 - CREM UMR CNRS 6211, France); Jean-Christophe Poutineau (University of Rennes 1 - CREM UMR CNRS 6211, France); Fabien Rondeau (University of Rennes 1 - CREM UMR CNRS 6211, France)
    Abstract: This paper questions the impact of trade integration on business cycle synchronization in the EMU by distinguishing increase of existing trade flows (the intensive margin) and creation of new trade flows (the extensive margin). Using a DSGE model, we find that synchronization is weakened when new firms are allowed to export in response to productivity gains. Using disaggregated data over 1995–2007 for the 10 founding members of the EMU and consistently with our model, we find that trade intensity has a positive direct effect while new trade flows have a negative effect on business cycle synchronization. Furthermore, new flows play essentially an indirect role by intensifying specialization and explain 60% of the overall effect of trade intensity and specialization on synchronization.
    Keywords: Trade Integration, New Trade Flows, Business Cycles, Synchronization, European Monetary Union
    JEL: F14 F15 F41 F44
    Date: 2013–04
  17. By: Thomas Sampson
    Abstract: This paper develops an open economy growth model in which firm heterogeneity increases the gains from trade. Technology spillovers from incumbent firms to entrants cause the productivity threshold for firm survival to grow over time as competition becomes tougher. By raising the profits of exporters, trade increases the entry rate and generates a dynamic selection effect that leads to higher growth. The paper shows that the gains from trade can be decomposed into: static gains that equal the total gains from trade in an economy without technology spillovers, and; dynamic gains that are strictly positive. Since trade raises growth through selection, not scale effects, the positive growth effect of trade vanishes when firms are homogeneous. Thus, firm heterogeneity creates a new source of dynamic gains from trade. Calibrating the model to the U.S. economy implies that dynamic selection approximately triples the gains from trade.
    Keywords: Gains from Trade, Endogenous Growth, Firm Heterogeneity
    JEL: F12 F43 O41
    Date: 2013–04
  18. By: M. Alper Çenesiz (cef.up, Faculdade de Economia, Universidade do Porto); Luís Guimarães (cef.up, Faculdade de Economia, Universidade do Porto)
    Abstract: The standard two-sector New Keynesian model with durable goods is at odds with conventional wisdom and VAR evidence: Following a monetary shock, it generates (i) either negative or no comovement across sectoral outputs, and (ii) aggregate neutrality of money when durable-goods' prices are flexible. We reconcile theory with evidence by incorporating real wage rigidities into the standard model: As long as durable-goods' prices are more flexible than nondurable-goods' prices, we obtain positive sectoral comovement and, thus, aggregate non-neutrality of money.
    Keywords: Durable goods; Real Wage Rigidities; Comovement; Money.
    JEL: E32 E51 E52
    Date: 2013–04
  19. By: Grégory Ponthière (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales [EHESS] - Ecole des Ponts ParisTech - Ecole normale supérieure de Paris - ENS Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We use the theory of rationalizable choices to study the survival and the extinction of types (or traits) in evolutionary OLG models. Two properties of evolutionary processes are introduced: rationalizability by a …tness ordering (i.e. only the most …fit types survive) and interactivity (i.e. a withdrawal of types a effects the survival of other types). Those properties are shown to be logically incompatible. We then examine whether the evolutionary processes at work in canonical evolutionary OLG models satisfy rationalizability or interactivity. We study n-types versions of the evolutionary OLG models of Galor and Moav (2002) and Bisin and Verdier (2001), and show that, while the evolutionary process at work in the former is generally rationalizable by a …tness ordering, the opposite is true for the latter, which exhibits, in general, interactivity.
    Keywords: Evolutionary OLG models ; Survival ; Extinction ; Fitness or- dering ; Rationalization
    Date: 2013–04–17

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