nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒05‒19
twenty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. On the Size of the Government Spending Multiplier in the Euro Area By Fève, Patrick; Sahuc, Jean-Guillaume
  2. Evidence on Features of a DSGE Business Cycle Model from Bayesian Model Averaging By Rodney Strachan; Herman K. van Dijk
  3. Solution-Driven Specification of DSGE Models By Francisco Blasques
  4. Collective versus Decentralized Wage Bargaining and the Efficient Allocation of Resources By Xiaoming Cai; Pieter A. Gautier; Makoto Watanabe
  5. Can the Montersen-Pissarides Model Match the Housing Market Facts? By Gaetano Lisi
  6. 'Excess Reserves, Monetary Policy and Financial Volatility By Keyra Primus
  7. Top Incomes, Rising Inequality, and Welfare By Kevin J. Lansing; Agnieszka Markiewicz
  8. Efficiency of Central Bank Policy During the Crisis : Role of Expectations in Reinforcing Hoarding Behavior By Volha Audzei
  9. Female Labour Supply, Human Capital and Welfare Reform By Blundell, Richard; Costa Dias, Monica; Meghir, Costas; Shaw, Jonathan
  10. Middlemen: A Directed Search Equilibrium Approach By Makoto Watanabe
  11. Estimating Equilibrium Effects of Job Search Assistance By Pieter Gautier; Paul Muller; Bas van der Klaauw; Michael Rosholm; Michael Svarer
  12. Inventories and the Stockout Contstraint in General Equilibrium By Katsuyuki Shibayama; Jagjit S. Chadha
  13. Demography of political economy : the baby-boom generation. By Belliveau, Stefan
  14. Taxation, match quality and social welfare By Brendan Epstein; Ryan Nunn
  15. Bailouts, time inconsistency, and optimal regulation By V.V. Chari; Patrick J. Kehoe
  16. Pruning in Perturbation DSGE Models - Guidance from Nonlinear Moving Average Approximations By Hong Lan; Alexander Meyer-Gohde; ;
  17. Reconciling consumption inequality with income inequality By Vadym Lepetyuk; Christian A. Stoltenberg
  18. A Note on Money and the Conduct of Monetary Policy By Jagjit S. Chadha; Luisa Corrado; Sean Holly
  19. The gender unemployment gap By Stefania Albanesi; Aysegül Sahin
  20. Nonlinear Programming Method for Dynamic Programming By Yongyang Cai; Kenneth L. Judd; Thomas S. Lontzek; Valentina Michelangeli; Che-Lin Su

  1. By: Fève, Patrick; Sahuc, Jean-Guillaume
    Abstract: This article addresses the existence of a wide range of estimated government spending multipliers in a dynamic stochastic general equilibrium model of the euro area. Our estimation results and counterfactual exercises provide evidence that omitting the interactions of key ingredients at the estimation stage (such as Edgeworth complementarity between private consumption and government expenditures, endogenous government spending policy and general time nonseparable preferences) paves the way for potentially large biases. We argue that uncertainty on the quantitative assessments of fiscal programmes could partly originate from these biases.
    Keywords: Government spending multiplier, DSGE models, Estimation bias, Euro area.
    JEL: C32 E32 E62
    Date: 2013–04
  2. By: Rodney Strachan (Australian National University); Herman K. van Dijk (Erasmus University Rotterdam, and VU University Amsterdam.)
    Abstract: The empirical support for features of a Dynamic Stochastic General Equilibrium model with two technology shocks is valuated using Bayesian model averaging over vector autoregressions. The model features include equilibria, restrictions on long-run responses, a structural break of unknown date and a range of lags and deterministic processes. We find support for a number of features implied by the economic model and the evidence suggests a break in the entire model structure around 1984 after which technology shocks appear to account for all stochastic trends. Business cycle volatility seems more due to investment specific technology shocks than neutral technology shocks.
    Keywords: Posterior probability; Dynamic stochastic general equilibrium model; Cointegration; Model averaging; Stochastic trend; Impulse response; Vector autoregressive model
    JEL: C11 C32 C52
    Date: 2012–03–20
  3. By: Francisco Blasques (VU University Amsterdam)
    Abstract: This paper proposes a functional specification approach for dynamic stochastic general equilibrium (DSGE) models that explores the properties of the solution method used to approximate policy functions. In particular, the solution-driven specification takes the properties of the solution method directly into account when designing the structural model in order to deliver enhanced flexibility and facilitate parameter identification within the structure imposed by the underlying economic theory. A prototypical application reveals the importance of this method in improving the specification of functional nonlinearities that are consistent with economic theory. The solution-driven specification is also shown to have the potential to greatly improve model fit and provide alternative policy recommendations when compared to standard DSGE model designs.
    Keywords: Nonlinear Model Specification, DSGE, Perturbation Solutions
    JEL: C51 E17 E37
    Date: 2013–04–19
  4. By: Xiaoming Cai (VU University Amsterdam); Pieter A. Gautier (VU University Amsterdam); Makoto Watanabe (VU University Amsterdam)
    Abstract: An advantage of collective wage agreement is that search and business-stealing externalities can be internalized. A disadvantage is that it takes more time before an optimal allocation is reached because more productive firms (for a particular worker type) can no longer signal this by posting higher wages. Specifically, we consider a search model with two sided heterogeneity and on-the-job search. We compare the most favorable case of a collective wage agreement (i.e. the wage that a planner would choose under the constraint that all firms in a sector-ocupation cell must offer the same wage) with the case without collective wage agreement. We find that collective wage agreements are never desirable if firms can commit ex ante to a wage and only desirable if firms cannot commit and the relative efficiency of on the job search to off- the job search is less than 20%. This result is hardly sensitive to the bargaining power of workers. Empirically we find both for the Netherlands and the US that this value is closer to 50%.
    Keywords: Collective wage agreements, on-the-job search, efficiency
    JEL: E24 J62 J63 J64
    Date: 2012–08–28
  5. By: Gaetano Lisi (Department of Economics and Law, University of Cassino and Southern Lazio)
    Abstract: In the housing markets three basic facts have been repeatedly reported by empirical studies: the existence of price dispersion, the positive correlation between housing price and timeon-the-market, and between housing price and trading volume. Since housing markets are characterised by a decentralised framework of exchange with important search and matching frictions, this paper examines whether the baseline search and matching model can account for these three basic facts. We find that the standard matching framework allows to obtain a direct relationship between market frictions and house prices which represents the key mechanism to explain the basic facts of the housing market.
    Keywords: Matching models, Housing markets, Time-on-the-market, Housing price dispersion, Trading volume
    JEL: R21 R31 J63
    Date: 2013–05
  6. By: Keyra Primus
    Abstract: This paper examines the financial and real effects of excess reserves in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with monopoly banking, credit market imperfections and a cost channel. The model explicitly accounts for the fact that banks hold excess reserves and they incur costs in holding these assets. Simulations of a shock to required reserves show that although raising reserve requirements is successful in sterilizing excess reserves, it creates a procyclical effect for real economic activity. This result implies that financial stability may come at a cost of macroeconomic stability. The findings also indicate that using an augmented Taylor rule in which the policy interest rate is adjusted in response to changes in excess reserves reduces volatility in output and inflation but increases fluctuations in financial variables. To the contrary, using a countercyclical reserve requirement rule helps to mitigate fluctuations in excess reserves, but increases volatility in real variables.
    Date: 2013
  7. By: Kevin J. Lansing (Federal Reserve Bank of San Francisco, and Norges Bank); Agnieszka Markiewicz (Erasmus University Rotterdam)
    Abstract: This paper develops a general-equilibrium model of skill-biased technological change that approximates the observed shifts in the shares of wage and non-wage income going to the top decile of U.S. households since 1980. Under realistic assumptions, we find that all agents can benefit from the technology change, provided that the observed rise in redistributive transfers over this period is taken into account. We show that the increase in capital’s share of total income and the presence of capital-entrepreneurial skill complementarity are two key features that help support the wages of ordinary workers as the new technology diffuses.
    Keywords: Income Inequality, Skill-biased Technological Change, Capital-skill
    JEL: E32 E44 H23 O33
    Date: 2012–10–26
  8. By: Volha Audzei
    Abstract: Investor sentiment proved to be an important factor during the recent financial and current euro crises. At the same time many existing general equilibrium models do not account for agents' expectations, market volatility, or over-pessimism of investors' forecasts. In this paper we incorporate into the DSGE model a financial sector populated by a continuum of banks with heterogeneous forecasts. We simulate the model with expectational shocks calibrated by the values observed during the financial crisis. Our results suggest that expectational shocks alone could generate a recession of a magnitude comparable to the recent crisis. We then conduct a simple exercise to mimic the credit support policy of a central bank. The results indicate that without influencing agents' expectations, the liquidity provision alone reduces the magnitude of the recession, but neither stops it nor shortens its duration. One reason for low ec ciency of the policy in our model is that banks hoard the liquidity provided by a central bank.
    Keywords: financial intermediation; expectations; DSGE; liquidity provision;
    JEL: E22 E32 G01 G18
    Date: 2012–12
  9. By: Blundell, Richard (University College London); Costa Dias, Monica (Institute for Fiscal Studies, London); Meghir, Costas (Yale University); Shaw, Jonathan (Institute for Fiscal Studies, London)
    Abstract: We consider the impact of tax credits and income support programs on female education choice, employment, hours and human capital accumulation over the life-cycle. We analyze both the short run incentive effects and the longer run implications of such programs. By allowing for risk aversion and savings, we quantify the insurance value of alternative programs. We find important incentive effects on education choice and labor supply, with single mothers having the most elastic labor supply. Returns to labor market experience are found to be substantial but only for full-time employment, and especially for women with more than basic formal education. For those with lower education the welfare programs are shown to have substantial insurance value. Based on the model, marginal increases to tax credits are preferred to equally costly increases in income support and to tax cuts, except by those in the highest education group.
    Keywords: labour supply, human capital, welfare reform
    JEL: J22 J24 H31
    Date: 2013–04
  10. By: Makoto Watanabe (VU University Amsterdam)
    Abstract: This paper studies an intermediated market operated by middlemen with high inventory holdings. I present a directed search model in which middlemen are less likely to experience a stockout because they have the advantage of inventory capacity, relative to other sellers. The model explains why popular items are sold at a larger premium, and everyday items at a larger discount, by large-scaled intermediaries. The concentration of middlemen's market, i.e., few middlemen, each with large capacity, can lead to a higher matching efficiency, but with a lower total welfare, compared to having many middlemen, each with small capacity.
    Keywords: Directed Search, Intermediation, Inventory holdings
    JEL: D4 F1 G2 L1 L8 R1
    Date: 2012–12–10
  11. By: Pieter Gautier (VU University Amsterdam); Paul Muller (VU University Amsterdam); Bas van der Klaauw (VU University Amsterdam, and CEPR); Michael Rosholm (Aarhus University); Michael Svarer (Aarhus University)
    Abstract: Randomized experiments provide policy relevant treatment effects if there are no spillovers between participants and nonparticipants. We show that this assumption is violated for a Danish activation program for unemployed workers. Using a difference-in-difference model we show that the nonparticipants in the experiment regions find jobs slower after the introduction of the activation program (relative to workers in other regions). We then estimate an equilibrium search model. This model shows that a large scale role out of the activation program decreases welfare, while a standard partial microeconometric cost-benefit analysis would conclude the opposite.
    Keywords: randomized experiment, policy-relevant treatment effects, job search,
    JEL: C21 E24 J64
    Date: 2012–07–18
  12. By: Katsuyuki Shibayama; Jagjit S. Chadha
    Abstract: We study the implications of a stockout constraint in a dynamic general equilibrium model, which can explain both RBC and inventory facts well. Under the stockout constraint, inventories and demand are complements in generating sales, and hence the optimal level of inventories increases in expected demand. We also show that the inventory to sales ratio is both persistent and countercyclical because the cost of carrying inventories is mainly determined by the interest rate. We use this model to disentangle output and sales, by matching the key inventory moments, and find that preference and productivity shocks are equally important in data. Finally, we assess whether improvements in inventory management can explain the Great Moderation. We find that, although improvements in inventory management can reduce the need for inventory holdings, which decreases output volatility relative to sales volatility, lower levels of inventories actually increases sales volatility. Because these two effects offset each other, a change in inventory management does not change output volatility to any great extent.
    Keywords: Inventory investment; Inventory cycles; Stockout constraint; Great Moderation
    JEL: E12 E20 E32
    Date: 2013–05
  13. By: Belliveau, Stefan
    Abstract: This working paper attributes a (potential) path of per-capita US output to demographic effects of the post-war baby boom. To the extent that the baby-boom generation predominates among age cohorts in the US population, a life-cycle model suggests a secular trend in per-capita GDP that is largely congruent with realized (and realizing) potential economic growth.
    Keywords: Demography, US, 1945-2046; economic growth; neoclassical growth model;population dynamics
    JEL: J11 O41
    Date: 2013–05–11
  14. By: Brendan Epstein; Ryan Nunn
    Abstract: A large public finance literature argues that taxable income elasticities are a sufficient statistic for the social welfare consequences of taxation. We develop calibrations that show such deadweight loss calculations are overestimates proportional to the quantitative significance of heterogeneity in amenities across job matches. In particular, the endogenous supply of amenities can substantially exacerbate this overestimation in both static and dynamic environments. Given the possibility of gradual migration of workers into more amenity-focused job matches in response to tax increases, welfare calculations based on long-run taxable income elasticities can be more misleading than those based on short-run elasticities.
    Date: 2013
  15. By: V.V. Chari; Patrick J. Kehoe
    Abstract: We develop a model in which, in order to provide managerial incentives, it is optimal to have costly bankruptcy. If benevolent governments can commit to their policies, it is optimal not to interfere with private contracts. Such policies are time inconsistent in the sense that, without commitment, governments have incentives to bail out firms by buying up the debt of distressed firms and renegotiating their contracts with managers. From an ex ante perspective, however, such bailouts are costly because they worsen incentives and thereby reduce welfare. We show that regulation in the form of limits on the debt-to-value ratio of firms mitigates the time-inconsistency problem by eliminating the incentives of governments to undertake bailouts. In terms of the cyclical properties of regulation, we show that regulation should be tightest in ag-gregate states in which resources lost to bankruptcy in the equilibrium without a government are largest.
    Keywords: Regulation
    Date: 2013
  16. By: Hong Lan; Alexander Meyer-Gohde; ;
    Abstract: We derive recursive representations of nonlinear moving average (NLMA) perturbations of DSGE models. As the stability of higher order NLMA representations follows directly from stability at first order, these recursive representations provide rigorous support for the practice of pruning that is becoming widespread. Our recursive representation differs from pruned perturbations in that it centers the approximation and its coefficients at the approximation of the stochastic steady state consistent with the order of approximation. We compare our algorithm with six different pruning algorithms at second and third order, documenting the differences between these six algorithms and standard (non pruned) state space perturbations at first, second, and third order in a unified notation compatible with the popular software package Dynare. While our third order algorithm is the most accurate, the gains over two alternate algorithms are modest, suggesting that this choice is unlikely to be a potential source of error.
    Keywords: Perturbation; DSGE; nonlinear; pruning
    JEL: C52 C63 E30
    Date: 2013–05
  17. By: Vadym Lepetyuk; Christian A. Stoltenberg
    Abstract: The rise in within-group consumption inequality in response to the increase in within-group income inequality over the last three decades in the U.S. is puzzling to expected-utility-based incomplete market models. The two-sided lack of commitment models exhibit too little consumption inequality while the standard incomplete markets models tend to predict too much consumption inequality. We show that a model with two-sided lack of commitment and chance attitudes, as emphasized by prospect theory, can explain the relationship and can avoid the systematic bias of the expected utility models. The chance attitudes, such as optimism and pessimism, imply that the households attribute a higher weight to high and low outcomes compared to their objective probabilities. For realistic values of risk aversion and of chance attitudes, the incentives for households to share the idiosyncratic risk decrease. The latter effect endogenously amplifies the increase in consumption inequality relative to the expected utility model, thereby improving the fit to the data.
    Keywords: Consumption (Economics) ; Income
    Date: 2013
  18. By: Jagjit S. Chadha; Luisa Corrado; Sean Holly
    Abstract: Prior to the financial crisis mainstream monetary policy practice had become disconnected from money. We outline the basic rationale for this development using a simple model of money and credit in which we explore the conditions under which money matters directly for the conduct of policy. Then, drawing on Goodfriend and McCallum's (2007) DSGE model, we examine the circumstances under which money becomes more closely linked to inflation. We find that money matters when the variance of the supply of lending dominates productivity and the velocity of money demand. This is because amplifying the role of loans supply leads to an expansion in aggregate demand, via a compression of the external finance premium, which is inflationary. We consider a number of alternative monetary policy rules, and find that a rule which exploits the joint information from money and the external finance premium performs best.
    Keywords: money; DSGE; policy rules; external finance premium
    JEL: E31 E40 E51
    Date: 2013–04
  19. By: Stefania Albanesi; Aysegül Sahin
    Abstract: The unemployment gender gap, defined as the difference between female and male unemployment rates, was positive until 1980. This gap virtually disappeared after 1980--except during recessions, when men's unemployment rates always exceed women's. We study the evolution of these gender differences in unemployment from a long-run perspective and over the business cycle. Using a calibrated three-state search model of the labor market, we show that the rise in female labor force attachment and the decline in male attachment can mostly account for the closing of the gender unemployment gap. Evidence from nineteen OECD (Organisation for Economic Co-operation and Development) countries also supports the notion that convergence in attachment is associated with a decline in the gender unemployment gap. At the cyclical frequency, we find that gender differences in industry composition are important in recessions, especially the most recent, but they do not explain gender differences in employment growth during recoveries.
    Keywords: Unemployment ; Women - Employment ; Business cycles ; Recessions
    Date: 2013
  20. By: Yongyang Cai; Kenneth L. Judd; Thomas S. Lontzek; Valentina Michelangeli; Che-Lin Su
    Abstract: A nonlinear programming formulation is introduced to solve infinite horizon dynamic programming problems. This extends the linear approach to dynamic programming by using ideas from approximation theory to avoid inefficient discretization. Our numerical results show that this nonlinear programming method is efficient and accurate.
    JEL: C61 C63
    Date: 2013–05

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