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on Dynamic General Equilibrium |
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Issue of 2013‒05‒22
27 papers chosen by |
| By: | Brant Abbott (University of British Columbia, Canada); Giovanni Gallipoli (University of British Columbia); Costas Meghir (Yale University and NBER, USA; IFS, UK); Giovanni L. Violante (New York University and NBER, USA; CEPR, UK) |
| Abstract: | This paper compares partial and general equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Altruistic parents make inter vivos transfers to their children. Labor supply during college, government grants and loans, as well as private loans, complement parental transfers as sources of funding for college education. We find that the current financial aid system in the U.S. improves welfare, and removing it would reduce GDP by two percentage points in the long-run. Any further relaxation of government-sponsored loan limits would have no salient effects. The short-run partial equilibrium effects of expanding tuition grants (especially their need-based component) are sizeable. However, long-run general equilibrium effects are 3-4 times smaller. Every additional dollar of government grants crowds out 20-30 cents of parental transfers. |
| Keywords: | Education, Financial Aid, Inter vivos Transfers, Credit Constraints, Equilibrium |
| JEL: | E24 I22 J23 J24 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:15_13&r=dge |
| By: | Jasmina Hasanhodzic (Department of Economics, Boston University); Laurence J. Kotlikoff (Department of Economics, Boston University) |
| Abstract: | The theoretical literature on generational risk assumes that this risk is large and that the government can effectively share it. To assess these assumptions, this paper simulates a realistically calibrated 80-period overlapping generations life-cycle model with aggregate productivity shocks. Previous solution methods could not handle large-scale OLG models such as ours due to the well-known curse of dimensionality. The prior state of the art is Krueger and Kubler (2004, 2006), whose sparse-grid method handles 10 to 30 periods depending on the model’s realism. Other methods used to solve large-scale, multi-period life-cycle models are tenuous because they rely on either local approximations (Rios-Rull, 1994, 1996) or summary statistics of state variables (Krusell and Smith, 1997, 1998). We build on a new algorithm by Judd, Maliar, and Maliar (2009, 2011), which restricts the state space to the model’s ergodic set. This limits the required computation and effectively banishes the dimensionality curse in models like ours. We find that intrinsic generational risk is quite small, that government policies can produce generational risk, and that bond markets can help share generational risk. We also show that a bond market can mitigate risk-inducing government policy. Our simulations produce very small equity premia for three reasons. First, there is relatively little intrinsic generational risk. Second, intrinsic generational risk hits both the young and the old in similar ways. And third, artificially inducing risk between the young and the old via government policy elicits more net supply as well as more net demand for bonds, by the young and the old respectively, leaving the risk premium essentially unchanged. Our results hold even in the presence of rare disasters and very high risk aversion. They echo Lucas’ (1987) and Krusell and Smith’s (1999) point that macroeconomic fluctuations are too small to have major microeconomic consequences. |
| Keywords: | Intergenerational Risk Sharing; Government Transfer Policies; Aggregate Shocks; Incomplete Markets; Stochastic Simulation |
| JEL: | E21 E24 E62 H55 H31 D91 D58 C63 C68 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:byu:byumcl:201301&r=dge |
| By: | Sarolta Laczo (University of California, Los Angeles); Arpad Abraham (European University Institute) |
| Abstract: | In the typical model of risk sharing with limited commitment (e.g. Kocherlakota, 1996) agents do not have access to any technology transferring resources intertemporally. In our model, agents have a private (non-contractible and/or non-observable) saving technology. We first show that, under general conditions, agents would like to use their private saving technology, i.e. their Euler constraints are violated at the constrained-optimal allocation of the basic model. We then study a problem where both the default and saving incentives of the agents are taken into account. We show that when the planner and the agents have access to the same intertemporal technology, agents no longer want to save at the constrained-optimal allocation. The reason is that endogenously incomplete markets provide at least as much incentive for the planner to save, because she internalizes the effect of aggregate assets on future risk sharing. This implies that aggregate savings are positive in equilibrium even when there is no aggregate uncertainty and the return to saving is below the discount rate. Further, we show that assets remain stochastic whenever only moderate risk sharing is implementable in the long run, but become constant if high but still imperfect risk sharing is the long-run outcome. In contrast, if the return on saving is as high as the discount rate, perfect risk sharing is always self-enforcing in the long run. We also show that higher consumption inequality implies higher public asset accumulation. In terms of consumption dynamics, two counterfactual properties of limited commitment models, amnesia and persistence, do not hold in our model when assets are stochastic in the long run. We also provide an algorithm to solve the model, and illustrate the effects of changing the discount factor and the return to saving by computed examples. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:680&r=dge |
| By: | Dirk Krueger; Alexander Ludwig |
| Abstract: | In this paper we characterize quantitatively the optimal mix of progressive income taxes and education subsidies in a model with endogenous human capital formation, borrowing constraints, income risk and incomplete financial markets. Progressive labor income taxes provide social insurance against idiosyncratic income risk and redistributes after tax income among ex-ante heterogeneous households. In addition to the standard distortions of labor supply progressive taxes also impede the incentives to acquire higher education, generating a non-trivial trade-off for the benevolent utilitarian government. The latter distortion can potentially be mitigated by an education subsidy. We find that the welfare-maximizing fiscal policy is indeed characterized by a substantially progressive labor income tax code and a positive subsidy for college education. Both the degree of tax progressivity and the education subsidy are larger than in the current U.S. status quo. |
| Keywords: | Progressive Taxation, Capital Taxation, Optimal Taxation |
| JEL: | E62 H21 H24 |
| Date: | 2013–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0060&r=dge |
| By: | Catarina Reis (Universidade Catolica Portuguesa); Vasia Panousi (Federal Reserve Board) |
| Abstract: | We examine the optimal taxation of capital in a Ramsey setting of a general-equilibrium heterogeneous-agent economy with uninsurable idiosyncratic investment or capital-income risk. We fully characterize the optimal tax in the case where there is no safe income in the economy. When the interest rate is allowed to adjust to changes in the capital tax, the optimal capital tax is always constant, even off steady state, and is positive when the variance of risk is higher than the mean return to the risky asset. When the interest rate is exogenously fixed, the optimal capital tax is zero. Therefore, general-equilibrium considerations are crucial for the dynamic effects of capital taxation when investment is risky. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:732&r=dge |
| By: | Annamaria Lusardi (The George Washington University School of Business & NBER); Pierre-Carl Michaud (Université du Québec à Montréal & RAND); Olivia S. Mitchell (Wharton School & NBER) |
| Abstract: | While financial knowledge is strongly positively related to household wealth, there is also considerable cross-sectional variation in both financial knowledge and net asset levels. To explore these patterns, we develop a calibrated stochastic life cycle model featuring endogenous financial knowledge accumulation. The model generates substantial wealth inequality, over and above that of standard life cycle models; this is because higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with precautionary saving motives, boost their need for private wealth accumulation and thus financial knowledge. Our simulations show that endogenous financial knowledge accumulation has the potential to account for a large proportion of wealth inequality. The fraction of the population which is rationally financially “ignorant” depends on the generosity of the retirement system and the level of means-tested benefits. Educational efforts to enhance financial savvy early in the life cycle so as to produce one percentage point excess return per year would be valued highly by people in all educational groups. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:133&r=dge |
| By: | Verona, Fabio; Wolters, Maik H. |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201302&r=dge |
| By: | Kremer, Jana; Stähler, Nikolai |
| 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 steadystate 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:152013&r=dge |
| By: | Tetsuo Ono (Graduate School of Economics, Osaka University) |
| Abstract: | This paper develops an overlapping-generations model with uncertain lifetimes and altruism towards children. The paper characterizes a Markov perfect political equilibrium of voting over two conflicting policy issues, public education for the young and social security for the elderly. The model derives multiple indeterminate political equilibria and demonstrates that the difference between the two equilibria in terms of policies and lifetime utility depends on longevity. In particular, the model prediction with respect to the differences in policies and longevity is consistent with the empirical evidence in developed countries. |
| Keywords: | Public education; Social security; Intergenerational conflict |
| JEL: | H52 H55 I22 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1306&r=dge |
| By: | Javier Olivera (UCD Geary Institute, University College Dublin) |
| Abstract: | We model intergenerational old-age support within the context of a developing country that faces demographic transition: declining fertility and increasing life expectancy. We attempt to answer if agents will be able to support their parents during the next generations and under what conditions. For this purpose we use a three period overlapping generations model and a cultural transmission process, in which agents may be socialized to different cultural family models (old-age supporters and non-supporters). As life expectancy increases, we find conditions under which a reduced fertility rate is compatible with the expectation to be supported during old-age. This offers an additional explanation for the persistency of family old-age support in developing countries facing demographic transsition. |
| Keywords: | Cultural transmission, intergenerational transfers, fertility |
| JEL: | J13 D10 E24 |
| Date: | 2013–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201307&r=dge |
| By: | Yaniv Yedid-Levi (The University of British Columbia) |
| Abstract: | In recessions, employment falls in all major sectors. Positive correlation of employment across sectors is a puzzle, because a standard two-sector business-cycle model driven by aggregate productivity shocks predicts negative correlation of total hours of work in the consumption-goods sector and the investment-goods sector. I start from the observation that most of the variability of total hours worked takes the form of variations in the number of workers. Hours per employed worker is only a secondary source of variation. The exten- sive margin is therefore critical in understanding the positive correlation of sectoral labor market variables, yet neglected by existing studies. This paper advances the literature on cross-sectoral correlation of employment by making unemployment an explicit feature of the model. I construct a two sector model with search and matching friction, capital ad- justment costs, and partial wage stickiness. The model explains the positive cross-sectoral correlation through movements of workers in both sectors into and out of unemployment. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:677&r=dge |
| By: | Jose Lopez (HEC PARIS) |
| Abstract: | This paper discusses the role of household heterogeneity in a model in which idiosyncratic consumption and labor income risks manifest as a distortion to the intra-temporal optimal condition of the representative agent. Aggregation over the undistorted labor-leisure condition of each household leads to a wedge between the Marginal Rate of Substitution, between consumption and leisure, (MRS) and the Marginal Product of Labor (MPL), through the lens of the representative agent model. I use household survey data to assess the properties of this aggregation wedge. I find that it is consistent with the systematic deviation between the MRS and the MPL observed in aggregate data, the so-called "Labor Wedge", for both the long-run and the business cycles. Additionally, I explore the quantitative implications of the model assuming imperfect insurability against idiosyncratic shocks. I show that cyclical changes in the distribution of household productivity and in the degree of risk sharing lead to cyclical changes in the aggregation wedge, as if the representative agent faced higher labor taxes - or was lazier- during recessions. The model also exhibits novel dynamics for labor, relative to the benchmark RBC, because of the various labor supply elasticities induced by the individual productivities and the wealth distribution. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:737&r=dge |
| By: | Edgar Vogel; Alexander Ludwig; Axel Börsch-Supan |
| Abstract: | Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged agents with assets accumulated for retirement. This paper addresses three important adjustments channels to dampen these detrimental effects of ageing: investing abroad, endogenous human capital formation and increasing the retirement age. Although non of these suggestions is new in itself, we examine their effects jointly in one coherent model. Our quantitative finding is that openness has a relatively mild effect. In contrast, endogenous human capital formation in combination with an increase in the retirement age has strong effects. Under these adjustments maximum welfare losses of demographic change for households alive in 2010 are reduced by about 3 percentage points. |
| Keywords: | population aging, human capital, welfare, pension reform, retirement age, open economy |
| JEL: | C68 E17 E25 J11 J24 |
| Date: | 2013–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0059&r=dge |
| By: | Alexander Zimper (University of Pretoria); Alexander Ludwig (CMR, University of Cologne); Max Groneck (University of Cologne) |
| Abstract: | On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We parameterize a learning model of subjective survival beliefs with psychological biases such that we replicate these patterns. We then combine this learning model with an otherwise standard life-cycle model of consumption and savings. In line with empirical findings we show that our agents consume more at younger ages and dissave less at old age than agents who perfectly foresee their survival probabilities. We also show that our information driven model yields similar predictions as a preference based hyperbolic discounting model. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:693&r=dge |
| By: | Andres Erosa (IMDEA); Lian Allub (Universidad Carlos III de Madrid) |
| Abstract: | We develop a quantitative life-cycle theory of occupational choice decisions, economic inequality, and financial frictions. The model is calibrated to life-cycle evidence on occupational choices and their persistence, earnings inequality, and consumption inequality in the Brazilian data. An important novelty of our theory is that individuals are heterogeneous in two ability types - ability as a worker and ability as an entrepreneur. Depending on their comparative advantage at occupations (ratio of abilities) and wealth, individuals may choose to become workers or entrepreneurs. The correlation of these two abilities is important for the quantitative implications of the theory because it determines the extent to which talented entrepreneurs are able to self-finance their businesses. When the correlation between skills is high, individuals that are talented as entrepreneurs are also talented as workers. Then, if skills are also persistent over time, young and talented individuals can work when young, build savings, and use their savings to finance their businesses when old. Thus, when entrepreneurial and working skills are highly correlated and persistent over time, the effects of financial frictions on resource allocations are less important than otherwise. Through counterfactual exercises, we want to study how alternative ways of generating economic inequality matter for the effects of financial frictions in the economy. We expect these results to deepen our understanding of the (non-trivial) interactions between inequality, financial frictions, and economic development. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:702&r=dge |
| By: | Maria José Gil-Moltó; Dimitrios Varvarigos |
| Abstract: | We model an industry that supplies intermediate goods in a growing economy. Agents can choose whether to provide labour or to become firm owners and compete in the industry. The idea that entry is determined through occupational choice has major implications for the economy’s intrinsic dynamics. Particularly, the results show that economic dynamics are governed by endogenous volatility in the determination of both the number of industry entrants and in the growth rate of output. Consequently, we argue that occupational choice and the structural characteristics of the endogenous market structure can act as both the impulse source and the propagation mechanism of economic fluctuations. |
| Keywords: | Overlapping generations; Endogenous cycles; Firms’ entry; Industry Dynamics |
| JEL: | E32 L16 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:13/05&r=dge |
| By: | Giuseppe Fiori (University of Sao Paulo); Fabio Ghironi (Boston College); Matteo Cacciatore (HEC Montreal) |
| Abstract: | The global crisis that began in 2008 reheated the debate on market deregulation as a tool to spur economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. We allow regulation in goods and labor markets to differ across countries. We first characterize optimal monetary policy when regulation is high and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International coordination of reforms is beneficial as it eliminates policy tradeoffs generated by asymmetric deregulation. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:678&r=dge |
| By: | Laun, Tobias (Uppsala Center for Fiscal Studies); Wallenius, Johanna (Department of Economics, Stockholm School of Economics) |
| Abstract: | In this paper we study the role of social insurance, namely old-age pensions, disability insurance and healthcare, in accounting for the differing labor supply patterns of older individuals across OECD countries. To this end, we develop a life cycle model of labor supply and health with heterogeneous agents. The key features of the framework are: (1) people choose when to stop working, and when/if to apply for disability and pension benefits, (2) the awarding of disability insurance benefits is imperfectly correlated with health, and (3) people can partially insure against health shocks by investing in health, the cost of which is dependent on health insurance coverage. We find that the incentives faced by older workers differ hugely across countries. In fact, based solely on differences in social insurance programs, the model predicts even more cross-country variation in the employment rates of people aged 55-64 than we observe in the data. |
| Keywords: | Life cycle; Retirement; Disability insurance; Health |
| JEL: | E24 J22 J26 |
| Date: | 2013–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uufswp:2013_006&r=dge |
| By: | Keiichi Morimoto (Department of Economics, Meisei University); Takeo Hori (College of Economics, Aoyama Gakuin University); Noritaka Maebayashi (Graduate School of Economics, Osaka University); Koichi Futagami (Graduate School of Economics, Osaka University) |
| Abstract: | We construct a small open economy model of endogenous growth with public capital accumulation and examine how a debt policy rule under which the government gradually reduces its debt-GDP ratio to a target level affects macroeconomic stability, fiscal sustainability, and welfare. We obtain the following implications for fiscal policy design in small countries. First, to ensure fiscal sustainability, the government should adjust public spending rather than the income tax rate to finance public debt. In addition, it has to set the target level of the debt-GDP ratio sufficiently low to avoid expectations-driven economic instabilities. Under sustainability and stability, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low). |
| Keywords: | Fiscal policy, Public debt, Welfare, Fiscal sustainability, Equiribrium indeterminacy |
| JEL: | E32 E62 H63 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1307&r=dge |
| By: | Luca Fornaro (London School of Economics) |
| Abstract: | This paper develops a dynamic small open economy model featuring an occasionally binding collateral constraint and nominal wage rigidities. The goal is to study the performance of alternative exchange rate policies in economies that endogenously alternate between tranquil times and crises. Financial frictions introduce a trade-off between price and financial stability. For low levels of foreign debt the probability of a future crisis is small and the best policy consists in targeting wage inflation. For high levels of foreign debt the probability of a future crisis is high and wage inflation targeting is dominated by a flexible exchange rate targeting rule, because the latter policy does a better job in mitigating the fall in output, consumption and capital inflows during crisis events. In contrast, pegging the exchange rate is always welfare dominated by targeting wage inflation. I also find that the exchange rate regime affects both the behavior of the economy during crisis events and the crisis probability, through its impact on debt accumulation during tranquil times. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:726&r=dge |
| By: | Stelios D. Bekiros (Department of Economics, European University Institute (EUI) and Rimini Centre for Economic Analysis (RCEA), Italy); Alessia Paccagnini (Department of Economics, Università degli Studi di Milano-Bicocca, Italy) |
| Abstract: | In this paper we employ advanced Bayesian methods in estimating dynamic stochastic general equilibrium (DSGE) models. Although policymakers and practitioners are particularly interested in DSGE models, these are typically too stylized to be taken directly to the data and often yield weak prediction results. Very recently, hybrid models have become popular for dealing with some of the DSGE model misspecifications. Major advances in Bayesian estimation methodology could allow these models to outperform well-known time series models and effectively deal with more complex real-world problems as richer sources of data become available. This study includes a comparative evaluation of the out-of-sample predictive performance of many different specifications of estimated DSGE models and various classes of VAR models, using datasets from the US economy. Simple and hybrid DSGE models are implemented, such as DSGE-VAR and tested against standard, Bayesian and Factor Augmented VARs. In this study we focus on a Factor Augmented DSGE model that is estimated using Bayesian approaches. The investigated period spans 1960:Q4 to 2010:Q4 for the real GDP, the harmonized CPI and the nominal short-term interest rate. We produce their forecasts for the out-of-sample testing period 1997:Q1-2010:Q4. This comparative validation can be useful to monetary policy analysis and macro-forecasting with the use of advanced Bayesian methods. |
| Keywords: | Bayesian estimation, Forecasting, Metropolis-Hastings, Markov chain monte carlo, Marginal data density, Factor Augmented DSGE |
| JEL: | C11 C15 C32 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:22_13&r=dge |
| By: | Boucekkine, Raouf |
| Abstract: | A simple open-economy AK model with collateral constraints accounts for growth breaks and growth-reversal episodes, during which countries face abrupt changes in their growth rate that may lead to either growth miracles or growth disasters. Absent commitment to investment by the borrowing country, imperfect contract enforcement leads to an informational lag such that the debt contracted upon today depends upon the past stock of capital. The no-commitment delay originates a history effect by which the richer a country has been in the past, the more it can borrow today. For (arbitrarily) small delays, the history effect offsets the growth benefits from international borrowing and dampens growth, and it leads to both leapfrogging in long-run levels and growth breaks. When large enough, the history effect originates growth reversals and we connect the latter to leapfrogging. Finally, we argue that the model accords with the reported evidence on changes in the growth rate at break dates. We also provide examples showing that leapfrogging and growth reversals may coexist, so that currently poor but fast-growing countries experiencing sharp growth reversals may end up, in the long-run, significantly richer than currently rich but declining countries. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ner:louvai:info:hdl:2078.1/118044&r=dge |
| By: | Veronica Rappoport (Columbia University); Kim Ruhl (New York University Stern School of Busi); Daniel Paravisini (Columbia University) |
| Abstract: | We propose a model that can account for both the dynamics of the firm's exports and debt stock along its life cycle, and the short-term responses of large and small exporters to credit shocks. In our model, the demand for external credit results from two different motives: i) to finance fixed investment, i.e., to increase the fixed capital stock or to pay upfront costs to enter new export markets, and ii) to finance short-term working capital, i.e., wages or inputs. Early in the life of the firm most credit is used for the expansion of the capital stock and the number of export markets. For large and established firms, on the other hand, external credit is mostly used to finance working capital. In our model, the impact of a credit shock on exports varies across firms, depending on their age and size. In the short term, most of the effect of a credit shock on aggregate exports is explained by the drop in the intensive margin of trade by large firms. However, a permanent change in credit conditions affects the steady state number and size of exporters. We calibrate this model to match our data parameters and perform different counterfactual simulations. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:706&r=dge |
| By: | Jagjit S. Chadha (Department of Economics, University of Kent); Luisa Corrado (University of Rome "Tor Vergata", CIMF and CReMic); Sean Holly (University of Cambridge) |
| 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 ?nd 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 ?nance premium, which is in?ationary. We consider a number of alternative monetary policy rules, and ?nd 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: | 2013–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:279&r=dge |
| By: | Fernando Perera-Tallo (Universidad de La Laguna) |
| Abstract: | Over recent decades, most developed countries have experienced a fall in fertility and an increase in longevity which have led to a significant increase in the weight of elderly on the population and a decrease in the number of working-age people per elderly population. Economists and politicians are concerned about the aging population process and the need to introduce policy reforms such as fertility enhancing programs and delaying the legal retirement age. This paper introduces a model which determines the optimal retirement age and analyzes the effects of population aging on it. What is revealed is the different role that the drop in the fertility rate and the increase in longevity play in determining the optimal retirement age. While an increase in longevity always implies an increase in the optimal retirement age, a drop in the fertility rate does not. The reason is that a drop in fertility involves three offsetting mechanisms: first, it raises the weight of elders on population increasing the dependency ratio (defined as non working population, children and retirees, over working population), which involves a larger optimal retirement age. Second, it also diminishes the weight of children, and this reduces the dependency ratio, decreasing the optimal retirement age. Finally, a drop in fertility rate increases the weight of older workers in the labor force. If these are more productive than the average, then the drop in the fertility increases the productivity of the labor force and reduces the optimal retirement age. In spite of these counterweighing mechanisms, this paper provides a clear measure to determine the sign of the effect of a drop in the fertility rate over per capita labor and the optimal retirement age. Such measure may be easily obtained from the data an establishes a precise criterion for clarifying the aging population debate |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:728&r=dge |
| By: | Spyridon Koikos (University of Milan, Italy) |
| Abstract: | In this paper we investigate the effect of corruption on human capital accumulation through two channels. The first channel is through the effect of corruption on the public expenditure on education and the second channel is through the effect of corruption on the physical capital investment. Public expenditure on education affects positively human capital, while physical capital can obsolete human capital. Initially, we construct an endogenous two-sector growth model with human capital accumulation and by considering corruption as an exogenous variable we try to explore the impact of corruption on the allocation of public expenditure and as such on the distribution of human capital across different sectors. The theoretical model’s results suggest that corruption has different effects on human capital accumulation through the two channels. Then we use a smooth coefficient semiparametric model to capture possible non-linearities, and the results support the existence of nonlinearities between human capital and corruption. |
| Keywords: | Corruption; Public Expenditure; Economic Growth; Human Capital Investment; Semiparametric Estimation |
| JEL: | D73 H52 J24 O41 O47 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:17_13&r=dge |
| By: | Andries Brandsma (European Commission – JRC - IPTS); d’Artis Kancs (European Commission – JRC - IPTS); Philippe Monfort (European Commission – DG REGIO); Alexandra Rillaers (European Commission – DG REGIO) |
| Abstract: | The paper presents the newly developed dynamic spatial general equilibrium model of European Commission - RHOMOLO, in which the interplay of agglomeration and dispersion forces can be analysed in a novel and theoretically consistent way. A particular attention is paid to flows of goods, factors and services within and between regions that are generated by the stimulus to the regions. This will allow an assessment of the feedback to the Member States and regions and the possibility that in the longer run they will all benefit from the additional growth that is generated. In doing so, it sheds new light on how the success of cohesion policy can be measured. |
| Keywords: | Economic modelling, spatial dynamics, policy impact assessment, regional development, economic geography, spatial equilibrium, DSGE. |
| JEL: | C63 C68 D58 F12 H41 O31 O40 R13 R30 R40 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc81133&r=dge |