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on Dynamic General Equilibrium |
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Issue of 2013‒05‒24
thirteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Karine Gente (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM)); Miguel León-Ledesma (School of Economics - University of Kent); Carine Nourry (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM), IUF - Institut Universitaire de France - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique) |
| 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 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00822385&r=dge |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27173&r=dge |
| By: | Jesús Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez |
| Abstract: | We propose a novel method to estimate dynamic equilibrium models with stochastic volatility. First, we characterize the properties of the solution to this class of models. Second, we take advantage of the results about the structure of the solution to build a sequential Monte Carlo algorithm to evaluate the likelihood function of the model. The approach, which exploits the profusion of shocks in stochastic volatility models, is versatile and computationally tractable even in large-scale models, such as those often employed by policy-making institutions. As an application, we use our algorithm and Bayesian methods to estimate a business cycle model of the U.S. economy with both stochastic volatility and parameter drifting in monetary policy. Our application shows the importance of stochastic volatility in accounting for the dynamics of the data. |
| Keywords: | Stochastic analysis |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-19&r=dge |
| By: | Marco Del Negro; Marc P. Giannoni; Frank Schorfheide |
| Abstract: | It has been argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent Great Recession, and that models in which inflation depends on economic slack cannot explain the recent muted behavior of inflation, given the sharp drop in output that occurred in 2008-09. In this paper, we use a standard DSGE model available prior to the recent crisis and estimated with data up to the third quarter of 2008 to explain the behavior of key macroeconomic variables since the crisis. We show that as soon as the financial stress jumped in the fourth quarter of 2008, the model successfully predicts a sharp contraction in economic activity along with a modest and more protracted decline in inflation. The model does so even though inflation remains very dependent on the evolution of both economic activity and monetary policy. We conclude that while the model considered does not capture all short-term fluctuations in key macroeconomic variables, it has proven surprisingly accurate during the recent crisis and the subsequent recovery. |
| Keywords: | Inflation (Finance) ; Recessions ; Keynesian economics ; Stochastic analysis ; Equilibrium (Economics) ; Econometric models |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:618&r=dge |
| By: | Marion Davin (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM)); Karine Gente (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM)); Carine Nourry (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM), IUF - Institut Universitaire de France - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique) |
| Abstract: | Should a country invest more in human or physical capital? The present paper addresses this issue, considering the impact of different factor intensities between sectors on both optimal human and physical capital accumulation. Using a two-sector overlapping generations setting with endogenous growth driven by human capital accumulation, we prove that relative factor intensity between sectors drastically shapes the welfare analysis: two laissez-faire economies with the same global capital share may generate physical capital excess or scarcity, with respect to the optimum. The model for the Japanese economy, that experienced a factor intensity reversal after the oil shock, is then calibrated. It is shown that Japan invested relatively too much in human capital before 1975, but has not invested enough since 1990. |
| Keywords: | endogenous growth; social optimum; two-sector model; factor intensity differential |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00822391&r=dge |
| By: | Carlos Garriga (Federal Reserve Bank of St. Louis); Mark P. Keightley (Florida State University) |
| Abstract: | This paper analyzes the effectiveness of three different types of education policies: tuition subsidies (broad based, merit based, and flat tuition), grant subsidies (broad based and merit based), and loan limit restrictions. We develop a quantitative theory of college within the context of general equilibrium overlapping generations economy. College is modeled as a multi-period risky investment with endogenous enrollment, time-to-degree, and dropout behavior. Tuition costs can be financed using federal grants, student loans, and working while at college. We show that our model accounts for the main statistics regarding education (enrollment rate, dropout rate, and time to degree) while matching the observed aggregate wage premiums. Our model predicts that broad based tuition subsidies and grants increase college enrollment. However, due to the correlation between ability and financial resources most of these new students are from the lower end of the ability distribution and eventually dropout or take longer than average to complete college. Merit based education policies counteract this adverse selection problem but at the cost of a muted enrollment response. Our last policy experiment highlights an important interaction between the labor-supply margin and borrowing. A significant decrease in enrollment is found to occur only when borrowing constraints are severely tightened and the option to work while in school is removed. This result suggests that previous models that have ignored the student's labor supply when analyzing borrowing constraints may be insufficient. |
| Keywords: | Student Loans, Education Subsidies, Higher Education |
| JEL: | E0 H52 H75 I22 J24 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2013-02&r=dge |
| By: | Gianluca Benigno; Luca Fornaro |
| Abstract: | This paper presents a model of financial resource curse, i.e. episodes of abundant access to foreign capital coupled with weak productivity growth. We study a two-sector, tradable and non-tradable, small open economy. The tradable sector is the engine of growth, and productivity growth is increasing in the amount of labor employed by firms in the tradable sector. A period of large capital inflows, triggered by a fall in the interest rate, is associated with a consumption boom. While the increase in tradable consumption is financed through foreign borrowing, the increase in non-tradable consumption requires a shift of productive resources toward the non-tradable sector at the expenses of the tradable sector. The result is stagnant productivity growth. We show that capital controls can be welfare-enhancing and can be used as a second best policy tool to mitigate the misallocation of resources during an episode of financial resource curse. |
| Keywords: | Capital flows, capital controls, financial resource curse, endogenous growth |
| JEL: | F32 F34 F36 F41 F43 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1217&r=dge |
| By: | Grey Gordon; Pablo Guerrón-Quintana |
| Abstract: | How does physical capital accumulation affect the decision to default in developing small open economies? We find that, conditional on a level of foreign indebtedness, more capital improves the sovereign’s ability to meet its obligations, reducing the likelihood of default and the risk premium. This effect, however, is diminishing in the stock of capital because capital also tames the severity of the contraction following default, making autarky more appealing. Access to long-term debt and costly capital adjustment are crucial for matching business cycles. Our quantitative model delivers default episodes that mimic those observed in the data. |
| Keywords: | Investments ; Debt ; Default (Finance) |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-18&r=dge |
| By: | Rahul Mukherjee (IHEID, The Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | Countries with weaker domestic institutions hold fewer foreign assets and exhibit concentrated corporate ownership. An equilibrium business cycle model of international capital ows with corporate governance frictions between outside investors and insiders explains both phenomena. Investment dynamics under insider control leads relative dividend and labor income for outsiders to be more negatively correlated in countries with weaker institutions. Consequently, outsiders hold more domestic assets to hedge labor income risk. I provide empirical evidence on this hedging demand. Concentrated ownership arises because international diversication through the sale of domestic assets by insiders is penalized by lower stock market valuation. |
| Keywords: | Home bias, institutional quality, corporate governance |
| JEL: | F21 F41 G15 |
| Date: | 2013–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp10-2013&r=dge |
| By: | Fernando M. Martin |
| Abstract: | Making the central bank more independent from political pressures lowers inflation and increases the primary deficit, persistently. In the long-run, however, fiscal considerations are paramount and inflation comes back up to accommodate the higher financial burden of accumulated public debt. Endowing instead the central bank with an explicit inflation target lowers long-run inflation and implies non-trivial welfare gains for private agents. Inflation-targeting has the added virtue of determining the primary deficit independently of political frictions. The theory helps explain several key developments in postwar U.S. policy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-017&r=dge |
| By: | Stefania Albanesi (Federal Reserve Bank of New York and CEPR); Aysegul Sahin (Federal Reserve Bank of New York) |
| 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 rate always exceeds 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 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: | Gender unemployment gap, labor market attachment |
| JEL: | E24 J64 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2013-04&r=dge |
| By: | HORI Takeo; UCHINO Taisuke |
| Abstract: | Extending the endogenous growth model proposed by Young (1998), we construct a two-sector growth model that explains the observed pattern of structural change. Unlike existing studies, we assume neither non-homothetic preferences nor exogenous differential in productivity growth among different sectors. Our key assumption is that any two goods produced by firms in a sector are closer substitutes than those produced by firms in other sectors, which gives rise to an endogenous differential in productivity growth among different sectors. When the two composite goods are poor substitutes, the share of employment gradually shifts from the sector with a low markup to that with a high markup. To test the validity of the prediction of our model, we also estimate industry-level total factor productivity (TFP) growth and markup using Japanese firm-level panel data. The empirical results show a negative correlation between estimated markup and long-term TFP growth, and a positive correlation between the growth of industrial labor input and markup, which supports our theoretical results. Finally, in contrast to the previous studies of structural change that consider competitive economies, we study the socially optimal allocation and characterize the optimal tax policies. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:13041&r=dge |
| By: | Aleksander Berentsen; Alessandro Marchesiani; Christopher J. Waller |
| Abstract: | An increasing number of central banks implement monetary policy via a channel system or a floor system. We construct a general equilibrium model to study the properties of these systems. We find that the optimal framework is a floor system if and only if the target rate satisfies the Friedman rule. Unfortunately, the optimal floor system requires either transfers from the fiscal authority to the central bank or a reduction in seigniorage payments from the central bank to the government. This is the unpleasant fiscal arithmetic of a floor system. When the central bank faces financing constraints on its interest expense, we show that it is optimal to operate a channel system. |
| Keywords: | Monetary policy, floor system, channel system, standing facilities |
| JEL: | E52 E58 E59 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:121&r=dge |