|
on Dynamic General Equilibrium |
| By: | Tim Robinson (Reserve Bank of Australia) |
| Abstract: | Different approaches to modelling the macroeconomy vary in the emphasis they place on coherence with theory relative to their ability to match the data. Dynamic stochastic general equilibrium (DSGE) models place greater emphasis on theory, while vector autoregression (VAR) models tend to provide a better fit of the data. Del Negro and Schorfheide (2004) develop a method of using a DSGE model to inform the priors of a Bayesian VAR. The resulting BVAR-DSGE model partially relaxes the relationships in the DSGE so as to fit the data better. However, their approach does not accommodate the typical restriction of small open economy models which ensures that developments in the small economy cannot affect the large economy. I develop a method that allows this restriction to be imposed and introduce a simple way, suitable for small open economies, of identifying the empirical BVAR-DSGE using information from the DSGE model. These methods are demonstrated using the Justiniano and Preston (2010a) DSGE model. Compared to the DSGE model, the empirical BVAR-DSGE model estimates that there is a larger role for foreign shocks in the small economy's business cycle. |
| Keywords: | BVAR-DSGE; small open economy |
| JEL: | C11 C32 C51 E30 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2013-06&r=dge |
| By: | Jonathan E. Goldberg |
| Abstract: | I study the effects of credit tightening in an economy with uninsured idiosyncratic investment risk. In the model, entrepreneurs require an equity premium because collateral constraints limit insurance. After collateral constraints tighten, the equity premium and the riskiness of consumption rise and the risk-free interest rate falls. I show that, both immediately after the shock and in the long run, the equity premium and the riskiness of consumption increase more than they would if the risk-free rate were constant. Indeed, the long-run increase in the riskiness of consumption growth is purely a general-equilibrium effect: if the risk-free rate were constant (as in a small open economy), an endogenous decrease in risk-taking by entrepreneurs would, in the long run, completely offset the decrease in their ability to diversify. I also show that the credit shock leads to a decrease in aggregate capital if the elasticity of intertemporal substitution is sufficiently high. Finally, I show that, due to a general-equilibrium effect, there is no "overshooting" in the equity premium: in response to a permanent decrease in firms' ability to pledge their future income, the equity premium immediately jumps to its new steady-state level and remains constant thereafter, even as aggregate capital adjusts over time. However, if idiosyncratic uncertainty is sufficiently low, credit tightening has no short- or long-run effects on aggregate capital, the equity premium, or the riskiness of consumption. Thus my paper highlights how investment risk affects the economy's response to a credit crunch. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-31&r=dge |
| By: | Tamas Papp (Institute for Advanced Studies); Alisdair McKay (Boston University) |
| Abstract: | We show that a parsimoniously calibrated search-and-matching model of the labor market with on-the-job search gives a good account of the cyclical variation in idiosyncratic wage risk among those experiencing unemployment and of the composition effect over the business cycle. As these components generate around 80% of the total, we argue that such a model gives a good account of cyclical variation in idiosyncratic wage risk. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:820&r=dge |
| By: | Sean Langcake (Reserve Bank of Australia); Tim Robinson (Reserve Bank of Australia) |
| Abstract: | In this paper, we develop a multi-sector dynamic stochastic general equilibrium (DSGE) model with a simple commodity sector and assess whether forecasts from this model can be improved by using it as a prior for an empirical Bayesian vector autoregression (BVAR). We treat the world economy as being observed and exogenous to the small economy, rather than unobserved, as has been done in some previous studies, such as Hodge, Robinson and Stuart (2008) and Lees, Matheson and Smith (2011). We find that the forecasts from a BVAR that uses this DSGE model as a prior are generally more accurate than those from the DSGE model alone. Nevertheless, these forecasts do not outperform a small open economy VAR estimated using other standard priors or simple univariate benchmarks. |
| Keywords: | empirical Bayesian VAR; forecasting; small open economy |
| JEL: | C53 E13 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2013-07&r=dge |
| By: | Viktoria Hnatkovska (University of British Columbia); Roc Armenter (Federal Reserve Bank of Philadelphia) |
| Abstract: | The U.S. non-financial corporate sector became a net lender vis-a-vis the rest of the economy in the early 2000s. We document this fact in the aggregate and firm-level data. We then develop a structural dynamic model with investment to study the firms' financing decisions. Debt is fiscally advantageous but subject to a no-default borrowing constraint. Equity allows the firm to suspend distributions to shareholders when the cash flow is negative. Firms accumulate financial assets for precautionary reasons, yet value equity as partial insurance against shocks. The calibrated model replicates the large fraction of firms with net savings observed in the period 2000-2007. We also find that the rise in corporate savings over the past 40 years can be mostly attributed to a fall in the cost of equity relative to debt, driven by lower dividend taxes. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:803&r=dge |
| By: | Halvor Mehlum (Department of Economics, University of Oslo); Ragnar Torvik (Department of Economics, Norwegian University of Science and Technology); Simone Valente (Department of Economics, Norwegian University of Science and Technology) |
| Abstract: | China's growth is characterized by massive capital accumulation, made possible by high and increasing domestic savings. In this paper we develop a model with the aim of explaining why savings rates have been high and increasing, and we investigate the general equilibrium effects on capital accumulation and growth. We show that increased savings and capital accumulation stimulates further savings and capital accumulation, through an intergenerational distribution effect and an old-age requirement effect. We introduce what we term the savings multiplier, and we discuss why and how the one-child policy, and the dismantling of the cradle-to-grave social benefits provided through the state owned enterprises, have stimulated savings and capital accumulation. |
| Keywords: | China, One-child policy, Overlapping generations, Growth, Savings |
| JEL: | O11 D91 E21 |
| Date: | 2013–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:nst:samfok:14713&r=dge |
| By: | Daria Onori (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), IRES - Université Catholique de Louvain, Departement of Economics and Law, Faculty of Economics - University of Rome “La Sapienza”) |
| Abstract: | Some recent evidence on government finance statistics of European countries suggests that countries with public debt issues also show a low tax revenue-GDP ratio. In this paper we develop a small open economy model of endogenous growth in which the engine of growth is public spending. We assume that government can finance public expenditures by borrowing on imperfect international financial markets where her borrowing capacity is limited. In contrast to the existing literature, where debt is constrained by the stock of capital, the collaterals are based on GDP. The balanced growth path and the transitional dynamics are studied. First, we show that the economy may converge in a finite time to the regime with binding collateral constraint. Second, in such regime the steady state public expenditures-GDP ratio is greater than that of the models without collateral constraints and of the stock-based collaterals literature. Third, the model predictions are consistent with recent empirical literature: there exists a certain threshold of financial and institutional development and economic features that an economy needs to attain in order to benefit from financial liberalization. Finally, if the degree of financial markets imperfections is weak, technologically developed countries experience a higher long-run growth rate than that of the stock-based collaterals literature, otherwise the world interest rate need to be high enough. |
| Keywords: | open economy; two-stage growth; public debt; flow collaterals; imperfect financial markets; multi-stage optimal control |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00824672&r=dge |
| By: | Miguel A. Iraola (Department of Economics, University of Miami); Juan Pablo Torres-Martinez (University of Chile) |
| Abstract: | We address a dynamic general equilibrium model where securities are backed by collateralized loans, and borrowers face endogenous liquidity contractions and financial participation constraints. Although the only payment enforcement is the seizure of collateral guarantees, restrictions on credit access make individually optimal payment strategies|coupon payment, pre-payment, and default|sensitive to idiosyncratic factors. In particular, the lack of liquidity and the presence of financial participation constraints rationalize the prevalence of negative equity loans. We prove equilibrium existence, characterize optimal payment strategies, and provide a numerical example illustrating our main results. |
| Keywords: | Asset-Backed Securities - Liquidity Contractions - Incomplete Financial Participation |
| JEL: | D50 D52 |
| Date: | 2013–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:mia:wpaper:2013-08&r=dge |
| By: | Verónica Acurio Vasconez (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Gaël Giraud (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Florent Mc Isaac (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Ngoc Sang Pham (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | The economic implications of oil price shocks have been extensively studied since the oil price shocks of the 1970s'. Despite this huge literature, no dynamic stochastic general equilibrium model is available that captures two well-known stylized facts: 1) the stagflationary impact of an oil price shock, together with 2) two possible reactions of real wages: either a decrease (as in the US) or an increase (as in Japan). We construct a New-Keynesian DSGE model, which takes the case of an oil-importing economy where oil cannot be stored and where fossil fuels are used in two different ways: One part of the imported energy is used as an additional input factor next to capital and labor in the intermediate production of manufactured goods, the remaining part of imported energy is consumed by households in addition to their consumption of the final good. Oil prices, capital prices and nominal government spendings are exogenous random processes. We show that, without capital accumulation, the stagflationary effect is accounted for in general, and provide conditions under which a rise (resp. a declinr) of real wages follows the oil price shock. |
| Keywords: | New-Keynesian model; DSGE; oil; capital accumulation; stagflation |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00827666&r=dge |
| By: | Luca Spataro; Luciano Fanti |
| Abstract: | In a standard OLG model of a small open economy with logarithmic utility and endogenous fertility we show that the reversion of the relationship between fertility and wages (i.e. a transition from the Malthusian to the Modern fertility behaviour) may be possible in presence of intergenerational public transfers(i.e. public national debt or PAYG pensions). In fact, as known, the latter have been implemented mostly in the advanced Western Countries, where the fertility behavior reversion has mainly occurred. We show that such a reversion is more likely to occur in economies that are entailed with low interest rate, low costs for raising children and low degree of patience, and high preference for children. |
| Keywords: | overlapping generations, endogenous fertility, savings,small open economy, public national debt, PAYG pension scheme,demographic transition. |
| JEL: | D91 E62 H63 J13 |
| Date: | 2013–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2013/163&r=dge |
| By: | Brennan Platt (Brigham Young University); Nuray Akin (University of Miami) |
| Abstract: | We analyze an equilibrium search model where buyers seek to purchase a good before a deadline and face uncertainty regarding the availability of past price quotes in the future. Sellers cannot observe a potential buyer's remaining time until deadline nor his quote history, and hence post prices that weigh the probability of sale versus the profit once sold. The model's equilibrium can take one of three forms. In a late equilibrium, buyers initially forgo purchases, preferring to wait until the deadline. In an early equilibrium, any equilibrium offer is accepted as soon as it is received. In a full equilibrium, higher prices are turned down until near the deadline, while lower prices are immediately accepted. Equilibrium price and sales dynamics are determined by the time remaining until the deadline and the quote history of the consumer. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:777&r=dge |
| By: | Ken-ichi Hashimoto (Graduate School of Economics, Kobe University); Ken Tabata (School of Economics, Kwansei Gakuin University) |
| Abstract: | This paper constructs a simple, overlapping generations version of an R&D-based growth model à la Diamond (1965) and Jones (1995), and examines how an increase in old-age survival probability impacts purposeful R&D investment and long-run growth by affecting fertility and education decisions. We demonstrate that under certain conditions, old-age survival probability, when relatively low (high), positively (negatively) affect economic growth. This study also compares the growth implications of child education subsidies and child rearing subsidies and demonstrates that although child education subsidies always foster economic growth, child rearing subsidies may negatively impact economic growth in particular situations. Finally, we briefly consider the effects of a child education subsidy on welfare levels. |
| Keywords: | R&D, Fertility, Human Capital, Child Education Subsidy, Child Rearing Subsidy |
| JEL: | J13 J24 O10 O30 O40 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:104&r=dge |
| By: | Zeno Enders (University of Heidelberg); Almut Balleer (Institute for International Economic Studies Stockholm) |
| Abstract: | This paper examines the effects of expansionary technology shocks (shocks that increase labor productivity and factor inputs) as opposed to contractionary technology shocks (shocks that increase labor productivity, but decrease factor inputs). We estimate these two shocks jointly based on a minimum set of identifying restrictions in a structural VAR. We show that most of the business cycle variation of key macroeconomic variables such as output and consumption is driven by expansionary technology shocks. However, contractionary technology shocks are important to understand the variation in labor productivity and production inputs. In addition, these shocks trigger different reactions of certain variables, which can help explain why existing evidence on technology shocks does not deliver clear results. In a simple DSGE model with managerial technology, which is consistent with our identifying restrictions, we interpret contractionary technology shocks as process innovations and motivate the difference to expansionary technology shocks. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:812&r=dge |
| By: | Richard Blundell (Institute for Fiscal Studies and University College London); Monica Costa Dias (Institute for Fiscal Studies and Institute for Fiscal Studies); Costas Meghir (Institute for Fiscal Studies and Yale University); Jonathan Shaw (Institute for Fiscal Studies) |
| 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 analyse 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 labour supply, with single mothers having the most elastic labour supply. Returns to labour 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. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:13/10&r=dge |
| By: | Virgiliu Midrigan (New York University); Joe Kaboski (University of Notre Dame); George Alessandria (Federal Reserve Bank of Philadelphia) |
| Abstract: | The large, persistent fluctuations in international trade that can not be explained in standard models by either changes in expenditures or relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their inventory holdings. We find that a two country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data. We find that modelling trade in this way alters the international transmission of business cycles. Specifically, real net exports become less procyclical and consumption becomes less correlated across countries. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:762&r=dge |
| By: | Manolis Galenianos (Pennsylvania State University) |
| Abstract: | This paper theoretically examines the firm's choice to use different search channels in order to hire new workers. An equilibrium model is developed where the quality of a match is uncertain and firms search for workers through the market and through referrals. The intensity of use of each search channel is endogenized through the choice of channel-specific search effort. When referrals generate more accurate signals regarding match quality, the model predicts that referred workers have higher starting wages, higher productivity and lower separation rates than non-referred candidates and that these differentials decrease over time due to selection, which is consistent with the data. The model is extended by introducing productivity heterogeneity in firms and allowing the endogenous determination of signal quality. It is shown that high productivity firms choose greater accuracy of signals which diminishes the referral-market differential and leads to lower referral intensity, consistent with the data. This type of selection on the firm side explains why regressions that do not include firm fixed effects find a negative effect of referrals on wages in contrast to firm-level and other evidence. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:814&r=dge |
| By: | Philippe Aghion (Department of Economics, Harvard University and NBER); Ufuk Akcigit (Department of Economics Univerity of Pennsylvania and NBER); Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania and NBER) |
| Abstract: | Chamley (1986) and Judd (1985) showed that, in a standard neoclassical growth model with capital accumulation and infinitely lived agents, either taxing or subsidizing capital cannot be optimal in the steady state. In this paper, we introduce innovation-led growth into the Chamley-Judd framework, using a Schumpeterian growth model where productivity-enhancing innovations result from pro.t-motivated R&D investment. Our main result is that, for a given required trend of public expenditure, a zero tax/subsidy on capital becomes suboptimal. In particular, the higher the level of public expenditure and the income elasticity of labor supply, the less should capital income be subsidized and the more it should be taxed. Not taxing capital implies that labor must be taxed at a higher rate. This in turn has a detrimental effect on labor supply and therefore on the market size for innovation. At the same time, for a given labor supply, taxing capital also reduces innovation incentives, so that for low levels of public expenditure and/or labor supply elasticity it becomes optimal to subsidize capital income. |
| Keywords: | : Capital tax, labor tax, optimal taxation, innovation, R&D, growth. |
| JEL: | H2 O3 O4 |
| Date: | 2013–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:13-025&r=dge |
| By: | Raffaella Giacomini (Institute for Fiscal Studies and UCL) |
| Abstract: | This chapter reviews the literature on the econometric relationship between DSGE and VAR models from the point of view of estimation and model validation. The mapping between DSGE and VAR models is broken down into three stages: 1) from DSGE to state-space model; 2) from state-space model to VAR (∞); 3) from VAR (∞) to finite order VAR. The focus is on discussing what can go wrong at each step of this mapping and on critically highlighting the hidden assumptions. I also point out some open research questions and interesting new research directions in the literature on the econometrics of DSGE models. These include, in no particular order: understanding the effects of log-linearisation on estimation and identification; dealing with multiplicity of equilibria; estimating nonlinear DSGE models; incorporating into DSGE models information from atheoretical models and from survey data; adopting flexible modelling approaches that combine the theoretical rigor of DSGE models and the econometric model's ability to fit the data. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:21/13&r=dge |
| By: | William Hawkins (University of Rochester) |
| Abstract: | Shimer (2007, American Economic Review) introduced a model of mismatch, in which limited mobility of vacant jobs and unemployed workers provides a microfoundation for their coexistence in equilibrium. Shimer assumed that the short side of a local labor market receives all the gains from trade, and argues that the model helps to explain the volatility of unemployment and the vacancy-unemployment ratio in response to productivity shocks. I show that the assumption on wages is essential for this conclusion by considering alternative assumptions. When wages are determined according to the Shapley value, they depend more smoothly on local labor market conditions, but unemployment and the vacancy-unemployment ratio are even more volatile. However, in both cases amplification relative to the Mortensen-Pissarides benchmark arises only because the implied process for wages is more volatile. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:797&r=dge |
| By: | Chu, Angus C.; Cozzi, Guido; Lai, Ching-Chong; Liao, Chih-Hsing |
| Abstract: | This study analyzes the growth and welfare effects of monetary policy in a two-country Schumpeterian growth model with cash-in-advance constraints on consumption and R&D investment. We find that an increase in the domestic nominal interest rate decreases domestic R&D investment and the growth rate of domestic technology. Given that economic growth in a country depends on both domestic and foreign technologies, an increase in the foreign nominal interest rate also decreases economic growth in the domestic economy. When each government conducts its monetary policy unilaterally to maximize the welfare of only domestic households, the Nash-equilibrium nominal interest rates are generally higher than the optimal nominal interest rates chosen by cooperative governments who maximize the welfare of both domestic and foreign households. This difference is caused by a cross-country spillover effect of monetary policy arising from trade in intermediate goods. Under the CIA constraint on consumption (R&D investment), a larger market power of firms decreases (increases) the wedge between the Nash-equilibrium and optimal nominal interest rates. We also calibrate the two-country model to data in the Euro Area and the UK and find that the cross-country welfare effects of monetary policy are quantitatively significant. |
| Keywords: | monetary policy, economic growth, R&D, trade in intermediate goods. |
| JEL: | E41 F43 O30 O40 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47364&r=dge |
| By: | Sagiri Kitao (Hunter College; Hunter College); Selahattin Imrohoroglu (University of Southern California, Marshall School of Business); Tomoaki Yamada (Meiji University) |
| Abstract: | Japan’s population is aging fast and the ratio of Japanese Government Bonds (JGBs) to GDP is highest among advanced economies. In addition, further government spending is expected, causing concerns about the potential for JGBs to become a significant global issue. In this paper we build a micro-data based, large-scale overlapping generations model for Japan in which individuals differ in age, gender, employment type, income, and asset holdings, and incorporate the Japanese pension rules in detail. We estimate age-consumption and age-earnings profiles from micro data, assume complete markets and use these to generate tax revenues and transfer payments for government accounts. We calibrate the model so that it replicates the main macroeconomic and fiscal indicators for 2010. Using existing pension law and fiscal parameters and the medium variants of fertility and survival probability projections, we produce future time paths for JGBs and the pension fund. |
| Keywords: | Fiscal balance, Social security, Demographic trends |
| JEL: | H60 H55 J11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:htr:hcecon:441&r=dge |
| By: | Marcelo Veracierto (Federal Reserve Bank of Chicago); Jonas Fisher (Federal Reserve Bank of Chicago); Morris Davis (University of Wisconsin-Madison, School) |
| Abstract: | This paper builds a dynamic general equilibrium model of cities and uses it to analyze the role of local housing markets and moving costs in determining the character and extent of labor reallocation in the US economy. Labor reallocation in the model is driven by idiosyncratic city-specific productivity shocks, which we measure using a dataset that we compile using more than 350 U.S. cities for the years 1984 to 2008. Based on this measurement, we find that our model is broadly consistent with the city-level evidence on net and gross population flows, employment, wages and residential investment. We also find that the location-specific nature of housing is more important than moving costs in determining labor reallocation. Absent this quasi-fixity of housing, and under various assumptions governing population flows, population and employment would be much more volatile than observed. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:805&r=dge |
| By: | Luigi Guiso; Charles Gottlieb (Oxford University); Andreas Fagereng (European University Institute) |
| Abstract: | Models of life cycle portfolio decisions with labor income uniformly predict that investors should reduce their portfolio share in stocks as they age because human capital, which acts a bond, becomes a smaller component of household total wealth. Despite the fact that the prediction rests on an undisputed fact - the shrinking pattern of human wealth over the life cycle - it has not yet found empirical support. We study the life cycle portfolio allocation using a random sample of 75,000 households drawn from the Norwegian Tax Registry followed over 14 years which contains exhaustive and error-free information on all components of households’ investments. We find that both participation in the stock market and the portfolio share in stocks have important life cycle patterns. Participation is limited at all ages but follows a hump-shaped profile which peaks around retirement; as households retire and begin decumulating wealth, they start exiting the stock market. The share invested in stocks among the participants is high and flat for the young but investors start reducing it slowly as retirement age gets closer. Our data suggest a double adjustment as people age: a rebalancing of the portfolio away from stocks as they approach retirement, and stock market exit after retirement. Existing calibrated life cycle models can account for the first behavior but not the second. We show that extending the models in Gomes, Kotlikoff, and Viceira (2008) and Gomes and Michaelides (2003) to incorporate reasonable per period participation costs can generate a joint pattern of participation and the risky asset share over the life cycle similar to the one observed in the data. In addition, if we add a small perceived probability of being cheated when investing in stocks, the model predicts a share in stocks much closer to the one observed in the data. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:783&r=dge |
| By: | Raymond Riezman (University of Iowa); Ping Wang (Washington University); Eric Bond (Vanderbilt University) |
| Abstract: | Along the global trend of economic development, it is often observed rapid industrial transformation accompanied by contitual rural-urban migration. In many developing countries there are yet abundant supplies of "surplus labor." We construct a small open, dynamic framework to examine how the existence of this large supply of rural, unskilled labor affects trade, urbanization, capital accumulation, factor returns, sectoral and aggregate output and social welfare, as well as to explore why the processes of urbanization and economic development are rather divergent in different economies. We find that in a surplus-labor economy commonly adopted trade policies may reduce capital accumulation, urbanization and aggregate output. Under reasonable factor intensity assumptions, a reduction in migration barriers enhances capital accumulation, inducing urbanization and increasing aggregate output. Our numerical results indicate that import tariffs in the presence of capital barriers can generate strong intertemporal distortions which delay urbanization and economic development. Trade and capital barriers are crucial for the presence of abundant rural surplus labor, whereas different trade/investment environments and policies may lead to very divergent processes of urbanization and economic development. While a reasonable migration discounting can generate a large urban-rural wage gap, locational no-arbitrage can cause irresponsiveness of the real unskilled wage in urban areas to parameter and policy changes. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:776&r=dge |
| By: | William Barnett (Department of Economics, The University of Kansas); Taniya Ghosh (Indira Gandhi Institute of Development Research, Reserve Bank of India, Mumbai) |
| Abstract: | This paper analyzes, within its feasible parameter space, the dynamics of the Uzawa-Lucas endogenous growth model. The model is solved from a centralized social planner perspective as well as in the model’s decentralized market economy form. We examine the stability properties of both versions of the model and locate Hopf and transcritical bifurcation boundaries. In an extended analysis, we investigate the existence of Andronov-Hopf bifurcation, branch point bifurcation, limit point cycle bifurcation, and period doubling bifurcations. While these all are local bifurcations, the presence of global bifurcation is confirmed as well. We find evidence that the model could produce chaotic dynamics, but our analysis cannot confirm that conjecture. It is important to recognize that bifurcation boundaries do not necessarily separate stable from unstable solution domains. Bifurcation boundaries can separate one kind of unstable dynamics domain from another kind of unstable dynamics domain, or one kind of stable dynamics domain from another kind (called soft bifurcation), such as bifurcation from monotonic stability to damped periodic stability or from damped periodic to damped multiperiodic stability. There are not only an infinite number of kinds of unstable dynamics, some very close to stability in appearance, but also an infinite number of kinds of stable dynamics. Hence subjective prior views on whether the economy is or is not stable provide little guidance without mathematical analysis of model dynamics. When a bifurcation boundary crosses the parameter estimates’ confidence region, robustness of dynamical inferences from policy simulations are compromised, when conducted, in the usual manner, only at the parameters’ point estimates. |
| Keywords: | bifurcation, endogenous growth, Lucas-Uzawa model, Hopf, inference robustness, dynamics, stability. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201304&r=dge |
| By: | Florina-Cristina Badarau (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954); Alexandra Popescu (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans) |
| Abstract: | The recent fi nancial crisis revealed several flaws in both monetary and fi nancial regulation. Contrary to what was believed, price stability is not a suffi cient condition for financial stability. At the same time, micro-prudential regulation alone becomes insu fficient to ensure the financial stability objective. In this paper, we propose an ex-post analysis of what a central bank could have done to improve the reaction of the economy to the financial bubble. We study by means of a fi nancial accelerator DSGE model the dynamics of our economy when the central bank has, fi rst, only traditional objectives, and second, when an additional financial stability objective is added. Overall, results indicate that a more aggressive monetary policy would have had little success in improving the response of the economy to the financial bubble, as the actions of the central bank would have remained limited by the use of a single instrument, the interest rate. |
| Keywords: | bank capital channel, credit cycles, financial stability, monetary policy. |
| Date: | 2012–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00828074&r=dge |
| By: | Guillaume Plantin (Toulouse School of Economics); Igor Makarov (London Business School) |
| Abstract: | This paper develops a model in which an arbitrageur may prefer to incur limits to arbitrage rather than seamlessly refinance his positions with other arbitrageurs in order to relax his capital constraints. Such deliberate limits to arbitrage arise because the sale of a position cannot be unbundled from the communication of the idea underlying it. The absence of property rights on arbitrage ideas implies that this creates future competition. We let arbitrage opportunities differ along the ease with which they can be identified and along the speed at which they mature. We find that such deliberate limits to arbitrage arise for arbitrage opportunities that are neither too slow nor too quick to mature. The range of maturities for which arbitrage is limited increases when arbitrage opportunities are easier to find. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:831&r=dge |
| By: | Robert Kollmann (ECARES, Université Libre de Bruxelles a) |
| Abstract: | This paper takes a two-country model with a global bank to US and Euro Area (EA) data. The estimation results (based on Bayesian methods) suggest that global banking strengthens the positive international transmission of real economic disturbances. Shocks that originate in the banking sector account for roughly 20% of the forecast error variance of investment, and about 5% of the forecast variance of US and EA GDP. Bank shocks explain 5%-20% of the fall in US and EA real activity, during the Great Recession. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:840&r=dge |
| By: | Lee Ohanian (University of California Los Angeles); David Lagakos (Arizona State University); Simeon Alder (University of Notre Dame) |
| Abstract: | Some regions of the United States fared much worse than others since the end of WWII. In this paper we document that those regions faring worst in terms of wage and employment growth from 1950-2000 tended to be those in which workers earned the largest wage premiums in 1950. We use this evidence to develop a theory of the decline of the ``Rust Belt'' region, which was highly unionized and paid workers substantially more than other workers of similar skill levels. We develop our theory in a two-region, open-economy version of the Neoclassical Growth model, which we parameterize to match key features of regional and aggregate data. We then use the model to ask how much differently the Rust Belt would have fared if its labor market had not been as distorted. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:793&r=dge |
| By: | Sylvain Leduc; Mark M. Spiegel |
| Abstract: | The recovery from the recent global financial crisis exhibited a decline in the synchronization of Asian output with the rest of the world. However, a simple model based on output gaps demonstrates that the decline in business cycle synchronization during the recovery from the global financial crisis was exceptionally steep by historical standards. We posit two potential reasons for this exceptionally steep decline: First, financial markets during this recovery improved from particularly distressed conditions relative to previous downturns. Second, monetary policy during the recovery from the crisis was constrained in western economies by the zero bound, but less so in Asia. To test these potential explanations, we examine the implications of an increase in corporate bond spreads similar to that which took place during the recent European financial crisis in a 3-region open-economy DSGE model. Our results confirm that global business cycle synchronization is reduced when zero-bound constraints across the world differ. However, we find that the impact of reduced financial contagion actually goes modestly against our predictions. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2013-10&r=dge |
| By: | Raouf Boucekkine (GREQAM - Aix-Marseille School of Economics (AMSE)); Carmen Camacho (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Giorgio Fabbri (EPEE - Université d'Evry-Val d'Essonne) |
| Abstract: | We study the optimal dynamics of an AK economy where population is uniformly distributed along the unit circle. Locations only differ in initial capital endowments. Spatio-temporal capital dynamics are described by a parabolic partial differential equation. The application of the maximum principle leads to necessary but non-sufficient first-order conditions. Thanks to the linearity of the production technology and the special spatial setting considered, the value-fonction of the problem is found explicitly, and the (unique) optimal control is identified in feedback form. Despite constant returns to capital, we prove that the spatio-temporal dynamics, induced by the willingness of the planner to give the same (detrended) consumption over space and time, lead to convergence in the level of capital across locations in the long-run. |
| Keywords: | Economic growth, spatial dynamics; optimal control; partial-differential equations |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00827641&r=dge |
| By: | Ivan Shaliastovich (University of Pennsylvania); Ravi Bansal (Duke University) |
| Abstract: | In the data, we show that bond risk premia increase at times of high uncertainty about expected inflation and decrease with high uncertainty about expected growth; the magnitude of bond return predictability by these two uncertainty measures is similar to that found based on multiple yield factors. Motivated by this evidence, we provide an equilibrium long-run risks model which features time-varying volatilities of expected growth and expected inflation, and non-neutral inflation effect on future growth. We estimate the model and show that it can (i) successfully match the observed bond yield and macroeconomic data, (ii) account for bond return predictability evidence based on real and inflation uncertainties as well as the yield-based projections, and (iii) simultaneously explain for violations of the uncovered interest parity in currency markets. In the model, as in the data, bond risk premia are high in periods of high inflation uncertainty (e.g., 1980s), and are low and even negative in periods of high real uncertainty (e.g., mid-2000). We show that preference for early resolution of uncertainty, time-varying volatilities, and a non-neutral effect of inflation on growth are important to account for these aspects of bond markets. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:778&r=dge |
| By: | Andreas Stathopoulos (University of Southern California); Andrea Vedolin (London School of Economics); Philippe Mueller (London School of Economics) |
| Abstract: | Foreign exchange correlation is a key driver of risk premia in the cross-section of carry trade returns. First, we show that the correlation risk premium, defined as the difference between the risk-neutral and objective measure correlation is large (15% per year) and highly time-varying. Second, sorting currencies according to their exposure with correlation innovations yields portfolios with attractive risk and return characteristics. We also find that high (low) interest rate currencies have negative (positive) loadings on the correlation risk factor. To address our empirical findings, we consider a multi-country general equilibrium model with time-varying risk aversion generated by external habit preferences. In the model, currency risk premia mostly compensate for exposure to global risk aversion, defined as a weighted average of country risk aversions. Given countercyclical real interest rates, the model can also address the forward premium puzzle, as high interest rate currencies are exposed to (while low interest rate currencies provide a hedge to) global risk aversion risk. We also show that high global risk aversion is associated with high conditional exchange rate variance and covariance, providing theoretical justification for sorting currencies on their exposure to fluctuations of exchange rate conditional second moments. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:818&r=dge |
| By: | Nikolai Roussanov (Wharton School, U. of Penn); Robert Ready (University of Rochester) |
| Abstract: | Persistent differences in interest rates across countries account for much of the profitability of currency carry trade strategies. We relate these differences to the differences of economic fundamentals across countries. We show that countries that primarily export basic commodities exhibit systematically high (real) interest rates while countries that specialize in exporting finished consumption goods typically have lower rates. The resulting interest rate differentials do not fully translate into the depreciation of the commodity currencies, on average. Instead, they translate into expected returns that capture the bulk of the unconditional risk premia that can be obtained in the currency markets. We provide a general equilibrium model of commodity trade and currency pricing that can rationalize these facts by relying on adjustment costs in the shipping sector. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:817&r=dge |
| By: | Kenneth Burdett (Department of Economics, University of Pennsylvania); Guido Menzio (Department of Economics, University of Pennsylvania and NBER) |
| Abstract: | We study the effect of menu costs on the pricing behavior of sellers and on the cross-sectional distribution of prices in the search-theoretic model of imperfect competition of Burdett and Judd (1983). We find that, when menu costs are small, the equilibrium is such that sellers follow a (Q, S, s) pricing rule. According to a (Q, S, s) rule, a seller lets inflation erode the real value of its nominal price until it reaches some point s. Then, the seller pays the menu cost and changes its nominal price so that the real value of the new price is randomly drawn from a distribution with support [S,Q], where Q is the buyer’s reservation price and S is some price between s and Q. Only when the menu cost is relatively large, the equilibrium is such that sellers follow a standard (S; s) pricing rule. We argue that whether sellers follow a (Q, S, s) or an (S, s) rule matters for the estimation of menu costs and seller-specific shocks. |
| Keywords: | Search frictions, Menu costs, Sticky prices |
| JEL: | D11 D21 D43 E32 |
| Date: | 2013–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:13-024&r=dge |
| By: | Borys Grochulski; Yuzhe Zhang |
| Abstract: | We study optimal incentives in a principal-agent problem in which the agent's outside option is determined endogenously in a competitive labor market. In equilibrium, strong performance increases the agent's market value. When this value becomes sufficiently high, the threat of the agent's quitting forces the principal to give the agent a raise. The prospect of obtaining this raise gives the agent an incentive to exert effort, which reduces the need for standard incentives, like bonuses. In fact, whenever the agent's option to quit is close to being "in the money," the market-induced incentive completely eliminates the need for standard incentives. |
| Keywords: | Labor market |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:13-05&r=dge |
| By: | Elena Asparouhova (University of Utah); Peter Bossaerts (Caltech); Nilanjan Roy (Caltech); William Zame (University of California, Los Angeles) |
| Abstract: | This paper reports on experimental tests of an instantiation of the Lucas asset pricing model with heterogeneous agents and time-varying private income streams. Central features of the model (infinite horizon, perishability of consumption, stationarity) present difficult challenges and require a novel experimental design. The experimental evidence provides broad support for the qualitative pricing and consumption predictions of the model (prices move with fundamentals, agents smooth consumption) but sharp differences from the quantitative predictions emerge (asset prices display excess volatility, agents do not hedge price risk). Generalized Method of Moments (GMM) tests of the stochastic Euler equations yield very different conclusions depending on the instruments chosen. It is suggested that the qualitative agreement with and quantitative deviation from theoretical predictions arise from agents' expectations about future prices, which are almost self-fulfilling and yet very different from what they would need to be if they were exactly self-fulfilling (as the Lucas model requires). |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1314&r=dge |
| By: | Adam Reiff (National Bank of Hungary); Attila Ratfai (Central European University) |
| Abstract: | We argue that the underlying width of the border in international price determination is a trivial fraction of the corresponding Engel and Rogers (1996) reduced form estimate. We develop a two-country, multi-region, dynamic, stochastic equilibrium model of monopolistic competition with costly price adjustment and cross-location shopping. The optimal price is proportional to a weighted average of market prices, with weights negatively related to shopping costs. We calibrate structural distance and border parameters to a unique panel of store-level prices, and conclude that price adjustment costs directly account for about a quarter of the reduced form border width. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:799&r=dge |
| By: | Heckman, James J. (University of Chicago); Raut, Lakshmi K. (U.S. Social Security Administration) |
| Abstract: | This paper formulates a structural dynamic programming model of preschool investment choices of altruistic parents and then empirically estimates the structural parameters of the model using the NLSY79 data. The paper finds that preschool investment significantly boosts cognitive and non-cognitive skills, which enhance earnings and school outcomes. It also finds that a standard Mincer earnings function, by omitting measures of non-cognitive skills on the right hand side, overestimates the rate of return to schooling. From the estimated equilibrium Markov process, the paper studies the nature of within generation earnings distribution and intergenerational earnings and schooling mobility. The paper finds that a tax financed free preschool program for the children of poor socioeconomic status generates positive net gains to the society in terms of average earnings and higher intergenerational earnings and schooling mobility. |
| Keywords: | preschool investment, early childhood development, intergenerational social mobility, structural dynamic programming |
| JEL: | J24 J62 O15 I21 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7415&r=dge |