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on Dynamic General Equilibrium |
| By: | Edward P. Herbst; Frank Schorfheide |
| Abstract: | We develop a sequential Monte Carlo (SMC) algorithm for estimating Bayesian dynamic stochastic general equilibrium (DSGE) models, wherein a particle approximation to the posterior is built iteratively through tempering the likelihood. Using three examples consisting of an artificial state-space model, the Smets and Wouters (2007) model, and Schmitt-Grohé and Uribe’s (2012) news shock model we show that the SMC algorithm is better suited for multimodal and irregular posterior distributions than the widely-used random walk Metropolis- Hastings algorithm. We find that a more diffuse prior for the Smets and Wouters (2007) model improves its marginal data density and that a slight modification of the prior for the news shock model leads to drastic changes in the posterior inference about the importance of news shocks for fluctuations in hours worked. Unlike standard Markov chain Monte Carlo (MCMC) techniques, the SMC algorithm is well suited for parallel computing. |
| JEL: | C11 C15 E10 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19152&r=dge |
| By: | Halvor Mehlum; Ragnar Torvik; Simone Valente |
| 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 bene?ts 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 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0013&r=dge |
| By: | Fei Li (Department of Economics, University of Pennsylvania) |
| Abstract: | This paper studies the dynamics of workers. on-the-job search behavior and its consequences in an equilibrium labor market. In a model with both directed search and learning about the match quality of firm-worker pairs, I highlight the job search target effect of learning: as a worker updates the evaluation of his current job, he adjusts his on-the-job search target, which results in a different job finding rate. This model generates a non-monotonic relation between the employment-to-employment transition rate and tenure, which provides a new explanation of the hump-shaped separation rate-tenure profile |
| Keywords: | Learning, Directed Search, Job Turnover, On-the-job Search, Employment-to-employment Transition |
| JEL: | D83 J31 |
| Date: | 2013–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:13-023&r=dge |
| By: | Masashige Hamano (CREA, University of Luxembourg) |
| Abstract: | This paper revisits Schumpeterian destruction in a DSGE model based on monopolistic competition. Firms enter the market through a free entry condition and exit endogenously depending on their specific productivity level. The mechanism of endogenous destruction among heterogeneous firms is based on the probabilistic argument discussed in Melitz (2003). The models in the paper are successful in reproducing observed business cycle patterns for creation and destruction and other major economic variables. The models also feature typical characteristics of Schumpeterian economies as found in literature. |
| Keywords: | entry and exit, firm heterogeneity, the Schumpeterian destruction, business cycles |
| JEL: | D24 E23 E32 L11 L60 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:13-04&r=dge |
| By: | Francesco Bianchi; Leonardo Melosi |
| Abstract: | This paper develops methods to study the evolution of agents' expectations and uncertainty in general equilibrium models. A central insight consists of recognizing that the evolution of agents' beliefs can be captured by defining a set of regimes that are characterized by the degree of agents' pessimism, optimism, and uncertainty about future equilibrium outcomes. Once this kind of structure is imposed, it is possible to create a mapping between the evolution of agents' beliefs and observable outcomes. Agents in the model are fully rational, conduct Bayesian learning, and they know that they do not know. Therefore, agents form expectations taking into account that their beliefs will evolve according to what they observe in the future. The new modeling framework accommodates both gradual and abrupt changes in agents' beliefs and allows an analytical characterization of uncertainty. Shocks to beliefs are shown to have both first-order and second-order effects. To illustrate how to apply the methods, we use a prototypical Real Business Cycle model in which households form beliefs about the likely duration of high-growth and low-growth regimes. |
| Keywords: | Markov switching DSGE model, Bayesian econometrics, beliefs, uncertainty, Bayesian learning, rational expectations |
| JEL: | D83 E52 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:13-14&r=dge |
| By: | Max Groneck; Alexander Ludwig; Alexander Zimper |
| Abstract: | On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is embedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold longer on to their assets than their rational expectations counterparts who correctly assess survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior. |
| JEL: | D91 D83 E21 |
| Date: | 2013–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0063&r=dge |
| By: | Alan Auerbach; Lorenz Kueng; Ronald Lee |
| Abstract: | Even with well-developed capital markets, there is no private market mechanism for trading between current and future generations, so a potential role for public old-age pension systems is to spread economic and demographic shocks among different generations. This paper evaluates the smoothing and propagation of shocks of three pay-as-you-go public pension schemes, based on the actual U.S. and German systems, which vary in the extent to which they rely on tax adjustments versus benefit adjustments to provide annual cash-flow budget balance. Modifying the Auerbach-Kotlikoff (1987) dynamic general-equilibrium overlapping generations model to incorporate realistic patterns of fertility and mortality and shocks to productivity, fertility and mortality, we evaluate the effectiveness of the three public pension systems at spreading the effects of such shocks. We find that the systems, particularly those that rely to some extent on tax adjustments, are effective at spreading fertility and mortality shocks, but that this is not the case for productivity shocks, for which the pension systems actually tend to concentrate the economic impact. These results suggest that both system design and the source of shocks are important factors in determining the potential of public pension arrangements to spread the burden of shocks. |
| JEL: | H22 H53 J11 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19137&r=dge |
| By: | Pierre-Richard Agénor; Roy Zilberman |
| Abstract: | Interactions between loan loss provisioning rules and business cycle fluctuations are studied in a dynamic stochastic general equilibrium model with credit market imperfections. With a backward-looking provisioning system, provisions are triggered by past due payments, which, in turn, depend on current economic conditions and the loan loss reserves-loan ratio. With a forward-looking system, both past due payments and expected losses over the whole business cycle are accounted for, and provisions are smoothed over the cycle. Experiments show that holding more provisions can reduce the procyclicality of the financial system. However, a forward-looking provisioning regime can increase or lower procyclicality, depending on whether holding more loan loss reserves translates into a higher or lower fraction of nonperforming loans. A credit gap-augmented Taylor rule, coupled with a backward-looking provisioning system may be quite effective at mitigating real and financial volatility |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:184&r=dge |
| By: | Kevin X.D. Huang (Vanderbilt University); Jonathan Willis (Federal Reserve Bank of Kansas City) |
| Abstract: | This paper presents a state-dependent pricing model with a two-stage chain-of-production structure and serially correlated, idiosyncratic price adjustment cost process in each sector. The model can explain much of the observed volatility and persistence of inflation and output, and nonlinearity and asymmetry in the responses of prices and quantities to monetary shocks. We derive analytical solutions in a static version of the model to illustrate the main results and to gain insights. We solve the dynamic model using a modified nonlinear solution method that features indirect inference and self-validating inflation forecasts as key components. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:883&r=dge |
| By: | Chia-Hui Lu (Department of Economics, National Taipei University); Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan) |
| Abstract: | This paper studies the optimal factor tax incidence in a neoclassical growth model with a given share of government expenditure in output. In the Ramsey planner’s optimization, the effect of next period’s capital on government expenditure equals the given share of the marginal product of capital. Capital accumulation reduces the discounted net marginal product of next period’s capital by way of increasing government expenditure. In order to internalize the distortion, it is optimal to tax capital income in the long run. |
| Keywords: | Optimal factor taxation, efficiency |
| JEL: | D83 E62 H21 J64 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:sin:wpaper:13-a005&r=dge |
| By: | Pietro F. Peretto; Simone Valente |
| Abstract: | We study the interactions between technological change, resource scarcity and population dynamics in a Schumpeterian model with endogenous fertility. We find a pseudo-Malthusian equilibrium in which population is constant and determined by resource scarcity while income grows exponentially. If labor and resources are substitutes in production, income and fertility dynamics are self-balancing and the pseudo-Malthusian equilibrium is the global attractor of the system. If labor and resources are complements, income and fertility dynamics are self-reinforcing and drive the economy towards either demographic explosion or collapse. Introducing a minimum resource requirement per capita, we obtain constant population even under complementarity. |
| Keywords: | Endogenous Innovation, Resource Scarcity, Population Growth, Fertility Choices |
| JEL: | E10 L16 O31 O40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:13-9&r=dge |
| By: | Árpád Ábrahám; Sarolta Laczóó |
| Abstract: | We extend the model of risk sharing with limited commitment (Kocherlakota, 1996) by introducing both a public and a private (non-contractible and/or non-observable) storage technology. Positive public storage relaxes future participation constraints and may hence improve risk sharing, contrary to the case where hidden income or effort is the deep friction. The characteristics of constrained-efficient allocations crucially depend on the storage technology’s return. In the long run, if the return on storage is (i) moderately high, both assets and the consumption distribution may remain time-varying; (ii) sufficiently high, assets converge almost surely to a constant and the consumption distribution is time-invariant; (iii) equal to agents’ discount rate, perfect risk sharing is self-enforcing. Agents never have an incentive to use their private storage technology, i.e., Euler inequalities are always satisfied, at the constrained-efficient allocation of our model, while this is not the case without optimal public asset accumulation. |
| Keywords: | risk sharing, limited commitment, hidden storage, dynamic contracts |
| JEL: | E20 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:697&r=dge |
| By: | Tyler Muir (Northwestern University); Andrea Eisfeldt (UCLA Anderson School of Management) |
| Abstract: | We document the fact that at both the aggregate and the firm level, corporations tend to simultaneously raise external finance and accumulate liquid assets. For all but the very largest firms, the aggregate correlation between external finance raised and liquidity accumulation is 0.6, and the average firm level correlation is 0.2. This seems puzzling if internal and external finance are substitutes and external finance is costly. In fact, static pecking order intuition predicts that firms will first draw down liquid balances and only then issue external finance. On the other hand, if one believes that the cost of external finance varies over time, then the fact that there appear to be aggregate waves of issuance and savings activity may not be surprising. We show that a simple dynamic model with constant costs of external finance can easily match the observed positive correlation between liquidity accumulation and external finance. We compare the results of this simple model to those from a model which features a shock to the cost of external finance. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:842&r=dge |
| By: | Llosa, Luis-Gonzalo (UCLA) |
| Abstract: | This paper analyzes how terms of trade affect aggregate productivity using a two-country monopolistic competitive business cycle model driven by aggregate technology shocks. The inefficiency of the equilibrium implies that each country’s productivity is affected by the terms of trade. This introduces a novel mechanism for business cycle synchronization. Moreover, for each country, foreign technology shocks have almost the same effects as domestic technology shocks. The paper also shows how terms of trade movements can lead to excess volatility of consumption and highly persistent productivity. On the quantitative side, the model delivers a degree of business cycle synchronization that is close to the actual comovement of the U.S. economy with the rest of the world. The model also implies that for some small open economies, specially emerging economies, foreign shocks can outperform domestic shocks in explaining their business cycles. Finally, the paper provides a quantification of the influence of the terms of trade on emerging countries’ productivity and finds that it can be large. |
| Keywords: | Imperfect Competition, Input-Output Linkages, Terms of Trade, Business Cycles, Total Factor Productivity |
| JEL: | C67 E23 F12 F41 F43 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2013-007&r=dge |
| By: | Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof |
| Abstract: | Occasionally binding credit constraints (OBC) have recently been explored as a promising way of modeling financial frictions. However, given their highly non-linear nature, most of the literature has concentrated on small models that can be solved using global methods. In this paper, we investigate the workings of OBC introduced via a smooth penalty function. This allows us to move towards richer models that can be used for policy analysis. We show that in a deterministic setting the OBC approach delivers welcome features, like asymmetry and non-linearity in reaction to shocks. However, feasible local approximations, necessary to generate stochastic simulations, suffer from fatal shortcomings that make their practical application questionable. |
| Keywords: | financial frictions; DSGE models; occasionally binding constraints; penalty function |
| JEL: | E30 E44 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:027&r=dge |
| By: | Athanasios Geromichalos; Lucas Herrenbrueck; Kevin Salyer (Department of Economics, University of California Davis) |
| Abstract: | A consistent empirical feature of bond yields is that term premia are, on average, positive. That is, investors in long term bonds receive higher returns than investors in similar (i.e.\ same default risk) shorter maturity bonds over the same holding period. The majority of theoretical explanations for this observation have viewed the term premia through the lens of the consumption based capital asset pricing model. In contrast, we harken to an older empirical literature which attributes the term premium to the idea that short maturity bonds are inherently more liquid. The goal of this paper is to provide a theoretical justification of this concept. To that end, we employ a model in the tradition of modern monetary theory extended to include assets of different maturities. Short term assets always mature in time to take advantage of random consumption opportunities. Long term assets do not, but agents may liquidate them in a secondary asset market, characterized by search-and-bargaining frictions a la Duffie, Garleanu, and Pedersen (2005). In equilibrium, long term assets have higher rates of return to compensate agents for their relative lack of liquidity. Consistent with empirical findings, our model predicts a steeper yield curve for assets that trade in less liquid secondary markets. |
| Keywords: | monetary-search models, liquidity, over-the-counter markets, yield curve |
| JEL: | E31 E43 E52 G12 |
| Date: | 2013–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:cda:wpaper:13-8&r=dge |
| By: | Mark Gertler; Nobuhiro Kiyotaki |
| Abstract: | We develop a variation of the macroeconomic model with banking in Gertler and Kiyotaki (2011) that allows for liquidity mismatch and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread between the expected rates of return on bank assets and deposits fluctuates counter-cyclically. However, because bank assets are less liquid than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenously determined liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. We also analyze the effects of anticipated bank runs. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability. |
| JEL: | E44 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19129&r=dge |
| By: | Francesco Bianchi; Leonardo Melosi |
| Abstract: | We develop a theoretical framework to quantitatively assess the general equilibrium effects and welfare implications of central bank reputation and transparency. Monetary policy alternates between periods of active inflation stabilization and periods during which the emphasis on inflation stabilization is reduced. When the central bank only engages in short deviations from active monetary policy, inflation expectations remain anchored and the model captures the monetary approach described as constrained discretion. However, if the central bank deviates for a prolonged period of time, agents gradually become pessimistic about future monetary policy, the disanchoring of inflation expectations occurs, and uncertainty rises. Reputation determines the speed with which agents' pessimism accelerates once the central bank starts deviating. When the model is fitted to U.S. data, we find that the Federal Reserve can accommodate contractionary technology shocks for up to five years before inflation expectations take off. Increasing transparency would improve welfare by anchoring agents' expectations. Gains from transparency are even more sizeable for countries whose central banks have weak reputation. |
| Keywords: | Bayesian learning, reputation, uncertainty, inflation expectations, Markov-switching models, impulse response |
| JEL: | E52 D83 C11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:13-13&r=dge |
| By: | Nujin Suphaphiphat; Pietro F. Peretto; Simone Valente |
| Abstract: | We analyze the general-equilibrium effects of alternative regimes of access rights over renewable natural resources – namely, open access versus full property rights on the pace of development when economic growth is endogenously driven by both horizontal and vertical innovations. Resource exhaustion may occur under both regimes but is more likely to arise under open access. Under full property rights, positive resource rents increase expenditures and temporarily accelerate productivity growth, but also yield a higher resource price at least in the short-to-medium run. We characterize analytically the welfare effect of a regime switch induced by a failure in property rights enforcement: switching to open access is welfare reducing if the utility gain generated by the initial drop in the resource price is more than offset by the static and dynamic losses induced by reduced expenditure. |
| Keywords: | Endogenous growth, Innovation, Renewable Resources, Sustainable Development, Property Rights |
| JEL: | O11 O31 Q21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:13-11&r=dge |
| By: | Ingmar Schumacher |
| Abstract: | We develop an overlapping generations model with environmental quality and endogenous environmental culture. Based upon empirical evidence, preferences over culturally-weighted consumption and environmental quality are assumed to follow a Leontieff function. We find that four different regimes may be possible, with interior or corner solutions in investments in environmental culture and maintenance. Depending on the parameter conditions, there exists one of two possible, asymptotically stable steady states, one with and one without investments in environmental culture. For low wealth levels, society is unable to free resources for environmental culture. In this case, society will only invest in environmental maintenance if environmental quality is sufficiently low. Once society has reached a certain level of economic development, then it may optimally invest a part of its wealth in developing an environmental culture. Environmental culture has not only a positive impact on environmental quality through lower levels of consumption, but it improves the environment through maintenance expenditure for wealth-environment combinations at which, in a restricted model without environmental culture, no maintenance would be undertaken. Environmental culture leads to a society with a higher indirect utility at steady state in comparison to the restricted model. Our model leads us to the conclusion that, by raising the importance of environmental quality for utility, environmental culture leads to lower steady state levels of consumption and wealth, but higher environmental quality. Thus, for societies trapped in a situation with low environmental quality, investments in culture may induce positive feedback loops, where more culture raises environmental quality which in turn raises environmental culture. We also discuss how environmental culture may lead to an Environmental Kuznets Curve. |
| Keywords: | environmental culture; overlapping generations model; environment; endogenous preferences. |
| JEL: | Q56 D90 |
| Date: | 2013–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:13&r=dge |
| By: | Matthias Doepke; Fabrizio Zilibotti |
| Abstract: | We discuss the two-way link between culture and economic growth. We present a model of endogenous technical change where growth is driven by the innovative activity of entrepreneurs. Entrepreneurship is risky and requires investments that affect the steepness of the lifetime consumption profile. As a consequence, the occupational choice of entrepreneurship hinges on risk tolerance and patience. Parents expecting their children to become entrepreneurs have an incentive to instill these two values in their children. Cultural transmission is Beckerian, i.e., parents are driven by the desire to maximize their children's happiness. We also consider, in an extension, a paternalistic motive for preference transmission. The growth rate of the economy depends on the fraction of the population choosing an entrepreneurial career. How many entrepreneurs there are in a society hinges, in turn, on parental investments in children's patience and risk tolerance. There can be multiple balanced-growth paths, where in faster-growing countries more people exhibit an "entrepreneurial spirit." We discuss applications of models of endogenous preferences to the analysis of socio-economic transformations, such as the British Industrial Revolution. We also discuss empirical studies documenting the importance of culture and preference heterogeneity for economic growth. |
| JEL: | J20 O10 O40 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19141&r=dge |
| By: | Pietro F. Peretto |
| Abstract: | This paper develops a theory of the emergence of modern innovation-driven Schumpeterian growth. It uses a tractable model that yields a closed-form solution, consisting of an S-shaped (i.e., logistic-like) time path of firm size and a set of equations that express the relevant endogenous variables – GDP, product variety and product quality, consumption, the shares of GDP earned by the factors of production – as functions of firm size. It also obtains closed-form solutions for the dates of the events that drive the economy's phase transitions as functions of the fundamentals. The resulting path of GDP per capita consists of a convex-concave profile replicating the key feature of long-run data: an accelerating phase followed by a deceleration with convergence to a stationary growth rate. Compared to other availables theories, the paper focuses on the within-industry forces that regulate the response of firms and entrepreneurs to Smithian market expansion. |
| Keywords: | Endogenous Growth, Firm Size, Market Structure, Take-off |
| JEL: | E10 L16 O31 O40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:13-10&r=dge |
| By: | Birur, Dileep K.; Beach, Robert H. |
| Keywords: | International Relations/Trade, Research Methods/ Statistical Methods, Resource /Energy Economics and Policy, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea13:150560&r=dge |