nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒07‒15
33 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Assessing the empirical relevance of Walrasian labor frictions to business cycle fluctuations By Joao Madeira
  2. Excess Reserves and Economic Activity By Scott J. Dressler; Erasmus Kersting
  3. Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation By Dirk Krueger; Alexander Ludwig
  4. Endogenous Growth and International Technology Diffusion By Michael Waugh; Christopher Tonetti; Jesse Perla
  5. Estimating Dynamic Equilibrium Models with Stochastic Volatility By Jesus Fernandez-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
  6. Government Debt and Default in a Minimal State By Ludwig, Maximilian
  7. Unemployment Crises By Nicolas Petrosky-Nadeau; Lu Zhang
  8. Animal Spirits as an Engine of Boom-Busts and Throttle of Productivity Growth By Christopher M. Gunn
  9. Government spending, consumption, and the extensive investment margin By Vivien LEWIS; Roland WINKLER
  10. Unemployment Insurance Take-up Rates in an Equilibrium Search Model By David Fuller; Stephane Auray; Damba Lkhagvasuren
  11. Indeterminacy and utility-generating government spending under balanced-budget fiscal policies By Takeo Hori; Noritaka Maebayashi
  12. Indexed versus nominal government debt under inflation and price-level targeting By Michael Hatcher
  13. Online Appendix to "Saving Up or Settling Down: Home Ownership over the Life Cycle By Jonathan Halket; Santhanagopalan Vasudev
  14. Inferring labor income risk and partial insurance from economic choices By Fatih Guvenen; Anthony Smith
  15. Monetary Policy, R&D and Economic Growth in an Open Economy By Chu, Angus C.; Cozzi, Guido; Lai, Ching-Chong; Liao, Chih-Hsing
  16. (Spillover) Effects of Labour Market Reforms in Germany and France By Claudia Busl; Atilim Seymen
  17. Fear of Sovereign Default, Banks, and Expectations-Driven Business Cycles By Christopher M. Gunn; Alok Johri
  18. Old, sick, alone, and poor: a welfare analysis of old-age social insurance programs By R. Anton Braun; Karen A. Kopecky; Tatyana Koreshkova
  19. Imperfect Competition and Optimal Taxation By Andrea Colciago
  20. Man-Bites-Dog Business Cycle By Kristoffer Nimark
  21. Financial exposure and the international transmission of financial shocks By Gunes Kamber; Christoph Thoenissen
  22. Two-Country Dynamic Model of Trade with Heterogeneous Firms and Comparative Advantage By Wolfgang Lechthaler; Mariya Mileva
  23. The Threat of Counterfeiting in Competitive Search Equilibrium By Enchuan Shao
  24. Quid pro quo: Technology capital transfers for market access in China By Thomas J. Holmes; Ellen R. McGrattan; Edward C. Prescott
  25. Technical appendix for quid pro quo: Technology capital transfers for market access in China By Thomas J. Holmes; Ellen R. McGrattan; Edward C. Prescott
  26. The age-time-cohort problem and the identification of structural parameters in life-cylce models By Sam Schulhofer-Wohl
  27. Uncertainty Shocks and Unemployment Dynamics: An Analysis of Post-WWII U.S. Recessions By Giovanni Caggiano; Efrem Castelnuovo; Nicolas Groshenny
  28. Intertemporal equilibria with Knightian Uncertainty By Rose-Anne Dana; Frank Riedel
  29. Feasibility and Optimality of the Initial Capital Stock in the Ramsey Vintage Capital Model By Franklin Gamboa; Wilfredo L. Maldonado
  30. Environmental Catastrophes under Time-Inconsistent Preferences By Thomas Michielsen
  31. Solving the DMP Model Accurately By Nicolas Petrosky-Nadeau; Lu Zhang
  32. A Theory of Disasters and Long-run Growth By AKAO Ken-Ichi; SAKAMOTO Hiroaki
  33. Entry, Exit, Firm Dynamics, and Aggregate Fluctuations By Gian Luca Clementi; Berardino Palazzo

  1. By: Joao Madeira (Department of Economics, University of Exeter)
    Abstract: This paper describes and estimates (with a Bayesian likelihood approach) an otherwise standard dynamic stochastic general equilibrium model, with both sticky prices and wages, augmented with several labor market rigidities (of a Walrasian nature), namely: indivisible labor, predetermined straight time employment numbers (in which case, firms adjust overtime employment to respond to unexpected shocks), hiring expenses and convex adjustment costs. The results show all these frictions to be empirically important. Labor frictions are shown to have important implications to business cycle dynamics and economic policy making. Labor frictions imply TFP shocks have a greater role in accounting for business cycle dynamics. Labor frictions also imply fiscal policy to lead to a greater crowding out of private sector activity and monetary policy to be more e¤ective in achieving disinflation.
    Keywords: DSGE; New Keynesian, labor frictions; indivisible labor; labor adjustment costs; overtime; employment; hours.
    JEL: E20 E24 E30 E31 E32
    Date: 2013
  2. By: Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University); Erasmus Kersting (Department of Economics and Statistics, Villanova School of Business, Villanova University)
    Abstract: This paper examines a DSGE environment with endogenous excess reserve holdings in the banking sector. Excess reserves act as an extensive margin of bank lending which is inactive in traditional limited participation models where banks hold minimal reserves by assumption. The results of our model suggest that this extensive margin of bank lending can dampen and even overcome the standard liquidity effect of monetary contractions, amplify the output response to productivity shocks, and bring about large, short-run responses to changes in the interest rate paid on reserves.
    Keywords: Financial Intermediation; Excess Reserves; Liquidity Effect; Output Amplification
    JEL: C68 E44
    Date: 2013–07
  3. By: Dirk Krueger (Department of Economics, University of Pennsylvania); Alexander Ludwig (University of Cologne, Faculty of Management, Economics and Social Sciences)
    Abstract: In this paper we characterize quantitatively the optimal mix of progressive income taxes and education subsidies in a model with endogeneous human capital formation, borrowing constraints, income risk and incomplete financial markets. Progressive labor income taxes provide social insurance against idiosyncratic income risk and redistributes after tax income among ex-ante heterogenous households. In addition to the standard distortions of labor supply progressive taxes also impede the incentives to acquire higher education, generation a non-trivial trade-off for the benevolent utilitarian government. The latter distortion can potentially be mitigated by an education subsidy. We find that the welfare-maximizing fiscal policy is indeed characterized by a substantially progressive labor income tax code and a positive subsidy for college education. Both the degree of tax progressivity and the education subsidy are larger than in the current U.S. status quo.
    Keywords: Progressive Taxation, Capital Taxation, Optimal Taxation
    JEL: E62 H21 H24
    Date: 2013–03–27
  4. By: Michael Waugh (New York University); Christopher Tonetti (New York University); Jesse Perla (NYU)
    Abstract: This paper studies international technology and idea flows and their effects on growth and the welfare gains from openness. We analyze a model where producers decide either to acquire productivity-increasing ideas through search or to produce domestically and potentially for export with their existing productivity. These choices (both domestically and abroad) jointly determine the distribution of productivity-increasing ideas availablewhich in turn affect search and exporting decisions. We characterize the balance growth path and transition dynamics for this economy, thereby allowing us to provide a theory as to how openness changes technology/idea adoption, growth, and the welfare gains from openness.
    Date: 2012
  5. By: Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania, NBER, CEPR, and FEDEA); Pablo Guerrón-Quintana (Federal Reserve Bank of Philadelphia); Juan F. Rubio-Ramírez (Duke University, Federal Reserve Bank of Atlanta, and FEDEA)
    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: Dynamic equilibrium models, Stochastic volatility, Parameter drifting, Bayesian methods
    JEL: E10 E30 C11
    Date: 2013–05–08
  6. By: Ludwig, Maximilian (Department of Economics, Hamburg University)
    Abstract: I construct a model of a small open economy in which government spending is necessary to mitigate transaction cost. This provides a simple raison d’etre for a government and generates features many sovereign default models do not have: taxes and government spending. Even though the government sector is relatively small, the model can generate average and peak levels of government debt as well as second moments in line with business cycle statistics of Argentina. The model is solved using an algorithm that works roughly similar to earlier works in this literature, but avoids their issues with erroneous approximations.
    Keywords: Sovereign Default; Government Spending; Interest Rates
    JEL: F32 F34 H63
    Date: 2013–07–05
  7. By: Nicolas Petrosky-Nadeau; Lu Zhang
    Abstract: A search and matching model, when calibrated to the mean and volatility of unemployment in the postwar sample, can potentially explain the large unemployment dynamics in the Great Depression. The limited response of wages to labor market conditions from credible bargaining and the congestion externality from matching frictions cause the unemployment rate to rise sharply in recessions but decline gradually in booms. The frequency, severity, and persistence of unemployment crises in the model are quantitatively consistent with U.S. historical time series.
    JEL: E24 E32 G01 G12
    Date: 2013–07
  8. By: Christopher M. Gunn (Department of Economics, Carleton University)
    Abstract: The news-shock literature interprets empirical news-shock identifications as signals about future productivity. Under this view, changes in productivity cause changes in expectations. I investigate an alternative interpretation whereby changes in expectations cause changes in productivity. I present a model where firms adopt the technology of a deterministic frontier, and where self-fulfilling expectational-shocks unleash a frenzy of adoption through which firms increase productivity. Consistent with the news evidence,stock prices and aggregate activity boom, yet TFP increases with a lag. Simulations using i.i.d. expectational-shocks yield moments consistent with the data, and qualitatively capture both high-frequency boom-busts as well as lower-frequency fluctuations.
    Keywords: expectations-driven business cycles, intermediation shocks, news shocks, great recession, financial accelerator
    JEL: E3 E44
    Date: 2013–06
  9. By: Vivien LEWIS; Roland WINKLER
    Abstract: We find VAR evidence that a rise in US government spending boosts consumption and firm entry. The joint dynamics observed in the data poses a puzzle for business cycle models with endogenous entry (extensive-margin investment). Persistent spending expansions generate entry but crowd out consumption through a negative wealth effect. Model features that dampen the wealth effect, such as credit-constrained consumers or non-separable preferences, reduce entry. This leads to weaker competition in oligopolistic markets, such that markups rise and consumption falls. The model captures the joint dynamics if labor supply is very elastic or public and private consumption are complements.
    Date: 2013–04
  10. By: David Fuller (Concordia University and CIREQ); Stephane Auray (CREST-ENSAI); Damba Lkhagvasuren (Concordia University and CIREQ)
    Abstract: In the US unemployment insurance (UI) system, only a fraction of those eligible for benefits actually collect them. We estimate this fraction using CPS data and detailed state-level eligibility criteria. We find that the fraction of eligible unemployed collecting benefits has been persistently below one, and is countercyclical. We show these empirical facts can be explained in an equilibrium search model where firms finance UI benefits via a payroll tax, and are heterogeneous with respect to their specific tax rate, which is experience rated. In equilibrium, low tax firms effectively offer workers an alternative UI scheme featuring a faster job arrival rate and a higher wage offer. Some eligible workers prefer the ``market'' scheme and thus do not collect UI. Quantitatively, the model does well matching key moments in the data. In addition, if all eligible unemployed collect, benefit expenditures increase by 29% and welfare increases by 0.43%. Average search effort decreases, but the unemployment rate and duration decrease as vacancy creation increases.
    Keywords: unemployment insurance, take-up, matching frictions, search
    JEL: E61 J32 J64 J65
    Date: 2013–06–26
  11. By: Takeo Hori (College of Economics, Aoyama Gakuin University); Noritaka Maebayashi (Graduate School of Economics, Osaka University)
    Abstract: We reexamine indeterminacy and utility-generating public spending under balanced- budget rules in a simple one-sector growth model. The introduction of consumption tax (subsidy) as well as subsidies for savings and labor modify indeterminacy con- ditions in the existing studies. We show that if consumption subsidies and income taxes exist, indeterminacy occurs even when private and public consumption are Edgeworth substitutes and public spending and leisure are separable in the utility function. Indeterminacy also occurs even when they are weak Edgeworth comple- ments if consumption tax and subsidies for savings and labor are present. Surpris- ingly, when they are strong Edgeworth complements, the stronger external effects of public consumption tend to lower the possibility of equilibrium indeterminacy in the presence of consumption tax.
    Keywords: utility-generating public spending, indeterminacy, balanced-budget rule
    JEL: E32 E62
    Date: 2013–07
  12. By: Michael Hatcher
    Abstract: This paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a much better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a better store of value relative to indexed bonds. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. From a policy perspective, a key finding is that accounting for optimal indexation has important welfare implications for comparisons of IT and PT.
    Keywords: government debt, inflation risk, inflation targeting, price-level targeting.
    Date: 2013–06
  13. By: Jonathan Halket (University of Essex); Santhanagopalan Vasudev (University of Essex)
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2013
  14. By: Fatih Guvenen; Anthony Smith
    Abstract: This paper uses the information contained in the joint dynamics of individuals’ labor earnings and consumption-choice decisions to quantify both the amount of income risk that individuals face and the extent to which they have access to informal insurance against this risk. We accomplish this task by using indirect inference to estimate a structural consumption-savings model, in which individuals both learn about the nature of their income process and partly insure shocks via informal mechanisms. In this framework, we estimate (i) the degree of partial insurance, (ii) the extent of systematic differences in income growth rates, (iii) the precision with which individuals know their own income growth rates when they begin their working lives, (iv) the persistence of typical labor income shocks, (v) the tightness of borrowing constraints, and (vi) the amount of measurement error in the data. In implementing indirect inference, we find that an auxiliary model that approximates the true structural equations of the model (which are not estimable) works very well, with negligible small sample bias. The main substantive findings are that income shocks are not very persistent, systematic differences in income growth rates are large, individuals have substantial amounts of information about their income growth rates, and about one-half of income shocks are effectively smoothed via partial insurance. Putting these findings together, we argue that the amount of uninsurable lifetime income risk that individuals perceive is substantially smaller than what is typically assumed in calibrated macroeconomic models with incomplete markets.
    Keywords: Labor economics ; Income
    Date: 2013
  15. 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: O30 O40 E41 F43
    Date: 2013–06
  16. By: Claudia Busl; Atilim Seymen
    Abstract: In this paper we analyze the (potential) effects of labour market and fiscal policy reforms by heterogeneous European countries—Germany and France—on the domestic and foreign economy. We test the implications of the gains in matching efficiency and reduced unemployment benefits induced by the German Hartz reforms in a two-country RBC model with frictions in the labour market, which replicates the data quite well. We then explore the reform possibilities in the French labour market and their potential (inter)national effects by calibrating the model to recent data. Both home and foreign economies benefit from labour market reforms in the home economy in our framework.
    Keywords: Labour market reforms, search and matching, dynamic stochastic general equilibrium models
    JEL: E24 E61 E65 F42 J38 J63
    Date: 2013–06
  17. By: Christopher M. Gunn (Department of Economics, Carleton University); Alok Johri (Department of Economics, McMaster University)
    Abstract: What is the effect of the fear of future sovereign default on the economy of the defaulting country? The typical sovereign default model does not address this question. In this paper we wish to explore the possibility that changing expectations about future default themselves can lead to financial stress (as measured by credit spreads) and recessionary outcomes. We exploit the \news-shock" framework to consider an environment in which sovereign debt-holders receive imperfect signals about the portion of debt that a sovereign may default on in the future. We then investigate how domestic banks can play a role in transmitting the expectation of default into a realized recession through the interaction of the domestic banks' holdings of government debt and their risk-weighted capital requirements. Our results suggest that, consistent with the data, even in the absence of actual realized government default, an increase in pessimism regarding the prospect of future default results in a rise in yields on government debt and an increase in interest rates on private domestic loans, as well as a recession in the economy.
    Keywords: expectations-driven business cycles, sovereign defaults; financial intermediation, news shocks, business cycles, interest rate spreads, capital adequacy requirements.
    JEL: E3 E44 F36 F37 F4 G21
    Date: 2013–05
  18. By: R. Anton Braun; Karen A. Kopecky; Tatyana Koreshkova
    Abstract: Poor health, large acute and long-term care medical expenses, and spousal death are significant drivers of impoverishment among retirees. We document these facts and build a rich, overlapping generations model that reproduces them. We use the model to assess the incentive and welfare effects of Social Security and means-tested social insurance programs such as Medicaid and food stamp programs, for the aged. We find that U.S. means-tested social insurance programs for retirees provide significant welfare benefits for all newborn. Moreover, when means-tested social insurance benefits are of the scale in the United States, all individuals would prefer to be born into an economy with no Social Security. Finally, we find that the benefits of increasing means-tested social insurance are small or negative, if we hold fixed Social Security contributions and benefits at their current levels
    Date: 2013
  19. By: Andrea Colciago
    Abstract: This paper provides optimal labor and dividend income taxation in a general equilibrium model with oligopolistic competition and endogenous firms' entry. In the long run the optimal dividend income tax corrects for inefficient entry. The dividend income tax depends on the form of competition and nature of the sunk entry costs. In particular, it is higher in market structures characterized by competition in quantities with respect to those characterized by price competition. Oligopolistic competition leads to an endogenous countercyclical price markup. As a result offsetting the distortions over the business cycle requires deviations from full tax smoothing.
    Keywords: Firms' Entry; Market Stuctures; Market Distortions; Optimal Dividend Income Tax
    JEL: E62 L13
    Date: 2013–06
  20. By: Kristoffer Nimark
    Abstract: The newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact. In particular, we analyze the consequences of information structures in which some types of signals are more likely to be observed after unusual events. Such signals may increase both uncertainty and disagreement among agents and when embedded in a simple business cycle model, can help us understand why we observe (i) occasional large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals (ii) persistent periods of high macroeconomic volatility and (iii) a positive correlation between absolute changes in macro variables and the cross-sectional dispersion of expectations as measured by survey data. These results are consequences of optimal updating by agents when the availability of some signals is positively correlated with tail-events. The model is estimated by likelihood based methods using individual survey responses and a quarterly time series of total factor productivity along with standard aggregate time series. The estimated model suggests that there have been episodes in recent US history when the impact on output of innovations to productivity of a given magnitude were more than eight times as large compared to other times.
    Date: 2013–06
  21. By: Gunes Kamber; Christoph Thoenissen
    Abstract: This paper analyzes the transmission mechanism of banking sector shocks in an international real business cycle model with heterogeneous bank sizes. We examine to what extent the financial exposure of the banking sector affects the transmission of foreign banking sector shocks. In our model, the more exposed domestic banks are to the foreign economy via lending to foreign firms, the greater are the spillovers from foreign financial shocks to the home economy. The model highlights the role of openness to trade and the dynamics of the terms of trade in the international transmission mechanism of banking sector shocks Spillovers from foreign banking sector shocks are greater the more open the home economy is to trade and the less the terms of trade respond to foreign shocks.
    Date: 2013–06
  22. By: Wolfgang Lechthaler; Mariya Mileva
    Abstract: We develop a dynamic trade model with comparative advantage, heterogeneous firms and workers and endogenous firm entry to study wage inequality during the adjustment to trade liberalization. We find that trade liberalization increases wage inequality both in the short run and in the long run. In the short run, wage inequality is mainly driven by inter-sectoral wage inequality, while in the long run, wage inequality is driven by an increase in the skill premium. It is not a good idea to exclude certain sectors from trade liberalization, because that greatly reduces the benefits of trade liberalization, while failing to protect vulnerable workers.
    Keywords: Trade liberalization, wage inequality, adjustment dynamics
    JEL: E24 F11 F16 J62
    Date: 2013–07
  23. By: Enchuan Shao
    Abstract: Recent studies in monetary theory show that if buyers can use lotteries to signal the quality of bank notes, counterfeiting does not occur in a pooling equilibrium. In this paper, I investigate the robustness of this non-existence result by considering an alternative trading mechanism. Specifically, a competitive search environment is employed in which sellers post offers and buyers direct their search based on those offers. In contrast to the previous studies, buyers’ ability to signal is fully eliminated in this environment. However, I find that counterfeiting does not exist if the equilibrium concept proposed by Guerrieri et al. (2010) is used. This is a refinement scheme in which sellers’ out-of-equilibrium beliefs about the likelihood of meeting with different types of buyers are restricted. Moreover, a threat of counterfeiting can result in the collapse of a monetary equilibrium. An extension of the model is provided which allows the threat of counterfeiting to materialize, in that some buyers cannot observe the offers, and therefore search randomly. Counterfeit notes are produced by those buyers who randomly search.
    Keywords: Bank notes
    JEL: D82 D83 E42
    Date: 2013
  24. By: Thomas J. Holmes; Ellen R. McGrattan; Edward C. Prescott
    Abstract: Despite the recent rapid development and greater openness of China’s economy, FDI flows between China and technologically advanced countries are relatively small in both directions. We assess global capital flows in light of China’s quid pro quo policy of exchanging market access for transfers of technology capital—accumulated know-how such as research and development (R&D) that can be used in multiple production locations. We first provide empirical evidence of this policy and then incorporate it into a multicountry dynamic general equilibrium model. This extension leads to a significantly better fit of the model to data. We also find large welfare gains for China—and welfare losses for its FDI partners—from quid pro quo.
    Keywords: China
    Date: 2013
  25. By: Thomas J. Holmes; Ellen R. McGrattan; Edward C. Prescott
    Abstract: Despite the recent rapid development and greater openness of China’s economy, FDI flows between China and technologically advanced countries are relatively small in both directions. We assess global capital flows in light of China’s quid pro quo policy of exchanging market access for transfers of technology capital—accumulated know-how such as research and development (R&D) that can be used in multiple production locations. We first provide empirical evidence of this policy and then incorporate it into a multicountry dynamic general equilibrium model. This extension leads to a significantly better fit of the model to data. We also find large welfare gains for China—and welfare losses for its FDI partners—from quid pro quo.
    Keywords: China
    Date: 2013
  26. By: Sam Schulhofer-Wohl
    Abstract: The standard approach to estimating structural parameters in life-cycle models imposes sufficient assumptions on the data to identify the “age profile” of outcomes, then chooses model parameters so that the model’s age profile matches this empirical age profile. I show that the standard approach is both incorrect and unnecessary: incorrect, because it generally produces inconsistent estimators of the structural parameters, and unnecessary, because consistent estimators can be obtained under weaker assumptions. I derive an estimation method that avoids the problems of the standard approach. I illustrate the method’s benefits analytically in a simple model of consumption inequality and numerically by reestimating the classic life-cycle consumption model of Gourinchas and Parker (2002).
    Keywords: Demography
    Date: 2013
  27. By: Giovanni Caggiano (University of Padova); Efrem Castelnuovo (University of Padova); Nicolas Groshenny (University of Adelaide)
    Abstract: We investigate the effects of uncertainty shocks on unemployment dynamics in the post-WWII U.S. recessions via non-linear (Smooth-Transition) VARs. The relevance of uncertainty shocks is found to be much larger than that predicted by standard linear VARs in terms of i) magnitude of the reaction of the unemployment rate to suck shocks, ii) welfare costs computed by considering conditional macroeconomic volatilities, iii) contribution to the variance of the prediction errors of unemployment at business cycle frequencies. We discuss the ability of different classes of DSGE models to replicate our results. Our findings reinforce the relevance of the trade-off between "correctness" and "timeliness" of policy makers' decisions.
    Keywords: Uncertainty shocks, Unemployment Dynamics, Smooth Transition Vector-AutoRegressions, Recessions. JEL: C32, E32, E52.
    Date: 2013–06
  28. By: Rose-Anne Dana; Frank Riedel
    Abstract: We study a dynamic and infinite{dimensional model with incomplete multiple prior preferences. In interior efficient allocations, agents share a common risk{adjusted prior and subjective interest rate. Interior efficient allocations and equilibria coincide with those of economies with subjective expected utility and priors from the agents' multiple prior sets. A specific model with neither risk nor uncertainty at the aggregate level is considered. Risk is always fully insured. For small levels of ambiguity, there exists an equilibrium with inertia where agents also insure fully against Knightian uncertainty. When the level of ambiguity exceeds a critical threshold, full insurance no longer prevails and there exist equilibria with inertia where agents do not insure against uncertainty at all. We also show that equilibria with inertia are indeterminate.
    Keywords: Knightian Uncertainty, Ambiguity, Incomplete Preferences, General Equilibrium Theory, No Trade, Dynamic General Equilibrium
    JEL: D51 D81 D91
    Date: 2013–05–16
  29. By: Franklin Gamboa; Wilfredo L. Maldonado
    Abstract: Using a discrete version of the Ramsey Vintage Capital Model we provide a characterization of the initial capital stocks compatible with a predefined scrapping time and a level of technical progress which generate feasible capital paths. From that characterization, it is proved that for a given level of technological progress there exists a minimum scrapping time for the machines which allows a sustainable growth path. Moreover, we reduce the infinite horizon dynamic programming problem to one of finite dimension and we show how this reduction allows us to find the optimal structure of the initial capital stock as well as the optimal scrapping time. A numerical example shows that, in accordance with the infinite horizon approach, the greater the technological progress, the lower the optimal scrapping time.
    Keywords: Vintage capital, technological innovation, dynamic programming.
    JEL: C61 E22 O33
    Date: 2013–06
  30. By: Thomas Michielsen (Tilburg University)
    Abstract: I analyze optimal natural resource use in an intergenerational model with the risk of a catastrophe. Each generation maximizes a weighted sum of discounted utility (positive) and the probability that a catastrophe will occur at any point in the future (negative). The model generates time- inconsistency as generations disagree on the relative weights on utility and catastrophe prevention. As a consequence, future generations emit too much from the current generation’s perspective and a dynamic game ensues. I consider a sequence of models. When the environmental problem is related to a scarce exhaustible resource, early generations have an in-incentive to reduce emissions in Markov equilibrium in order to enhance the ecosystem’s resilience to future emissions. When the pollutant is expected to become obsolete in the near future, early generations may however in- crease their emissions if this reduces future emissions. When polluting inputs are abundant and expected to remain essential, the catastrophe becomes a self-fulfilling prophecy and the degree of concern for catastrophe prevention has limited or even no effect on equilibrium behaviour.
    Keywords: Catastrophic Events, Decision Theory, Uncertainty, Time Consistency
    JEL: C73 D83 Q54
    Date: 2013–05
  31. By: Nicolas Petrosky-Nadeau; Lu Zhang
    Abstract: An accurate global algorithm is critical for quantifying the dynamics of the Diamond-Mortensen-Pissarides model. Loglinearization understates the mean and volatility of unemployment, overstates the unemployment-vacancy correlation, and ignores impulse responses that are an order of magnitude larger in recessions than in booms. Although improving on loglinearization, the second-order perturbation in logs also induces large errors. We demonstrate these insights in the context of Hagedorn and Manovskii (2008). Once solved accurately, their small surplus calibration fails to explain the Shimer (2005) puzzle. While the volatility of labor market tightness is close to the data, the unemployment volatility is too high.
    JEL: E24 E32
    Date: 2013–07
  32. By: AKAO Ken-Ichi; SAKAMOTO Hiroaki
    Abstract: We examine the long-term consequences to economic growth of disasters using a discrete-time endogenous growth model. We consider two types of hypothetical disasters: historical disasters, which follow a Bernoulli process, and periodic disasters, which are taken as a regular event by assuming that one period is a sufficient time period. We show that the effects of historical disasters on the steady state growth rate depend on the intertemporal elasticity of substitution for consumption. Specifically, when it is less than one, more destructive disasters or more frequent occurrence of historical disasters foster investment in human capital, which results in a higher economic growth rate. This conditionally supports the empirical finding: disasters may positively affect long-run economic growth. We also show the effects of historical and periodic disasters on resource allocation and industrial composition at the steady state and on the convergence speed.
    Date: 2013–07
  33. By: Gian Luca Clementi; Berardino Palazzo
    Abstract: Do firm entry and exit play a major role in shaping aggregate dynamics? Our answer is yes. Entry and exit propagate the effects of aggregate shocks. In turn, this results in greater persistence and unconditional variation of aggregate time-series. These are features of the equilibrium allocation in Hopenhayn (1992)'s model of equilibrium industry dynamics, amended to allow for investment in physical capital and aggregate fluctuations. In the aftermath of a positive productivity shock, the number of entrants increases. The new firms are smaller and less productive than the incumbents, as in the data. As the common productivity component reverts to its unconditional mean, the new entrants that survive become more productive over time, keeping aggregate efficiency higher than in a scenario without entry or exit.
    JEL: D92 E23 E32 L11
    Date: 2013–07

This nep-dge issue is ©2013 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.