nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒08‒10
nine papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Deficits, Gifts, and Bequests By Daniel Barczyk
  2. Asset Bubbles in an Overlapping Generations Model with Endogenous Labor Supply By Shi, Lisi; Suen, Richard M. H.
  3. Public Deficit Bias and Immigration By Michael Ben-Gad
  4. A General Equilibrium Theory of College with Education Subsidies, In-School Labor Supply, and Borrowing Constraints By Carlos Garriga; Mark P. Keightley
  5. Woodford's Approach to Robust Policy Analysis in a Linear-Quadratic Framework By Jianjun Miao; Hyosung Kwon
  6. What do Nominal Rigidities and Monetary Policy tell us about the Real Yield Curve? By Francisco Palomino; Alex Hsu
  7. Partial Disability System and Labor Market Adjustment: The Case of Spain By Jose I. Silva; Judit Vall-Castello
  8. A macroeconomic model of liquidity crises By Keiichiro Kobayashi; Tomoyuki Nakajima
  9. Credibility For Sale By Dirk Niepelt; Harris Dellas

  1. By: Daniel Barczyk (McGill University)
    Abstract: What is the response of aggregate consumption to a deficit-financed tax cut? It is well-known that intergenerational transfers are key to answer this question. I address this issue by studying a heterogeneous-agents overlapping-generations economy with imperfect altruism. The model generates richer and more realistic transfer behavior than a dynastic or an overlapping-generations economy. The model is calibrated to match aggregate data on inter-vivos transfers. I find that the response of aggregate consumption to a deficit-financed tax cut is quantitatively more similar to the overlapping-generations economy's welfare implications, however, tend to be closer to the dynastic economy's.
    Date: 2013
  2. By: Shi, Lisi; Suen, Richard M. H.
    Abstract: This paper examines the effects of asset bubbles in an overlapping generations model with endogenous labor supply. We derive a set of conditions under which asset bubbles will lead to an expansion in steady-state capital, investment, employment and output. We also provide a specific numerical example to illustrate these results.
    Keywords: Asset Bubbles, Overlapping Generations, Endogenous Labor.
    JEL: E22 E44
    Date: 2013–08–04
  3. By: Michael Ben-Gad (City University London)
    Abstract: How much can governments shift the cost of government expenditure from today's voters to tomorrow's generations of immigrants, without resorting to taxation that is explicitly discriminatory? I demonstrate that if their societies are absorbing continuous flows of new immigrants, we should expect governments that represent the interests of today's population, even if that population is altruistically linked to future generations, to choose policies that shift some portion of the tax burden to the future. This bias in favor of deficit finance is not infinite. Today's population or their descendents, together with future immigrants, ultimately pay the higher taxes necessary to finance the accumulated debt, and live with the additional excess burdens these higher taxes generate. For a given rate of immigration and policy horizon, governments balance the deadweight losses associated with fluctuating tax rates against the benefits that accrue to the initial resident population from shifting part of the burden of financing government expenditure to future immigrant families. To measure the deficit bias, I analyse the dynamic behavior of an optimal growth model with overlapping dynasties and factor taxation, calibrated for the US economy. Models with overlapping infinite-lived dynasties allow for a very clear distinction between natural population growth (an increase in the size of existing dynasties) and immigration (the addition of new dynasties). They also provide an alternative to the strict dichotomy between models with overlapping generations, where agents disregard the impact of their choices on future generations, and the quasi-Ricardian world of infinite-lived dynasties with representative agents that fully participate in both the economy and the political system in every period. The trajectory of the debt burden predicted by the model is a good match for the rise in US Federal government debt since the early 1980's, as well as the increases in debt projected by the Congressional Budget Office over the next few decades.
    Date: 2013
  4. By: Carlos Garriga (Federal Reserve Bank of St. Louis); Mark P. Keightley (Florida State University)
    Abstract: This paper analyzes the effectiveness of three different types of education policies: tuition subsidies (broad based, merit based, and flat tuition), grant subsidies (broad based and merit based), and loan limit restrictions. We develop a quantitative theory of college within the context of general equilibrium overlapping generations economy. College is modeled as a multi-period risky investment with endogenous enrollment, time-to-degree, and dropout behavior. Tuition costs can be financed using federal grants, student loans, and working while at college. We show that our model accounts for the main statistics regarding education (enrollment rate, dropout rate, and time to degree) while matching the observed aggregate wage premiums. Our model predicts that broad based tuition subsidies and grants increase college enrollment. However, due to the correlation between ability and financial resources most of these new students are from the lower end of the ability distribution and eventually dropout or take longer than average to complete college. Merit based education policies counteract this adverse selection problem but at the cost of a muted enrollment response. Our last policy experiment highlights an important interaction between the labor-supply margin and borrowing. A significant decrease in enrollment is found to occur only when borrowing constraints are severely tightened and the option to work while in school is removed. This result suggests that previous models that have ignored the student's labor supply when analyzing borrowing constraints may be insufficient.
    Keywords: Student Loans, Education Subsidies, Higher Education
    JEL: E0 H52 H75 I22 J24
    Date: 2013–05
  5. By: Jianjun Miao (Boston University); Hyosung Kwon (Boston University)
    Abstract: This paper extends Woodford's (2010) approach to the robustly monetary policy to a general linear quadratic framwork. We provide algorithms to solve for a time-invariant linear robustly optimal policy from a timeless perspective and for a time-invariant linear Markov perfect equilibrium under discretation. We apply our methods to two New Keynesian models of monetary policy: (i) a model with persistent cost-push shocks and (ii) a model with inflation persistence. We find that the robustly optimal commitment inflation is less responsive to a cost-push shock when the shock is more persistent and that the robustly optimal discretionary policy is more responsive to lagged inflation in the presence inflation inertia.
    Date: 2013
  6. By: Francisco Palomino (University of Michigan); Alex Hsu (Georgia Tech)
    Abstract: We study term and inflation risk premia in real and nominal bonds, respectively, in an equilibrium model calibrated to United States data. Nominal wage and price rigidities, and an interest-rate monetary policy rule characterize our model economy. Wage rigidities induce positive term and inflation risk premia for permanent productivity shocks: they generate high marginal utility, expected consumption growth, inflation, and bond yields, simultaneously. Policy and inflation-target shocks increase real and nominal yield variability, respectively. Real-nominal bond return correlations are increased by the rigidities. Stronger policy responses to output and inflation reduce real term premia and increase inflation risk premia.
    Date: 2013
  7. By: Jose I. Silva (University Of Kent); Judit Vall-Castello (Universitat de Girona)
    Abstract: Although partially disabled individuals in Spain are allowed to combine the receipt of disability benefits with a job, the empirical evidence shows that employment rates for this group of individuals are very low. Therefore, in this paper we construct labor market model with search intensity and matching frictions in order to identify the incentives and disincentives to work provided by the partial disability system in Spain from the point of view of both disabled individuals and employers. According to the model, the high employment rate gap observed between nondisabled and disabled workers can be partially explained by the presence of a lower level of productivity and higher searching costs among disabled individuals that discourage them from looking for jobs. Moreover, the design of the Spanish Disability System also contributes in explaining this gap. We also analyze the role of business cycle conditions in shaping the labor market transitions of disabled individuals.
    Keywords: disability system, job search intensity, flow analysis
    JEL: I18 J64 J68
    Date: 2013–07
  8. By: Keiichiro Kobayashi (Keio University); Tomoyuki Nakajima (Kyoto University)
    Abstract: We develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-fulfilling beliefs or by fundamental shocks. It occurs as a result of market failure due to debt overhang in short-term loans. The government's commitment to deposit guarantee reduces the likelihood of self-fulfilling crisis but increases that of fundamental crisis.
    Keywords: Debt overhang, liquidity, working capital, systemic crisis.
    JEL: E30 G01 G21
    Date: 2013–08
  9. By: Dirk Niepelt (Gerzensee; U Bern; IIES, Stockholm U); Harris Dellas (University of Bern)
    Abstract: We develop a model with official and private creditors where the probability of sovereign default depends on both the level and the composition of debt. Higher exposure to official lenders improves incentives to repay but also carries extra costs such as reduced ex post flexibility. We characterize the equilibrium composition of debt across creditor groups. Our model can account for important features of sovereign debt crises: Namely, that official lending to sovereigns takes place only in times of debt distress, carries a favorable rate and tends to displace private funding. It also offers a novel perspective on the relationship between debt overhang and default risk: The availability of official debt makes default on outstanding debt more likely.
    Date: 2013

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