nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒08‒31
28 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Can Uncorrelated Shocks Generate Aggregate Autocorrelation?: Business Cycle Persistence in a Model with Endogenous Growth and Fluctuations By Chase Coleman; Kerk Phillips
  2. Financial factors and the international transmission mechanism By Haddow, Abigail; Mileva, Mariya
  3. Optimal Monetary Policy in an Open Economy under Asset Market Segmentation By Rajesh Singh
  4. Interaction-based Foundation of Aggregate Investment Shocks By Makoto Nirei
  5. Export dynamics in large devaluations By George Alessandria; Sangeeta Pratap; Vivian Yue
  6. Capital over the business cycle: renting versus ownership By Gal, Peter; Pinter, Gabor
  7. The Stabilizing Virtues of Fiscal vs. Monetary Policy on Endogenous Bubble Fluctuations By Lise Clain-Chamosset-Yvrard; Thomas Seegmuller
  8. How status concerns can make us rich and happy By Strulik, Holger
  9. News Shocks, Real Exchange Rates and International Co-Movements By Kyriacos Lambrias
  10. A Monetary Theory with Non-degenerate Distributions By Guido Menzio; Shouyong Shi; Hongfei Sun
  11. Investment in a Growth Model of Non-Excludable Aggregate Capital By Eric Fesselmeyer; Leonard J. Mirman; Marc Santugini
  12. Dynamic analysis of wage inequality and creative destruction By Keiichi Kishi
  13. A Note on Money and the Conduct of Monetary Policy By Jagjit S. Chadha; Luisa Corrado; Sean Holly
  14. Dynamic Selection and the New Gains from Trade with Heterogeneous Firms By Thomas Sampson
  15. Non-uniform wage-staggering: European evidence and monetary policy implications By Juillard, Michel; Le Bihan, Herve; Millard, Stephen
  16. Balanced-Budget Rules and Aggregate Instability: The Role of Consumption Taxes in a Monetary Economy By Jianpo Xue; Chong K. Yip
  17. Employment Insurance and the Business Cycle By Pollak, Andreas
  18. Financial Frictions in Production Networks By Saki Bigio
  19. Flexible Pension Take-up in Social Security By Adema, Y.; Bonenkamp, J.; Meijdam, A.C.
  20. Financial Distress and Endogenous Uncertainty By Francois Gourio
  21. Credit crunches and credit allocation in a model of entrepreneurship By Marco Bassetto; Marco Cagetti; Mariacristina De Nardi
  22. Customer Driven Establishment Dynamics and Allocative Efficiency By Allen Tran
  23. A Model of Chinese Capital Account Liberalisation By Dong He; Paul Luk
  24. Stochastic Terms of Trade Volatility in Small Open Economies By Patricia Gómez-González; Daniel Rees
  25. Booms and Busts with dispersed information By Kenza Benhima
  26. The Household Revolution: Childcare, Housework, and Female Labor Force Participation By Emanuela Cardia; Paul Gomme
  27. The Great Recession: A Self-Fulfilling Global Panic By Philippe Bacchetta; Eric van Wincoop
  28. Shadow Economies in OECD Countries: DGE vs. MIMIC Approaches By Ceyhun Elgin; Friedrich Schneider

  1. By: Chase Coleman (Stern School, New York University); Kerk Phillips (Department of Economics, Brigham Young University)
    Abstract: This paper considers a model which incorporates Schumpeterian type growth into an otherwise standard RBC model similar to the one in Phillips & Wrase (2006). We consider a model with three sources of shocks. The first is a standard productivity shock. The second is a set of Schumpeterian innovation shocks which are industry specific and correspond to the results of an applied R&D process. The final shock is an aggregate shock to the stock of basic knowledge and arrives as a Poisson process with an arrival rate influenced by economy-wide spending on R&D. We show that this model is capable of generating an observed TFP series that is autocorrelated, even when the standard productivity shock is pure white noise.
    Keywords: autocorrelation, dynamic stochastic general equilibrium, business cycles, technology persistence, Schumpeterian, economic growth, GDP, TFP
    JEL: C63 E32 E37
    Date: 2013–08
  2. By: Haddow, Abigail (Bank of England); Mileva, Mariya (Kiel Institute for the World Economy)
    Abstract: The aim of this paper is to investigate theoretically how financial factors affect the international transmission mechanism. We build a two-country dynamic stochastic general equilibrium model with sticky prices and financial frictions. To add to the literature we extend the model to include two types of credit spread shocks that are micro-founded; a mean preserving shock to the dispersion of firms idiosyncratic productivity (risk shock) and a shock to financial agents net worth (financial wealth shock). We find that the source of the shock to the credit spread matters; credit spread shocks of equivalent size, but driven by different innovations, have different consequences for output and inflation in the home and foreign economy. In general risk shocks generate more realistic spillovers to activity than a financial wealth shock.
    Keywords: International transmission mechanism; financial frictions; financial shocks; DSGE model
    JEL: E37 F41 F42 F44
    Date: 2013–08–16
  3. By: Rajesh Singh (Iowa State University)
    Abstract: This paper studies optimal monetary policy in a small open economy under flexible prices. The paper's key innovation is to analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented). In this environment, we study three rules: the optimal state contingent monetary policy; the optimal non-state contingent money growth rule; and the optimal non-state contingent devaluation rate rule. We compare welfare and the volatility of macro aggegates like consumption, exchange rate, and money under the different rules. One of our key findings is that amongst non-state contingent rules, policies targeting the exchange rate are, in general, welfare dominated by policies which target monetary aggregates. Crucially, we find that fixed exchange rates are almost never optimal. On the other hand, under some conditions, a non-state contingent rule like a fixed money rule can even implement the first-best allocation.
    Date: 2013
  4. By: Makoto Nirei (Hitotsubashi University)
    Abstract: This paper demonstrates that the interactions of firm-level indivisible investments give rise to aggregate fluctuations without aggregate exogenous shocks. I develop a method to derive the distribution of aggregate capital growth rate by embedding a fictitious tatonnement in a branching process. This method shows that idiosyncratic shocks may lead to non-vanishing aggregate fluctuations when the number of firms tends to infinity. By incorporating this mechanism in a dynamic general equilibrium model with indivisible investment and sticky price, I provide the real business cycle theory with a driver of fluctuations: aggregate investment demand shocks that arise from idiosyncratic productivity shocks. Due to predetermined prices of goods, firms respond to investment shocks by adjusting labor and output, thereby causing the comovements of output and consumption with investment. Numerical simulations show that the model generates aggregate fluctuations comparable to the business cycles in magnitude and correlation structure under standard calibration.
    Date: 2013
  5. By: George Alessandria; Sangeeta Pratap; Vivian Yue
    Abstract: We study the source and consequences of sluggish export dynamics in emerging markets following large devaluations. We document two main features of exports that are puzzling for standard trade models. First, given the change in relative prices, exports tend to grow gradually following a devaluation. Second, high interest rates tend to suppress exports. To address these features of export dynamics, we embed a model of endogenous export participation due to sunk and per period export costs into an otherwise standard small open economy. In response to shocks to productivity, the interest rate, and the discount factor, we find the model can capture the salient features of export dynamics documented. At the aggregate level, the features giving rise to sluggish exports lead to more gradual net export reversals, sharper contractions and recoveries in output, and endogenous stagnation in labor productivity.
    Keywords: Exports
    Date: 2013
  6. By: Gal, Peter (Tinbergen Institute and OECD); Pinter, Gabor (Bank of England)
    Abstract: We find that capital renting makes up one fifth of US capital expenditures, and it increases during downturns. Further, we present cross-country evidence that output losses after financial crises are smaller where renting is more prevalent. To understand these findings, we build a general equilibrium model with borrowing constraints and with the option to rent or buy capital. The countercyclicality of rentals occurs because their supply increases, as renting serves as an additional means of savings when credit markets malfunction. Moreover, demand also shifts towards rentals as they become relatively cheaper. By absorbing excess savings, renting mitigates financial crises.
    Keywords: Renting; capital; business cycle; financial shocks
    JEL: E22 E32 E44 G01 G32
    Date: 2013–08–16
  7. By: Lise Clain-Chamosset-Yvrard (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)); Thomas Seegmuller (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))
    Abstract: We explore the existence of endogenous fluctuations with a rational bubble and the stabilizing role of fiscal and monetary policies. Consumers' credit constraints, the role of collateral and a portfolio choice are the key ingredients of our analysis. We consider an overlapping generations model where households realize a portfolio choice between three assets with different returns (capital, money and bonds). Expectation-driven fluctuations and the multiplicity of steady states occur under a positive bubble on bonds, gross substitutability and large input substitution because of credit market imperfections. Focusing on the stabilizing role of policies, we show that a progressive taxation on capital income may rule out expectation-driven fluctuations and the multiplicity of steady states. In contrast, a monetary policy under a Taylor rule has a mitigated stabilizing role, depending on the reactiveness of the policy rule and the concavity of the utility function. When the monetary authority decides instead to fix the nominal interest rate regardless the inflation, decreasing the level of the nominal interest rate can rule out expectation-driven fluctuations, restore the uniqueness of steady states, but can damage the welfare at the steady state.
    Keywords: indeterminacy; rational bubble; cash-in-advance constraint; collateral; progressive taxation; monetary policy
    Date: 2013–08
  8. By: Strulik, Holger
    Abstract: This paper considers an overlapping generations model of economic growth populated by two types of individuals. Competitive types compare future consumption (i.e. wealth) with the mean. Self-sufficient types derive utility simply from their own consumption and do not compare themselves with others. I derive a condition under which the utility (happiness) of both types increases when the economy is populated by a larger share of competitive types. In the long-run the condition is always fulfilled when the economy is capable of economic growth. The reason for this phenomenon is that competitive types generate higher savings and thus higher aggregate capital stock and income per capita, which raises utility of both types. I show that the result is robust to the consideration of endogenous work effort and that a sufficiently high share of competitive types in a society can be inevitable for long-run economic growth to exist. --
    Keywords: status preferences,happiness,economic growth
    JEL: D90 E21 O40
    Date: 2013
  9. By: Kyriacos Lambrias
    Abstract: We propose a fully flexible, complete-market model of the international business cycle that is consistent with two major empirical facts: positive cross-country co-movement of economic aggregates and a negative correlation between the real exchange rate and relative consumption (the Backus-Smith puzzle). The model features non-tradable goods, zero wealth effects on labour supply, imperfect substitutability of capital across sectors and variable capacity utilisation. The latter can generate strong Balassa-Samuelson effects that drive a low consumption-real exchange rate correlation. Cyclical movements across countries are also positively correlated. The novelty of our paper is to introduce changes in expectations (news-shocks) as an explanation to the Backus-Smith puzzle through the wealth effects of future changes in income, while being consistent with expectations-driven economic expansions.
    Keywords: News-Driven Cycles, Backus-Smith Puzzle, Real-Exchange Rates
    JEL: F41 F44
    Date: 2013–07
  10. By: Guido Menzio; Shouyong Shi; Hongfei Sun
    Abstract: We construct and analyze a tractable search model of money with a non-degenerate distribution of money holdings. Analytical tractability comes from modeling decentralized exchange as directed search, which makes the monetary steady state block recursive. By adapting lattice-theoretic techniques, we characterize individuals' policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists and provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate. Moreover, we analyze the properties of this distribution.
    Keywords: Money; Distribution; Search; Lattice-Theoretic.
    JEL: E00 E4 C6
    Date: 2013–08–17
  11. By: Eric Fesselmeyer; Leonard J. Mirman; Marc Santugini
    Abstract: We study the effect of investment on the dynamics of aggregate capital when different sectors of the economy compete strategically for the utilization of non-excludable capital to produce both consumption and investment goods. We consider two types of investment goods: complements and substitutes. For each case, we derive the equilibrium and provide the corresponding stationary distribution. We then compare the equilibrium with the social planner’s optimal solution.
    Keywords: Capital accumulation, dynamic game, growth, investment, non-excludable capital
    JEL: C72 C73 D81 D92 O40
    Date: 2013
  12. By: Keiichi Kishi (Graduate School of Economics, Osaka University)
    Abstract: This paper investigates the transitional dynamics of a basic Schumpeterian growth model under constant relative risk aversion. In this model, there are three patterns of the evolution of wage inequality: (a) skill-biased technological change, i.e., technological progress leads to a widening of wage inequality; (b) unskill-biased technological change, i.e., technological progress leads to a contraction of wage inequality; and (c) unbiased technological change, i.e., technological progress is independent of wage inequality. By conducting comparative dynamics of an unexpected permanent increase in research productivity in any sector, which we interpret as the arrival of new general purpose technologies, we show that the property of technological change shifts entirely from unskill-biased to skill-biased. The evolution of wage inequality in the model is then consistent with that of the US economy during the period from the 1930s to the 2000s.
    Keywords: Endogenous growth, creative destruction, wage inequality, factor-biased technological change, general purpose technologies.
    JEL: O31 O40 O41
    Date: 2013–08
  13. By: Jagjit S. Chadha; Luisa Corrado; Sean Holly
    Abstract: Prior to the financial crisis mainstream monetary policy practice had become disconnected from money. We outline the basic rationale for this development using a simple model of money and credit in which we explore the conditions under which money matters directly for the conduct of policy. Then, drawing on Goodfriend and McCallum’s (2007) DSGE model, we examine the circumstances under which money becomes more closely linked to inflation. We find that money matters when the variance of the supply of lending dominates productivity and the velocity of money demand. This is because amplifying the role of loans supply leads to an expansion in aggregate demand, via a compression of the external finance premium, which is inflationary. We consider a number of alternative monetary policy rules, and find that a rule which exploits the joint information from money and the external finance premium performs best.
    Keywords: money, DSGE, policy rules, external finance premium
    JEL: E31 E40 E51
    Date: 2013–08–28
  14. By: Thomas Sampson (LSE)
    Abstract: This paper develops an open economy growth model in which firm heterogeneity increases the gains from trade. Technology spillovers from incumbent firms to entrants cause the productivity threshold for firm survival to grow over time as competition becomes tougher. By raising the profits of exporters, trade increases the entry rate and generates a dynamic selection effect that leads to higher growth. The paper shows that the gains from trade can be decomposed into: static gains that equal the total gains from trade in an economy without technology spillovers, and; dynamic gains that are strictly positive. Since trade raises growth through selection, not scale effects, the positive growth effect of trade vanishes when firms are homogeneous. Thus, firm heterogeneity creates a new source of dynamic gains from trade. Calibrating the model to the U.S. economy implies that dynamic selection approximately triples the gains from trade.
    Date: 2013
  15. By: Juillard, Michel (Banque de France); Le Bihan, Herve (Banque de France); Millard, Stephen (Bank of England)
    Abstract: In many countries, wage changes tend to be clustered in the beginning of the year, with wages being set for fixed durations of typically one year. This has been, in particular, documented in recent years for European countries using microeconomic data. Motivated by this evidence we build a model of uneven wage staggering, embedded in a standard DSGE model of the euro area, and investigate the monetary policy consequences of non-synchronised wage-setting. The model has the potential to generate responses to monetary policy shocks that differ according to the timing of the shock. Using a realistic calibration of the seasonality in wage-setting, based on a wide survey of European firms, the quantitative difference across quarters turns out however to be moderate. Relatedly, we obtain that the optimal monetary policy rule does not vary much across quarters.
    Keywords: Wage-setting; wage-staggering; wage synchronisation; monetary policy shocks; optimal simple monetary policy rules
    JEL: E27 E52
    Date: 2013–08–16
  16. By: Jianpo Xue (Renmin University of China); Chong K. Yip (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research)
    Abstract: This paper examines the stabilizing property of consumption taxation in a balanced-budget setting of a neoclassical one-sector cash-in-advance economy. We find that saddle-path stability is not a necessary outcome even though the utility function is additively separable between consumption and leisure. Both the existence of a Laffer curve and the indeterminacy outcome of consumption taxation depend on the elasticities of intertemporal substitution in consumption and of labor supply. Numerical examples show that consumption tax may lead to aggregate instability for the OECD countries under the current over-easy monetary policies.
    Keywords: Balanced-Budget Rules, Consumption Tax, CIA Constraint, Indeterminacy
    JEL: E32 E63
    Date: 2013–08
  17. By: Pollak, Andreas
    Abstract: This paper quantitatively investigates the scope for improving welfare by making aspects of the unemployment insurance (UI) system depend on the state of the business cycle. A particular focus is the Canadian system of "Employment Insurance" (EI), which is designed in such a way that the generosity of benefits depends on the state of the macroeconomy. Simulations of a life-cycle model with heterogeneous agents and search frictions confirm the expectation that optimal UI systems are characterized by a substantial increase in generosity during recessions, when adverse labour market conditions reduce the importance of moral hazard while increasing the need for consumption insurance. It turns out, however, that the welfare improvements resulting from this sort of temporal differentiation of benefits are extremely small. The insurance against business cycle effects inherent in the Canadian EI system is welfare enhancing when considered in isolation; this insurance effect is, however, dominated by the welfare implications of the inter-regional redistribution effected by the system.
    Keywords: unemployment insurance; job search; business cycle
    JEL: E3 J6
    Date: 2013–08–13
  18. By: Saki Bigio (Columbia Business School)
    Abstract: We show that the organization of production among firms in an economy has important implications for the impact of financial frictions. We set up a model in which firms use output of other firms as inputs for their own production. We allow for arbitrary network structures such that aggregate production functions are constant. Therefore, in the absence of frictions these structures are allocatively equivalent. We then provide several examples which illustrate that when firms face liquidity constraints, different input-output structures require vastly di§erent amounts of aggregate liquidity in order to implement identical allocations. This implies that the input-output structure of the economy is an important determinant of its response to a financial shock. Our main result is that financial constraints have a stronger impact on aggregate output when firms are engaged in a larger amount of transactions among themselves. Finally, we calibrate the model to match the input-output matrix of the U.S. economy and use this to explore the extent to which these interrelationships can explain the drop in output during the latest recession.
    Date: 2013
  19. By: Adema, Y.; Bonenkamp, J.; Meijdam, A.C. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper studies the redistribution and welfare effects of increasing the flexibility of individual pension take-up. We use an overlapping-generations model with Beveridgean pay-as-you-go pensions, where individuals differ in ability and life span. We find that introducing flexible pension take-up can induce a Pareto improvement when the initial pension scheme contains within-cohort redistribution and induces early retirement. Such a Pareto-improving reform entails the application of uniform actuarial adjustment of pension entitlements based on average life expectancy. Introducing actuarial non-neutrality that stimulates later retirement further improves such a flexibility reform.
    Keywords: redistribution;retirement;flexible pensions.
    JEL: H55 H23 J26
    Date: 2013
  20. By: Francois Gourio (Boston University)
    Abstract: A large amount of recent research in macroeconomics emphasizes the role of uncertainty as a driver of business cycles, but the majority of this work takes uncertainty as exogenous. This paper proposes a model where aggregate uncertainty is endogenously time-varying through financial distress costs. As firms become closer to default, their employment and investment demand is reduced by debt overhang. Moreover, firms' productivity may also be directly reduced by higher transaction costs. These two mechanisms make macroeconomic aggregates more volatile when a large number of firms have low equity value. The cross-sectional distribution of firms' equity values hence affects directly aggregate macroeconomic volatility. Empirical evidence consistent with the model is provided.
    Date: 2013
  21. By: Marco Bassetto; Marco Cagetti; Mariacristina De Nardi
    Abstract: We study the effects of credit shocks in a model with heterogeneous entrepreneurs, financing constraints, and a realistic firm size distribution. As entrepreneurial firms can grow only slowly and rely heavily on retained earnings to expand the size of their business in this set-up, we show that, by reducing entrepreneurial firm size and earnings, negative shocks have a very persistent effect on real activity. In determining the speed of recovery from an adverse economic shock, the most important factor is the extent to which the shock erodes entrepreneurial wealth.
    Date: 2013
  22. By: Allen Tran (UCLA)
    Abstract: A common result from models of misallocation is that allocative efficiency is reflected in the correlation between size and productivity. But establishments start small which raises the question: how does the distribution of size have to evolve over the lifecycle to achieve allocative efficiency? Simply put, it must be that more productive establishments grow faster at the expense of less productive establishments. As evidence of this selection mechanism, I use establishment level data to construct cohorts of entrants and show that the spread of growth between fast and slow growing establishments is positively associated with higher exit rates. But unlike typical models that feature selection, I show that neither increases in input costs nor greater volatility are the force behind selection. To reconcile these facts, I present a model where the degree to which customers are willing to match with establishments who produce low quality goods introduces a new margin that affects selection. In the model, 60 per cent of changes in the intensity of selection come from changes in demand side behavior. To assess this new margin of selection, I recalibrate a parameter which controls the degree to which establishments can crowd out others for customers to match the slower fanning out in the evolution of the size distribution in Chile relative to the US. The model suggests that going from the US to Chile in this dimension would result in a 44 per cent loss in welfare.
    Date: 2013
  23. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Paul Luk (Hong Kong Institute for Monetary Research)
    Abstract: In shaping the evolution of the global financial system in the decade ahead, few events will likely be more significant than capital account liberalisation in China and the internationalisation of the renminbi. This paper provides a theory-based enquiry into the contours of China's international balance sheets after the renminbi becomes convertible under the capital account. We construct a two-country general equilibrium model with trading in equities and bonds and calibrate the model with US and Chinese data. We interpret Chinese capital account liberalisation as a removal of restrictions that prohibit agents from trading Chinese bonds and US equities. We explore how international risk-sharing can be achieved through portfolio diversification in each of these asset market configurations. We also look at how these holdings would change as China gradually rebalances its production with a higher share of labour income, and as the productivity gap between China and the US narrows. We find that both US and Chinese residents would have incentives to increase their holdings in each other's equities, and to issue debt in each other's currency. We interpret the latter observation as the co-existence of the US dollar and the renminbi as major international currencies.
    Keywords: China, Country Portfolios, Capital Account Liberalization, Renminbi Internationalization
    JEL: F3 F4 G1
    Date: 2013–08
  24. By: Patricia Gómez-González (Massachusetts Institute of Technology); Daniel Rees (Reserve Bank of Australia)
    Abstract: The terms of trade of commodity-producing small open economies are subject to large shocks that can be an important source of economic fluctuations. Alongside times of high volatility, however, these economies also experience periods in which their terms of trade are comparatively stable. We estimate the empirical process for the terms of trade for six small open economies and examine the responses of output, the current account and prices to changes in terms of trade volatility using a vector autoregression (VAR). We find that increased terms of trade volatility, by itself, is associated with a contraction in domestic demand and an increase in the current account. We then set up a small open economy real business cycle model and show that it can broadly replicate the responses to a volatility shock estimated in the VAR. We use this model to explore the sectoral implications of terms of trade volatility shocks and to quantify the importance of these shocks as a source of business cycle fluctuations. Our results suggest that the direct effects of terms of trade volatility shocks on output, consumption and investment are generally small. But, interacted with shocks to the level of the terms of trade, volatility shocks account for around one-quarter of the total impact of the terms of trade on macroeconomic outcomes.
    Keywords: terms of trade; small open economy; real business cycle; stochastic volatility
    JEL: C32 E32 F41 Q33
    Date: 2013–08
  25. By: Kenza Benhima
    Abstract: This paper lays down a model where dispersed information generates booms and busts in economic activity. Boom-and-bust dynamics start when firms are initially over-optimistic about demand due to an aggregate noise shock in their signals. Consequently, they over-produce, which generates a boom. This however also depresses their mark-ups, which, to firms, signals low demand and overturns their expectations, generating a bust. This emphasizes a novel role for imperfect common knowledge: dispersed information makes firms ignorant about their competitors' actions, which makes them confuse high noise-driven supply with low fundamental demand. Boom-and-bust episodes are more dramatic when the aggregate noise shocks are more unlikely and when congestion effects are stronger.
    Keywords: Imperfect Common Knowledge; Expectations; Recessions
    JEL: E32 D83 D52
    Date: 2013–08
  26. By: Emanuela Cardia; Paul Gomme
    Abstract: Over the twentieth century, the allocation of womens' time changed dramatically. This paper explores the implications for the allocation of married womens' time stemming from: (1) the household revolution associated with the introduction of a variety of labor-saving devices in the home; (2) the remarkable increase in the relative wage of women; and (3) changes in childcare requirements associated with changes in fertility patterns. To do so, we construct a life-cycle model with home production and childcare constraints. The parameters of the childcare production function are estimated using micro evidence from U.S. time use data. We find that the increase in the relative wage of women is the most important explanation of the increase in married womens' market work time over the twentieth century. Changes in fertility had large effects up to 1980, but little effect thereafter. The declining price of durables has an appreciable effect only since 1980, an effect that is consistent with a broader interpretation of durable goods re ecting the marketization of home production.
    Keywords: Household technology, childcare, women labor force participation, home production
    Date: 2013
  27. By: Philippe Bacchetta (University of Lausanne, Swiss Finance Institute, Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Eric van Wincoop (University of Virginia, National Bureau of Economic Research, and Hong Kong Institute for Monetary Research)
    Abstract: While the 2008-2009 financial crisis originated in the United States, we witnessed steep declines in output, consumption and investment of similar magnitudes around the globe. This raises two questions. First, given the observed strong home bias in goods and financial markets, what can account for the remarkable global business cycle synchronicity during this period? Second, what can explain the difference relative to previous recessions, where we witnessed far weaker co-movement? To address these questions, we develop a two-country model that allows for self-fulfilling business cycle panics. We show that a business cycle panic will necessarily be synchronized across countries as long as there is a minimum level of economic integration. Moreover, we show that several factors generated particular vulnerability to such a global panic in 2008: tight credit, the zero lower bound, unresponsive fiscal policy and increased economic integration.
    Date: 2013–06
  28. By: Ceyhun Elgin; Friedrich Schneider
    Date: 2013

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