New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒09‒24
eighteen papers chosen by



  1. Tractable Latent State Filtering for Non-Linear DSGE Models Using a Second-Order Approximation By Kollmann, Robert
  2. Banking and the Macroeconomy in China: A Banking Crisis Deferred? By Le, Vo Phuong Mai; Matthews, Kent; Meenagh, David; Minford, Patrick; Xiao, Zhiguo
  3. Getting to Know GIMF: The Simulation Properties of the Global Integrated Monetary and Fiscal Model By Derek Anderson; Ben Hunt; Mika Kortelainen; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula; Stephen Snudden
  4. Work Incentives of Medicaid Beneficiaries and The Role of Asset Testing By Pashchenko, Svetlana; Porapakkarm, Ponpoje
  5. Optimal Consumption and Savings with Stochastic Income By Chong Wang; Neng Wang; Jinqiang Yang
  6. General equilibrium dynamics with naive and sophisticated hyperbolic consumers in an overlapping generations economy By Takeshi Ojima
  7. Liquidity and Welfare By Yi Wen
  8. The Effect of Globalization in an Endogenous Growth Model with Heterogeneous Firms and Endogenous International Spillovers: Note By Katsufumi Fukuda
  9. Solving and Estimating Indeterminate DSGE Models By Roger E.A. Farmer; Vadim Khramov
  10. On the optimal control of pollution in a human capital growth model By Stefano Bosi; Lionel Ragot
  11. Housing and Tax Policy By Sami Alpanda; Sarah Zubairy
  12. Fiscal Sustainability, Public Investment, and Growth in Natural Resource-Rich, Low-Income Countries: The Case of Cameroon By Issouf Samaké; Priscilla S. Muthoora; Bruno Versailles
  13. Housing in Retirement Across Countries By Makoto Nakajima; Irina A. Telyukova
  14. Implications of fiscal constraints By Fernando Martin
  15. Monetary Shocks with Observation and Menu Costs By Alvarez, Fernando E; Lippi, Francesco; Paciello, Luigi
  16. Temptation and self-control: some evidence and applications By Kevin X.D. Huang; Zheng Liu; John Q. Zhu
  17. Endogenous Grids in Higher Dimensions: Delaunay Interpolation and Hybrid Methods By Alexander Ludwig; Matthias Schön
  18. The Welfare Implications of Services Liberalization in a Developing Country: Evidence from Tunisia By Nizar Jouini; Nooman Rebei

  1. By: Kollmann, Robert
    Abstract: This paper develops a novel approach for estimating latent state variables of Dynamic Stochastic General Equilibrium (DSGE) models that are solved using a second-order accurate approximation. I apply the Kalman filter to a state-space representation of the second-order solution based on the ‘pruning’ scheme of Kim, Kim, Schaumburg and Sims (2008). By contrast to particle filters, no stochastic simulations are needed for the filter here--the present method is thus much faster. In Monte Carlo experiments, the filter here generates more accurate estimates of latent state variables than the standard particle filter. The present filter is also more accurate than a conventional Kalman filter that treats the linearized model as the true data generating process. Due to its high speed, the filter presented here is suited for the estimation of model parameters; a quasi-maximum likelihood procedure can be used for that purpose
    Keywords: estimation of DSGE models; Kalman filter; Latent state filtering; particle filter; pruning; quasi-maximum likelihood; second-order approximation
    JEL: C63 C68 E37
    Date: 2013–05
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:9469&r=dge
  2. By: Le, Vo Phuong Mai; Matthews, Kent; Meenagh, David; Minford, Patrick; Xiao, Zhiguo
    Abstract: The downturn in the world economy following the global banking crisis has left the Chinese economy relatively unscathed. This paper develops a model of the Chinese economy using a DSGE framework with a banking sector to shed light on this episode. It differs from other applications in the use of indirect inference procedure to test the fitted model. The model finds that the main shocks hitting China in the crisis were international and that domestic banking shocks were unimportant. However, directed bank lending and direct government spending was used to supplement monetary policy to aggressively offset shocks to demand. The model finds that government expenditure feedback reduces the frequency of a business cycle crisis but that any feedback effect on investment creates excess capacity and instability in output.
    Keywords: China; Crises; DSGE model; Financial Frictions; Indirect Inference
    JEL: C1 E3 E44 E52
    Date: 2013–04
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:9422&r=dge
  3. By: Derek Anderson; Ben Hunt; Mika Kortelainen; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula; Stephen Snudden
    Abstract: The Global Integrated Monetary and Fiscal model (GIMF) is a multi-region, forward-looking, DSGE model developed by the Economic Modeling Division of the IMF for policy analysis and international economic research. Using a 5-region version of the GIMF, this paper illustrates the model’s macroeconomic properties by presenting its responses under a wide range of experiments, including fiscal, monetary, financial, demand, supply, and international shocks.
    Keywords: Economic models;Monetary policy;Financial sector;External shocks;Fiscal policy;Fiscal consolidation;Government expenditures;Demand;business cycle, fiscal multipliers; fiscal consolidation; fiscal policy; general equilibrium models, interest rates, macroeconomic interdependence, monetary policy, policy effects, simulation.
    Date: 2013–02–27
    URL: http://d.repec.org/n?u=RePEc:imf:imfwpa:13/55&r=dge
  4. By: Pashchenko, Svetlana; Porapakkarm, Ponpoje
    Abstract: Having low income is one of the requirements for Medicaid eligibility. Given that earning ability is unobservable, once an individual with high labor income stops working it is impossible to distinguish him from those whose potential labor income is low. This can affect the ability of Medicaid to target the most disadvantaged people given that a large fraction of its beneficiaries do not work. In this paper we ask two questions: 1) Does Medicaid significantly distort work incentives? 2) Can the insurance-incentives trade-off of Medicaid be improved without changing the size of the redistribution in the economy? Our tool is a general equilibrium model with heterogeneous agents calibrated using the Medical Expenditure Panel Survey Dataset to match the life-cycle patterns of employment and insurance take-up behavior as well as the key aggregate statistics. We find that around 20% of Medicaid enrollees do not work in order to be eligible. These distortions are costly for the economy: if Medicaid eligibility could be linked to (unobservable) productivity the resulting ex-ante welfare gains are equivalent to 1.5% of the annual consumption. We show that asset testing can achieve a similar outcome but only if asset limits are allowed to be different for workers and non-workers.
    Keywords: health insurance, Medicaid, labor supply, asset testing, general equilibrium, life-cycle models
    JEL: D52 D91 E21 H53 I13 I18
    Date: 2013–09–13
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:49730&r=dge
  5. By: Chong Wang; Neng Wang; Jinqiang Yang
    Abstract: We develop an analytically tractable consumption-savings model for a liquidity-constrained agent who faces both permanent and transitory income shocks. We find that risk aversion and intertemporal substitution have very different effects on both consumption and the steady-state savings target. Moderate changes in risk aversion have large effects on consumption and buffer-stock savings. With permanent shocks, it takes many years to reach the steady-state savings target. We also find that large discrete income shocks (jumps) occurring at low frequencies can be very costly. Unlike conventional wisdom, transitory shocks can generate very large precautionary savings demand, especially for low transitory income states.
    JEL: E21
    Date: 2013–08
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:19319&r=dge
  6. By: Takeshi Ojima
    Abstract: Using an overlapping generations model, this paper describes interactions between naive and sophisticated hyperbolic discounters in general equilibrium. The naifs, who overestimate their future propensity to save and hence over-forecast the future equilibrium asset prices, are exploited through capital transactions by sophisticates, who correctly forecast the future asset prices by incorporating the naifsf mis-forecasts. Due to the capital losses, the naifs fall into bankruptcy when they are highly present-biased, highly patient, and having a low population density. Under generous conditions, the equilibrium is shown to be globally stable and Pareto inefficient in the ex-post sense.
    Date: 2013–09
    URL: http://d.repec.org/n?u=RePEc:dpr:wpaper:0886&r=dge
  7. By: Yi Wen (Federal Reserve Bank of St. Louis)
    Abstract: This paper develops an analytically tractable Bewley model of money featuring capital and financial intermediation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that best match both the aggregate money demand curve suggested by Lucas (2000) and the variance of household consumption, agents in our model are willing to reduce consumption by 7%-10% (or more) to avoid 10% annual inflation. In other words, raising the U.S. inflation target from 2% to 3% amounts to roughly a 0.5 percentage reduction in aggregate consumption. The astonishingly large welfare costs of inflation arise because inflation tightens liquidity constraints by destroying the buffer-stock value of money, thus raising the volatility of consumption at the household level. Such an inflation-induced increase in the idiosyncratic consumption-volatility at the micro level cannot be captured by representative-agent models or the Bailey triangle. Although the development of a credit and banking system can reduce the welfare costs of inflation by alleviating liquidity constraints, with realistic credit limits the cost of moderate inflation still remains several times larger than estimations based on the Bailey triangle. Our finding not only provides a justification for adopting a low inflation target by central banks, but also offers a plausible explanation for the robust positive relationship between inflation and social unrest in developing countries where money is the major form of household financial wealth.
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:red:sed013:204&r=dge
  8. By: Katsufumi Fukuda (Graduate School of Economics, Kobe University, JAPAN)
    Abstract: This paper shows that globalization increases (decreases) the growth rate if and only if the beachhead cost for the domestic market is strictly higher (lower) than that for the foreign market in a endogenous growth model with firm heterogeneity, international trade, and endogenous international spillover under specified necessary and sufficient conditions for exporting firms being more productive than non-exporting firms.
    Keywords: heterogeneous firms, endogenous international spillovers, endogenous growth theory
    JEL: F12 F15 O30 O33
    Date: 2013–08
    URL: http://d.repec.org/n?u=RePEc:kob:dpaper:dp2013-24&r=dge
  9. By: Roger E.A. Farmer; Vadim Khramov
    Abstract: We propose a method for solving and estimating linear rational expectations models that exhibit indeterminacy and we provide step-by-step guidelines for implementing this method in the Matlab-based packages Dynare and Gensys. Our method redefines a subset of expectational errors as new fundamentals. This redefinition allows us to treat indeterminate models as determinate and to apply standard solution algorithms. We provide a selection method, based on Bayesian model comparison, to decide which errors to pick as fundamental and we present simulation results to show how our procedure works in practice.
    JEL: C11 C13 C54
    Date: 2013–09
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:19457&r=dge
  10. By: Stefano Bosi; Lionel Ragot
    Abstract: On the one hand, the adoption of polluting technologies can enhance the factor productivity; on the other hand, pollution lowers the stock of human capital by weakening physical and mental performances, and short-ening the life expectancy at the end. To capture the impact of pollution on economic growth, we compute the optimal policy in an endogenous growth model `a la Lucas (1988) and we study the effects of pollution in the short and the long run.
    Keywords: pollution, human capital, endogenous growth
    JEL: D90 J24
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:drm:wpaper:2013-25&r=dge
  11. By: Sami Alpanda; Sarah Zubairy
    Abstract: In this paper, we investigate the effects of housing-related tax policy measures on macroeconomic aggregates using a dynamic general-equilibrium model. The model features borrowing and lending across heterogeneous households, financial frictions in the form of collateral constraints tied to house prices, and a rental housing market alongside owner-occupied housing. Using our model, we analyze the effects of changes in housing-related tax policy measures on the level of output, tax revenue and household debt, along with other macroeconomic aggregates. The tax policies we consider are (i) increasing property tax rates, (ii) eliminating the mortgage interest deduction, (iii) eliminating the depreciation allowance for rental income, (iv) instituting taxation of imputed rental income from owner-occupied housing and (v) eliminating the property tax deduction. We find that among these fiscal tools, eliminating the mortgage interest deduction would be the most effective in raising tax revenue, and in reducing household debt, per unit of output lost. On the other hand, eliminating the depreciation allowance for rental income would be the least effective. Our experiments also highlight the differential welfare impact of each tax policy on savers, borrowers and renters.
    Keywords: Economic models; Fiscal Policy
    JEL: E62 H24 R38
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:bca:bocawp:13-33&r=dge
  12. By: Issouf Samaké; Priscilla S. Muthoora; Bruno Versailles
    Abstract: This paper assesses the implications of the use of oil revenue for public investment on growth and fiscal sustainability in Cameroon. We develop a dynamic stochastic general equilibrium model to analyze the effects of such investment on growth and on the path of key fiscal indicators, such as the non-oil primary deficit and public debt. Policy scenarios show that Cameroon’s large infrastructural needs and relatively low current debt levels could justify a temporary deviation from traditional policy advice that suggests saving part of the oil revenue to smooth expenditure over time. Model simulations show that a relatively high degree of efficiency of public investment is needed for scaled-up public investment to make a significant contribution to growth, while maintaining fiscal sustainability.
    Keywords: Fiscal sustainability;Cameroon;Economic growth;Oil revenues;Fiscal policy;Public investment;Natural resources;Low-income developing countries;Economic models;Cameroon, fiscal policy, DSGE, natural resource-rich countries, low-income countries, public investment, growth.
    Date: 2013–06–11
    URL: http://d.repec.org/n?u=RePEc:imf:imfwpa:13/144&r=dge
  13. By: Makoto Nakajima; Irina A. Telyukova
    Abstract: The “retirement saving puzzle” is a phenomenon in which many households U.S. households have significant wealth late in life, contrary to the predictions of a simple life-cycle model. In this project, we examine cross-country differences in the saving behavior of retirees in order to weigh in on the discussion of the puzzle. First, we find that countries in our sample vary noticeably in terms of the extent of the puzzle: one group of countries, in South and Central Europe, look like the United States, while in Northern Europe, retirees spend down their wealth much more rapidly. Second, it appears that the rate of dissaving in retirement is correlated with the extent of public coverage of healthcare and long-term care, and these differences in saving happen predominantly through dissaving of financial assets, while housing assets are less affected. In a quantitative experiment using a life-cycle model of saving in retirement, we measure the role of out-of-pocket medical spending risk in accounting for differences in observed saving patterns among retirees in the United States and Sweden, considering housing and financial assets separately. The model predicts that this risk accounts, on average across age, for one-half of the difference in median net worth between United States and Sweden, and for about 70 percent of the difference in median financial assets. The role of risk diminishes with age, and is seen primarily in financial asset saving, while housing assets do not appear to respond to spending risk, suggesting that housing is not a precautionary asset.
    Date: 2013–08
    URL: http://d.repec.org/n?u=RePEc:crr:crrwps:wp2013-18&r=dge
  14. By: Fernando Martin (Federal Reserve Bank of St. Louis)
    Abstract: Recent events in the U.S. and Europe have renewed interest in the desirability of imposing constraints on fiscal policy. In the U.S., the implementation of large and persistent deficits as a response to the financial crisis and subsequent recession motivated debates about debt ceilings and brought back proposals for balanced-budget-rules. In the Eurozone, the fiscal crisis driven by excessive debt has forced some governments to enact austerity programs, consisting both of tax increases and expenditure cuts. The objective of this paper is to evaluate the effects of putting constraints on the ability of politicians to run fiscal policy, with an emphasis on how monetary policy interacts with such restrictions. The institutional experiments conducted include balanced budget rules and cooperation between government agencies in setting policy.
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:red:sed013:213&r=dge
  15. By: Alvarez, Fernando E; Lippi, Francesco; Paciello, Luigi
    Abstract: We compute the impulse response of output to an aggregate monetary shock in a general equilibrium when firms set prices subject to a costly observation of the state and a menu cost. We study how the aggregate effects of a monetary shock depend on the relative size of these costs. We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks compared to models with menu cost only, flattening the shape of the impulse response function. Moreover we show that if the shocks are not large the results are independent of the assumption of whether firms know the realization of the monetary shock on impact.
    Keywords: impulse responses; inattentiveness; monetary shocks; sticky prices
    JEL: E5
    Date: 2013–05
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:9488&r=dge
  16. By: Kevin X.D. Huang; Zheng Liu; John Q. Zhu
    Abstract: This paper studies the empirical relevance of temptation and self-control using household-level data from the Consumer Expenditure Survey. We construct an infinite-horizon consumption-savings model that allows, but does not require, temptation and self-control in preferences. In the presence of temptation, a wealth-consumption ratio, in addition to consumption growth, becomes a determinant of the asset-pricing kernel, and the importance of this additional pricing factor depends on the strength of temptation. To identify the presence of temptation, we exploit an implication of the theory that a more tempted individual should be more likely to hold commitment assets such as IRA or 401(k) accounts. Our estimation provides empirical support for temptation preferences. Based on our estimates, we explore some quantitative implications of this class of preferences for capital accumulation in a neoclassical growth model and the welfare cost of the business cycle
    Keywords: Consumption (Economics) ; Consumer behavior
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:fip:fedfwp:2013-23&r=dge
  17. By: Alexander Ludwig; Matthias Schön
    Abstract: This paper investigates extensions of the method of endogenous grid-points (ENDGM) introduced by Carroll (2006) to higher dimensions with more than one continuous endogenous state variable. We compare three different categories of algorithms: (i) the conventional method with exogenous grids (EXGM), (ii) the pure method of endogenous grid-points (ENDGM) and (iii) a hybrid method (HEGM). ENDGM comes along with Delaunay interpolation on irregular grids. Comparison of methods is done by evaluating speed and accuracy. We find that HEGM and ENDGM both dominate EXGM. The choice between HEGM and ENDGM depends on the number of dimensions and the number of grid-points in each dimension. With less than 150 grid-points in each dimension ENDGM is faster than HEGM, and vice versa. For a standard choice of 20 to 40 grid-points in each dimension, ENDGM is 1:6 to 1:8 times faster than HEGM.
    Keywords: Dynamic Models, Numerical Solution, Endogenous Gridpoints Method, Delaunay Interpolation
    JEL: C63 E21
    Date: 2013–08–29
    URL: http://d.repec.org/n?u=RePEc:kls:series:0065&r=dge
  18. By: Nizar Jouini; Nooman Rebei
    Abstract: We propose an integrated method based on a two-sector small open economy dynamic and stochastic general equilibrium model to estimate non-tariff barriers and quantify the impact of services liberalization. The major component of trade barriers is explicitly modeled through the introduction of entry-sunk costs. Hence, liberalization is treated assuming a government's policy decision aimed at reducing those costs. Then, we estimate the model using Bayesian techniques for Tunisia and the Euro Area. The paper presents a precise quantitative evaluation of services trade barriers as the difference between entry-sunk costs in Tunisia versus the Euro Area. We find significant welfare benefits in addition to aggregate and sectoral growth gains the Tunisian economy could attain following services liberalization. Surprisingly, the goods sector is the one that benefits the most from services liberalization in the short- and long-term horizons.
    Keywords: Services sector;Tunisia;Euro Area;Trade liberalization;Developing countries;Nontariff barriers;Economic models;Liberalization, trade in services and goods, general equilibrium, Bayesian estimation, welfare analysis, Tunisia, Euro Area.
    Date: 2013–05–15
    URL: http://d.repec.org/n?u=RePEc:imf:imfwpa:13/110&r=dge

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