nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒09‒25
eight papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Paradox of thrift recessions By Zhen Huo; Jose-Victor Rios-Rull
  2. Credit-crunch dynamics with uninsured investment risk By Jonathan E. Goldberg
  3. Productivity insurance: the role of unemployment benefits in a multi-sector model By David L. Fuller; Marianna Kudlyak; Damba Lkhagvasuren
  4. Endogenous sources of volatility in housing markets: the joint buyer-seller problem By Elliot Anenberg; Patrick Bayer
  5. The quantitative importance of openness in development By Wenbiao Cai; B. Ravikumar; Raymond Riezman
  6. Structural change in an open economy By Timothy Uy; Kei-Mu Yi; Jing Zhang
  7. Talent, labor quality, and economic development By German Cubas; B. Ravikumar; Gustavo Ventura
  8. Global imbalances and structural change in the United States By Timothy J. Kehoe; Kim J. Ruhl; Joseph B. Steinberg

  1. By: Zhen Huo; Jose-Victor Rios-Rull
    Abstract: We build a variation of the neoclassical growth model in which both wealth shocks (in the sense of wealth destruction) and financial shocks to households generate recessions. The model features three mild departures from the standard model: (1) adjustment costs make it difficult to expand the tradable goods sector by reallocating factors of production from nontradables to tradables; (2) there is a mild form of labor market frictions (Nash bargaining wage setting with Mortensen-Pissarides labor markets); (3) goods markets for nontradables require active search from households wherein increases in consumption expenditures increase measured productivity. These departures provide a novel quantitative theory to explain recessions like those in southern Europe without relying on technology shocks.
    Keywords: Recessions ; Productivity
    Date: 2013
  2. By: Jonathan E. Goldberg
    Abstract: I study the effects of credit tightening in an economy with uninsured idiosyncratic investment risk. In the model, entrepreneurs require an equity premium because collateral constraints limit insurance. After collateral constraints tighten, the equity premium and the riskiness of consumption rise and the risk-free interest rate falls. I show that, both immediately after the shock and in the long run, the equity premium and the riskiness of consumption increase more than they would if the risk-free rate were constant. Indeed, the long-run increase in the riskiness of consumption growth is purely a general-equilibrium effect: if the risk-free rate were constant (as in a small open economy), an endogenous decrease in risk-taking by entrepreneurs would, in the long run, completely offset the decrease in their ability to diversify. I also show that the credit shock leads to a decrease in aggregate capital if the elasticity of intertemporal substitution is sufficiently high. Finally, I show that, due to a general-equilibrium effect, there is no "overshooting" in the equity premium: in response to a permanent decrease in firms' ability to pledge their future income, the equity premium immediately jumps to its new steady-state level and remains constant thereafter, even as aggregate capital adjusts over time. However, if idiosyncratic uncertainty is sufficiently low, credit tightening has no short- or long-run effects on aggregate capital, the equity premium, or the riskiness of consumption. Thus my paper highlights how investment risk affects the economy's response to a credit crunch.
    Date: 2013
  3. By: David L. Fuller; Marianna Kudlyak; Damba Lkhagvasuren
    Abstract: We construct a multi-sector search and matching model where the unemployed receive idiosyncratic productivity shocks that make working in certain sectors more productive than in the others. Agents must decide which sector to search in and face moving costs when leaving their current sector for another. In this environment, unemployment is associated with an additional risk: low future wages if mobility costs preclude search in the appropriate sector. This introduces a new role for unemployment benefits—productivity insurance while unemployed. Analytically, we characterize two competing effects of benefits on productivity, a moral hazard effect and a consumption effect. In a stylized quantitative analysis, we show that the consumption effect dominates, so that unemployment benefits increase per-worker productivity. We also analyze the welfare-maximizing benefit level and find that it decreases as moving costs increase.
    Date: 2013
  4. By: Elliot Anenberg; Patrick Bayer
    Abstract: This paper presents new empirical evidence that internal movement--selling one home and buying another--by existing homeowners within a metropolitan housing market is especially volatile and the main driver of fluctuations in transaction volume over the housing market cycle. We develop a dynamic search equilibrium model that shows that the strong pro-cyclicality of internal movement is driven by the cost of simultaneously holding two homes, which varies endogenously over the cycle. We estimate the model using data on prices, volume, time-on-market, and internal moves drawn from Los Angeles from 1988-2008 and use the fitted model to show that frictions related to the joint buyer-seller problem: (i) substantially amplify booms and busts in the housing market, (ii) create counter-cyclical build-ups of mismatch of existing owners with their homes, and (iii) generate externalities that induce significant welfare loss and excess price volatility.
    Date: 2013
  5. By: Wenbiao Cai; B. Ravikumar; Raymond Riezman
    Abstract: This paper deals with a classic development question: how can the process of economic development – transition from stagnation in a traditional technology to industrialization and prosperity with a modern technology – be accelerated? Lewis (1954) and Rostow (1956) argue that the pace of industrialization is limited by the rate of capital formation which in turn is limited by the savings rate of workers close to subsistence. We argue that access to capital goods in the world market can be quantitatively important in speeding up the transition. We develop a parsimonious open-economy model where traditional and modern technologies coexist (a dual economy in the sense of Lewis (1954)). We show that a decline in the world price of capital goods in an open economy increases the rate of capital formation and speeds up the pace of industrialization relative to a closed economy that lacks access to cheaper capital goods. In the long run, the investment rate in the open economy is twice as high as in the closed economy and the per capita income is 23 percent higher.
    Keywords: Economic development ; Economic conditions
    Date: 2013
  6. By: Timothy Uy; Kei-Mu Yi; Jing Zhang
    Abstract: We study the importance of international trade in structural change. Our framework has both productivity and trade cost shocks, and allows for non-unitary income and substitution elasticities. We calibrate our model to investigate South Korea's structural change between 1971 and 2005. We find that the shock processes, propagated through the model's two main transmission mechanisms, non-homothetic preferences and the open economy, explain virtually all of the evolution of agriculture and services labor shares, and the rising part of the hump-shape in manufacturing. Counterfactual exercises show that the role of the open economy is quantitatively important for explaining South Korea's structural change.
    Keywords: Gross domestic product ; Labor mobility ; Manufacturing industries
    Date: 2013
  7. By: German Cubas; B. Ravikumar; Gustavo Ventura
    Abstract: We develop a theory of labor quality based on (i) the division of the labor force between unskilled and skilled workers and (ii) investments in skilled workers. In our theory, countries differ in two key dimensions: talent and total factor productivity (TFP). We measure talent using the observed achievement levels from the Programme for International Student Assessment (PISA) scores. Our findings imply that the quality of labor in rich countries is about twice as large as the quality in poor countries. Thus, the implied disparities in TFP levels are smaller relative to the standard growth model using a measure of labor quality based on Mincer returns. In our model, the resulting elasticity of output per worker with respect to TFP is about 2.
    Keywords: Economic development ; Education - Economic aspects ; Labor productivity
    Date: 2013
  8. By: Timothy J. Kehoe; Kim J. Ruhl; Joseph B. Steinberg
    Abstract: Since the early 1990s, as the United States has borrowed from the rest of the world, employment in U.S. goods-producing sectors has fallen. Using a dynamic general equilibrium model, we find that rapid productivity growth in goods production, not U.S. borrowing, has been the most important driver of the decline in goods-sector employment. As the United States repays its debt, its trade balance will reverse, but goods-sector employment will continue to fall. A sudden stop in foreign lending in 2015–2016 would cause a sharp trade balance reversal and painful reallocation across sectors, but would not affect long-term structural change.
    Keywords: Trade
    Date: 2013

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