nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒10‒11
sixteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Search frictions, real wage rigidities and the optimal design of unemployment insurance By Julien Albertini; Xavier Fairise
  2. Labor Market Frictions, Firm Growth, and International Trade By Pablo D. Fajgelbaum
  3. Growth and financial liberalization under capital collateral constraints: The striking case of the stochastic AK model with CARA preferences By Raouf Boucekkine; Giorgio Fabbri; Patrick Pintus
  4. Age-dependent Taxation, Retirement Behavior, and Work Hours Over the Life Cycle By Julian Diaz Saavedra
  5. Lumpy investment in sticky information general equilibrium By Verona, Fabio
  6. Illiquid Life Annuities By Hippolyte d’Albis; Johanna Etner
  7. Collateral, liquidity and debt sustainability By Stefan Niemann; Paul Pichler
  8. The environment and directed technical change : comment By Jean-Charles Hourcade; Antonin Pottier; Etienne Espagne
  9. Universal banking, competition and risk in a macro model By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  10. Scientific breakthroughs, innovation clusters and stochastic growth cycles By Stadler, Manfred
  11. Cash in advance constraint on RD in a Schimpeterian growth model with an endogenous market structure By Chienyu Huang; Juin Jen Chang; Lei Ji
  12. Estimating Contract Indexation in a Financial Accelerator Model By Charles T. Carlstrom; Last: T. Carlstrom; Timothy S. Fuerst; Last: S. Fuerst; Alberto Ortiz; Last: Ortiz; Matthias Paustian; Last: Paustian
  13. Informal versus Formal Search: Which Yields a Better Pay? By Tumen, Semih
  14. Patents RD subsidies and endogenous market structure in a Schumpeterian economy By Angus C.Chu; Yuichi Furukawa; Lei Ji
  15. Cross-industry tfp growth differences with asymmetric industries and the endogenous market structure By Lei Ji
  16. Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects By Marcus Hagedorn; Fatih Karahan; Iourii Manovskii; Kurt Mitman

  1. By: Julien Albertini (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Xavier Fairise (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - Université du Maine, TEPP - Travail, Emploi et Politiques Publiques - CNRS : FR3435 - Université Paris-Est Marne-la-Vallée (UPEMLV))
    Abstract: In this paper, we study the optimal unemployment benefits financing scheme when the economy is subject to labor market imperfections characterized by real wage rigidities and search frictions. The US unemployment insurance financing is such that firms are taxed proportionately to their layoffs to finance unemployment benefits. Using DSGE methodology, we investigate how policy instruments should interact with labor market imperfections. It is shown that wage rigidities in a search and matching environment cause welfare costs, especially in the absence of an incentive-based unemployment insurance. This cost is mainly due to the distorting effect of wage rigidities which generate inefficient separations. We show that the optimal unemployment benefits financing scheme - corresponding to the Ramsey policy - offsets labor market imperfections and allows implementation of the Pareto allocation. The second-best allocation brings the economy close to the Ramsey allocation. The implementation of the optimal policies clearly highlights the role of labor market institutions for short-run stabilization.
    Keywords: DSGE models ; search and matching frictions ; layoff tax ; wage rigidities
    Date: 2013–03
  2. By: Pablo D. Fajgelbaum
    Abstract: This paper develops a model to study the aggregate effects of labor market frictions in an open economy through their impact on the growth and investment decisions of firms. The model features interactions between firms' dynamic fixed investments in exporting and search frictions with job-to-job mobility. Search frictions induce slow firm growth and are a source of dispersion in firm size and export status. Job-to-job transitions are a crucial ingredient of the analysis, as in their absence search frictions do not affect outcomes per worker. The model is tractable for general-equilibrium analysis and accommodates several extensions which are useful for quantitative work. A calibration to Argentina's economy suggests that frictions in job-to-job mobility may have considerable effects on firm growth and aggregate income, and that barriers to worker mobility across firms may be relevant to measure the gains from international trade.
    JEL: D92 F16 J62 L11
    Date: 2013–10
  3. By: Raouf Boucekkine (Aix-Marseille University (Aix-Marseille School of Economics), CNRS and EHESS); Giorgio Fabbri (EPEE, Université d’Evry-Val-d’Essonne (TEPP, FR-CNRS 3126)); Patrick Pintus (Aix-Marseille University (Aix-Marseille School of Economics), CNRS and EHESS)
    Abstract: We consider a small-open, collateral-constrained AK economy. We show that the combination of CARA preferences and uncertainty on capital inflows in such an economy generates long-term (expected) growth while the deterministic counterpart does not. In this framework, long-term growth is entirely driven by precautionary savings. In particular, we show that the asymptotic growth rate of the expected capital stock is an increasing function of both the risk parameter and the Arrow-Prat absolute risk aversion parameter. The model also predicts that economies that are more financially integrated through international borrowing experience lower consumption growth volatility relative to output growth volatility.
    Keywords: Financial liberalization, growth, CARA preferences, collateral constraints, precautionary savings
    JEL: F34 F43 O40
    Date: 2013
  4. By: Julian Diaz Saavedra (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: We use a computable overlapping generations model economy, which matches the stylized facts con- cerning retirement behavior, to analyze the consequences of three reforms designed to reduce tax rates on the labor supply of older workers. We nd that these reforms increase the participation rates of the elderly and show that the gains, in terms of old age work hours, are non-trivial. However, we also nd that the total labor supply response to the reforms is not so much an increase in total lifetime hours as it is a reallocation of hours over the life cycle. Finally, we show that these reforms, designed to increase the length of the working life of individuals, may not increase output.
    Keywords: Computable general equilibrium, labor supply, retirement, age-dependent taxation.
    JEL: C68 J22 J26 H31
    Date: 2013–09–25
  5. By: Verona, Fabio (Bank of Finland Research)
    Abstract: In this paper, I introduce lumpy micro-level capital adjustment into a sticky information general equilibrium model. Lumpy adjustment arises because of inattentiveness in capital investment decisions instead of the more common assumption of non-convex adjustment costs. The model features inattentiveness as the only source of stickiness. I find that the model with lumpy investment yields business cycle dynamics which differ substantially from those of an otherwise identical model with frictionless investment and are much more consistent with the empirical evidence. These results therefore strengthen the case in favour of the relevance of microeconomic investment lumpiness for the business cycle.
    Keywords: sticky information; general equilibrium; lumpy investment; business cycle
    JEL: D83 E10 E22 E32
    Date: 2013–08–17
  6. By: Hippolyte d’Albis; Johanna Etner
    Abstract: In this article, we consider illiquid life annuity contracts and show that they may be preferred to Yaari (1965)'s liquid contracts. In an overlapping-generation economy, liquid life annuities are demanded only if the equilibrium is dynamically inefficient. Alternatively, an equilibrium displaying a positive demand for illiquid life annuities is efficient. In this latter case, the welfare at steady-state is larger if illiquid life annuity contracts are available.
    Keywords: annuity, overlapping generation model
    JEL: E21 D11
    Date: 2013
  7. By: Stefan Niemann; Paul Pichler
    Abstract: We study the sustainability of public debt in a closed production economy where a benevolent government chooses fiscal policies, including haircuts on its outstanding debt, in a discretionary manner. Government bonds are held by domestic agents to smooth consumption over time and because they provide collateral and liquidity services. We characterize a recursive equilibrium where public debt amounts to a sizeable fraction of output in steady state and is nevertheless fully serviced by the government. In a calibrated economy, steady state debt amounts to around 84% of output, the government's default threshold is at around 94% of output, and the haircut on outstanding debt at this threshold is around 40%. Both reputational costs of default and contemporaneous costs due to lost collateral and liquidity are essential to generate these empirically plausible predictions.
    Date: 2013–08–30
  8. By: Jean-Charles Hourcade (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech); Antonin Pottier (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech, LPT - Laboratoire de Physique Théorique d'Orsay - CNRS : UMR8627 - Université Paris XI - Paris Sud); Etienne Espagne (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech)
    Abstract: This paper discusses the growth model with environmental constraints recently presented in (Acemoglu et al., 2011) which focuses on the redirection of technical change by climate policies with research subsidies and a carbon tax. First, Acemoglu et al.'s model and chosen parameters yield numerical results that do not support the conclusion that ambitious climate policies can be conducted " without sacrificing (much or any) long-run growth ". Second, they select unrealistic key parameters for carbon sinks and elasticity of substitution. We find that more realistic parameters lead to very different results. Third, the model leads to an unrealistic conclusion when used to analyse endogenous growth, suggesting specification problems.
    Date: 2013–09–30
  9. By: Tatiana Damjanovic (Department of Economics, University of Exeter); Vladislav Damjanovic (Department of Economics, University of Exeter); Charles Nolan (University of Glasgow)
    Abstract: A macroeconomic model is developed to analyse integration of retail and investment banks with and without deposit insurance. Benefits flow from elimination of double marginalization and insurance premia which retail banks otherwise charge investment banks. Deposit insurance increases average output, whether banks are universal or separated, and can be welfare improving as it counters monopoly distortion. However, when unfavourable shocks hit the economy, the size of government bailout is larger with integrated than with separated banks. The welfare assessment of the structure of banks depends on the kinds of shock hitting the economy, the degree of competitiveness of the banking sectors as well as on the efficiency of government intervention (the excess burden of deposit insurance). Scenarios are sketched in which different banking structures are desirable.
    Keywords: Financial intermediation in DSGE models, separating commercial and investment banking, competition and risks, systematic and idiosyncratic risks, bailouts, deposit insurance and economic wedges.
    JEL: E13 E44 G11 G24 G28
    Date: 2013
  10. By: Stadler, Manfred
    Abstract: We develop a dynamic stochastic general-equilibrium model of science, education and innovation to explain the simultaneous emergence of innovation clusters and stochastic growth cycles. Firms devote human-capital resources to research activities in order to invent higher quality products. The technological requirements in climbing up the quality ladders increase over time but this hampering effect is compensated for by an improving qualification of researchers allowing for a sustainable process of innovation and scale-invariant growth. Jumps in human capital, triggered by scientific breakthroughs, induce innovation clusters across industries and generate long-run growth cycles. --
    Keywords: Science,Education,Innovation clusters,Stochastic growth cycles
    JEL: C61 E32 O33
    Date: 2013
  11. By: Chienyu Huang (Southwestern University of Finance and economics); Juin Jen Chang (Institute of economics, Academia Sinica Taiwan); Lei Ji (Ofce sciences-po,skema Business School)
    Abstract: In this paper we explore the effects of monetary policy on the number of firms, firm market size, inflation and growth in a Schumpeterian growth model with endogenous market structure and cash-in-advance CIA constraints on two distinct types of RD investment in-house RD and entry investment. This allows us to match the empirical evidence and provides novel implications to the literature. We show that if in-house RD (quality improvement-type R&D) is subject to the CIA constraint, raising the nominal interest rate increases the number of firms and inflation, but decreases the firm size and economic growth. By contrast, if entry investment variety expansion-type RD is subject to the CIA constraint, these variables adversely respond to such a monetary policy. Besides, our model generates rich transitional dynamics in response to a change in monetary policy, when RD entry is restricted by a cash constraint.
    Keywords: CIA constraints on RD, endogenous market structure,monetary policy,economic growth
    JEL: O30 O40 E41
    Date: 2013–09
  12. By: Charles T. Carlstrom; Last: T. Carlstrom (Federal Reserve Bank of Cleveland); Timothy S. Fuerst; Last: S. Fuerst (University of Notre Dame; Federal Reserve Bank of Cleveland); Alberto Ortiz; Last: Ortiz (Centro de Estudios Monetarios Latinoamericanos; EGADE Business School); Matthias Paustian; Last: Paustian (Bank of England)
    Abstract: This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principle conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model with indexation over the frictionless model, they have remarkably similar business cycle properties for non-financial exogenous shocks.
    Keywords: Agency costs; financial accelerator; business cycles.
    JEL: E32 E44
    Date: 2013–06
  13. By: Tumen, Semih
    Abstract: Estimates on the effect of job contact method -- i.e., informal versus formal search -- on wage offers vary considerably across studies, with some of them finding a positive correlation between getting help from informal connections and obtaining high-paying jobs, while others finding a negative one. In this paper, I investigate the sources of discrepancies in these empirical results. Using a formal job search framework, I derive an equilibrium wage distribution which reveals that the informal search yields for some groups higher and for some others lower wages than formal search. The key result is the existence of nonmonotonicities in wage offers. Two potential sources of these nonmonotonicities exist: (i) peer effects and (ii) unobserved worker heterogeneity in terms of the inherent cost of maintaining connections within a productive informal network. The model predicts that a greater degree of unobserved heterogeneity tilts the estimates toward producing a positive correlation between informal search and higher wages, whereas stronger peer influences tend to yield a negative correlation. This conclusion informs the empirical research in the sense that identification of the true correlation between job contact methods and wage offers requires a careful assessment of the unobserved heterogeneity and peer influences in the relevant sample.
    Keywords: Job search; informal networks; peer effects; heterogeneity; nonmonotonicities.
    JEL: D85 J31 J64
    Date: 2013–10–01
  14. By: Angus C.Chu (University of Liverpool United Kingdom); Yuichi Furukawa (Chukyo University Japan); Lei Ji (Shanghai University of finance and economics China)
    Abstract: This study explores the different implications of patent breadth and RD subsidies on economic growth and endogenous market structure in a Schumpeterian growth model. We fend that when the number of firms is fixed in the short run, patent breadth and R&D subsidies serve to increase economic growth as in previous studies. However, when the number of firms adjusts endogenously in the long run, RD subsidies increase economic growth but decrease the number of firms,whereas patent breadth expands the number of firms but reduces economic growth. Therefore, RD subsidy is perhaps a more suitable policy instrument than patent breadth for the purpose of stimulating long-run economic growth.
    Keywords: economic growth,endogenous market structure, patents rd subsidies
    JEL: O30 O40
    Date: 2013–09
  15. By: Lei Ji (Ofce sciences-po, Skema Business School)
    Abstract: I develop a multi-industry endogenous growth model with the endogenous market structure. Industries are heterogeneous in production unit costs, research and development RD productivities, fixed operating costs and industry level market sizes. The endogenous market structure allows an empirically realistic and theoretically important determination of the individual firms’ market sizes and distinguishes the model from the previous literatures. There are two sets of results. First, the balanced growth rate depends positively on RD productivities and firm market size of both industries but not industry market size. Surprisingly, the steady state total factor productivity TFP level ratio between industry 1 and 2 depends negatively on RD productivity and fixed costs in industry 1 and positively on those parameters in industry 2. Second, industry differences in both TFP growth and R&D intensity mainly reflect differences in quality-adjusted gross profits and RD productivities. Such differences depend on RD productivities and fixed operating cost parameters in general equilibrium. The industry with a higher RD productivity and fixed cost has a lower TFP growth and research intensity compared to the other industry. Differences in production unit costs and industry level market sizes do not to contribute to cross-industry TFP growth differences. These results are substantially different from what is found in the existing literature. Model also offers novel explanations for directed technical change and structural change, and it offers a structure for analyzing the interaction between trade and growth.
    Keywords: Cross-industry TFP growth differences, endogenous growth, asymmetric industries,endogenous market structure
    Date: 2013–09
  16. By: Marcus Hagedorn; Fatih Karahan; Iourii Manovskii; Kurt Mitman
    Abstract: We exploit a policy discontinuity at U.S. state borders to identify the effects of unemployment insurance policies on unemployment. Our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility. In contrast to the existing recent literature that mainly focused on estimating the effects of benefit duration on job search and acceptance strategies of the unemployed -- the micro effect -- we focus on measuring the general equilibrium macro effect that operates primarily through the response of job creation to unemployment benefit extensions. We find that it is the latter effect that is very important quantitatively.
    JEL: E24 J63 J64 J65
    Date: 2013–10

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