nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒11‒29
thirty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. DSGE Model-Based Forecasting of Modeled and Non-Modeled Inflation Variables in South Africa By Rangan Gupta; Patrick T. kanda; Mampho P. Modise; Alessia Pacagnini
  2. Liquidity, Quantitative Easing and Optimal Monetary Policy By Engin Kara; Jasmin Sin
  3. Capital- and Labor-Saving Technical Change in an Aging Economy By Andreas Irmen
  4. Demand shocks and open economy puzzles By Jose-Victor Rios-Rull; Yan Bai
  5. Unemployment Fluctuations in a Small Open-Economy Model with Segmented Labour Markets: The Case of Canada By Yahong Zhang
  6. Excess Reserves, Monetary Policy and Financial Volatility By Primus, Keyra
  7. Collateral requirements and asset prices By Brumm, Johannes; Grill, Michael; Kubler, Felix; Schmedders, Karl
  8. Explaining Educational Attainment across Countries and over Time By Diego Restuccia; Guillaume Vandenbroucke
  9. A Generalized Steady-State Growth Theorem By Andreas Irmen
  10. Hyperbolical discounting and endogenous growth By Strulik, Holger
  11. Can news shocks account for the business-cycle dynamics of inventories? By Hyunseung Oh; Nicolas Crouzet
  12. Consumer Default with Complete Markets: Default-based Pricing and Finite Punishment By Xavier Mateos-Planas; Giulio Seccia
  13. Evaluating pay-as-you-go social security systems By Andreas Bachmann; Kaspar Wüthrich
  14. China: An Institutional View of an Unusual Macroeconomy By David Dollar; Benjamin F. Jones
  15. Neglected implications of neoclassical capital-labour substitution for investment theory:another criticism of Say's Law By Fabio Petri
  16. Elementary Results on Solutions to the Bellman Equation of Dynamic Programming:Existence, Uniqueness, and Convergence By Takashi Kamihigashi
  17. Limited Stock Market Participation Among Renters and Home Owners By Roine Vestman
  18. Analyzing the impact of labor market integration By Keisuke Kawata; Kentaro Nakajima; Yasuhiro Sato
  19. Solving for the Retirement Age in a Continuous-time Model with Endogenous Labor Supply By Emin Gahramanov; Xueli Tang
  20. Pollution effects on labor supply and growth By Stefano Bosi; David Desmarchelier; Lionel Ragot
  21. Fiscal Externalities and Optimal Unemployment Insurance By Nicholas Lawson
  22. Too Good to Be True: Asset Pricing Implications of Pessimism By Beker, Pablo F; Espino, Emilio
  23. The Role of Establishment Heterogeneity in the Recovery from Sudden Stops By Horag Choi
  24. Regional Equilibrium Unemployment Theory at the Age of the Internet By Vanessa LUTGEN; Bruno VAN DER LINDEN
  25. An overlapping generations approach to price policies in privatehealthcare insurance. The Catalan case By Carles Lavila, Misericordia; Oliva Furés, Martí
  26. The endogenous formation of an environmental culture By Ingmar Schumacher
  27. The dynamic implications of liberalizing global migration By Marco DELOGU; Frédéric DOCQUIER; Joël MACHADO
  28. Idea Flows, Economic Growth, and Trade By Fernando E. Alvarez; Francisco J. Buera; Robert E. Lucas, Jr.
  29. Population Ageing, Retirement Age Extension and Economic Growth in China A Dynamic General Equilibrium Analysis By Xiujian Peng; Yinhua Mai
  30. JOB SEARCH COSTS AND INCENTIVES By Andriy Zapechelnyuk; Ro'i Zultan
  31. Shocking Stuff: Technology, Hours, and Factor Substitution By Cristiano Cantore; Miguel A. Leon-Ledesma; Peter McAdam; Alpo Willman

  1. By: Rangan Gupta (Department of Economics, University of Pretoria); Patrick T. kanda (Department of Economics, University of Pretoria); Mampho P. Modise (Department of Economics, University of Pretoria); Alessia Pacagnini (Dipartimento di Economia, Metodi Quantitativi e Strategie d'Impresa (DEMS), Facoltà di Economia, Università degli Studi di Milano-Bicocca)
    Abstract: Inflation forecasts are a key ingredient for monetary policymaking - especially in an inflation targeting country such as South Africa. Generally, a typical Dynamic Stochastic General Equilibrium (DSGE) only includes a core set of variables. As such, other variables,e.g. such as alternative measures of inflation that might be of interest to policymakers, do not feature in the model. Given this, we implement a closed-economy New Keynesian DSGE model-based procedure which includes variables that do not explicitly appear in the model. We estimate such a model using an in-sample covering 1971Q2 to 1999Q4, and generate recursive forecasts over 2000Q1-2011Q4. The hybrid DSGE performs extremely well in forecasting inflation variables (both core and non-modeled) in comparison with forecasts reported by other models, such as the AR(1).
    Keywords: DSGE model, in ation, core variables, non-core variables
    JEL: C11 C32 C53 E27 E47
    Date: 2013–11
  2. By: Engin Kara; Jasmin Sin
    Abstract: We investigate optimal monetary policy design using a New Keynesian model that accommodates liquidity frictions. In this model, unlike the standard New Keynesian model, the central bank faces a trade-off between inflation and output stabilisation. Optimal policy requires a temporary deviation from price stability in response to a negative shock to the liquidity of private financial assets. We find that quantitative easing improves the trade-off between inflation and output by improving liquidity conditions in the economy.
    Keywords: DSGE Models, Optimal Monetary Policy, liquidity, quantitative easing
    JEL: E44 E52 E58
    Date: 2013–09
  3. By: Andreas Irmen (CREA, University of Luxembourg)
    Abstract: Does population aging and the associated increase in the old-age dependency ratio affect economic growth ? The answer is given in a novel analytical framework that allows for population aging to affect endogenous capital- and labor-saving technical change. The short-run analysis reveals that population aging induces more labor- and less capital-saving technical change as it increases the relative scarcity of labor with respect to capital. Due to external contemporaneous knowledge spill-overs across innovating firms induced technical change has a first-order effect on current aggregate income. In the long-run capitalsaving technical progress vanishes, and the economy’s growth rate reflects only labor-saving technical change. However, the mere possibility of capital-saving technical change is shown to imply that the economy’s steady-state growth rate becomes independent of its age structure: neither a higher life-expectancy nor a decline in fertility affects economic growth in the long run.
    Keywords: Demographic Transition, Capital Accumulation, Direction of Technical Change
    JEL: D91 D92 O33 O41
    Date: 2013
  4. By: Jose-Victor Rios-Rull (University of Minnesota); Yan Bai (University of Rochester)
    Abstract: The paper explores to what extent demand shocks can solve the open economy puz- zles. To this purpose, we pose a shopping model structure a la Bai, R 퀱os-Rull, and Storesletten (2011) on top of an otherwise standard two-country international real busi- ness cycle model. Shopping for goods take effort, which prevents perfect matching between potential customers and producers. Larger demand in a country increases its consumption for both home and foreign goods. Real exchange rate and terms of trade depreciate in response to the larger demand. Larger demand also induces more shop- ping and so higher output and TFP. Thus, demand shock under our shopping model generates countercyclical terms of trade and solves the Backus-Smith puzzle.
    Date: 2013
  5. By: Yahong Zhang
    Abstract: The recent financial crisis and subsequent recession have spurred great interest in the sources of unemployment fluctuations. Previous studies predominantly assume a single economy-wide labour market, and therefore abstract from differences across sector-specific labour markets in the economy. In Canada, such differences are substantial. From 1991 to 2010, employment in the tradable sector is almost three times as volatile as that in the non-tradable sector, and wages are about twice as volatile. To capture the labour market differences at the sectoral level, I introduce a segmented labour market structure to a medium-scale dynamic stochastic general-equilibrium model with financial and labour market frictions and estimate the model using Canadian data from 1991 to 2010. I find that, in the long run, unemployment fluctuations are mainly driven by the shocks to firms’ net worth and production technology in the non-tradable sector and the shocks to the foreign interest rate. In the short run, however, it is the shocks to firms’ net worth in the tradable sector that account for about 50 per cent of unemployment fluctuations. I also find that inclusion of the recent financial crisis data in the estimation is crucial for assessing the effects of the financial wealth shocks.
    Keywords: Business fluctuations and cycles; Economic models; Labour markets
    JEL: E32 E44 J6
    Date: 2013
  6. By: Primus, Keyra
    Abstract: This paper examines the financial and real effects of excess reserves in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with monopoly banking, credit market imperfections and a cost channel. The model explicitly accounts for the fact that banks hold excess reserves and they incur costs in holding these assets. Simulations of a shock to required reserves show that although raising reserve require- ments is successful in sterilizing excess reserves, it creates a procyclical e¤ect for real economic activity. This result implies that financial stability may come at a cost of macroeconomic stability. The findings also indicate that using an augmented Taylor rule in which the policy interest rate is adjusted in response to changes in excess re- serves reduces volatility in output and inflation but increases fluctuations in financial variables. To the contrary, using a countercyclical reserve requirement rule helps to mitigate fluctuations in excess reserves, but increases volatility in real variables.
    Keywords: Excess Reserves, Reserve Requirements, Countercyclical Rule
    JEL: E4 E5 E52 E58
    Date: 2013–10
  7. By: Brumm, Johannes; Grill, Michael; Kubler, Felix; Schmedders, Karl
    Abstract: Many assets derive their value not only from future cash flows but also from their ability to serve as collateral. In this paper, we investigate this collateral value and its impact on asset returns in an infinite-horizon general equilibrium model with heterogeneous agents facing collateral constraints for borrowing. We document that borrowing against collateral substantially increases the return volatility of long-lived assets. Moreover, otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics because their prices contain a sizable collateral premium that varies over time. This premium can be positive even for assets that never pay dividends. --
    Keywords: collateral constraints,collateral premium,endogenous margins,heterogeneous agents,leverage
    JEL: D53 G11 G12
    Date: 2013
  8. By: Diego Restuccia; Guillaume Vandenbroucke
    Abstract: Consider the following facts. In 1950 the richest ten-percent of countries attained an average of 8 years of schooling whereas the poorest ten-percent of countries attained 1.3 years, a 6-fold difference. By 2005, the difference in schooling declined to 2-fold. The fact is that schooling has increased faster in poor than in rich countries. What explains educational attainment differences across countries and their evolution over time? We develop an otherwise standard model of human capital accumulation with two important features: non-homothetic preferences and an operating labor supply margin. We use the model to assess the quantitative contribution of productivity and life expectancy differences across countries in explaining educational attainment. Calibrating the parameters of the model to reproduce the historical time-series data for the United States, we find that the model accounts for 90 percent of the difference in schooling levels between rich and poor countries in 1950 and 64 percent of the increase in schooling over time in poor countries. The model generates a faster increase in schooling in poor than in rich countries consistent with the data. These results highlight the importance of productivity and development in education, emphasizing the crucial role of productivity improvements in poor countries relative to often-discussed educational policies.
    Keywords: Schooling, productivity, life expectancy, education policy, labor supply.
    JEL: O1 O4 E24 J22 J24
    Date: 2013–11–21
  9. By: Andreas Irmen (CREA, University of Luxembourg)
    Abstract: Uzawa’s steady-state growth theorem (Uzawa (1961)) is generalized to a neoclassical economy that uses current output, e. g., to create technical progress or to manufacture intermediates. The difference between aggregate final-good production and these resources is referred to as net output. The new generalized steady-state growth theorem holds since net output exhibits constant returns to scale in capital and labor. This insight provides an understanding for why technical change is labor-augmenting in steady state even if capital-augmenting technical change is feasible. By example, this point is made for three recent growth models that allow for endogenous capital- and labor-augmenting technical change, namely, Irmen (2013), Acemoglu (2003), and Acemoglu (2009), Chapter 15. The reduced form of these models is shown to be consistent with the generalized steady-state growth theorem.
    Keywords: Steady-State Growth, Capital Accumulation, Uzawa’s Theorem, Endogenous Direction of Technical Change
    JEL: E10 O10 O40
    Date: 2013
  10. By: Strulik, Holger
    Abstract: This paper provides the exact analytical solution for the standard model of endogenous growth when consumers have present-biased preferences and make time-inconsistent savings plans, which they revise continuously. It is shown that long-run growth is not necessarily lower under present-biased preferences. In fact, an equivalence result holds. If hyperbolical discounting provides the same present value of a constant infinite income stream as standard exponential discounting, then the equilibrium rate of economic growth is also the same under both discounting methods. In this sense present-bias and the entailed time-inconsistency of savings plans are harmless for economic growth. The result is robust to the introduction of non-homothetic utility and a variable elasticity of intertemporal substitution in consumption. --
    Keywords: hyperbolic discounting,time-inconsistency,endogenous growth,adjustment dynamics
    JEL: D91 E21 O40
    Date: 2013
  11. By: Hyunseung Oh (Columbia University); Nicolas Crouzet (Columbia University)
    Abstract: The procyclicality of inventory investment is a central feature of US business cycles. As such, it provides a test for the recent literature on news shocks, which argues that anticipated changes in fundamentals are important sources of aggregate fluctuations. We show that, in a range of inventory models, anticipated shocks to fundamentals generate booms of a peculiar kind: consumption and investment increase, but inventories fall persistently. During these booms, production and inventory investment are dominated by intertemporal substitution, as firms satisfy sales out of inventory stock and delay production until the realization of the anticipated shock. This mechanism is surprisingly difficult to overturn. We derive analytical parameter restrictions which guarantee procyclical inventory dynamics in response to news shocks, and show that standard calibrations considered in the literature do not come close to satisfying the restrictions. Furthermore, the introduction of the frictions studied by the news literature, such as variable capacity utilization and adjustment costs, is not sufficient to restore the procyclicality of inventories. We use the models' restrictions on the comovement of sales and inventories to identify news shocks in postwar US data. We find that the identified shock leads to a diffusion in TFP, but has a short implementation lag and accounts for a small fraction of long-run movements in TFP, inventories and sales.
    Date: 2013
  12. By: Xavier Mateos-Planas (Queen Mary University of London); Giulio Seccia (University of Southampton)
    Abstract: This paper studies economies with complete markets where there is positive default on consumer debt. In a simple tractable two-period model, households can default partially, at a finite punishment cost, and competitive intermediaries price loans of different sizes separately. This environment yields only partial insurance. The default-based pricing of debt makes it too costly for the borrower to achieve full insurance and there is too little trade in securities. This framework is in contrast with existing literature. Unlike the literature with default, there are no restrictions on the set of state contingent securities that are issued. Unlike the literature on lack of commitment, limited trade arises without need of debt constraints that rule default out. Compared with the latter, the present approach appears to imply more consumption inequality. An extended model with an infinite horizon, idiosyncratic risk and more realistic assumptions is used to demonstrate the general validity of this approach and its main implications.
    Keywords: Consumer default, Complete markets, Endogenous incomplete markets, Risk-based pricing, Risk sharing
    JEL: E21 E44 D52
    Date: 2013–11
  13. By: Andreas Bachmann; Kaspar Wüthrich
    Abstract: This paper proposes a new method for welfare analysis of unfunded social security systems. Based on an overlapping generations model with endogenous labor supply, we derive a formula for the evaluation of existing pay-as-you-go social security systems that depends on impulse response functions and projected growth rates only. We propose an implementation strategy based on reduced form estimates of a VAR model that is valid under weak assumptions about the deep structure of the model. Our method is related to the sufficient statistic approach (Chetty, 2009). For the current system in the United States, we find that a transitory increase in the payroll tax rate along with higher pension benefits leads to a welfare increase mainly due to welfare gains of today's retirees. A scenario analysis demonstrates the robustness of this result.
    Keywords: unfunded social security system; sufficient statistic; overlapping generations; reduced form VAR
    JEL: E62 H55
    Date: 2013–11
  14. By: David Dollar; Benjamin F. Jones
    Abstract: China presents several macroeconomic patterns that appear inconsistent with standard stylized facts about economic development and hence inconsistent with the standard neoclassical growth model. We show that Chinese macroeconomic patterns instead appear consistent with an environment where state control of factor markets can promote aggressive output goals. We consider the micro-institutional features that can sustain this behavior, emphasizing the hukou system and state control over capital allocation, and present a simple model built on these features. The model can explain several puzzling facts about the Chinese economy, including its unusually low labor share and unusually high saving and investment rates. Interestingly, the model also shows that free-market reforms can initially take the economy further from global macroeconomic norms.
    JEL: E02 E2 O11 P2
    Date: 2013–11
  15. By: Fabio Petri
    Abstract: Neoclassical capital-labour substitution correctly understood is unable to prove a tendency toward the full employment of resources because it leaves investment indeterminate if the full employment of labour is not assumed to start with; then Say's Law loses plausibility because of the inevitable presence of accelerator-type influences on investment, even neglecting the inconsistencies of neoclassical capital theory; and wage decreases cause a decrease of investment, undermining the 'neoclassical synthesis' criticism of Keynes. The way a negatively interest-elastic investment function is obtained by Romer without assuming the full employment of labour, that is through adjustment costs, relies on several grave mistakes. The recent DSGE models which directly assume that investment equals savings are not supported by general equilibrium theory because the latter theory is admitted by the specialists not to be a positive theory, nor can those models rely on the neoclassical synthesis or monetarism because of the critique of this paper (besides the capital critique), so they must be discarded too.
    JEL: E2 B5
    Date: 2013–10
  16. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: We establish some elementary results on solutions to the Bellman equation without introducing any topological assumption. Under a small number of conditions, we show that the Bellman equation has a unique solution in a certain set, that this solution is the value function, and that the value function can be computed by value iteration with an appropriate initial condition. In addition, we show that the value function can be computed by the same procedure under alternative conditions. We apply our results to two optimal growth models: one with a discontinuous production function and the other with \roughly increasing" returns.
    Keywords: Dynamic programming, Bellman equation, value function, xed point
    JEL: C61
    Date: 2013–11
  17. By: Roine Vestman (Stockholm University and SIFR)
    Abstract: Home owners are about twice as likely as renters to participate in the stock market, both in the USA and Sweden. This paper sets up a life-cycle portfolio choice model which generates this pattern of limited stock market participation. Calibrated to Swedish data, the model generates the stock market participation rate of home owners as well as the much lower participation rate of renters. In addition, the model replicates two salient features of the data. First, it replicates the U-shaped life-cycle profile of stock market participation among renters, which is due to sorting. Second, the crowding-out mechanism that leads to limited participation among home owners in the model is consistent with difference-in-difference regressions on a high-quality Swedish panel data set.
    Date: 2013
  18. By: Keisuke Kawata (Hiroshima University); Kentaro Nakajima (Tohoku University); Yasuhiro Sato (Osaka University)
    Abstract: We develop a competitive search model involving multiple regions, geographically mobile work- ers, and moving costs. Equilibrium mobility patterns are analyzed and characterized, indicating that shocks to a particular region, such as a productivity shock, can propagate to other regions through workersf mobility. Moreover, equilibrium mobility patterns are not efficient due to the existence of moving costs, implying that they affect social welfare not only because they are costs but also be- cause they distort equilibrium allocation. By calibrating our framework to Japanese regional data, we demonstrate that the impacts of eliminating migration costs are comparable to those of a 30% productivity increase.
    Keywords: geographical mobility of workers, competitive job search, moving costs, labor market inte- gration
    JEL: J61 J64 R23
    Date: 2013–11
  19. By: Emin Gahramanov; Xueli Tang
    Abstract: This paper studies a continuous-time life-cycle model with a consumption-leisure choice made by a finitely-lived agent with a random lifetime. We explicitly account for the leisure constraint in the corresponding constrained optimal control problem with a commonly postulated solution structure, and provide a complete analytic solution of the problem. By solving both the constrained and unconstrained control formulations, we demonstrate the inaccuracy of the latter formulation (where an unconstrained leisure path gets truncated once it exceeds the time endowment limit) can indeed be significant. For cases when the subjective discount rate is quite close to or exceeds the interest rate, the optimal control path would not be consistent with the structure of the optimal solution so commonly postulated in applied studies.
    Keywords: Constrained control; Pontryagin’s Maximum Principle; Life-cycle consumption and labor- leisure
    JEL: D91 C02 C61 J22 J26
    Date: 2013–11–13
  20. By: Stefano Bosi; David Desmarchelier; Lionel Ragot
    Abstract: Some recent empirical contributions have pointed out a significant negative impact of pollution on labor supply. These impacts have been largely ignored in the theoretical literature, which, instead, focused on the case of pollution effects on consumption demand. In this paper, we study the short and long-run effects of pollution in a Ramsey model where pollution and labor supply are nonseparable arguments in households’ preferences. We determine sufficient conditions for existence and uniqueness of a longterm equilibrium and we show how large (negative) effects of pollution on labor supply may promotes macroeconomic volatility (deterministic cycles near the steady state) through a flip bifurcation.
    Keywords: pollution, endogenous labor supply, Ramsey model.
    JEL: E32 O44
    Date: 2013–11–02
  21. By: Nicholas Lawson (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: A common finding of the optimal unemployment insurance literature is that the optimal UI replacement rate is around 50%, implying that current levels in the US are close to optimal. However, a key assumption in the existing literature is that unemployment benefits are the only government spending activity. In this paper I show that recommendations for optimal UI levels are dramatically reduced when one incorporates the fact that UI spending is a small part of overall government spending. This occurs because the negative impact of UI on income tax revenues implies added welfare costs, a mechanism that I refer to as a fiscal externality. Using both a calibrated structural job search model and a "suffcient statistics" method that relies on reduced-form elasticities, I find that the optimal replacement rate drops to zero once fiscal externalities are incorporated. However, I also consider the possibility that more generous UI could increase reservation wages and thus potentially increase the tax base, and I show that this second fiscal externality could have important effects on the results, with an optimal replacement rate which could rise above 70%.
    Keywords: unemployment insurance; fiscal externality; job search; suffcient statistics; government spending
    Date: 2013–11
  22. By: Beker, Pablo F (Department of Economics, University of Warwick); Espino, Emilio (Universidad Torcuato Di Tella)
    Abstract: We evaluate whether the introduction of pessimistic homogeneous beliefs in the frictionless Lucas-Mehra-Prescott model and the Kehoe-Levine-Alvarez-Jermann model with endogenous borrowing constraints, helps explain the equity premium, the risk-free rate and the equity volatility puzzles as well as the short-term momentum and long-term reversal of excess returns. We calibrate the model to U.S. data as in Alvarez and Jermann [4] and we find that the data does not contradict the qualitative predictions of the models. When the preferences parameters are disciplined to match both the average annual risk-free rate and equity premium, the Lucas-Mehra-Prescott model gives a more quantitatively accurate explanation for short-term momentum than the Kehoe-Levine-Alvarez-Jermann model but the latter gives a more quantitatively accurate explanation for the equity volatility puzzle. Long-term reversal remains quantitatively unexplained in both models. JEL classification: Financial Markets Anomalies ; Pessimism ; Homogeneous Beliefs ; Limited Enforceability ; Endogenously Incomplete Markets.
    Date: 2013
  23. By: Horag Choi (Monash University)
    Abstract: The 1997-1998 Asian crisis countries experienced drastic collapses of macroeconomic aggregates followed by highly persistent underperformance of economies relative to their pre-crises periods. In this paper, we develop a small open economy model with heterogeneous producers which can explain the evolution of the number of establishments across sizes following the sudden stop in Korea: the larger the size of establishments, the slower the recovery for the number of the establishments. The model shows that the establishment composition can explain 40 percent of the short-run drop in TFP, and almost all of the persistently underperforming Korean TFP from the second year of the sudden stop. With the transition dynamics of the TFP, the model can closely match the responses of the macroeconomic aggregates to the sudden stop in Korea. The model also predicts that this highly persistent behavior of TFP coming from the establishment composition causes output to be 7.7 percent lower than its trend even 20 years after the shock.
    Date: 2013
  24. By: Vanessa LUTGEN (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Bruno VAN DER LINDEN (FNRS, UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), IZA and CESifo)
    Abstract: This paper studies equilibrium unemployment in a two-region economy where homogeneous workers and jobs are free to move and the housing market clears. Because of the Internet, searching for a job in another region without first migrating there is nowadays much simpler than in the past. Search-matching externalities are amplified by this possibility and by the fact that some workers can simultaneously receive a job offer from each region. The rest of the framework builds on Moretti (2011). We study numerically the impacts of various local shocks in a stylized US economy. Contrary to what could be expected, increasing matching effectiveness in the other region yields growing regional unemployment rates. We characterize the optimal allocation and conclude that the Hosios condition is not sufficient to restore efficiency. In the efficient allocation, the regional unemployment rates are much lower than in the decentralized economy and nobody searches in the other region.
    Keywords: Matching; Search then move; Spatial equilibrium; Regional economics; Unemployment differentials
    JEL: J61 J64 R13 R23
    Date: 2013–10–28
  25. By: Carles Lavila, Misericordia; Oliva Furés, Martí
    Abstract: We analyze premium policies and price dispersion among private healthcare insurance firms from an overlapping-generations model. The model shows that firms that apply equal premium to all policyholders and firms that set premiums according to the risk of insured can coexist in the short run, whereas coexistence is unlikely in the long run because it requires the coincidence of economic growth and interest rates. We find support for the model’s results in the Catalan health insurance industry. Keywords: Economic theory, price policies, health insurance, health economics, overlapping-generations. JEL Classifications: I11 / L11 / L23
    Keywords: Economia de la salut, Assegurances de salut, Preus -- Fixació, Serveis sanitaris, Producció -- Organització, 338 - Situació econòmica. Política econòmica. Gestió, control i planificació de l'economia. Producció. Serveis. Turisme. Preus,
    Date: 2013
  26. By: Ingmar Schumacher
    Abstract: This model provides a mechanism explaining the surge in environmental culture across the globe. We discuss empirical evidence on the determinants of environmental culture and preferences. Based upon this empirical evidence, we develop an overlapping generations model with environmental quality and endogenous environmental culture. The model predicts that for low wealth levels, society is unable to free resources for environmental culture. In this case, society will only invest in environmental maintenance if environmental quality is suffciently low. Once society has reached a certain level of economic development, then it may optimally invest a part of its wealth in developing an environmental culture. Environmental culture has not only a positive impact on environmental quality through lower levels of consumption, but it improves the environment through maintenance expenditure for wealth-environment combinations at which, in a restricted model without environmental culture, no maintenance would be undertaken. Environmental culture leads to a society with a higher indirect utility at steady state in comparison to the restricted model. Our model leads us to the conclusion that, for societies trapped in a situation with low environmental quality, investments in culture may induce positive feedback loops, where more culture raises environmental quality which in turn raises environmental culture. We also discuss how environmental culture may lead to an Environmental Kuznets Curve.
    Keywords: environmental culture; overlapping generations model; environment; endogenous preferences.
    JEL: Z1 Q56 D90
    Date: 2013–11–07
  27. By: Marco DELOGU (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and University of Luxemburg); Frédéric DOCQUIER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and FNRS, National Fund for Scientific Research); Joël MACHADO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper quantitatively investigates the short- and long-run effects of liberalizing global migration on the world distribution of income. We develop and parametrize a dynamic model of the world economy with endogenous migration, fertility and education decisions. We identify bilateral migration costs and their legal component for each pair of countries and two classes of worker. Our analysis reveals that the effects of a liberalization on human capital accumulation, income and inequality are gradual and cumulative. In case of a complete liberalization, the world average level of GDP per worker increases by 20 percent in the short-run, and by more than 55 percent after 50 years. The world average index of inequality decreases and the liberalization path has stochastic dominance over the Baseline-As-Usual. These results are very robust to our identifying assumptions. We also analyze partial liberalization shocks: effi ciency and inequality e¤ects are roughly proportional to the "liberalization rate".
    Keywords: Migration, Migration policy, Liberalization, Growth, Human Capital, Fertility, Inequality
    JEL: O15 F22 I24
    Date: 2013–11–15
  28. By: Fernando E. Alvarez; Francisco J. Buera; Robert E. Lucas, Jr.
    Abstract: We provide a theoretical description of a process that is capable of generating growth and income convergence among economies, and where freer trade has persistent, positive effects on productivity, beyond the standard efficiency gains due to reallocation effects. We add to a standard Ricardian model a theory of endogenous growth where the engine of growth is the flow of ideas. Ideas are assumed to diffuse by random meetings where people get new ideas by learning from the people they do business with or compete with. Trade then has a selection effect of putting domestic producers in contact with the most efficient foreign and domestic producers. We analyze the way that trade in goods, and impediments to it, affect this diffusion. We find that exclusion of a country from trade reduces productivity growth, with large long-term effects. Smaller trade costs have moderate effects on productivity.
    JEL: F1 O11 O19 O33
    Date: 2013–11
  29. By: Xiujian Peng; Yinhua Mai
    Abstract: China is experiencing rapid population ageing with the proportion of the population aged 65 and above projected to increase almost threefold between 2010 and 2050. The growth of the working age population is expected to stop approximately in 2015 and to turn strongly negative. China's low retirement age compounds the ageing problem. One means to mitigate the negative effects of shrinking labour force on economic growth is to stimulate labour force participation among the current working age population. Raising the official retirement age is one strategy to encourage labour force participation. This paper first investigates the effects of population ageing on labour force participation rates and, thus, on labour supply over the period of 2010-2030. It then estimates the effects of retirement age extension schemes on the size of the labour force. Thirdly, applying dynamic computable general equilibrium (CGE) modelling, it examines the effects of retirement age extension schemes on China's economic growth. It finds that raising the retirement age increases effective labour input, real GDP, capital stock, household real consumption and exports. The main results are that retirement age extension is likely to boost China's economic growth and that both urban and rural sectors will benefit from the extension.
    Keywords: population ageing, retirement age extension, economic growth, CGE model
    JEL: J11 J26 C68
    Date: 2013–08
  30. By: Andriy Zapechelnyuk (School of Economics and Finance, Queen Mary, University of London, Mile End Road, London E1 4NS, UK); Ro'i Zultan (BGU)
    Abstract: The costs of searching for a job vacancy are typically associated with fric- tion that deters or delays employment of potentially productive individuals. We demonstrate that in a labor market with moral hazard where effort is non- contractible, job search costs play a positive role, whose effect may outweigh the negative implications. As workers are provided incentives to exert effort by the threat of losing their job and having to search for a new vacancy, a reduction in job search costs leads to fewer employees willing to exert effort. The overall lower productivity will make more individuals and firms opting to stay out of the labor market, resulting in lower employment and decreased welfare. Eventually, a reduction of jobs search costs below a certain level results in collapse of the labor market.
    Keywords: job search, moral hazard, labor market, unemployment insurance
    JEL: D83 J64 J65
    Date: 2013
  31. By: Cristiano Cantore (University of Surrey); Miguel A. Leon-Ledesma (University of Kent); Peter McAdam (University of Surrey & European Central Bank); Alpo Willman (European Central Bank)
    Abstract: The response of hours to technology shocks is a key controversy in macroeconomics. We show that differences between RBC and NK models hinge on highly restrictive views of technology. We introduce CES production technologies and demonstrate that the response of hours depends on the factor-augmenting nature of shocks and the capital-labor substitution elasticity in both models. We develop analytical expressions to establish the thresholds determining its sign. This opens new margins for shock identification combining theory and VAR evidence. We discuss how our models provide new robust restrictions for empirical work, especially using the labor income share.
    JEL: E32 E23 E25
    Date: 2013–11

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