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on Dynamic General Equilibrium |
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Issue of 2014‒01‒24
seventeen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Nakajima, Makoto (Federal Reserve Bank of Philadelphia) |
| Abstract: | I construct the life-cycle model with equilibrium default and preferences featuring temptation and self-control. The model provides quantitatively similar answers to positive questions such as the causes of the observed rise in debt and bankruptcies and macroeconomic implications of the 2005 bankruptcy reform, as the standard model without temptation. However, the temptation model provides contrasting welfare implications, because of overborrowing when the borrowing constraint is relaxed. Specifically, the 2005 bankruptcy reform has an overall negative welfare effect, according to the temptation model, while the effect is positive in the no-temptation model. As for the optimal default punishment, welfare of the agents without temptation is maximized when defaulting results in severe punishment, which provides a strong commitment to repaying and thus a lower default premium. On the other hand, welfare of agents with temptation is maximized when weak punishment leads to a tight borrowing constraint, which provides a commitment against overborrowing. |
| Keywords: | Consumer bankruptcy; Debt; Default; borrowing constraint; Temptation and self-control; Hyperbolic-discounting; Heterogeneous agents; Incomplete markets |
| JEL: | D91 E21 E44 G18 K35 |
| Date: | 2013–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:14-1&r=dge |
| By: | Christoph Görtz; John D. Tsoukalas |
| Abstract: | An important disconnect in the news driven view of the business cycle formalized by Beaudry and Portier (2004), is the lack of agreement between different—VAR and DSGE—methodologies over the empirical plausibility of this view. We argue that this disconnect can be largely resolved once we augment a standard DSGE model with a financial channel that provides amplification to news shocks. Both methodologies suggest news shocks to the future growth prospects of the economy to be significant drivers of U.S. business cycles in the post-Greenspan era (1990-2011), explaining as much as 50% of the forecast error variance in hours worked in cyclical frequencies. |
| Keywords: | News shocks, Business cycles, DSGE, VAR, Bayesian estimation. |
| JEL: | E2 E3 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2013_25&r=dge |
| By: | Philip Jung (public) |
| Abstract: | Extensive literature demonstrates that workers with high tenure suffer large and persistent earnings losses when they are displaced. We study the reasons behind these losses in a tractable search model that includes a lifecycle dimension, endogenous job mobility, and worker- and match-heterogeneity. The model jointly explains key characteristics of the U.S. labor market such as large average transition rates, a large share of stable jobs, and earnings losses after displacement. We decompose earnings losses and find that only 50% result from wage loss, and endogenous reactions and selection account for the remainder. These findings have important implications for welfare costs of displacement and labor market policies. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:771&r=dge |
| By: | 加納, 隆 |
| Abstract: | 本稿では、動学的確率的一般均衡モデルのマクロ計量経済分析における役割を、Geweke (2010)による強解釈と弱解釈および最小解釈の3分類に従って批判的に略説する。最小解釈の応用例として、Kano and Nason (2013)による消費の習慣形成の金融政策ショック伝播メカニズムとしての役割に関する実証分析を紹介する。最後に将来研究への展望を議論する。, This paper critically reviews roles of dynamics stochastic general equilibrium (DSGE) models in macroeconometrics, introducing econometric categorizations of DSGE models made by Geweke (2010): strong, weak, and minimal econometric interpretations. As an application of the minimal interpretation, this paper introduces the Bayesian Monte Carlo exercise conducted by Kano and Nason (2013) for investigating business cycle implications of consumption habits as a propagation mechanism of monetary policy shocks. |
| Keywords: | 動学的確率的一般均衡モデル, マクロ計量モデル, ベイズ統計学, ニューケインジアンモデル, 消費の習慣形成 |
| JEL: | E10 E20 E32 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2014-01&r=dge |
| By: | Pietro Garibaldi |
| Abstract: | In real life labor markets firms hold at all times a variety of liquid assets not invested in their core business. Such external use of funds acts as an insurance against future adverse financial shocks, and typically varies across firms and sectors. As a result, different firms use different degrees of financial leverage. This paper investigates the consequence of firms' use of funds on their hiring and firing policy. Using a standard matching model of unemployment, the paper finds an equilibrium interplay between the value of unemployment and financial conditions. Financial market imperfections- such as the probability of refinancing or firms' share of their pleadgeable income- affect equilibrium unemployment. In this sense, the paper brings together the work on liquidity by Holmstrom anf Tirole (2011) with the traditional Mortensen Pissarides (2004) model of equilibrium unemployment. The model implies also that at times of adverse financial shocks, firms that are more leveraged are more likely to liquiditate their assets and destroy jobs. Empirically, we test whether there is a causal link between firms leverage and job destruction at times of adverse financial shocks. We draw on firm-level data on employment adjustment matched with balance sheet records throughout the Great Recession and find that highly leveraged firms destroy more jobs during a financial crisis. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:775&r=dge |
| By: | Docquier, Frédéric (Université catholique de Louvain); Müller, Tobias (University of Geneva); Naval, Joaquín (Universitat Autònoma de Barcelona) |
| Abstract: | One of the most salient features of developing economies is the existence of a large informal sector. This paper uses quantitative theory to study the dynamic implications of informality on wage inequality, human capital accumulation, child labor and long-run growth. Our model can generate transitory informality equilibria or informality-induced poverty traps. Its calibration reveals that the case for the poverty-trap hypothesis is strong: although informality serves to protect low-skilled workers from extreme poverty in the short-run, it prevents income convergence between developed and developing nations in the long run. Sudden elimination of informality would induce severe welfare losses for several generations on the transition path. Hence, we examine the effectiveness of different development policies to exit the poverty trap. Our numerical experiments show that using means-tested education subsidies is the most cost-effective single policy option. However, for longer time horizons, or as the economy gets closer to the poverty trap threshold, combining means-tested education and wage subsidies is even more effective. |
| Keywords: | informality, development, education, child labor, inequality |
| JEL: | O11 O15 O17 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7883&r=dge |
| By: | Keyu Jin (London School of Economics); Nicolas Coeurdacier (SciencesPo Paris) |
| Abstract: | This paper analyzes the impact of the 'one child policy' in China on its household saving behavior. First, it develops a life-cycle model with endogenous fertility, intergenerational transfers and human capital accumulation. We show a macroeconomic and a microeconomic channel of a fall in fertility on raising aggregate household saving: at the macroeconomic level, the population composition shifts initially towards the middle-aged—the high savers of the economy. At the microeconomic level, (1) expenditures of children fall—despite higher education investment in each child—as quantity substitutes for quality; (2) middle-aged save additionally for retirement in anticipation of reduced transfers from their only child. Second, our quantitative model implies policy-induced changes in aggregate savings and age-saving profiles broadly consistent with estimates from Chinese household-level data. Third, an empirical study using the birth of twins as a source of exogenous increase in fertility is shown to support the micro-economic channels we highlight. Overall, our estimation suggests that the policy is able to account for 30% to 50% of the rise in household savings rate since its implementation in 1980. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:790&r=dge |
| By: | Nathalie Mathieu-Bolh (University of Vermont - University of Vermont); Xavier Pautrel (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272) |
| Abstract: | We build a model that takes into consideration the evolution of health over the life cycle and its consequences on individual optimal choices. In this framework, the effect of environmental taxation are not limited to the traditional negative crowding-out and positive productivity effects. We show that environmental taxation generates new general equilibrium effects ignored by previous contributions. Indeed, as the environmental tax improves the health profile over the life-cycle, it influences saving, labor supply, retirement and investment in health. We also show that whether those general equilibrium effects are positive or negative for the economy crucially depends on the degree of substitutability between young and old labor. We complete our theoretical analysis with numerical examples. Within the range of our parameters, it appears that ignoring those general equilibrium effects results in significantly understating the negative of environmental tax- ation on output per capita and welfare. |
| Keywords: | Health; environmental policy; economic growth |
| Date: | 2014–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00930936&r=dge |
| By: | Carlos da Costa (Fundação Getulio Vargas) |
| Abstract: | We study optimal taxation in a dynamic Mirrlees' incentive structure where both aggregate and idiosyncratic risks are present. When aggregate shocks are i.i.d., we characterize the steady-state of our economy and prove the existence of an invariant distribution of expected utilities, which is non-degenerate thanks to the perpetual youth we assume. We show that consumption and income shares of each cohort are invariant to the aggregate state. In contrast, when aggregate shocks are persistent, efficient allocations display history dependence, and no invariant distribution needs to exist. We provide a particular example in which it does not exist and one in which it does. In the latter case, the particular distribution at which a society settles depends on the whole history of aggregate shocks. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:788&r=dge |
| By: | Rose-Anne Dana (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Franck Riedel (Center for mathematical economics - Universität Bielefeld (GERMANY)) |
| Abstract: | We study a dynamic and infinite-dimensional model with incomplete multiple prior preferences. In interior efficient allocations, agents share a common risk-adjusted prior and subjective interest rate. Interior efficient allocations and equilibria coincide with those of economies with subjective expected utility and priors from the agentsʼ multiple prior sets. A specific model with neither risk nor uncertainty at the aggregate level is considered. Risk is always fully insured. For small levels of ambiguity, there exists an equilibrium with inertia where agents also insure fully against Knightian uncertainty. When the level of ambiguity exceeds a critical threshold, full insurance no longer prevails and there exist equilibria with inertia where agents do not insure against uncertainty at all. We also show that equilibria with inertia are indeterminate. |
| Keywords: | Dynamic general equilibrium; No trade; General equilibrium theory; Incomplete preferences; Ambiguity; Knightian uncertaintyagainst uncertainty at all. . Dynamic general equilibrium; No trade; General equilibrium theory; Incomplete preferences; Ambiguity; Knightian uncertaintyagainst uncertainty at all. . Dynamic general equilibrium; No trade; General equilibrium theory; Incomplete preferences; Ambiguity; Knightian uncertaintyagainst uncertainty at all. . |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00927170&r=dge |
| By: | Hakki Yazici (Sabanci University); Ctirad Slavik (Goethe University in Frankfurt) |
| Abstract: | In this paper, we take a step in this direction. Our theory confirms the optimality of differential capital asset taxation, but with an important caveat. Capital assets can be divided into two groups based on the tax treatment they receive in the U.S. tax code: structures and equipment. As documented by Gravelle (2011), in the current U.S. tax code the effective tax rate on equipment capital is on average 6% below the effective tax rate on structure capital. In contrast, our theory suggests that capital equipment should be taxed at a higher rate than capital structures. We conduct a quantitative exercise to assess the quantitative importance of optimal differential capital taxation. In our baseline calibration we find that the tax rate on capital equipments should be at least 19% higher than the tax rate on structure capital. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:766&r=dge |
| By: | Xavier Mateos-Planas (Queen Mary University of London); Jose-Victor Rios-Rull (University of Minnesota); Cristina Arellano (Federal Reserve Bank of Minneapolis) |
| Abstract: | In this paper we produce a theory of partial default applicable to sovereign debt. The theory uses Markovian equilibria and the notion that circulating unpaid coupons of any given country courtail its productive capabilities. As a consequence no issues of equilibrium selection appear in the analysis. The theory allows for renegotiation of the debt which occurs in particular dire circumstances. This theory, in contrast with the ones in the literature, is consistent with the main facts of international debt crises, which we document. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:765&r=dge |
| By: | Fujita, Shigeru (Federal Reserve Bank of Philadelphia); Moscarini, Giuseppe (Yale University) |
| Abstract: | Using data from the Survey of Income and Program Participation (SIPP) covering 1990-2011, we document that a surprisingly large number of workers return to their previous employer after a jobless spell and experience more favorable labor market outcomes than job switchers. Over 40% of all workers separating into unemployment regain employment at their previous employer; over a fifth of them are permanently separated workers who did not have any expectation of recall, unlike those on temporary layoff. Recalls are associated with much shorter unemployment duration and better wage changes. Negative duration dependence of unemployment nearly disappears once recalls are excluded. We also find that the probability of finding a new job is more procyclical and volatile than the probability of a recall. Incorporating this fact into an empirical matching function significantly alters its estimated elasticity and the time-series behavior of matching efficiency, especially during the Great Recession. We develop a canonical search-and-matching model with a recall option where new matches are mediated by a matching function, while recalls are free and triggered by both aggregate and job-specific shocks. The recall option is lost when the unemployed worker accepts a new job. A quantitative version of the model captures well our cross-sectional and cyclical facts through selection of recalled matches. |
| Keywords: | Recalls; Unemployment; Duration dependence; Matching function |
| JEL: | E24 E32 J64 |
| Date: | 2013–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:14-3&r=dge |
| By: | Dos Santos Ferreira, Rodolphe (University of Strasbourg 3); Lloyd-Braga, Teresa (Católica Lisbon); Modesto, Leonor (Universidade Catolica Portuguesa, Lisbon) |
| Abstract: | We study employment dynamics using an OLG model with unemployment benefits and universal old-age survival pensions, both financed by taxing employed workers. The novelty is that we explicitly introduce workers' social norms that shape both the individual participation decision of workers and wage bargaining. We find that social norms increase the likelihood of multiplicity of equilibria and somewhat facilitate the emergence of indeterminacy and flip bifurcations, constituting therefore a source of business cycles driven by self-fulfilling volatile expectations, i.e. sunspots. We also find that, in the presence of strong social norms, standard policy recommendations that advocate a decrease in unemployment benefits in order to boost employment are no longer valid. Indeed, our simulation results show that the opposite will happen for empirically plausible levels of the unemployment rate. |
| Keywords: | flip bifurcations, local indeterminacy, steady state multiplicity, sunspots, workers' social norms, unemployment benefits |
| JEL: | E32 H23 H31 J65 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7888&r=dge |
| By: | Roberto Samaniego (George Washington University) |
| Abstract: | Economies tend to diversify and then re-specialize as they develop. In an economy with many industries that experience different rates of productivity growth, these "stages of diversification" may obtain if initial conditions are skewed away from the industries that dominate economic structure in the long run as a matter of productivitydriven structural change. A calibrated multi-industry growth model with many countries replicates the main features of the "stages of diversification". We also present evidence that countries shift resources towards high-TFP growth manufacturing industries, and towards low-TFP growth sectors, consistent with the model. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:774&r=dge |
| By: | Pedro Silos (Federal Reserve Bank of Atlanta); GERMAN CUBAS (Central Bank of Uruguay) |
| Abstract: | Using the Survey of Income and Program Participation (SIPP) we estimate quarterly labor earnings risk across 21 industries of the US economy. We document a significant and positive association between earnings risk (both permanent and transitory) and average log-earnings across industries. The Finance sector is 50% riskier than Government which implies a mean earnings premium of 20%. We develop an equilibrium framework to analyze the interplay between volatility in labor earnings and comparative advantage in determining the level of earnings across industries. We use the model to decompose how much of the empirical correlation represents compensation for risk and how much represents selection. The positive association between permanent risk and earnings is compensation for risk, but selection is responsible for the observed relationship between temporary risk and mean earnings. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:789&r=dge |
| By: | Marian Vavra (National Bank of Slovakia) |
| Abstract: | This paper addresses the issue related to testing for non-linearity in economic models using new principal component based multivariate non-linearity tests. Monte Carlo results suggest that the new multivariate tests have good size and power properties even in small samples usually available in practice. The empirical results indicate that the use of linear economic models is unsuitable for policy recommendations. |
| Keywords: | DSGE model, Markov-switching, Monte Carlo method, principal components, nonlinearity testing |
| JEL: | C12 C15 C32 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:svk:wpaper:1024&r=dge |