nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2014‒03‒01
nine papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Maturity Structure and Debt Renegotiation in International Lending By Jaromir Nosal
  2. An Estimated Search and Matching Model of the Japanese Labor Market By Ching-Yang Lin; Hiroaki Miyamoto
  3. On the (de)Stabilizing Effect of Public Debt In a Ramsey Model with Heterogeneous Agents By Kazuo Nishimura; Carine Nourry; Thomas Seegmuller; Alain Venditti
  4. Balanced budget stimulus with tax cuts in a liquidity constrained economy By Vivek Prasad
  5. Revisiting the Matching Function By Britta Kohlbrecher; Christian Merkl; Daniela Nordmeier
  6. Participation, Recruitment Selection, and the Minimum Wage By Frédéric Gavrel
  7. Can Intangible Capital Explain Cyclical Movements in the Labor Wedge? By Gourio, Francois; Rudanko, Leena
  8. Firm Dynamics and Residual Inequality in Open Economies By Felbermayr, Gabriel; Impullitti, Giammario; Prat, Julien
  9. Dynamic Contracts and Learning by Doing By Prat, Julien

  1. By: Jaromir Nosal (Columbia University)
    Abstract: This paper presents a model of sovereign default with multi-period debt contracts with endogenous maturity. The sovereign in the model chooses the most favorable combination of interest rate, loan size and maturity out of the contracts oered in equilibrium by international lenders. All three characteristics of the contract endogenously vary with the business cycle of the sovereign. Additionally, in contrast to existing theories, we explicitly model the debt overhang problem: that the market power of the lenders depends on the renancing opportunities of the sovereign borrower. As a special case, we model how the debt is optimally restructured in case the sovereign decides to cease payments on outstanding debt. We explore the quantitative predictions of the calibrated model for debt, endogenous business cycle evolution of the debt contracts and the determination of the optimal debt relief when the sovereign is in default.
    Date: 2013
  2. By: Ching-Yang Lin (International University of University); Hiroaki Miyamoto (International University of University)
    Abstract: This paper studies how well a simple search and matching model can describe aggregate Japanese labor market dynamics in a full information setting. We develop a discrete-time search and matching model with a convex vacancy posting cost and three shocks: productivity, separation, and markup shocks. We use the model as a data-generating process for our empirical analysis and estimate it by using Bayesian methods. The model is successful in replicating the behavior of unemployment and vacancies in Japan. However, we also find that the success of the model relies on shock processes that are not empirically plausible.
    Keywords: Search and matching model, Unemployment, Bayesian Estimation, Japanese labor market
    JEL: C11 C51 E24 J64
    Date: 2014–02
  3. By: Kazuo Nishimura (Research Institute for Economics & Business Administration (RIEB), Kobe University, and KIER, Kyoto University); Carine Nourry (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)
    Abstract: We introduce public debt in a Ramsey model with heterogenous agents and a public spending externality a ecting utility which is nanced by income tax and public debt. We show that public debt considered as a xed portion of GDP can have a stabilizing or destabilizing e ect depending on some fundamental elasticities. When the public spending externality is weak and the elasticity of capital labor substitution is low enough, public debt can only be destabilizing, generating damped or persistent macroeconomic uctuations. Whereas when the public spending externality and the elasticity of capital labor substitution are strong enough, public debt can be stabilizing, driving to monotone convergence an economy experiencing damped or persistent uctuations without debt.
    Keywords: Endogenous cycles, heterogeneous agents, public spending, public debt, borrowing constraint
    JEL: C62 E32 H23
    Date: 2014–02
  4. By: Vivek Prasad (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: This paper examines the macroeconomic effects of unexpected, exogenous, simultaneous, temporary cuts to income tax rates in an economy when the government follows a balanced budget fiscal rule and keeps money supply constant, and private agents face constraints on the ability to finance investments. The main results are that the tax cuts increase output, private consumption, and investment; the increases in output and consumption are significant and long-lasting; and the liquidity constraints play a major role in the shock's long-term persistence. Results are obtained from calibrating a modified version of the DSGE model of liquidity and business cycles by Kiyotaki and Moore (2012). The modifications are twofold: (i) distortionary taxes to labour and dividend incomes are added, and (ii) the government follows a balanced budget fiscal rule and keeps money supply constant. Results are qualitatively robust, but quantitatively sensitive, to assumptions regarding structural parameter values, and qualitatively and quantitatively sensitive to significant variations in the persistence of tax shocks.
    Keywords: Fiscal policy, taxation, balanced budget, liquidity constraints.
    JEL: E10 E20 E30 E44 E50 E62 H30
    Date: 2014–01
  5. By: Britta Kohlbrecher; Christian Merkl; Daniela Nordmeier
    Abstract: Many labor market models use both idiosyncratic productivity and a vacancy free entry condition. This paper shows that these two features combined generate an equilibrium comovement between matches on the one hand and unemployment and vacancies on the other hand, which is observationally equivalent to a constant returns Cobb-Douglas function commonly used to model match formation. We use German administrative labor market data to show that the matching function correlation solely based on idiosyncratic productivity and free entry is very close to the empirical matching function. Consequently, we argue that standard matching function estimations are seriously biased if idiosyncratic productivity plays a role for match formation. In this case, they are not suitable for the calibration of labor market models
    Keywords: matching function, idiosyncratic productivity, job creation, vacancies
    JEL: E24 E32 J63 J64
    Date: 2014–02
  6. By: Frédéric Gavrel (TEPP - Travail, Emploi et Politiques Publiques - CNRS : FR3435 - Université Paris-Est Marne-la-Vallée (UPEMLV), CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie)
    Abstract: This paper reexamines the efficiency of participation with heterogeneous workers in a search-matching model with bargained wages and free entry. Assuming that firms hire their best applicants, we state that participation is insufficient whatever workers' bargaining strengths. The reason for this is that, when holding a job, the marginal participant should receive the entire output. As a consequence, introducing a (small) minimum wage raises participation, job creation, and employment. Therefore the aggregate income of the economy is enhanced.
    Keywords: Search and matching, participation, heterogeneous workers, applicant ranking, effi ciency, minimum wage
    Date: 2014–02–14
  7. By: Gourio, Francois (Federal Reserve Bank of Chicago); Rudanko, Leena (Boston University)
    Abstract: Intangible capital is an important factor of production in modern economies that is generally neglected in business cycle analyses. We demonstrate that intangible capital can have a substantial impact on business cycle dynamics, especially if the intangible is complementary with production capacity. We focus on customer capital: the capital embodied in the relationships a firm has with its customers. Introducing customer capital into a standard real business cycle model generates a volatile and countercyclical labor wedge, due to a mismeasured marginal product of labor. We also provide new evidence on cyclical variation in selling effort to discipline the exercise.
    Keywords: Business cycle; capital; labor wedge
    JEL: E13 E32
    Date: 2014–01–15
  8. By: Felbermayr, Gabriel (University of Munich); Impullitti, Giammario (University of Nottingham); Prat, Julien (CREST)
    Abstract: Increasing wage inequality between similar workers plays an important role for overall inequality trends in industrialized societies. To analyze this pattern, we incorporate directed labor market search into a dynamic model of international trade with heterogeneous firms and homogeneous workers. Wage inequality across and within firms results from their different hiring needs along their life cycles and the convexity of their adjustment costs. The interaction between wage posting and firm growth explains some recent empirical regularities on firm and labor market dynamics. Fitting the model to capture key features obtained from German linked employer-employee data, we investigate how falling trade costs and institutional reforms interact in shaping labor market outcomes. Focusing on the period 1996-2007, we find that neither trade nor key features of the Hartz labor market reforms account for the sharp increase in residual inequality observed in the data. By contrast, inequality is highly responsive to the increase in product market competition triggered by domestic regulatory reform.
    Keywords: wage inequality, international trade, directed search, firm dynamics, product and labor market regulation
    JEL: F12 F16 E24
    Date: 2014–02
  9. By: Prat, Julien (CREST)
    Abstract: This paper studies the design of optimal contracts in dynamic environments where agents learn by doing. We derive a condition under which contracts are fully incentive compatible. A closed-form solution is obtained when agents have CARA utility. It shows that human capital accumulation strengthens the power of incentives and allows the principal to provide the agent with better insurance against transitory risks.
    Keywords: human capital, principal agent problem, moral hazard
    JEL: D82 D83 J24 J41
    Date: 2014–02

This nep-dge issue is ©2014 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.