nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2014‒03‒08
ten papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Optimal Taxation and Life Cycle Labor Supply Prole By Michael Kuklik; Nikita Céspedes
  2. Robust Dynamic Optimal Taxation and Environmental Externalities By Xin Li; Borghan Narajabad; Ted Temzelides
  3. An Estimated Small Open Economy Model with Labour Market Frictions By Sheen, Jeffrey; Wang, Ben Z.
  4. Prices and Investment with Collateral and Default By Michael Magill; Martine Quinzii
  5. How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets By Luis-Gonzalo Llosa
  6. Social Security and the Rise in Health Spending By Kai Zhao
  7. Safe Assets’ Scarcity, Liquidity and Spreads By G. Chiesa
  8. Economic modeling approaches: optimization versus equilibrium By Olga Kiuila; Thomas F. Rutherford
  9. Growth effect of bubbles in a non-scale endogenous growth model with in-house R&D By Kizuku Takao
  10. Chocs extérieurs et régimes monétaires en Asie du Sud-Est : une analyse DSGE By Ibrahima Sangaré

  1. By: Michael Kuklik (Long Island University); Nikita Céspedes (Central Bank of Peru)
    Abstract: The optimal capital income tax rate is 36 percent as reported by Conesa, Kitao, and Krueger (2009). This result is mainly driven by the market incompleteness as well as the endogenous labor supply in a life-cycle framework. We show that this model fails to account for the basic life-cycle features of the labor supply observed in the U.S. data. In this paper, we introduce into this model non-linear wages and inter-vivos transfers into this model in order to account for the life-cycle features of labor supply. The former makes hours of work highly persistent and helps to account for labor choices at the extensive margin over the life cycle. The latter allows us to account for labor choices early in life. The suggested model delivers an optimal capital income tax rate of 7.4 percent, which is significantly lower than what Conesa, Kitao, and Krueger (2009) found.
    Keywords: Labor supply, optimal taxation, capital taxation, non-linear wage, inter-vivos transfer
    JEL: E13 H21 H24 H25
    Date: 2014–02
  2. By: Xin Li; Borghan Narajabad; Ted Temzelides
    Abstract: We study a dynamic stochastic general equilibrium model where agents are concerned about model uncertainty regarding climate change. An externality from greenhouse gas emissions adversely affects the economy’s capital stock. We assume that the mapping from climate change to damages is subject to uncertainty, and we adapt and use techniques from robust control theory in order to study efficiency and optimal policy. We obtain a sharp analytical solution for the implied environmental externality, and we characterize dynamic optimal taxation. A small increase in the concern about model uncertainty can cause a significant drop in optimal energy extraction. The optimal tax which restores the social optimal allocation is Pigouvian. Under more general assumptions, we develop a recursive method and solve the model computationally. We find that the introduction of uncertainty matters qualitatively and quantitatively. We study optimal output growth in the presence and in the absence of concerns about uncertainty and find that these can lead to substantially different conclusions.
    JEL: N10
    Date: 2014
  3. By: Sheen, Jeffrey; Wang, Ben Z.
    Abstract: We estimate small open economy models with involuntary unemployment using Australian data from 1993 to 2007, focusing on hiring costs and real wage rigidity. We find a strong preference for models with hiring costs, which account for 0.97% of GDP. The data favour models with real over nominal wage rigidity. Impulse responses to technology shocks reveal no productivity-employment puzzle for the preferred model. In the short run, technology shocks, operating through hiring costs via labour demand, explain most unemployment variance, while labour preference shocks explain most real wage variance. Demand shocks dominate supply shocks in explaining output variance. In the long run, these contributions reverse. Out-of-sample conditional forecasts perform well but cannot predict the confidence effects of the crisis.
    Keywords: DSGE; Hiring cost; Wage rigidities; Bayesian estimation; Small open economy
    JEL: C11 C13 E32 F41 J64
    Date: 2014–02
  4. By: Michael Magill; Martine Quinzii (Department of Economics, University of California Davis)
    Abstract: This paper uses the framework of an OLG economy with three-period lived agents in which a durable good serves as collateral for loans, to study the effect of an unanticipated income shock when the economy is in a steady state equilibrium. We focus on the consequence of default on loans when the value of the collateral falls below the value of the debt it secures. We analyze the impulse response functions of the price and production of the durable good and show that there is an asymmetry between the response of the price and investment of the durable good to a positive and a negative income shock arising from default on the collateralized loans.
    Keywords: Overlapping generations, durable good, collateral, default, Golden Rule steady state, asymmetric impulse response functions.
    JEL: D D
    Date: 2014–02–26
  5. By: Luis-Gonzalo Llosa (AFP Profuturo)
    Abstract: This paper analyzes how terms of trade affect aggregate productivity using a two-country monopolistic competitive business cycle model driven by aggregate technology shocks. The inefficiency of the equilibrium implies that each country’s productivity is affected by the terms of trade. This introduces a novel mechanism for business cycle synchronization. Moreover, for each country, foreign technology shocks have almost the same effects as domestic technology shocks. The paper also shows how terms of trade movements can lead to excess volatility of consumption and highly persistent productivity. On the quantitative side, the model delivers a degree of business cycle synchronization that is close to the actual comovement of the U.S. economy with the rest of the world. The model also implies that for some small open economies, specially emerging economies, foreign shocks can outperform domestic shocks in explaining their business cycles. Finally, the paper provides a quantification of the influence of the terms of trade on emerging countries’ productivity and finds that it can be large.
    Keywords: Imperfect Competition, Input-Output Linkages, Terms of Trade, Business Cycles, Total Factor Productivity
    JEL: C67 E23 F12 F41 F43
    Date: 2014–02
  6. By: Kai Zhao (University of Connecticut)
    Abstract: In a quantitative model of Social Security with endogenous health, I argue that Social Security increases the aggregate health spending of the economy because it redistributes resources to the elderly whose marginal propensity to spend on health is high. I show by using computational experiments that the expansion of US Social Security can account for over a third of the dramatic rise in US health spending from 1950 to 2000. In addition, Social Security has a spill-over effect on Medicare. As Social Security increases health spending, it also increases the payments from Medicare, thus raising its financial burden.
    Keywords: Social Security, Health Spending, Saving, Longevity
    JEL: E20 E60 H30 I00
    Date: 2014–01
  7. By: G. Chiesa
    Abstract: This paper constructs a simple general equilibrium model to analyse the interactions between the financial and the real sector in an environment where liquidity holdings is an input of the credit/investment process. The supply of liquidity is constrained in that income pledgeability limits inside liquidity, and not all sovereign debt is safe/liquid. We pin down the determinants of liquidity/collateral premia and bond spreads, and with reference to the eurozone: (i) the implications of the ECB’s policies on liquidity provision and credit, and (ii) the debt management policy that would increase welfare with no need for transfer payments.
    JEL: E44 H63 G18
    Date: 2014–02
  8. By: Olga Kiuila (Faculty of Economic Sciences, University of Warsaw); Thomas F. Rutherford (ETH Zurich, Centre for Energy Policy and Economics)
    Abstract: The paper discusses three general classes of nonlinear programming models. Our objective is to show how to represent optimization problem, such as nonlinear programs, in a compact format using extended mathematical programming. This is a useful tool, especially in cases when complementarity representation, such as mixed complementarity problems, could be difficult to apply. We reflect on the special features of the abstract neoclassical growth model with infinite horizon and illustrate four distinct approaches to computing equilibrium transition paths. The relationship between optimization and equilibrium modeling is explored. We conclude with a test of a new model representation (extended mathematical programming) using two common general equilibrium studies in the literature: Ramsey and Negishi. The new framework allows to define complementarity problems for a model formulated as an optimization problem, thus the resulting model becomes in fact a complementarity problem.
    Keywords: nonlinear programming, complementarity programming, extended mathematical programming, computable general equilibrium modeling, infinite horizon
    JEL: C02 C60 C61 C68 D58
    Date: 2014
  9. By: Kizuku Takao (Graduate School of Economics, Osaka University)
    Abstract: This paper provides a theoretical explanation for why the presence of asset bubbles can lead to higher economic growth in concurrence with high consumption by using a simple endogenous growth model. In the model economy, long-lived valuemaximizing firms continuously improve the quality of their specific products through in-house R&D, while at the same time new firms also enter into the market. Due to an absence of intergenerational altruism, asset bubbles can exist as pyramid schemes whose value is not backed by fundamental value. The presence of asset bubbles then leads to higher interest rates. This requires product proliferation to be impeded, which would result in an increase in the demand for differentiated goods at the level of an individual firm. A larger scale of production at the level of an individual firm can encourage in-house R&D of firms and promote economic growth.
    Keywords: Bubbles, R&D, Overlapping generations
    JEL: E44 O32 O41
    Date: 2014–02
  10. By: Ibrahima Sangaré (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954)
    Abstract: Cet article compare les performances économiques et en termes de bien-être de quatre régimes monétaires (flottement pur, flottement dirigé, zone cible et change fixe) pour chacun des cinq pays fondateurs de l'ASEAN, à l'aide d'un modèle DSGE de petite économie ouverte. Le modèle intègre l'accélérateur financier et le phénomène de péché originel, et est estimé partiellement par la méthode bayésienne et calibré en utilisant les données de ces pays. Nous trouvons via l'analyse des propriétés de stabilisation et du bien-être qu'en face des chocs extérieurs, le change flexible est le meilleur régime pour chacun des pays étudiés, suivi des régimes intermédiaires et du change fixe. Nous montrons que ces résultats pourraient être affectés par le degré d'ouverture des économies, soulignant ainsi le rôle d'effet de substitution de demande.
    Keywords: Régimes monétaires, Chocs extérieurs, Dette en monnaie étrangère, Asie du Sud-Est, Frictions financières.
    Date: 2014–02–19

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.
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