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on Dynamic General Equilibrium |
|
Issue of 2014‒03‒15
eighteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Petra Marotzke (Department of Economics, University of Konstanz, Germany) |
| Abstract: | In line with earlier literature, I document a U-shaped relationship between age and wage dispersion in the U.S.. To explain this outcome, I consider a life-cycle model of labor market search with strategic wage bargaining, heterogeneous firm-worker matches, and endogenous search effort. Three factors shape the age-inequality profile of wages in the model economy: the time until retirement, match heterogeneity, and the workers’ bargaining power. Young workers switch employers often and are gradually matched to better jobs, which leads to the initial reduction in the variance of log wages. Middle-aged and older workers switch employers less frequently and have a longer search history. As workers are differently successful in the labor market, the variance of match productivities rises in the second half of the working life. The calibrated model captures the U-shape of the age-inequality profile of wages in conjunction with the hump-shaped age profile of average wages, as well as employment-to-employment transitions that decrease with age. |
| Keywords: | Search Frictions, Wage Dispersion, Life Cycle, Wage Bargaining |
| JEL: | J31 J41 J64 |
| Date: | 2014–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1406&r=dge |
| By: | Naohisa Hirakata (Asian Development Bank Institute (ADBI)); Yuto Iwasaki; Masahiro Kawai |
| Abstract: | This paper examines the international transmission effects that a positive supply shock in emerging economies may have on inflation in developed economies. We construct a dynamic stochastic general equilibrium (DSGE) model for three countries and analyze the impact of a supply shock in an emerging economy, the People’s Republic of China (PRC), on inflation rates in two developed economies, the United States (US) and Japan. We demonstrate that the assumed asymmetric trade structures among the three countries and the PRC’s choice of exchange rate regime influence the international transmission of a supply shock in the PRC. Specifically, Japan is under a greater deflationary pressure than the US because of its vertical trade specialization vis-à -vis the PRC and the PRC’s USdollar- pegged regime. This outcome suggests that, even though Japan and the US may face common positive supply shocks from emerging economies, the deflationary impact of the shock is greater for Japan. |
| Keywords: | emerging economies, supply shock, price deflation, dynamic stochastic general equilibrium (DSGE) model, PRC, China, Japan, US, international transmission effects, exchange rate regime |
| JEL: | F32 F41 F44 F47 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23970&r=dge |
| By: | Ryne Belliston (Department of Economics, Brigham Young University); Scott Bradford (Department of Economics, Brigham Young University); Kerk L. Phillips (Department of Economics, Brigham Young University) |
| Abstract: | This paper constructs a single-sector dynamic stochastic general equilibrium (DSGE) model for a trading economy. We are able to examine the effects on output, consumption, factor prices, and utility. We do this for both steady states and for transition paths. By including macroeconomic shocks, we are able to calculate confidence bands around our policy impulse response functions. We find that while the effects of immigration are likely to be observable in aggregate data, the welfare effects on households of all types is small relative to the natural fluctuations in utility coming from economic fluctuations at business cycle frequencies. The effects are also small relative to the upward trend in utility due to technical progress. We find that household utility rises most for immigration policies that favor skilled immigrants, though different types of domestic households will favor slightly different policies. |
| Keywords: | labor migration, factor mobility, dynamic general equilibrium, Japan |
| JEL: | F15 F22 F42 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:byu:byumcl:201402&r=dge |
| By: | ANDREZA APARECIDA PALMA; MARCELO SAVINO PORTUGAL |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2013:055&r=dge |
| By: | Chatterjee, Sidharta |
| Abstract: | Models in macroeconomic sciences are designed with the aim of understanding and then simulating the real world economic and monetary policy making. There has been a considerable debate over how to model the real world economic phenomena, and how correctly those models allow explanations of general equilibrium; that is, whether the models with their assumed parameters are able to expound on critical aspects of monetary policy making. Some models are structured to provide naïve explanations of the monetary policy process, while others are higher order complex models that attempt to elucidate the dynamicity of economic equilibrium. Dynamic Stochastic General Equilibrium (DSGE) model is one of such a complex model which has found the flavour of the time following its rapid adoption by Central Banks around the world. But strong contentions rebate the usefulness and question its effectiveness over other standard tools of macroeconomic and monetary policymaking process. Many scholars debate that DSGE models are far from perfect, to render it efficient in public policy making, although its adoption has been one such phenomenal. This paper aims to discuss in some detail about such debates relating to the contentious issues which arose on account of the failure of DSGE models to effectively detect the recent financial crisis the subprime of 2008. Hence, the present study revolves around a formal analysis of the epistemology of econometric modeling involving complex dynamic systems in real world policy making, and discusses whether if new models like DSGE could in fact help explain general equilibrium, or if they fail, then what to look for in their failure. |
| Keywords: | DSGE models, macroeconomic equilibrium, monetary policy |
| JEL: | E1 E12 E17 |
| Date: | 2014–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53893&r=dge |
| By: | Davis, Scott (Federal Reserve Bank of Dallas); Presno, Ignacio (Federal Reserve Bank of Dallas) |
| Abstract: | Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy markers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by foreign capital inflows and outflows, the adoption of temporary capital controls can lead to a significant welfare improvement. The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy. |
| JEL: | E32 E52 F32 F41 |
| Date: | 2014–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:171&r=dge |
| By: | Karsten Wasiluk (Department of Economics, University of Konstanz, Germany) |
| Abstract: | This paper studies the effect of demographic change on the technology distribution of an economy and on aggregate productivity growth. In the quantitative dynamic model, firms decide on employment and the technology they use subject to an aging workforce. Firms with a higher share of elderly workers update their technology less often and prefer older technologies than firms with a younger workforce. The shorter expected worklife of elderly workers makes firms reluctant to train them for new technologies. I calibrate the model for the German economy and simulate the projected demographic change. The results indicate that labor force aging reduces the realized annual productivity growth rate by 0.28 percentage points between 2010–2025. |
| Keywords: | Demographic Change, TFP growth, Retirement Policies |
| JEL: | J11 J21 J26 O33 |
| Date: | 2014–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1405&r=dge |
| By: | Robert Becker; Stefano Bosi; Cuong Le Van; Thomas Seegmuller |
| Abstract: | We address the issues of existence of Ramsey equilibrium under bor- rowing constraints and occurrence of rational bubbles. First, we consider a time-truncated economy. Since the feasible allo- cations sets of our economy are uniformly bounded, we prove that there exists an equilibrium in a time-truncated bounded economy by Gale and Mas-Colell's (1975) theorem. Actually, this equilibrium turns out to be an equilibrium for the time-truncated economy as the uniform bounds are relaxed, as is commonly shown in general equilibrium proofs of existence for ffnite-dimensional commodity spaces. Second, we take the limit of a sequence of truncated, unbounded economies, and prove the existence of an intertemporal equilibrium in the limit economy. Third, rational bubbles never occur in our productive economy. |
| Keywords: | Ramsey model, heterogeneous agents, labor supply, borrowing constraint, bubbles. |
| JEL: | C62 D31 D91 G10 |
| Date: | 2014–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-105&r=dge |
| By: | Roger E.A. Farmer |
| Abstract: | The representative agent model (RA) has dominated macroeconomics for the last thirty years. This model does a reasonably good job of explaining the co-movements of consumption, investment, GDP and employment during normal times. But it cannot easily explain movements in asset prices. Two facts are hard to understand 1) The return to equity is highly volatile and 2) The premium for holding equity, over a safe government bond, is large. This paper constructs a lifecycle model in which agents of different generations have different savings rates and different attitudes to risk and I use this model to account for both a high equity premium and a volatile stochastic discount factor. The model is persuasive, precisely because it explains so much with so few parameters, each of which is pinned down by a few simple facts. |
| JEL: | G0 G12 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19958&r=dge |
| By: | Hanushek, Eric; Leung, Charles Ka Yui; Yilmaz, Kuzey |
| Abstract: | This paper provides a consistent comparison of general tuition subsidies, need-based student aid, merit-based student aid, and income continent loans (ICL). Each of these policies is analyzed through a dynamic general equilibrium model in which individuals differ in family wealth and opportunities of completing college. The overlapping generation structure of the model permits evaluation of different aid schemes in their implications on the aggregate outcomes, income distribution and intergenerational mobility. Compared to current U.S. tuition and loan policies, the ICL and need-based policies are most effective in promoting the aggregate efficiency and income equality, while merit-based policies are least effective. |
| Keywords: | need-based student aid; merit-based student aid; income contingent loan; efficiency-equality tradeoff; intergenerational mobility |
| JEL: | D10 H20 I20 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:54238&r=dge |
| By: | Chan, Rosanna |
| Abstract: | Financial constraints are widespread in developing countries, where even short-term credit is limited. Finance held by firms as working capital is a substantial proportion of sales revenue, yet the role of working capital is largely neglected by existing models of financial constraints. This paper presents a dynamic model of the firm that incorporates working capital by introducing a delay between factor payments and the receipt of revenue. In contrast with previous models, the working capital model predicts that firms under binding constraints will substitute between labor and capital in response to demand shocks, causing investment to be countercyclical. For firms near the margin of being constrained, constraints bind when positive production opportunities arise. Output growth is therefore constrained in response to positive shocks but not to negative shocks. Simulations suggest that models without working capital may understate the predicted effects of financial constraints on production efficiency, firm profit and growth over time. The predictions are tested with the Bangladesh Panel Survey data for manufacturing firms. Consistent with the theory, there is evidence that constraints bind when output price increases, that investment by constrained firms is countercyclical, and that output response to positive shocks is dampened for firms that are sometimes constrained. The results also are important for policy. In order to maximize growth, efforts to relieve credit constraints should be focused on periods when demand shocks are high. |
| Keywords: | Access to Finance,Economic Theory&Research,Debt Markets,Emerging Markets,Investment and Investment Climate |
| Date: | 2014–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6797&r=dge |
| By: | THAIS WAIDEMAN NIQUITO; MARCELO SAVINO PORTUGAL; FABRÍCIO TOURRUCÔO; ANDRÉ FRANCISCO NUNES DE NUNES |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2012:057&r=dge |
| By: | Chatterjee, Satyajit (Federal Reserve Bank of Philadelphia); Eyigungor, Burcu (Federal Reserve Bank of Philadelphia) |
| Abstract: | We prove that the standard quasi-geometric discounting model used in dynamic consumer theory and political economics does not possess continuous Markov perfect equilibria (MPE) if there is a strictly positive lower bound on wealth. We also show that, at points of discontinuity, the decision maker strictly prefers lotteries over the next period's assets. We then extend the standard model to have lotteries and establish the existence of an MPE with continuous decision rules. The models with and without lotteries are numerically compared, and it is shown that the model with lotteries behaves more in accord with economic intuition. |
| Keywords: | Quasi-geometric; Quasi-hyperbolic; Time consistency; Markov Perfect Equilibrium; Debt Limit; Continuous Solutions; Lotteries; |
| JEL: | C73 D11 D90 E21 H63 P16 |
| Date: | 2014–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:14-6&r=dge |
| By: | Etienne Farvaque (Université du Havre, Faculté des A¤aires Internationales); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | We develop a stochastic overlapping-generations model with endogenously evolving heterogeneous beliefs on the degree of inflation protection to be provided by markets versus the monetary authority. It incorporates adaptive learning from inflation history and imperfect empathy in the cultural transmission of beliefs. Analytical results on endogenous inflation beliefs and socially-optimal inflation are derived first in a within-generation voting equilibrium that defines a particular degree of inflation aversion of a society's monetary institution. Then further theoretical and simulation analysis of the intergenerational dynamics of inflation and inflation beliefs provides insights into the long-run evolution of population types and social institutions, exploring the interactions of three central forces: the persistence of inflation, the degree of inflation aversion of the central bank and the recurrent irregular cycles of agent type proportions and subsequent majority switches. Our main contribution consists in showing how the endogenous transmission of inflation beliefs and monetary institutions in a stochastic economic environment can be understood as a process of intergenerational learning from history combined with a political economy mechanism that amends legislation and a socialization process that transmits experienced knowledge. |
| Keywords: | evolving beliefs, in?ation aversion, adaptive learning, voting equilibrium, cultural transmission, monetary institutions |
| JEL: | D72 D83 E31 E58 H41 J10 |
| Date: | 2014–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2014-02&r=dge |
| By: | Mitsuru Katagiri; Ryo Kato; Takayuki Tsuruga |
| Abstract: | A fast growing literature on small open economy models with pecuniary externalities has provided the theoretical grounds for the policy analysis of macro prudential regulations. Using the framework of Jeanne and Korinek (2010), we investigate whether a subsidy on debt during crises as a form of bailout can outperform prudential capital controls. We show that the result depends on the functional form of the collateral constraint faced by households. If households collateralize their assets that they purchase at the same time as their borrowing, subsidizing debt during crises is preferable. If, on the other hand, the maximum borrowing is constrained by the value of their assets that they have purchased before they borrow, a stronger case can be made for prudential capital controls. |
| Keywords: | Financial crises, Credit externalities, Bailouts, Macroprudential policies |
| JEL: | E32 G01 G18 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-25&r=dge |
| By: | SIDNEY MARTINS CAETANO; GUILHERME VALLE MOURA |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2013:059&r=dge |
| By: | Luo, Yulei; Nie, Jun; Young, Eric |
| Abstract: | This paper studies the aggregate dynamics of durable and nondurable consumption under slow information diffusion (SID) due to noisy observations and learning within the permanent income framework. We show that SID can significantly improve the model’s predictions on the joint behavior of income, durable consumption, and nondurable consumption at the aggregate level. Specifically, we find that SID can significantly improve the model’s predictions for: (i) smoothness in durable and nondurable consumption, (ii) autocorrelation of durable consumption, and (iii) contemporaneous correlation between durable and nondurable consumption. Furthermore, we discuss that incorporating a fixed cost into our SID model does a better job of reproducing the infrequent adjustments of durable consumption at the individual level and the slow adjustments at the aggregate level. |
| Keywords: | Durability, Slow Learning, Slow Information Diffusion, Infrequent Adjustments, Consumption Stickiness |
| JEL: | D8 D81 E2 E21 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:54089&r=dge |
| By: | ALEXANDRE FLÁVIO SILVA ANDRADA |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2013:005&r=dge |