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on Dynamic General Equilibrium |
| By: | Felix Kubler (University of Zurich and SFI); Johannes Brumm (University of Zurich) |
| Abstract: | In this paper we develop a Negishi approach to characterize recursive equilibria in stochastic models with overlapping generations. When competitive equilibria are Pareto-optimal, using Negishi-weights as a co-state variable has three major computational advantages over the standard approach of using the natural state: First, the endogenous state space is a unit simplex and thus easy to handle. Second, the number of unknown functions characterizing equilibrium dynamics is orders of magnitude smaller. Third, approximation errors have a compelling economic interpretation. Our main contribution is to show that the Negishi approach extends naturally to models with borrowing-constraints and incomplete financial markets where the welfare theorems fail. Many of the computational advantages carry over to this setting. We derive sufficient conditions for the existence of Markov equilibria in the complete markets model as well as for models with incomplete markets and borrowing constraints. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:1352&r=dge |
| By: | Jeremy Lise; Costas Meghir (UCL Department of Economics); Jean-Marc Robin (Département d'économie) |
| Abstract: | We develop an empirical search-matching model with productivity shocks so as to analyze policy interventions in a labor market with heterogeneous agents. To achieve this we develop an equilibrium model of wage determination and employment, which is consistent with key empirical facts. As such our model extends the current literature on equilibrium wage determination with matching and provides a bridge between some of the most prominent macro models and microeconometric research. The model incorporates long-term contracts, on-the-job search and counter-offers, and a vacancy creation and destruction process linked to productivity shocks. Importantly, the model allows for the possibility of assortative matching between workers and jobs, a feature that had been ruled out by assumption in the empirical equilibrium search literature to date. We use the model to estimate the potential gain from an optimal unemployment insurance scheme, as well as the redistributive effects of such a policy |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/6ggbvnr6munghes9od0s108ro&r=dge |
| By: | Federico GIRI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali) |
| Abstract: | The aim of this paper is to assess the impact of the interbank market on the business cycle fluctuations. We build a DSGE model with heterogeneous households and banks. Two kind of banks are in the model: Deficit banks which are net borrowers on the interbank market and they provide credit to the real economy. The surplus bank are net lender and they could choose to provide interbank lending or purchase government bonds.;The portfolio choice of the surplus bank is affected by an exogenous shock that modifies the riskiness of the interbank lending thus allowing us to capture the collapse of the interbank market and the fl y to quality mechanism underlying the 2007 financial crisis.;The main result is that an interbank riskiness shock seems to explain part of the 2007 downturn and the rise of the interest rate on the credit market just after the financial turmoil. |
| Keywords: | Bayesan estimation, DSGE model, financial frictions, interbank market |
| JEL: | E30 E44 E51 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:398&r=dge |
| By: | Hairault, Jean-Olivier (University of Paris 1 Panthéon-Sorbonne); Langot, François (University of Le Mans); Sopraseuth, Thepthida (University of Cergy-Pontoise) |
| Abstract: | Since the last recession, it is usually argued that older workers are less affected by the economic downturn because their unemployment rate rose less than the one of prime-age workers. This view is a myth: older workers are more sensitive to the business cycle. We document volatilities of worker flows and hourly wage across age groups on CPS data. We find that old worker's job flows are characterized by a higher responsiveness to business cycles than their younger counterparts. In contrast, their wage cyclicality is lower than prime-age workers'. Beyond this empirical contribution, we show that a life-cycle Mortensen & Pissarides (1994) model is well suited to explain these facts: older workers' shorter work-life expectancy endogenously reduces their outside options and leads their wages to be less sensitive to the business cycle. Thus, in a market where wage adjustments are small, quantities vary a lot: this is the case for older workers, whereas the youngest behave like infinitively-lived agents. Our theoretical results point out that Shimer (2005)'s view on the MP model is consistent with prime-age workers' labor market while aging endogenously introduces real wage rigidities, allowing to match what we observe for old workers, without specific assumptions as in Hagendorn & Manovskii (2008). |
| Keywords: | search, matching, business cycle, life-cycle |
| JEL: | E32 J11 J23 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8076&r=dge |
| By: | Francesco Zanetti; Konstantinos Theodoridis |
| Abstract: | This paper uses a VAR model estimated with Bayesian methods to identify the effect of productivity news shocks on labor market variables by imposing that they are orthogonal to current technology but they explain future observed technology.� In the aftermath of a positive news shock, unemployment falls, whereas wages and the job finding rate increase.� The analysis establishes that news shocks are important in explaining the historical developments in labor market variables, whereas they play a minor role for movements in real activity.� We show that the empirical responses to news shocks are in line with those of a baseline search and matching model of the labor market and that the job destruction rate and real wage rigidities are critical for the variables' responses to the news shock. |
| Keywords: | Anticipated productivity shocks, Bayesian SVAR methods, labor market search frictions |
| JEL: | E32 C32 C52 |
| Date: | 2014–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:699&r=dge |
| By: | Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | We analyze optimal consumption in the life cycle model by introducing life and pension insurance contracts. The model contains a credit market with biometric risk, and market risk via risky securities. This idealized framework enables us to clarify important aspects life insurance and pension contracts. We find optimal pension plans and life insurance contracts where the benefits are state dependent. We compare these solutions both to the ones of standard actuarial theory, and to policies offered in practice. Implications of this include what role the insurance industry may play to improve welfare. The relationship between substitution of consumption and risk aversion is highlighted in the presence of a consumption puzzle. One problem related portfolio choice is discussed - the horizon problem. Finally, we present some comments on longevity risk and cohort risk. |
| Keywords: | The life cycle model; pension insurance; optimal life insurance; longevity risk; the horizon problem; consumption puzzle |
| JEL: | D91 |
| Date: | 2014–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2014_013&r=dge |
| By: | Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business) |
| Abstract: | A large literature has related the failure of interest rate parity in the foreign exchange market to the existence of a time-varying risk premium. Nevertheless, most modern open economy DSGE models imply a (near) perfect interest rate parity condition. This paper presents a stylized two-country incomplete-markets model in which countries have strong precautionary motives because they face international liquidity constraints, the presence of which successfully generates a time-varying risk premium: the country that has accumulated debt after experiencing relative worse times has stronger precautionary motives and its asset carries a risk premium. |
| Keywords: | Uncovered Interest Rate Parity, Incomplete Market, Precautionary Savings, Time-Varying Risk Premium |
| JEL: | F31 F41 G12 G15 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp171&r=dge |
| By: | Frederic Gavrel (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie, TEPP - Travail, Emploi et Politiques Publiques - CNRS : FR3435 - Université Paris-Est Marne-la-Vallée (UPEMLV)) |
| Abstract: | This paper reexamines the e ciency of participation with heterogeneous workers in a search-matching model with bargained wages and free entry. As- suming that rms hire their best applicants, we state that participation is insu cient 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 maching ; participation ; heterogeneous workers ; applicant ranking ; efficiency ; minimum wage |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00972289&r=dge |
| By: | Jesper Bagger (Royal Holloway, University of London); Rasmus Lentz (University of Wisconsin-Maddison) |
| Abstract: | This paper studies wage dispersion in an equilibrium on-the-job-search model with endogenous search intensity. Workers differ in their permanent skill level and firms differ with respect to productivity. Positive (negative) sorting results if the match production function is supermodular (submodular). The model is estimated on Danish matched employer-employee data. We find evidence of positive assortative matching. In the estimated equilibrium match distribution, the correlation between worker skill and firm productivity is 0.12. The assortative matching has a substantial impact on wage dispersion. We decompose wage variation into four sources: Worker heterogeneity, firm heterogeneity, frictions, and sorting. Worker heterogeneity contributes 51% of the variation, firm heterogeneity contributes 11%, frictions 23%, and finally sorting contributes 15%. We measure the output loss due to mismatch by asking how much greater output would be if the estimated population of matches were perfectly positively assorted. In this case, output would increase by 7.7%. |
| Keywords: | Sorting, Worker heterogeneity, Firm heterogeneity, On-the-job search, Wage dispersion, Matched employer-employee data |
| JEL: | J24 J33 J62 J63 J64 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2014-11&r=dge |
| By: | Tayler, William; Zilberman, Roy |
| Abstract: | This paper examines the macroprudential roles of bank capital regulation and monetary policy in a Dynamic Stochastic General Equilibrium model with endogenous financial frictions and a borrowing cost channel. We identify various transmission channels through which credit risk, commercial bank losses, monetary policy and bank capital requirements affect the real economy. These mechanisms generate significant financial accelerator effects, thus providing a rationale for a macroprudential toolkit. Following credit shocks, countercyclical bank capital regulation is more effective than monetary policy in promoting financial, price and overall macroeconomic stability. For supply shocks, macroprudential regulation combined with a strong response to inflation in the central bank policy rule yield the lowest welfare losses. The findings emphasize the importance of the Basel III regulatory accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress. -- |
| Keywords: | Bank Capital Regulation.,Macroprudential Policy,Basel III,Monetary Policy,Cost Channel |
| JEL: | E32 E44 E52 E58 G28 |
| Date: | 2014–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:95230&r=dge |
| By: | Pavel Sevcik (Ecole des Sciences de Gestion, Universite du Quebec a Montreal (ESG UQAM)); Rui Castro (University of Montreal) |
| Abstract: | We develop a framework which allows us to study the effect of financing constraints for both firm-level investment decisions, and household-level schooling decisions. We characterize the joint determination of occupational choices, educational outcomes, and production decisions. We first evaluate the role of financial frictions in distorting resource allocation. We find significant departures from efficiency, from adverse selection effects into entrepreneurship, to distortions in both investment/schooling and production decisions. We then (i) ask whether our model helps understand observed cross-country variation in outcomes, and (ii) quantify the full effect of financing frictions for economic development, and in particular whether our framework produces an amplification of the output and productivity effects of financing frictions compared to standard models without schooling investments. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:1321&r=dge |
| By: | Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan) |
| Abstract: | In this paper we show that multiple interior steady states are possible in the Ramsey model with elastic labor supply. In particular we establish the following three results: (i) for any discount factor and production function, there is a utility function such that a continuum of interior steady states exist; (ii) the number of interior steady states can also be any nite number; and (iii) for any discount factor and production function, there is a utility function such that there is no interior steady state. Some numerical examples are provided. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2014-11&r=dge |
| By: | Alp Simsek (Massachusetts Institute of Technology); Anton Korinek (Johns Hopkins University and IMF) |
| Abstract: | We investigate the role of debt market policies in mitigating liquidity traps driven by household leverage. When borrowers engage in deleveraging, the interest rate needs to fall to induce lenders to pick up the decline in aggregate demand. However, if the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In such an environment, households' borrowing and saving decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante restrictions on leverage to mitigate prospective deleveraging. Ex-post policies to write down debt also generate positive demand externalities. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:1369&r=dge |
| By: | Armas, Adrián (Banco Central de Reserva del Perú); Castillo, Paul (Banco Central de Reserva del Perú); Vega, Marco (Banco Central de Reserva del Perú) |
| Abstract: | This paper extends the model of Aoki et al. (2009) considering a two sector small open economy. We study the interaction of borrowing, asset prices, and spillovers between tradable and non-tradable sectors. Our results suggest that when it is difficult to enforce debtors to repay their debt unless it is secured by collateral, a productivity shock in the tradable sector generates an increase in asset prices and leverage that spills over to the non-tradable sector, generating an appreciation of the real exchange and an increase in domestic lending. Macro-prudential instruments are introduced under the form of cyclical loan-to-value ratios that limit the amount of capital that entrepreneurs can pledge as collateral. Cyclical taxes that respond to the movements in the price of non-tradable goods are analyzed. Simulation results show that this type of instruments significantly lessen the amplifying effects of borrowing constraints on small open economies and consequently reduce output and asset price volatility. |
| Keywords: | Collateral, productivity, small open economy. |
| JEL: | E21 E23 E32 E44 G01 O11 O16 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2014-006&r=dge |
| By: | Daniel Harenberg; Alexander Ludwig |
| Abstract: | We ask whether a PAYG-financed social security system is welfare improving in an economy with idiosyncratic and aggregate risk. We argue that interactions between the two risks are important for this question. One is a direct interaction in the form of a countercyclical variance of idiosyncratic income risk. The other indirectly emerges over a household's life-cycle because retirement savings contain the history of idiosyncratic and aggregate shocks. We show that this leads to risk interactions, even when risks are statistically independent. In our quantitative analysis, we find that introducing social security with a contribution rate of two percent leads to welfare gains of 2.2% of lifetime consumption in expectation, despite substantial crowding out of capital. This welfare gain stands in contrast to the welfare losses documented in the previous literature, which studies one risk in isolation. We show that jointly modeling both risks is crucial: 60% of the welfare benefits from insurance result from the interactions of risks. |
| Keywords: | social security, idiosyncratic risk, aggregate risk, welfare |
| JEL: | C68 E27 E62 G12 H55 |
| Date: | 2014–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0071&r=dge |
| By: | Diego Restuccia; Guillaume Vandenbroucke |
| Abstract: | Consider the following facts. In 1950, the richest countries attained an average of 8 years of schooling whereas the poorest countries 1.3 years, a large 6-fold difference. By 2005, the difference in schooling declined to 2-fold because schooling increased faster in poor than in rich countries. What explains educational attainment differences across countries and their evolution over time? We consider an otherwise standard model of schooling featuring non-homothetic preferences and a labor supply margin to assess the quantitative contribution of productivity and life expectancy in explaining educational attainment. A calibrated version of the model accounts for 90 percent of the difference in schooling levels in 1950 between rich and poor countries and 71 percent of the faster increase in schooling over time in poor relative to rich countries. These results suggest an alternative view of the determinants of low education in developing countries that is based on low productivity. |
| Keywords: | schooling, productivity, life expectancy, labor supply. |
| JEL: | O1 O4 E24 J22 J24 |
| Date: | 2014–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-507&r=dge |
| By: | Cordoba, Juan Carlos; Liu, Xiying |
| Abstract: | This paper studies fertility choices and fertility policies when children's earning abilities are random and parents are altruistic. We characterize equilibrium allocations arising in endowment economies with either complete or incomplete markets. Both models can replicate a number of empirical regularities, such as inequality, social mobility and fertility decreasing with ability, but the incomplete markets model provides a number of more plausible predictions. We find that fertility policies are generally welfare detrimental in our models even when fertility is inefficiently high. |
| Keywords: | Idiosyncratic risk; Bewley model; Fertility; uninsurable risk; complete markets; incomplete markets |
| JEL: | D11 D31 D51 D61 I3 J1 |
| Date: | 2014–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:37481&r=dge |
| By: | Amanda Gosling; Mathan Satchi |
| Abstract: | We present a job posting model of a labour market where jobs differ in characteristics other than wages and workers differ in their marginal willingness to pay for such characteristics. This creates incentives for firms to separate workers by posting multiple jobs. The interaction between these separation incentives and the standard search frictions is the key contribution of the paper. The paper examines the implications for policies such as a minimum wage or ones which set minimum standards on these non-wage job characteristics. We show that policies that set standards on wages and the other job characteristics can increase the utility of the worst-off workers and may reduce inefficient forms of unemployment. Policies that only intervene in one aspect on the other hand may increase these forms of unemployment. |
| Keywords: | Search; Job posting; Non-wage characteristics; Separation incentives; Minimum Wages |
| JEL: | J31 J32 J42 J64 J80 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1401&r=dge |
| By: | Katarina Borovickova (New York University) |
| Abstract: | I present new empirical evidence on the relationship between the job flows, worker flows, and the time horizon at which these flows are measured. In particular, I show that worker flows grow linearly with the horizon at which they are measured; job flows grow approximately with the square root of the horizon. Further, I show that these patterns hold for all firm size categories separately, and that the magnitude of the job and worker flows decreases with employer's size. To interpret these patterns, I explore simple models of a representative firm which faces employment adjustment costs. I show that such a model can replicate some of the observed patterns. I discuss the implications of presented facts for interpreting the differences in the characteristics of the labor markets in Europe and the U.S. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:1338&r=dge |
| By: | William Brock; Anastasios Xepapadeas; Athanasios Yannacopoulos |
| Abstract: | We study rational expectations equilibrium problems and social optimum problems in innite horizon spatial economies in the context of a Ramsey type capital accumulation problem with geographical spillovers. We identify sufficient local and global conditions for the emergence (or not) of optimal agglomeration, using techniques from monotone operator theory and spectral theory in innite dimensional Hilbert spaces. We show that agglomerations may emerge, with any type of returns to scale (increasing or decreasing) and with the marginal productivity of private capital increasing or decreasing with respect to the spatial externality. This is a fairly general result indicating the importance of the network structure of the spatial externality relative to the properties of the aggregate production function. Our analytical methods can be used to systematically study optimal potential agglomeration and clustering in dynamic economics. |
| Keywords: | Agglomeration, spatial spillovers, spillover induced instability, rational expectations equilibrium, social optimum, monotone operators. |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:aue:wpaper:1403&r=dge |