nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2014‒05‒09
seventeen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Technology Shocks, Labour Mobility and Aggregate Fluctuations By Daniela Hauser
  2. Estimating a Small Open Economy DSGE Model with Indeterminacy: Evidence By Tingguo Zheng; Huiming Guo
  3. A Policy Model to Analyze Macroprudential Regulations and Monetary Policy By Sami Alpanda; Gino Cateau; Césaire Meh
  4. Labor Market Participation, Unemployment and Monetary Policy By Alessia Campolmi; Stefano Gnocchi
  5. Assessing the Impacts of Non-Ricardian Households in an Estimated New Keynesian DSGE Model By Marto, Ricardo
  6. Second-best national saving and growth with intergenerational disagreement By Francisco M. Gonzalez; Itziar Lazkano; Sjak A. Smulders
  7. A demand-driven search model with self-fulfilling expectations: The new `Farmerian' framework under scrutiny By Gelain, Paolo; Guerrazzi, Marco
  8. Error Correction Dynamics of House Prices: an Equilibrium Benchmark By Leung, Charles Ka Yui
  9. Labor Market Conditions, Skill Requirements and Education Mismatch By Summerfield, Fraser
  10. E-Money: Efficiency, Stability and Optimal Policy By Jonathan Chiu; Tsz-Nga Wong
  11. Public expenditure distribution, voting, and growth By Lorenzo Burlon
  12. Approximate aggregation in the neoclassical growth model with ideosyncratic shocks By Karsten Chipeniuk; Nets Hawk Katz; Todd Walker
  13. A Theory of Vintage Capital Investment and Energy Use By Antonia Díaz,; Luis A. Puch
  14. Too Old To Work, Too Young To Retire? By Andrea Ichino; Guido Schwerdt; Rudolf Winter-Ebmer; Josef Zweimüller
  15. The Sooner The Better - The Welfare Effects of the Retirement Age Increase Under Various Pension Schemes By Marcin Bielecki; Karolina Goraus; Jan Hagemejer; Joanna Tyrowicz
  16. The Zero Lower Bound: Frequency, Duration, and Numerical Convergence By Alexander W. Richter; Nathaniel A. Throckmorton
  17. An Affine Term Structure Model with Auxiliary Stochastic Volatility-Covolatility By Linlin Niu

  1. By: Daniela Hauser
    Abstract: We provide evidence regarding the dynamic behaviour of net labour flows across U.S. states in response to a positive technology shock. Technology shocks are identified as disturbances that increase relative state productivity in the long run for 226 state pairs, encompassing 80 per cent of labour flows across U.S. states in the 1976 - 2008 period. The data suggest heterogeneous responses of both employment and net labour flows across states, conditional on a positive technology shock. We build a two-region dynamic stochastic general equilibrium (DSGE) model with endogenous labour mobility and region-specific shocks to account for this evidence. We calibrate the model economy consistently with the observed differences in the degree of nominal rigidities across states, and show that we replicate the different patterns of the responses in employment and net labour flows across states following a technology shock.
    Keywords: Business fluctuations and cycles; Labour markets
    JEL: E24 E32 J61
    Date: 2014
  2. By: Tingguo Zheng; Huiming Guo
    Abstract: Considering that monetary policy instability may cause indeterminacy of the macroeconomic equilibrium, this paper derives the boundary condition between determinacy and indeterminacy in a small open economy DSGE model, and then uses this model to investigate China's monetary policy and macroeconomic fluctuations under indeterminacy during the period from 1992 to 2011. The empirical results show that the nominal interest rate reacts not only to inflation and output gap, but also to the changes in RMB exchange rate. Moreover, the indeterminacy in the macro-dynamics indicates the instability in China's monetary policy, and it stems from two sources, the sunspot shock and the indeterminate propagation of fundamental shocks. In addition, we find that the monetary policy shock affects macroeconomic dynamics significantly in the short run, while in the long run, it only influences nominal variables, such as the inflation and the exchange rate, but not the real output.
    Keywords: Small open economy, DSGE model, Indeterminacy, Monetary policy
    JEL: C5 E4 E5 F4
    Date: 2013–10–14
  3. By: Sami Alpanda; Gino Cateau; Césaire Meh
    Abstract: We construct a small-open-economy, New Keynesian dynamic stochastic general-equilibrium model with real-financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. Our model has four key features. First, it allows for non-trivial interactions between the balance sheets of households, firms and banks within a unified framework. Second, it incorporates a risk-taking channel by allowing the risk appetite of investors to depend on aggregate economic activity and funding conditions. Third, it incorporates long-term debt by allowing households and businesses to pay back their stock of debt over multiple periods. Fourth, it incorporates targeted and broader macroprudential instruments to analyze the interaction between macroprudential and monetary policy. The model also features nominal and real rigidities, and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial shocks in the model economy, and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan-to-value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.
    Keywords: Economic models; Financial system regulation and policies
    JEL: E44 E32 E17
    Date: 2014
  4. By: Alessia Campolmi; Stefano Gnocchi
    Abstract: We incorporate a participation decision in a standard New Keynesian model with matching frictions and show that treating the labor force as constant leads to incorrect evaluation of alternative policies. We also show that the presence of a participation margin mitigates the Shimer critique.
    Keywords: Business fluctuations and cycles, Labour markets, Transmission of monetary policy
    JEL: E24 E32 E52
    Date: 2014
  5. By: Marto, Ricardo
    Abstract: Using Bayesian maximum likelihood and data for Portugal, I estimate a New Keynesian DSGE model allowing for the presence of non-Ricardian households and test the stability of the model's prediction when the fraction of liquidity-constrained households changes. In particular, I assess the impacts on: (i) the model parameters posterior distributions; (ii) the impulse responses to six types of structural shocks; and (iii) the sources of fluctuations in output, inflation and the nominal interest rate. The first interesting result is the estimated share of non-Ricardian households in the Portuguese economy, which is found to be relatively high (58%). Even under a simplistic model economy, this result seems plausible and in line with Campbell and Mankiw (1989) for the US (50% of households estimated to be liquidity-constrained) but slightly higher than for other European countries and the euro area (between 25% and 37%). I also show that different-even if relatively close-shares of non-Ricardian households provide very distinct estimates of several parameters, and uneven results and interpretations. Impulse responses to consumption preference and productivity shocks are more amplified for lower shares of liquidity-constrained households; whereas for greater proportions, the model predicts more noticeable responses to price markup and government spending shocks. Fluctuations in output growth are mainly driven by productivity shocks for a lower share of rule-of-thumb consumers and by price markup shocks in the opposite scenario. Furthermore, the presence of a high proportion of non-Ricardian households and a high degree of price stickiness makes the Taylor-type interest rate rule solution locally indeterminate as in Galí et al. (2007).
    Keywords: DSGE, New Keynesian model, non-Ricardian households, Bayesian inference, Portugal.
    JEL: C11 E12 E37 E52 E62
    Date: 2013–12–01
  6. By: Francisco M. Gonzalez (Department of Economics, University of Waterloo); Itziar Lazkano (Department of Economics, University of Wisconsin-Milwaukee); Sjak A. Smulders (Department of Economics, Tilburg University)
    Abstract: We illustrate the contrast between two sources of intergenerational disagreement when generations are overlapping and governments aggregate preferences in a utilitarian manner. Social preferences tend to exhibit a present-bias because generations are imperfectly altruistic about future generations; but they tend to exhibit a future-bias because coexisting generations are imperfectly altruistic about currently older generations. When the future-bias dominates, society faces an intergenerational equity problem, in which case the present-day government tends to support institutions that enable commitments to lower growth at the expense of future generations. This is so even with perfect altruism about future generations.
    JEL: D60 H30 O40
    Date: 2014–03
  7. By: Gelain, Paolo; Guerrazzi, Marco
    Abstract: In this paper, we implement Bayesian econometric techniques to analyze a theoretical framework built along the lines of Farmer's micro-foundation of the General Theory. Specifically, we test the ability of a demand-driven search model with self-fulfilling expectations to match the behaviour of the US economy over the last thirty years. The main findings of our empirical investigation are the following. First, all over the period, our model fits data very well. Second, demand shocks are the most relevant in explaining the variability of concerned variables. In addition, our estimates reveal that a large negative demand shock caused the Great Recession via a sudden drop of confidence. Overall, those results are consistent with the main features of the New 'Farmerian' Economics as well as to latest demand-side explanations of the finance-induced recession.
    Keywords: New Farmerian Economics; Competitive search; Dynamic models; Bayesian estimation.
    JEL: E24 E32 J64
    Date: 2014–05–06
  8. By: Leung, Charles Ka Yui
    Abstract: Central to recent debates on the "mis-pricing" in the housing market and the proactive policy of central bank is the determination of the "fundamental house price." This paper builds a dynamic stochastic general equilibrium (DSGE) model that produces reduced-form dynamics that are consistent with the error-correction models proposed by Malpezzi (1999) and Capozza et al (2004). The dynamics of equilibrium house prices are tied to the dynamics of the house-price-to-income ratio. This paper also shows that house prices and incomes should be co-integrated, and hence provides a justification of using co-integration tests to detect possible "mis-pricing" in the housing market.
    Keywords: fundamental house price, error-correction model, cointegration, house price-to-income ratio, endogenous house price and income.
    JEL: E30 O40 R30
    Date: 2014–04
  9. By: Summerfield, Fraser
    Abstract: This paper shows that changes in the skill requirements of jobs are one way by which economic downturns affect job match quality. In doing so this paper makes two contributions to the literature. The first contribution is to document a stylized fact about the cyclicality of skill requirements (tasks) for newly formed jobs. Relating local unemployment rates in Canadian data, to skill requirements generated from the Occupational Information Network (O*NET) database, I show that the demand for manual skill requirements is countercyclical. This stylized fact shown to be consistent with the predictions of a job search models with heterogeneous workers and vacancies. In this framework, firms increase the share manual job vacancies during downturns because they are less costly to post and fill. The second contribution is to show that the cyclicality of skill requirements, rather than economic conditions themselves, contribute to the incidence of overqualification. Estimates using various measures of overqualification confirm that changes in the skill requirements of newly formed jobs can account for much of the relationship between labor market conditions and job match quality. This empirical finding is also consistent with the model, where the share of overqualified workers varies with economic conditions partially because of corresponding changes in the type of job vacancies.
    Keywords: Mismatch, Job Search, Overeducation, Skill Demand, Business Cycles
    JEL: E24 E32 J24 J63 J64
    Date: 2014–04–28
  10. By: Jonathan Chiu; Tsz-Nga Wong
    Abstract: What makes e-money more special than cash? Is the introduction of e-money necessarily welfare enhancing? Is an e-money system necessarily stable? What is the optimal way to design an efficient and stable e-money scheme? This paper provides a first attempt to develop a micro-founded, dynamic, general-equilibrium model of e-money for investigating these policy issues. We first identify some superior features of e-money which help mitigate informational frictions and enhance social welfare in a cash economy. A model that features both trading frictions and two-sided platforms is then built and used to compare two potential e-money schemes: (i) public provision of e-money with decentralized adoption, and (ii) private monopolistic provision of e-money. We show that, in general, both public and private provision of e-money are inefficient, and we characterize the optimal incentive scheme by addressing four potential sources of inefficiency – market powers in goods trading, network externality, liquidity constraint and monopoly distortion in e-money issuance. We show that the welfare impact of e-money depends critically on whether cash is a viable alternative to e-money as a means of payment. When it is not (e.g., for online payments where usage of money is prohibitively costly), the adoption of e-money is always welfare enhancing, albeit not welfare maximizing. However, when cash is a viable alternative (e.g., in a coffee shop), introducing e-money can sometimes reduce social welfare. Moreover, a system with public provision and decentralized adoption is inherently unstable, while a planner or a private issuer can design a pricing scheme to restore stability. Lastly, we examine an alternative e-money scheme – a hypothetical set-up with public provision through a private platform. We also compare the impact of various provision schemes on central bank seigniorage income. While this scheme may or may not improve efficiency, it can always increase seigniorage income, even though there may exist better policy options such as imposing a cash reserve requirement or collecting a charter fee.
    Keywords: Bank notes, E-money, Payment clearing and settlement systems
    JEL: E E4 E42 E5 E58 L L5 L51
    Date: 2014
  11. By: Lorenzo Burlon (Bank of Italy)
    Abstract: In this paper we study why the misallocation of resources across different productive sectors tends to persist over time. To this end we propose a general equilibrium model that delivers two structural relations. On the one hand, the public expenditure distribution influences the future sectoral composition of the economy; on the other, the distribution of vested interests across sectors determines public policy decisions. The model predicts that different initial sectoral compositions entail different future streams of public expenditure and therefore different development paths.
    Keywords: public expenditure, sectoral composition, vested interests, economic growth
    JEL: O41 O43
    Date: 2014–04
  12. By: Karsten Chipeniuk; Nets Hawk Katz; Todd Walker
    Abstract: We provide an explicit aggregation in the neoclassical growth model with aggregate shocks and uninsurable employment risk. We show there are two restrictions on the unemployment shock for approximate aggregation to occur. First the probability of unemployment must be positive for each agent in each time period. That ensures a strong precautionary savings motive. Second, we must have like agents having similar future prospects. That is agents with similar employment status and wealth must have similar employment paths. The solution of the model must have distribution of wealth as a state variable and hence the curse of dimensionality must be confronted. We sidestep this thorny issue by introducing a Walrassian auctioneer that communicates the optimal amount of invested in every period for every outcome of the shocks to the agents.
    Date: 2014–04
  13. By: Antonia Díaz, (Department of Economics, Universidad Carlos III de Madrid, 28093 Madrid, Spain); Luis A. Puch (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa) (Department of Foundations of Economic Analysis II (Quantitative Economics)), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid))
    Abstract: In this paper we propose a theory of investment and energy use to study the response of macroeconomic aggregates to energy price shocks. In our theory this response depends on the interaction between the energy efficiency built in capital goods (which is irreversible throughout their lifetime) and the growth rate of Investment Specific Technological Change (ISTC hereafter). We show that ISTC is a sort of energy-saving technical change and, therefore, a substitute of energy eficiency: it rises the productivity of capital without rising energy use, which increases effective energy eficiency (i.e., the amount of energy use required per unit of quality-adjusted capital). Hence, our theory can account for the fall of energy use per unit of output observed during the 1990s, a period in which energy prices fell below trend. By increasing investment in the years of high ISTC growth, the economy was increasing the average eficiency of the economy (the capital-energy ratio), shielding the economy against the impact of the 2003-08 price shock.
    Keywords: Energy use, vintage capital, energy price shocks, investment-specific technology shocks.
    JEL: E22 E23
    Date: 2013–10
  14. By: Andrea Ichino (Università di Bologna (UNIBO)); Guido Schwerdt (Ifo Institute for Economic Research); Rudolf Winter-Ebmer (University of Linz and Institute for Advances Studies, Vienna); Josef Zweimüller (University of Zurich)
    Abstract: We study whether employment prospects of old and young workers differ after a plant closure. Using Austrian administrative data, we show that old and young workers face similar displacement costs in terms of employment in the long-run, but old workers lose considerably more initially and gain later. We interpret these findings using a search model with retirement as an absorbing state, that we calibrate to match the observed patterns. Our finding is that the dynamics of relative employment losses of old versus young workers after a displacement are mainly explained by different opportunities of transition into retirement. In contrast, differences in layoff rates and job offer arrival rates cannot explain these patterns. Our results support the idea that retirement incentives, more than weak labor demand, are responsible for the low employment rates of older workers.
    Date: 2014–05
  15. By: Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw); Karolina Goraus (Faculty of Economic Sciences, University of Warsaw); Jan Hagemejer (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland); Joanna Tyrowicz (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)
    Abstract: We evaluate the welfare and macroeconomic effects of increasing the retirement age in the context of population aging. In an overlapping generations framework we simulate the increase of the retirement age by seven years under different pension systems (defined benefit, notionally defined contribution and fully funded). We show that raising the retirement wage is universally welfare enhancing for all living and future cohorts, regardless of the pension system. Quantitatively, this policy intervention is able to counterweight the adverse macroeconomic consequences of aging. We test the validity of our findings in a population with lower pace of aging due to higher fertility. Finally, we show scope for further welfare gains if productivity is relatively high at old ages.
    Keywords: pension system, defined benefit, NDC, retirement age, pension system reform, welfare
    JEL: C68 E17 E25 J11 J24 H55 D72
    Date: 2014
  16. By: Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: When monetary policy faces a zero lower bound (ZLB) constraint on the nominal interest rate, a minimum state variable (MSV) solution may not exist even if the Taylor principle holds when the ZLB does not bind. This paper shows there is a clear tradeoff between the expected frequency and average duration of ZLB events along the boundary of the convergence region---the region of the parameter space where our policy function iteration algorithm converges to an MSV solution. We show this tradeoff with two alternative stochastic processes: one where monetary policy follows a 2-state Markov chain, which exogenously governs whether the ZLB binds, and the other where ZLB events are endogenous due to discount factor or technology shocks. We also show that small changes in the parameters of the stochastic processes cause meaningful differences in the decision rules and where the ZLB binds in the state space.
    Keywords: Monetary policy; zero lower bound; convergence; minimum state variable solution; policy function iteration
    JEL: E31 E42 E58
    Date: 2014–05
  17. By: Linlin Niu
    Abstract: This paper proposes an affine term structure model in a stochastic volatility setting. It provides a useful modeling tool to bridge the two strands of macroeconomic and finance research: the DSGE-VAR with stochastic volatility and the macro-finance model of term structure. In the model, the state vector follows a VAR; its innovations are conditional normal with a time-varying variance-covariance following a Wishart Autoregression process, which directly drives the risk price in the stochastic discount factor. In this setting, the yield curve under no-arbitrage is determined both by the state vector and its stochastic volatility-covolatility matrix. A DSGE-VAR with stochastic volatility can readily be cast into the state of this term structure model. Simulation of the baseline model shows that: 1) two factors are sufficient to fully reproduce all typical shapes of the yield curve; 2) Volatility and Covolatility has sizable effect on medium to long maturity yields; 3) volatility is a curvature factor of the yield curve, and the net effect of a multivariate variance-covariance matrix is also a curvature factor; 4) expected excess returns are explicitly linked to the volatility-covolatility of state innovations; 5) the model can well explain the bond yield "conundrum" in 2004-2005, where the long term interest rate remains low while short term rate keeps rising continuously.
    Keywords: Term structure, Stochastic volatility, Wishart Autoregressive process
    JEL: G12 E43
    Date: 2013–10–14

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