nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2014‒06‒02
thirty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions By Nicolas Petrosky-Nadeau; Etienne Wasmer
  2. Optimal fiscal policy in the neoclassical growth model revisited By Mennuni, Alessandro; Gervais, Martin
  3. Optimal Environmental Policy, Public Goods and Labor Markets over the Business Cycle By Anna Grodecka; Karlygash Kuralbayeva
  4. The Effects of the Saving and Banking Glut on the U.S. Economy By Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea
  5. Public education, endogenous fertility and economic growth By Ko Shakuno
  6. Chronicle of a War Foretold: The Macroeconomic Effects of Anticipated Defense Spending Shocks By Ben Zeev, Nadav; Pappa, Evi
  7. The One-Child Policy and Household Savings By Choukhmane, Taha; Coeurdacier, Nicolas; Jin, Keyu
  8. Trade Dynamics with Sector-Specific Human Capital By Guren, Adam; Hemous, David; Olsen, Morten
  9. State dependent monetary policy By Lippi, Francesco; Ragni, Stefania; Trachter, Nicholas
  10. Optimal Tax Progressivity: An Analytical Framework By Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L
  11. Buying First or Selling First in Housing Markets By Moen, Espen R; Nenov, Plamen T.
  12. Productivity Spillovers Through Labor Mobility By Heggedal, Tom-Reiel; Moen, Espen R; Preugschat, Edgar
  13. Aggregate Fertility and Household Savings: A General Equilibrium Analysis using Micro Data By Banerjee, Abhijit; Meng, Xin; Porzio, Tommaso; Qian, Nancy
  14. Collateral constraints and rental markets By Hippolyte D'Albis; Eleni Iliopulos
  15. Solving and Estimating Indeterminate DSGE Models By Farmer, Roger E A; Khramov, Vadim
  16. Market Deregulation and Optimal Monetary Policy in a Monetary Union By Cacciatore, Matteo; Fiori, Giuseppe; Ghironi, Fabio
  17. Optimal Exchange Rate Policy in a Growing Semi-Open Economy By Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
  18. Asset Prices in a Lifecycle Economy By Farmer, Roger E A
  19. The Vanishing Procyclicality of Labor Productivity By Galí, Jordi; van Rens, Thijs
  20. Childcare Subsidies and Household Labor Supply By Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo
  21. Integrating search in macroeconomics: the defining years By Samuel DANTHINE; Michel DE VROEY
  22. Safety Traps By Benhima, Kenza; Massenot, Baptiste
  23. Macroprudential Regulation and Macroeconomic Activity By Sudipto Karmakar
  24. Household Leveraging and Deleveraging By Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea
  25. Is the Social Security Crisis Really as Bad as We Think? By Bagchi, Shantanu
  26. Monetary/Fiscal Policy Mix and Agents' Beliefs By Bianchi, Francesco; Ilut, Cosmin
  27. Search, Flows, Job Creations and Destructions By Cahuc, Pierre
  28. Racial Discrimination in the U.S. Labor Market: Employment and Wage Differentials by Skill By Daniel Borowcyzk-Martins; Jake Bradley; Linas Tarasonis
  29. A DSGE Model of China By Dai, Li; Minford, Patrick; Zhou, Peng
  30. An Application of Kleene's Fixed Point Theorem to Dynamic Programming: A Note By Takashi Kamihigashi; Kevin Reffett; Masayuki Yao
  31. Seeking Ergodicity in Dynamic Economies By Takashi Kamihigashi; John Stachurski

  1. By: Nicolas Petrosky-Nadeau; Etienne Wasmer (Département d'économie)
    Abstract: This paper shows that goods-market frictions drastically change the dynamics of the labor market, bridging the gap with the data both in terms of persistence and volatility. In a DSGE model with three imperfect markets - goods, labor and credit - we find that credit- and goods-market imperfections are substitutable in raising volatility. Goods-market frictions are however unique in generating persistence. The two key mechanisms generating autocorrelation in growth rates and the hump-shaped pattern in the response to productivity shocks are related to the goods market: i) countercyclical dynamics of goods market tightness and prices, which alter future profit flows and raise persistence and ii) procyclical search effort in the goods market, by either consumers, firms or both, raises both amplification and persistence. Expanding our knowledge of goods market frictions is thus needed for a full account of labor market dynamics.
    Date: 2014–02
  2. By: Mennuni, Alessandro; Gervais, Martin
    Abstract: This paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period, thereby making the supply of capital elastic in the short run. Because taxing capital is distortionary in the short run, the government's ability/desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed. Our timing assumption also leads to a tractable Ramsey problem without state-contingent debt, which can give rise to debt-financed budget deficits during recessions.
    Date: 2014–02–01
  3. By: Anna Grodecka; Karlygash Kuralbayeva
    Abstract: This paper studies the design of optimal fiscal policy in a real business cycle model with distortionary taxes and a climate change externality. Governments face the dual task of internalizing environmental externalities and raising revenues to finance the provision of public goods, including public capital. At their disposal governments have access to two tax instruments: tax on emissions and labor tax. We find that a tax on labor is an efficient instrument to finance public spending and facilitate the adjustment of the economy to the temporary improvement in productivity. Therefore, labor tax is cut in the model. Tax on emissions follows a distinct pattern depending on whether the potential economic expansion in response to a positive productivity shock is strong or weak: it is procyclical in the model that features public capital and is countercyclical in the models with public consumption only. The model implies that by restraining or boosting expansion in the short-run, the optimal carbon tax policy can help policy makers reconcile short-term concerns over economic growth with longer-term risks from climate change. The welfare gains from such short-run policies are non-negligible and can amount to USD 121.9bn or 0.7% of the US GDB.
    Keywords: public finance, public goods, business cycles, distortionary taxes, environmental policy
    JEL: E32 H23 Q54 Q58
    Date: 2014
  4. By: Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea
    Abstract: Abstract. We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period.
    Keywords: Capital flows; Collateral constraints; Global imbalances; House prices; Household debt
    JEL: E21 F32 G21
    Date: 2013–11
  5. By: Ko Shakuno
    Abstract: Using a closed-economy overlapping generations model with en- dogenous fertility, child quality choice and human capital accumula- tion, this paper examine the effects of public investment in education on fertility rate and per capita output growth rate under a pay-as-you- go (PAYG) social security system. Parents face a trade-off between the quantity and quality of children. Differently from previous studies, this paper shows that there is an inverted U-shaped relation between pub- lic investment in education and fertility. Small sized public education policy stimulates fertility and impedes growth.
    Date: 2014–05
  6. By: Ben Zeev, Nadav; Pappa, Evi
    Abstract: We identify US defense news shocks as shocks that best explain future movements in defense spending over a five-year horizon and are orthogonal to current defense spending. Our identified shocks are strongly correlated with the Ramey (2011) news shocks, but explain a larger share of macroeconomic fluctuations and have significant demand effects. Fiscal news induces significant and persistent increases in output, consumption, investment, hours and the interest rate. Standard DSGE models fail to produce such a pattern. We propose a sticky price model with distortionary taxation, variable capital utilization, capital adjustment costs and rule-of-thumb consumers that replicates the empirical findings.
    Keywords: defense spending news; DSGE model; maximum forecast error variance; SVAR
    JEL: E62 E65 H30
    Date: 2014–04
  7. By: Choukhmane, Taha; Coeurdacier, Nicolas; Jin, Keyu
    Abstract: We ask how much the advent of the `one child policy' can explain the sharp rise in China's household saving rate. In a life-cycle model with endogenous fertility, intergenerational transfers and human capital accumulation, we show a macroeconomic and a microeconomic channel through which restrictions in fertility raise aggregate saving. The macro-channel operates through a shift in the composition of demographics and income across generations. The micro-channel alters saving behaviour and education decisions at the individual level. A main objective is to quantify these various channels in the data. Exploiting the birth of twins as an identification strategy, we provide direct empirical evidence on the micro-channel and show its quantitative relevance in accounting for the rise in the household saving rate since the inception of the policy in 1980. Our quantitative OLG model can explain from a third to at most 60% of the rise in aggregate saving rate; equally important is its implied shift in the level and shape of the age-saving profile consistent with micro-level estimates from the data.
    Keywords: Fertility; Intergenerational transfers; Life Cycle Consumption/Savings
    JEL: D10 D91 E21
    Date: 2013–10
  8. By: Guren, Adam; Hemous, David; Olsen, Morten
    Abstract: This paper develops a dynamic Heckscher Ohlin Samuelson model with sector-specific human capital and overlapping generations to characterize the dynamics and welfare implications of gradual labor market adjustment to trade. Our model is tractable enough to yield sharp analytic results, that complement and clarify an emerging empirical literature on labor market adjustment to trade. Existing generations that have accumulated specific human capital in one sector can switch sectors when the economy is hit by a trade shock. Nonetheless, the shock induces few workers to switch, generating a protracted adjustment that operates largely through the entry of new generations. This results in wages being tied to the sector of employment in the short-run but to the skill type in the long-run. Relative to a world with general human capital, welfare is improved for the skill group whose type-intensive sector shrinks. We extend the model to include physical capital and show that the transition is longer when capital is mobile. We also introduce nonpecuniary sector preferences and show that larger gross flows are associated with a longer transition.
    Keywords: sector-specific human capital; trade shock; transitional dynamics; worker mobility
    JEL: E24 F11 F16 J24
    Date: 2014–02
  9. By: Lippi, Francesco; Ragni, Stefania; Trachter, Nicholas
    Abstract: We study the optimal anticipated monetary policy in a flexible-price economy featuring heterogenous agents and incomplete markets, which give rise to a business cycle. In this setting money policy has distributional effects that depend on the state of the cycle. We parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by cash- poor unproductive agents. To minimize the inflationary effect of these expansions the policy prescribes monetary contractions in good times. Although the optimal money growth rate varies greatly through the business cycle, this policy “echoes” Friedman’s principle in the sense that the expected real return of money approaches the rate of time preference.
    Keywords: distributional effects; heterogenous agents; incomplete markets; liquidity; precautionary savings
    JEL: E50
    Date: 2014–01
  10. By: Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L
    Abstract: What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preferences, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the externality linked to valued government purchases play quantitatively similar roles in limiting desired progressivity.
    Keywords: income distribution; labor supply; partial insurance; progressivity; skill investment; valued government expenditures; welfare
    JEL: D30 E20 H20 H40 J22 J24
    Date: 2014–03
  11. By: Moen, Espen R; Nenov, Plamen T.
    Abstract: Housing transactions by existing homeowners take two steps, a purchase of a new property and sale of the old housing unit. These two decisions are not independent, and their sequence may depend on the state of the housing market. This paper shows how the sequence of buyer-seller decisions depends on, and in turn, affects housing market conditions in an equilibrium search-and-matching model of the housing market. Under a simple payoff condition, we show that the decisions to ``buy first'' or ``sell first'' among existing homeowners are strategic complements - homeowners prefer to ``buy first'' whenever there are more buyers than sellers in the market. This behavior leads to multiple steady state equilibria and to dynamic equilibria featuring low frequency self-fulfilling fluctuations in house prices and time on the market. The model is broadly consistent with stylized facts about the housing market.
    Keywords: Excess volatility; Housing market; Order of transactions; Search frictions; Self-fulfilling fluctuations
    JEL: R21 R31
    Date: 2014–04
  12. By: Heggedal, Tom-Reiel; Moen, Espen R; Preugschat, Edgar
    Abstract: Do firms have the right incentives to innovate in the presence of productivity spillovers? This paper proposes an explicit model of spillovers through labor flows in a framework with search frictions. Firms can choose to innovate or to imitate by hiring a worker from a firm that has already innovated. We show that if innovation firms can commit to long-term wage contracts with their workers, productivity spillovers are fully internalized. If firms cannot commit to long-term wage contracts, there is too little innovation and too much imitation in equilibrium. Our model is tractable and allows us to analyze welfare effects of various policies in the limited commitment case. We find that subsidizing innovation and taxing imitation improves welfare.Moreover, allowing innovation firms to charge quit fees or rent out workers to imitation firms also improves welfare. By contrast, non-pecuniary measures like covenants not to compete, interpreted as destruction of matches between imitation firms and workers from innovation firms, always reduce welfare.
    Keywords: efficiency; imitation; innovation; productivity; search frictions; spillovers; worker flows
    JEL: J63 J68 O38
    Date: 2014–03
  13. By: Banerjee, Abhijit; Meng, Xin; Porzio, Tommaso; Qian, Nancy
    Abstract: This study uses micro data and an OLG model to show that general equilibrium forces are critical for understanding the relationship between aggregate fertility and household savings. First, we document that parents perceive children as an important source of old-age support and that in partial equilibrium, increased fertility lowers household savings. Then, we construct an OLG model that parametrically matches the partial equilibrium empirical evidence. Finally, we extend the model to conduct a general equilibrium analysis and show that under standard assumptions and with the parameters implied by the data, general equilibrium forces can substantially offset the partial equilibrium effects. Thus, focusing only on partial equilibrium effects can substantially overstate the effect of a change in aggregate fertility on households savings.
    Keywords: Demographic Structure; fertility; Savings
    JEL: J11 J13 O11 O4
    Date: 2014–04
  14. By: Hippolyte D'Albis (INED - Paris School of Economics - Université Paris I - Panthéon-Sorbonne); Eleni Iliopulos (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We study a benchmark model with collateral constraints and heterogeneous discounting. Contrarily to a rich literature on borrowing limits, we allow for rental markets. By incorporating this missing market, we show that impatient agents choose to rent rather than to own the collateral in the neighborhood of the deterministic steady state. Consequently, impatient agents are not indebted and borrowing constraints play no role in local dynamics.
    Keywords: heterogeneous discounting; collateral constraints; rental market; credit market.
    Date: 2013–12–01
  15. By: Farmer, Roger E A; Khramov, Vadim
    Abstract: We propose a method for solving and estimating linear rational expectations models that exhibit indeterminacy and we provide step-by-step guidelines for implementing this method in the Matlab-based packages Dynare and Gensys. Our method redefines a subset of expectational errors as new fundamentals. This redefinition allows us to treat indeterminate models as determinate and to apply standard solution algorithms. We provide a selection method, based on Bayesian model comparison, to decide which errors to pick as fundamental and we present simulation results to show how our procedure works in practice.
    Keywords: Bayesian estimation; Dynare; indeterminacy
    JEL: C11 C13 C54
    Date: 2013–09
  16. By: Cacciatore, Matteo; Fiori, Giuseppe; Ghironi, Fabio
    Abstract: The wave of crises that began in 2008 reheated the debate on market deregulation as a tool to improve economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. Regulation affects producer entry costs, employment protection, and unemployment benefits. We first characterize optimal monetary policy when regulation is high in both countries and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation.
    Keywords: Market deregulation; Monetary union; Optimal monetary policy
    JEL: E24 E32 E52 F41 J64 L51
    Date: 2013–11
  17. By: Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
    Abstract: In this paper, we consider an alternative perspective to China's exchange rate policy. We study a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, we assume limited financial development generating a large demand for saving instruments by the private sector. We analyze the optimal exchange rate policy by modelling the central bank as a Ramsey planner. Our main result is that in a growth acceleration episode it is optimal to have an initial real depreciation of the currency combined with an accumulation of reserves, which is consistent with the Chinese experience. This depreciation is followed by an appreciation in the long run. We also show that the optimal exchange rate path is close to the one that would result in an economy with full capital mobility and no central bank intervention.
    Keywords: China; Exchange rate policy; International reserves
    JEL: E58 F31 F41
    Date: 2013–09
  18. By: Farmer, Roger E A
    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. The equity premium has two parts; a risk premium and a term premium. This paper constructs a lifecycle model in which agents of different generations have different savings rates and I use this model to account for a high term premium and a volatile stochastic discount factor. The fact the term premium is large, accounts for a substantial part of the observed equity premium.
    Keywords: asset prices; equity premium puzzle; excess volatility puzzle
    JEL: G10 G12
    Date: 2014–03
  19. By: Galí, Jordi; van Rens, Thijs
    Abstract: We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity vanished, (ii) the relative volatility of employment rose, and (iii) the relative (and absolute) volatility of the real wage rose. We propose an explanation for all three changes that is based on a common source: the decline in labor market turnover, which reduced hiring frictions. We develop a simple model with hiring frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the decline in turnover may also have contributed to the observed decline in output volatility.
    Keywords: effort choice; hiring frictions; labor hoarding; labor market turnover; wage rigidities
    JEL: E24 E32
    Date: 2014–03
  20. By: Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo
    Abstract: What would be the aggregate effects of adopting a more generous and universal childcare subsidy program in the U.S.? We answer this question in a life-cycle equilibrium model with heterogeneous married and single households with three key features: (i) joint labor-supply of married households along extensive and intensive margins; (ii) heterogeneity in terms of the presence of children across households; (iii) skill losses of females associated to non participation. We find that subsidies have substantial effects on female labor supply and lead to a large reallocation of hours worked from males to females. Fully subsidized childcare available to all households leads to longrun increases in the participation of married females and total hours worked by about 10.1% and 1.0%, respectively, and to a decline of male hours by 1.5%. There are large differences across households in welfare gains, as a small number of households–poorer households with children– gain significantly while others lose. Welfare gains of newborn households amount to 1.9%.
    Keywords: Childcare; Household Labor Supply
    JEL: E62 H24 H31
    Date: 2013–12
  21. By: Samuel DANTHINE (CREST - ENSAI); Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Our paper studies two attempts at integrating unemployment in macroeconomics. The first, due to Diamond, consists in a search model exhibiting multiple equilibria. The second is due to Andolfatto and Merz who, more or less simultaneously, were able to integrate the matching function in RBC modeling. As a common thread of these two attempts is to be based on the search approach as developed in labor economics, we recount the birth and further development of the search paradigm in a first section. We then analyze Diamond’s, Andolfatto’s and Merz’s contributions. Our interest lies specifically in how they made their way in the development of the field. We show that Diamond’s model, which ambitioned to rival Lucas’s Expectations and the Neutrality of Money model, did not live up to its author’s expectations. We propose an interpretation as to the reason this was so. As to Andolfatto and Merz, while their project was less ambitious, we show that they were able to establish what they were striving at, namely an harmonious integration of one particular search model within the RBC paradigm. The price to be paid, however, was to abandon several constitutive traits of the search approach.
    Keywords: Search and Matching models, Diamond, Lucas, Real Business Cycle models, Unemployme
    JEL: B21 B40 D83 E24 J64
    Date: 2014–04–24
  22. By: Benhima, Kenza; Massenot, Baptiste
    Abstract: Fear of risk provides a rationale for protracted economic downturns. We develop a real business cycle model where investors with decreasing relative risk aversion choose between a risky and a safe technology that exhibit decreasing returns. Because of a feedback effect from the interest rate to risk aversion, two equilibria can emerge: a standard equilibrium and a ``safe'' one in which investors invest in safer assets. We refer to the dynamics of this second equilibrium as a safety trap because it is self-reinforcing as investors accumulate more wealth and show it to be consistent with Japan's lost decade.
    Keywords: Business cycles; Japan's lost decade; Risk aversion
    JEL: E22 E32
    Date: 2013–09
  23. By: Sudipto Karmakar
    Abstract: This paper develops a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on bank’s financial decisions and the implications for the real sector. I explicitly incorporate costs and benefits of capital requirements. I model an occasionally binding capital constraint and approximate it using an asymmetric non linear penalty function. This friction means that the banks refrain from valuable lending. At the same time, countercyclical buffers provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations. I also show that stronger regulation can induce banks to hold buffers and hence mitigate an economic downturn as well. Increasing the capital requirements do not seem to have an adverse effect on the welfare. Lastly, I also show that switching to a countercyclical capital requirement regime can help reduce fluctuations and raise welfare.
    JEL: G01 G21 G28
    Date: 2013
  24. By: Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea
    Abstract: Abstract. U.S. households' debt skyrocketed between 2000 and 2007, and has been falling since. This leveraging (and deleveraging) cycle cannot be accounted for by the liberalization, and subsequent tightening, of credit standards in mortgage markets observed during the same period. We base this conclusion on a quantitative dynamic general equilibrium model calibrated using macroeconomic aggregates and microeconomic data from the Survey of Consumer Finances. From the perspective of the model, the credit cycle is more likely due to factors that impacted house prices more directly, thus affecting the availability of credit through a collateral channel. In either case, the macroeconomic consequences of leveraging and deleveraging are relatively minor, because the responses of borrowers and lenders roughly wash out in the aggregate.
    Keywords: Collateral constraints; Financial liberalization; House prices; Household debt
    JEL: E20 E21
    Date: 2013–10
  25. By: Bagchi, Shantanu
    Abstract: Because they ignore the household-level and macroeconomic adjustments associated with longevity improvements, the actuarial projections of the Social Security Administration overestimate the Social Security crisis. Using a general-equilibrium model with heterogeneous agents and incomplete markets, I show that accounting for these adjustments, a significantly smaller decline in benefits is needed to balance the Social Security budget. Households respond to the longevity improvements by delaying retirement and Social Security benefit collection, working more hours, and by also saving more. In general equilibrium, these effects lead to a natural expansion of Social Security's tax base and generate significant delayed retirement credits, which the actuarial estimates completely overlook.
    Keywords: Social Security; longevity improvement; general equilibrium; delayed retirement; delayed retirement credit
    JEL: E21 H55 J22
    Date: 2013–08
  26. By: Bianchi, Francesco; Ilut, Cosmin
    Abstract: We reinterpret post World War II US economic history using an estimated microfounded model that allows for changes in the monetary/fiscal policy mix. We find that the fiscal authority was the leading authority in the '60s and the '70s. The appointment of Volcker marked a change in the conduct of monetary policy, but inflation dropped only when fiscal policy accommodated this change two years later. In fact, a disinflationary attempt of the monetary authority leads to more inflation if not supported by the fiscal authority. If the monetary authority had always been the leading authority or if agents had been confident about the switch, the Great Inflation would not have occurred and debt would have been higher. This is because the rise in trend inflation and the decline in debt of the '70s were caused by a series of fiscal shocks that are inflationary only when monetary policy accommodates fiscal policy. The reversal in the debt-to-GDP ratio dynamics, the sudden drop in inflation, and the fall in output of the early '80s are explained by the switch in the policy mix itself. If such a switch had not occurred, inflation would have been high for another fifteen years. Regime changes account for the stickiness of inflation expectations during the '60s and the '70s and for the break in the persistence and volatility of inflation.
    Keywords: Bayesian estimation; DSGE; Fiscal policy; general equilbrium.; Great Inflation; Markov-switching
    JEL: E31 E52 E58 E62
    Date: 2013–09
  27. By: Cahuc, Pierre (Ecole Polytechnique, Paris)
    Abstract: This paper presents a short overview of dynamic models of labor markets with transaction costs. It shows that these models have deeply renewed the understanding of job search, job flows, job creations and destructions, unemployment and wage formation. It argues that this renewal provides a very useful toolkit for analyzing important economic policy issues such as the optimal level of unemployment benefits, the funding of unemployment insurance and the impact of employment protection legislation.
    Keywords: job search, job flows, workers flows, unemployment
    JEL: J6 J31 J38
    Date: 2014–05
  28. By: Daniel Borowcyzk-Martins; Jake Bradley; Linas Tarasonis
    Abstract: In the US labor market the average black worker is exposed to a lower employment rate and earns a lower wage compared to his white counterpart. Lang and Lehmann (2012) argue that these mean differences mask substantial heterogeneity along the distribution of workers’ skill. In particular, they argue that black-white wage and employment gaps are smaller for high-skill workers. In this paper we show that a model of employer taste-based discrimination in a labor market characterized by search frictions and skill complementarities in production can replicate these regularities. We estimate the model with US data using methods of indirect inference. Our quantitative results portray the degree of employer prejudice in the US labor market as being strong and widespread, and provide evidence of an important skill gap between black and white workers. We use the model to undertake a structural decomposition and conclude that discrimination resulting from employer prejudice is quantitatively more important than skill differences to explain wage and employment gaps. In the final section of the paper we conduct a number of counterfactual experiments to assess the effectiveness of different policy approaches aimed at reducing racial differences in labor market outcomes.
    Keywords: employment and wage differentials, discrimination, job search.
    JEL: J31 J64 J71
    Date: 2014–05
  29. By: Dai, Li; Minford, Patrick (Cardiff Business School); Zhou, Peng (Cardiff Business School)
    Abstract: We use available methods for testing macro models to evaluate a model of China over the period from Deng Xiaoping’s reforms up until the crisis period. Bayesian ranking methods are heavily influenced by controversial priors on the degree of price/wage rigidity. When the overall models are tested by Likelihood or Indirect Inference methods, the New Keynesian model is rejected in favour of one with a fair-sized competitive product market sector. This model behaves quite a lot more ‘flexibly’ than the New Keynesian.
    Keywords: China; DSGE; Bayesian Inference; Indirect Inference
    JEL: C11 C15 C18 E27
    Date: 2014–05
  30. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kevin Reffett (Department of Economics, Arizona State University); Masayuki Yao (Department of Economics, Keio University)
    Abstract: In this note, we show that the least xed point of the Bellman op- erator in a certain set can be computed by value iteration whether or not the xed point is the value function. As an application, we show one of the main results of Kamihigashi (2014a) with a simpler proof.
    Keywords: Dynamic programming, Bellman equation, Value function, Fixed point
    JEL: C61
    Date: 2014–05
  31. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); John Stachurski (Research School of Economics, Australian National University, Australia)
    Abstract: In estimation and calibration studies the concept of ergodicity plays a fundamental role. At the same time, a significant number of economic models do not satisfy the classical ergodicity conditions. Motivated by existing work on economic dynamics, we develop a new set of results on ergodicity using an ordertheoretic approach. Our conditions are necessary and sufficient, and, by varying the notion of order, can include the classical Markov ergodic theorem as a special case. We discuss implications, sufficient conditions and economic applications.
    Keywords: Ergodicity, Consistency, Calibration
    JEL: C62 C63
    Date: 2014–05

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