nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2014‒06‒07
ten papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Fiscal Stimuli in the Form of Job Creation Subsidies By Chun-Hung Kuo; Hiroaki Miyamoto
  2. The Misspecification of Expectations in New Keynesian Models: A DSGE-VAR Approach By Stephen Cole; Fabio Milani
  3. Export and the Labor Market: a Dynamic Model with on-the-job Search By Suverato, Davide
  4. Income and Wealth Distributions in a Population of Heterogeneous Agents By Muliere, Pietro; Suverato, Davide
  5. Consumption Dynamics During Recessions By David Berger; Joseph Vavra
  6. Intertemporal equilibrium with production: bubbles and efficiency By Stefano Bosi; Cuong Le Van; Ngoc-Sang Pham
  7. Delaying the normal and early retirement ages in Spain: behavioural and welfare consequences for employed and unemployed workers By Alfonso R. Sánchez Martín; Jose Ignacio García Pérez; Sergi Jiménez Martín
  8. The Future of Spanish Pensions By Javier Diaz Gimenez; Julian Diaz Saavedra
  9. Corporate Saving in Global Rebalancing By Philippe Bacchetta; Kenza Benhima
  10. Long-Term Investment with Stochastic Interest and Inflation Rates Incompleteness and Compensating Variation By Farid Mkouar; Jean-Luc Prigent

  1. By: Chun-Hung Kuo (International University of Japan); Hiroaki Miyamoto (The University of Tokyo)
    Abstract: This paper examines the effects of fiscal stimuli in the form of job creation subsidies in a DSGE model with search frictions in the labor market. We consider two types of job creation subsidies: a subsidy to the cost of posting vacancies and a hiring subsidy. Our model demonstrates that qualitative effects of a vacancy cost subsidy are similar to those of a hiring subsidy. Quantitatively, however, the vacancy cost subsidy is more effective in lowering unemployment than the hiring subsidy. We also compute fiscal multipliers for both traditional increases in government spending and increases in job creation subsidies.
    Keywords: Fiscal Policy, Hiring Subsidy, Unemployment, Search and matching
    JEL: E24 E62 J64
    Date: 2014–05
  2. By: Stephen Cole (Department of Economics, University of California-Irvine); Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper tests the ability of popular New Keynesian models, which are traditionally used to study monetary policy and business cycles, to match the data regarding a key channel for monetary transmission: the dynamic interactions between macroeconomic variables and their corresponding expectations. In the empirical analysis, we exploit direct data on expectations from surveys. To explain the joint evolution of realized variables and expectations, we adopt a DSGE-VAR approach, which allows us to estimate all models in the continuum between the extremes of an unrestricted VAR, on one side, and a DSGE model in which the cross-equation restrictions are dogmatically imposed, on the other side. Moreover, the DSGE-VAR approach allows us to assess the extent, as well as the main sources, of misspecification in the model. The paper's results illustrate the failure of New Keynesian models under the rational expectations hypothesis to account for the dynamic interactions between observed macroeconomic expectations and macroeconomic realizations. Confirming previous studies, DSGE restrictions prove valuable when the New Keynesian model is exempted from matching observed expectations. But when the model is required to match data on expectations, it can do so only by moving away, and hence substantially rejecting, DSGE restrictions. Finally, we investigate alternative models of expectations formation, including examples of extrapolative and heterogeneous expectations, and show that they can go some way toward reconciling the New Keynesian model with the data. Intermediate DSGE-VAR models, which avail themselves of DSGE prior restrictions, return to fit the data better than the unrestricted VAR. Hence, the results overall point to misspecification in the expectations formation side of the DSGE model, more than in the structural microfounded equations.
    Keywords: Modeling of expectations; DSGE models; Rational expectations; Observed survey expectations; Model misspecification; DSGE-VAR; Heterogeneous expectations
    JEL: C52 D84 E32 E50 E60
    Date: 2014–04
  3. By: Suverato, Davide
    Abstract: This paper develops a two-sector, two-factor trade model with labor market frictions in which workers search for a job also when they are employed. On the job search (OJS) is a key ingredient to explain the response to trade liberalization of sectoral employment, unemployment and wage inequality. OJS generates wage dispersion and it leads to a reallocation of workers from less productive firms that pay lower wages to more productive ones. Following a trade liberalization the traditional selection effects are more severe than without OJS and the tradable sector experiences a loss of employment, while the opposite is true for the non tradable sector. Starting from autarky, the opening to trade has a positive effect on employment but it increases wage inequality. For an already open economy, a further increase of trade openness can, however, lead to an increase of unemployment. The dynamics of labor market variables is obtained in closed form. The model predicts overshooting at the time of implementation of a trade liberalization, then the paths of adjustment follow a stable transitional dynamics.
    Keywords: International Trade; Unemployment; Wage Inequality; Firm Dynamics
    JEL: F12 F16 E24
    Date: 2014–05–27
  4. By: Muliere, Pietro; Suverato, Davide
    Abstract: This paper develops a simple framework to characterize the distribution of income and wealth in a real business cycle model. Agents are of two types depending on the human factor of production they own and they are located in separated markets, cities. In each city the two types of agent match to produce a composite factor, human service. We show that if the population is an exchangeable sequence of agents' types generated according to a Pòlya urn then (i) the share of agents' type follows a Beta distribution and (ii) the functional form of the matching function belongs to the family of the constant elasticity of substitution, with agent shares that depend on the composition of the population. We nest this structure into a standard Bewley economy, in which the aggregate supply of human service is combined with physical capital to produce the homogeneous output. Given the results (i)-(ii) we perform the exact aggregation of income, consumption and asset holding across agents, leading to the solution of the real business cycle model with heterogeneous agents. Our framework predicts that the theoretical distributions of income and wealth are known real valued transformations of a Beta distribution. This result provides a simple way to characterize the equilibrium of macroeconomic models with heterogeneous agents.
    Date: 2014–05–28
  5. By: David Berger; Joseph Vavra
    Abstract: Are there times when durable spending is less responsive to economic stimulus? We argue that aggregate durable expenditures respond more sluggishly to economic shocks during recessions because microeconomic frictions lead to declines in the frequency of households' durable adjustment. We show this by first using indirect inference to estimate a heterogeneous agent incomplete markets model with fixed costs of durable adjustment to match consumption dynamics in PSID microdata. We then show that aggregating this model delivers an extremely procyclical Impulse Response Function (IRF) of durable spending to aggregate shocks. For example, the response of durable spending to an income shock in 1999 is estimated to be almost twice as large as if it occurred in 2009. This procyclical IRF holds in response to standard business cycle shocks as well as in response to various policy shocks, and it is robust to general equilibrium. After estimating this robust theoretical implication of micro frictions, we provide additional direct empirical evidence for its importance using both cross-sectional patterns in PSID data as well as time-series patterns from aggregate durable spending.
    JEL: D91 E21 E32
    Date: 2014–05
  6. By: Stefano Bosi; Cuong Le Van; Ngoc-Sang Pham
    Abstract: We consider a general equilibrium model with heterogeneous agents, borrowing constraints, and exogenous labor supply. First, the existence of intertemporal equi- librium is proved even if the aggregate capitals are not uniformly bounded above and the production functions are not time invariant. Second, (i) we call by physical capital bubble a situation in which the fundamental value of physical capital is lower than its price, (ii) we say that the interest rates are low if the sum of interest rates is finite. We show that physical capital bubble is equivalent to a situation with low interest rates. Last, we prove that with linear technologies, every intertemporal equilibrium is efficient. Moreover, there is a room for both efficiency and bubble.
    Keywords: Intertemporal equilibrium, physical capital bubble, efficiency, infinite hori- zon.
    JEL: C62 D31 D91 G10
    Date: 2014–06–02
  7. By: Alfonso R. Sánchez Martín (Department of Economics, Universidad Pablo de Olavide); Jose Ignacio García Pérez (Department of Economics, Universidad Pablo de Olavide); Sergi Jiménez Martín (Department of Economics, Universitat Pompeu Fabra)
    Abstract: In this paper, we explore the links between pension reform, early retirement, and the use of unemployment as an alternative pathway to retirement. We use a dynamic rational expectations model to analyze the search and retirement behaviour of employed and unemployed workers aged 50 or over. The model is calibrated to reproduce the main reemployment and retirement patterns observed between 2002 and 2008 in Spain. It is subsequently used to analyze the effects of the 2011 pension reform in Spain, characterized by two-year delays in both the early and the normal retirement ages. We ?nd that this reform generates large increases in labour supply and sizable cuts in pension costs, but these are achieved at the expense of very large welfare losses, especially among unemployed workers. As an alternative, we propose leaving the early retirement age unchanged, but penalizing the minimum pension (reducing its generosity in parallel to the cuts imposed on individual pension bene?ts, and making it more actuarially fair with age). This alternative reform strikes a better balance between individual welfare and labour supply stimulus.
    Keywords: Retirement; Unemployment; Incentives; Pension system; Early Retirement; Pension reform; Spain
    JEL: H55 J14 J26 J64
    Date: 2014–06
  8. By: Javier Diaz Gimenez (IESE Business School); Julian Diaz Saavedra (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: We use an overlapping generations model economy with endogenous retirement to study the 2011 and 2013 reforms of the Spanish public pension system. We nd that this latest reforms, which extend the number of years os contributions used to compute the pensions, delay the retirement ages, introduce two sustainability factors, and eectively transform the Spanish pay-as-yougo system into a dened-contribution system, succeed in making Spanish pensions sustainable until 2037, but they fail to do so afterwards. The success until 2037 is achieved reducing the real value of the average pension and leaving the many loopholes of the contributivity and the transparency of the system unchanged. This reduction in pensions is progressive and, by 2037, the average pension will be approximately 20 percent smaller in real terms than what it would have been under the pension rules prevailing in 2010. The 2013 pension reform fails after 2037 because, from that year onwards, approximately 50 percent of the Spanish retirees will be paid the minimum pension, which is exempt from the sustainability factors. We conjecture that further reforms lurk in the future of Spanish pensions.
    Keywords: Computable general equilibrium, social security reform, retirement.
    JEL: C68 H55 J26
    Date: 2014–05–27
  9. By: Philippe Bacchetta; Kenza Benhima
    Abstract: In this paper, we examine theoretically how corporate saving in emerging markets is contributing to global rebalancing. We consider a two-country dynamic general equilibrium model, based on Bacchetta and Benhima (2014), with a Developed and an Emerging country. Firms need to save in liquid assets to finance their production projects, especially in the Emerging country. In this context, we examine the impact of a credit crunch in the Developed country and of a growth slowdown in both countries. These three shocks imply smaller global imbalances and a positive output comovement, but have a different impact on interest rates. Contrary to common wisdom, a slowdown in the Emerging market implies a trade balance improvement in the Developed country.
    Keywords: Capital Flows; Credit Constraints; Global Imbalances; Financial Crisis
    JEL: E22 F21 F41 F44
    Date: 2014–05
  10. By: Farid Mkouar; Jean-Luc Prigent
    Abstract: We examine the long term investment problem, under stochastic interest and inflation rates and incompleteness. Four basic financial assets are available on the financial market: a money market account (the cash), a real consumption good, a financial stock index and a bond with constant maturity. This one corresponds to a nominal bond. In this incomplete framework, we provide the general solution of the expected utility maximization. This intertemporal optimization problem is solved by using the convex duality method, introduced by Cvitanic and Karatzas (1992). We determine also the optimal portfolio weights by using the method of dynamic programming based on the Hamilton-Jacobi-Bellmann approach. We compute the monetary loss from not having access to an indexed-inflation bond, in order to be hedged against the inflation risk, in particular for the logarithmic case.
    Keywords: portfolio optimization, stochastic interest rate, stochastic inflation, incom- pleteness, compensating variation..
    JEL: C61 G11 G12
    Date: 2014–06–02

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