nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2014‒08‒02
twenty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. A DSGE model with endogenous entry and exit By Miguel Casares; Jean-Christophe Poutineau
  2. BoGGEM: a dynamic stochastic general equilibrium model for policy simulations By Dimitris Papageorgiou
  3. Optimal Policy with Informal Sector and Endogenous Savings By Luz Adriana Flórez
  4. Environmental Policies under Debt Constraint By Mouez Fodha; Thomas Seegmuller; Hiroaki Yamagami
  5. The European Monetary Union and Imbalances: Is it an Anticipation Story ? By D. Siena
  6. The Cost of Pollution on Longevity, Welfare and Economic Stability By Natacha Raffin; Thomas Seegmuller
  7. The Search and Matching Equilibrium in an Economy with an Informal Sector: A Positive Analysis of Labor Market Policies By Luz Adriana Flórez
  8. A Model of Housing and Credit Cycles with Imperfect Market Knowledge By Pei Kuang
  9. Aggregate Demand, Idle Time, and Unemployment By Pascal Michaillat; Emmanuel Saez
  10. A Note on Learning in a Credit Economy By Pei Kuang
  11. Competitive Search Equilibrium in the Credit Market under Asymmetric Information and Limited Commitment By Song, Jae Eun
  12. Estimation of the Basic New Keynesian Model for the Economy of Romania By Ifrim, Adrian
  13. The Social Aversion to Intergenerational Inequality and the Recycling of a Carbon Tax By Frederic Gonand
  14. The Efficiency of the Informal Sector on the Search and Matching Framework By Luz Adriana Flórez
  15. A Minimum-Wage Model of Unemployment and Growth: The Case of a Backward-Bending Demand Curve for Labor By Richard A. Brecher; Till O. Gross
  16. Rebalancing Frequency and the Welfare Cost of Inflation By Andre C. Silva
  17. Overaccumulation, Interest, and Prices By Christopher M. Gunn
  18. Risk Aversion in a Model of Endogenous Growth By Christian Chiglino; Nicole Tabasso
  19. Foreign exchange reserve diversification and the "exorbitant privilege" By Pietro Cova; Patrizio Pagano; Massimiliano Pisani
  20. Bequest choices under uncertainty By Rodrigo J. Raad; Gilvan R. Guedes

  1. By: Miguel Casares (Universidad Pública de Navarra University); Jean-Christophe Poutineau (Université de Rennes I)
    Abstract: This paper describes a DSGE model where the extensive margin of activity —the number of varieties available for consumption—, depends on micro-founded decisions of entry and exit in the goods market. Both the extended model and a more conventional version have been estimated with US data during the Great Moderation period. Our main ?ndings are two. First, the role of technology shocks for business cycle ?uctuations increases signi?cantly due to the ?ows of entry and exit. Second, the extensive margin of activity explains most of the business cycle reactions to supply-side shocks, whereas the intensive margin (?rm-level output) takes most of the adjustment after demand-side shocks.
    Keywords: entry and exit, DSGE models, US business cycles
    JEL: E20 E32
    Date: 2014–07
  2. By: Dimitris Papageorgiou (Bank of Greece)
    Abstract: This paper presents the theoretical foundations and dynamic properties of a dynamic stochastic general equilibrium (DSGE) model designed for quantitative policy analysis and counterfactual exercises. The approach of the paper can be summarized as follows. First, we present the model’s theoretical framework and building blocks. Then, we calibrate the model to the Greek economy and examine the dynamic properties of the model by inspecting the sample moments produced by the model, reporting impulse response functions to a number of shocks, and by performing variance decomposition analysis. The results indicate that the model performs quite well in these contexts
    Keywords: Dynamic stochastic general equilibrium model; Small open economy; Greece
    JEL: E27 E30 E52 E60
    Date: 2014–05
  3. By: Luz Adriana Flórez
    Abstract: This paper analyzes the effect of social security and lump sum layoff payment in an economy with an informal sector and savings, where the search effort is unobserved. I characterize the optimal consumption/search/non-participant strategy assuming that workers are risk averse and that formal jobs last forever. After including job destruction shocks I solve the model numerically, and focus on the effects of lump sum layoff and social security payments on workers’ decision to be formal, informal or non-participant. I find that severance payments protect formal workers against the unemployment risk. With severance payments workers do not over-accumulate to protect themselves against unemployment, instead they increase the search effort through the re-entitlement effects. In this respect my work resembles that of Coles (2006). I find that in the steady state a high severance payment increases the proportion of formal workers while reduces the proportion of informal workers and those who decide not to participate in the labor market. Even though the optimal policy with severance payment is generous, I find that in the steady state the unemployment rate is low and welfare improves. Classification JEL: D91; J32; J64; J65.
    Date: 2014–07
  4. By: Mouez Fodha (University Paris 1 and Paris School of Economics. Maison des Sciences Economiques); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Hiroaki Yamagami (Seikei University, Tokyo)
    Abstract: This article analyzes the consequences of environmental tax policies when the government imposes a constraint on stabilizing public debt. A public sector of pollution abatement is financed by taxation and by issuing public debt. Considering a simple overlapping-generations model, the tax reform stimulates steady-state investment. Then, the environmental quality and the aggregate consumption increase if and only if (i) pollution abatement is large enough and (ii) there is under-accumulation of the per capita capital stock. This arises if environmental taxation allows a decrease of either income taxation or debt-output ratio.
    Keywords: environmental tax reform, debt, public emission abatement, double dividend
    JEL: Q5 H23 H63
    Date: 2014–06
  5. By: D. Siena
    Abstract: This paper investigates the sources of current account imbalances accumulated within the European Monetary Union before the Great Recession. First, it documents that starting in 1996, before the actual introduction of the euro, countries in the euro area periphery experienced increasing current account deficits, appreciating real exchange rates and output growing faster than trends. Then, it develops and estimates a small open economy DSGE model which encompasses a variety of possible unanticipated and anticipated shocks. The main finding is that anticipated reductions in international borrowing costs can explain the observed evidence while productivity increases (anticipated or not) cannot: falling borrowing costs implies appreciation while increasing productivity implies depreciation. Quantitatively, anticipated shocks account for one third of output, half of real exchange rate and two third of current account fluctuations. In particular, anticipated fluctuations in international borrowing costs explain respectively 30 and 40 percent of current account and real exchange rate movements.
    Keywords: Current Account, Business cycles, Anticipated Shocks.
    JEL: E32 F32 F41
    Date: 2014
  6. By: Natacha Raffin (Université Paris Ouest Nanterre la Défense EconomiX); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS)
    Abstract: This paper presents an overlapping generations model where pollution, private and public healths are all determinants of longevity. Public expenditure, financed through labour taxation, provide both public health and abatement. We study the complementarity between the three components of longevity on welfare and economic stability. At the steady state, we show that an appropriate fiscal policy may enhance welfare. However, when pollution is heavily harmful for longevity, the economy might experience aggregate instability or endogenous cycles. Nonetheless, a fiscal policy, which raises the share of public spending devoted to health, may display stabilizing virtues and rule out cycles. This allows us to recommend the design of the public policy that may comply with the dynamic and welfare objectives.
    Keywords: longevity, Pollution, welfare, complex dynamics
    JEL: J10 O40 Q56 C62
    Date: 2014–07–16
  7. By: Luz Adriana Flórez
    Abstract: This paper contributes to the theoretical analysis of the informal sector in the search and matching framework. Building upon the work of Albrecht et al. (2009), where the informal sector consists of unregulated self-employment, I describe the search and matching equilibrium in an economy with an informal sector where workers are risk neutral and the government can observe when a worker is formal and informal. In this case I solve the matching equilibrium by introducing three policies: unemployment benefits, a formal lump sum tax, and a job creation subsidy. I analyze the effects of these policies on unemployment rates, formal employment and informal employment. I show that these policies affect the incentives of workers to be formal or informal changing the composition of these two types of workers in the labor market. Classification JEL: J46; J65; J68
    Date: 2014–07
  8. By: Pei Kuang
    Abstract: The paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion/contraction. Positive (negative) development in house price fuels optimism (pessimism) and credit expansion (contraction), which in turn boost (dampen) housing demand and house prices and reinforce agents' optimism (pessimism). Bayesian learning about house prices can endogenously generate self-reinforcing booms and busts in house prices and significantly strenthen the role of collateral constraints in aggregate fluctuations. The model can quantitatively account for the 2001-2008 U.S. boom-bust cycle in house prices and associated household debt and consumption dynamics. It also demonstrates that allowing for imperfect knowledge knowledge of agents, a higher leveraged economy is more prone to self-reinforcing fluctuations.
    Keywords: Boom Bust, Collateral Constraints, Learning, Leverage Housing
    JEL: D83 D84 E32 E44
    Date: 2014–03
  9. By: Pascal Michaillat (London School of Economics (LSE), Economics Department; Centre for Macroeconomics (CFM)); Emmanuel Saez (University of California-Berkeley, Department of Economics)
    Abstract: This paper develops a model of unemployment fluctuations. The model keeps the architecture of the Barro and Grossman [1971] general disequilibrium model but replaces the disequilibrium framework on the labor and product markets by a matching framework. On the product and labor markets, both price and tightness adjust to equalize supply and demand. There is one more variable than equilibrium condition on each market, so we consider various price mechanisms to close the model, from completely flexible to completely rigid. With some price rigidity, aggregate demand influences unemployment through a simple mechanism: higher aggregate demand raises the probability that firms find customers, which reduces idle time for firms’ employees and thus increases labor demand, which in turn reduces unemployment. We use the comparative-statics predictions of the model together with empirical measures of quantities and tightnesses to re-examine the origins of labor market fluctuations. We conclude that (1) price and real wage are not fully flexible because product and labor market tightness fluctuate significantly; (2) fluctuations are mostly caused by labor demand and not labor supply shocks because employment is positively correlated with labor market tightness; and (3) labor demand shocks mostly reflect aggregate demand and not technology shocks because output is positively correlated with product market tightness.
    Date: 2014–07
  10. By: Pei Kuang
    Abstract: This paper studies the interaction of agents' collateral price beliefs, credit constraint and aggregate economic activity over the business cycle. Learning strengthens the role of collateral constraints in aggregate fluctuations. Under Heterogeneous learning rules, numerical simulations illustrate that bankruptcy on the part of borrowers arises sooner as they track the economy faster.
    Keywords: Learning, Collateral Constraint, Bankruptcy, Heterogeneity
    JEL: D83 E44 G14
    Date: 2013–12
  11. By: Song, Jae Eun
    Abstract: This paper develops a model of a competitive search credit market under hidden information and limited commitment. Using the model, it provides a theoretical account that links time delays and costs in financial intermediation as well as lack of collateral to the distribution of credit supply and interest rate spreads. The link sheds light on and explains the possibility of pure credit rationing due to the credit frictions. This paper also demonstrates the possibility of contract dispersion among homogeneous borrowers.
    Keywords: credit frictions, competitive search, contract, market tightness
    JEL: D82 E43 E51 G21
    Date: 2014–07
  12. By: Ifrim, Adrian
    Abstract: In this paper a simple New-Keynesian DSGE model is derived and then estimated for the Romanian economy. Some parameters are calibrated and others are estimated on Romania’s data using Bayesian techniques. The model fit is evaluated and the effects of different types of shock are presented.
    Keywords: New-Keynesian,Romania,Impulse-Response
    JEL: C11 E32 E47
    Date: 2014
  13. By: Frederic Gonand
    Abstract: Redistributing the income of a carbon tax impacts the economic activity and the intergenerational inequality, which both influence the intertemporal social welfare. Thus the way a social planner recycles a carbon tax is influenced by its degree of aversion to intergenerational inequality. This article analyses the effect of social aversion to intergenerational inequality on the social choice as concerns implementing and redistributing a carbon tax. It relies on a detailed computable general equilibrium model with overlapping generations and an energy module, with a parameterisation on empirical data. We use two types of social welfare functionals which both incorporate a variable parameter measuring the degree of aversion of the social planner to intergenerational inequality. Results suggest that the social planner recycles a carbon tax through higher public expenditures if its aversion to intergenerational inequity is relatively high. This holds even if recycling through lower income taxes increases activity.
    Keywords: Energy transition, intergenerational redistribution, social choice, overlapping generations, carbon tax, general equilibrium.
    JEL: D58 D63 E62 L7 Q28 Q43
    Date: 2014
  14. By: Luz Adriana Flórez
    Abstract: This paper analyzes efficiency in an economy with an informal sector that consists of unregulated self-employment, and where there are no costs of being informal, (Albrecht et al. (2009)). First, assuming workers in the formal sector are ex-ante heterogeneous, I show that this type of economy is inefficient. Second, I identify the optimal policies the government can implement, where the informal sector is unobserved (or search effort is unobserved). Allowing the government to use different policies such as social security payment, severance payment, formal tax, and job creation subsidy, I show that the government cannot affect worker’s behavior by using severance and social security payments because of the risk neutrality assumption (Lazear (1990)). However, it can achieve an efficient allocation through a tax-credit policy. This result is interesting since it can guide the way in which social security programs can be implemented in developing countries, where in general social protection programs are assumed to subsidize informal activities. Classification JEL: H21; J64; J65
    Date: 2014–07
  15. By: Richard A. Brecher (Department of Economics, Carleton University); Till O. Gross (Department of Economics, Carleton University)
    Abstract: We add a minimum wage and hence involuntary unemployment to a conventional two-sector model of a perfectly competitive economy with optimal saving and endogenous growth. Our resulting model highlights the possible case of a backward-bending demand curve for labor, along which a hike in the minimum wage might increase total employment. This possibility provides theoretical support for some controversial empirical studies, which challenge the textbook prediction of an inverse relationship between employment and the minimum wage. Our model also implies that a minimum-wage hike has negative implications for both the growth rate and lifetime utility.
    Keywords: Optimal growth, Minimum wage, Learning by doing, Involuntary unemployment
    JEL: E24 O41
  16. By: Andre C. Silva
    Abstract: Cash-in-advance models usually require agents to reallocate money and bonds in fixed periods, every month or quarter, for example. I show that fixed periods underestimate the welfare cost of inflation. I use a model in which agents choose how often they exchange bonds for money. In the benchmark specification, the welfare cost of ten percent instead of zero inflation increases from 0.1 percent of income with fixed periods to one percent with optimal periods. The results are robust to different preferences, to different compositions of income in bonds or money, and to the introduction of capital and labor. JEL codes: E3, E4, E5
    Keywords: portfolio rebalancing frequency, welfare cost of inflation, money demand, cash-in-advance models, market segmentation
    Date: 2014
  17. By: Christopher M. Gunn (Department of Economics, Carleton University)
    Abstract: An emerging view of business cycles from the news-shock literature suggests that recessions may occur when agents depress their demand for new capital upon the realization that they have accumulated too much conditional on current information. In this paper I use a New Keynesian model with a financial accelerator to study the behaviour of interest and prices under both a "technology boom-bust" driven by changes in expectation about TFP, and a "credit boom-bust" driven by changes in expectations about the efficiency of the financial sector. While the two scenarios are similar in that they both lead to a run-up and then sharp drop-off in new capital and debt, I show that the behaviour of interest and prices depends critically on the nature of the new-shock driving the overaccumulation. In particular, the boom-phase of the TFP boom-bust is characterized by below-trend inflation or deflation, whereas that of the credit boom-bust is characterized by above-trend but low inflation. In contrast, inflation falls below-trend in the bust phases of both. I show that consistent with results elsewhere in the literature, stricter inflation-targeting fails to pull the economy toward the efficient equilibrium during the boom phase of the TFP boom-bust. In contrast, stricter inflation targeting pushes the economy closer to the flexible-price response during the boom-phase of the credit boom-bust. In both cases however, conditional on realization of overaccumulation, in inflation-targeting pulls the economy towards the flexible price equilibrium.
    Keywords: expectations-driven business cycle, boom-bust, news shock, monetary policy, overaccumulation, in?ation, ?nancial accelerator, Great Recession.
    JEL: E3 E44
    Date: 2014–07–10
  18. By: Christian Chiglino (University of Essex); Nicole Tabasso (University of Surrey)
    Abstract: Despite the evidence on incomplete financial markets and substantial risk being borne by innovators, current models of growth through creative destruction predominantly model innovators as risk neutral. Risk aversion is expected to reduce the incentive to innovate and we might fear that without insurance innovation completely disappears in the long run. The present paper introduces risk averse agents into an occupational choice model of endogenous growth in which insurance against failure to innovate is not available. We derive a clear negative relationship between the level of risk aversion and long run growth. Surprisingly, we show that in an equilibrium there exists a cut-off value of risk aversion below which the growth rate of the mass of innovators tends to a strictly positive constant. In this case, innovation persists on the long run and consumption per capita grows at a strictly positive rate. On the other hand, for levels of risk aversion above the cut-off of value, the economy eventually stagnates.
    JEL: O40 O41 O43
    Date: 2014–07
  19. By: Pietro Cova (Bank of Italy); Patrizio Pagano (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We assess the global macroeconomic implications of different strategies of official reserve management by developing a large scale new-Keynesian dynamic general equilibrium model of the world economy, calibrated on the euro area, the United States, China, Japan and the rest of the world. An increase in global demand for euros would boost euro-area aggregate demand because of the reduction in euro-area interest rates (the main benefit associated with the “privilege” of being a global currency). If the higher demand for euros is associated with lower demand for US dollars, then US economic activity falls because of higher interest rates, which depress domestic aggregate demand, while the external balance improves; countries accumulating reserves continue to run a trade surplus, as exports to the euro-area increase. We also compute welfare gains/costs for all economies.
    Keywords: global imbalances, global currency, dynamic general equilibrium modelling
    JEL: F33 F41 C51 E52
    Date: 2014–07
  20. By: Rodrigo J. Raad (Cedeplar-UFMG); Gilvan R. Guedes (Cedeplar-UFMG)
    Abstract: This paper develops a theoretical model for parental behavior regarding land inheritance, explicitly accounting for consumption and human capital savings strategies. We distinguish two types of modeling: one with and another without strategic behavior. In the first model, we assume that children do not act strategically towards their parent; in this case, the parent chooses how much to bequeath contingent upon each child's return to human capital. We find that the child with the highest return to human capital is more likely to receive a larger share of the land if difference in offspring's returns is large enough. This result points to a non-altruistic behavior. In the second model, we allow for each child to influence parent's optimal choice of bequest by providing services to the latter. We show a numerical example in which the child's strategy for service provision is sufficient to assure that the one providing more service will receive a larger share of the bequest in a Nash equilibrium. This holds, regardless of differences in offspring returns to human capital.
    Keywords: Land inheritance, Altruism, Exchange motive, Nash equilibrium
    JEL: K11 P51
    Date: 2014–05

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