nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2014‒10‒13
twelve papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. A note on hump-shaped output in the RBC model By Daichi Shirai
  2. The cost of pollution on longevity, welfare and economic stability By Natacha Raffin; Thomas Seegmuller
  3. The Political Economy of Growth, Inequality, the Size and Composition of Government Spending By Klaus Schmidt-Hebbel; José-Carlos Tello
  4. Limited asset market participation, income inequality and macroeconomic volatility By Giorgio Motta; Patrizio Tirelli
  5. Liquidity Traps and Monetary Policy: Managing a Credit Crunch By Buera, Francisco J.; Nicolini, Juan Pablo
  6. Lliquidity, trends, and the great recession By Guerron-Quintana, Pablo; Jinnai, Ryo
  7. 'Entry and Exit with Financial Frictions' By Patrick Macnamara
  8. The effects of a money-financed fiscal stimulus By Jordi Galí
  10. The Shimer puzzle(s) in a New Keynesian framework. By A.Pizzo
  11. Working Less and Bargain Hunting More: Macro Implications of Sales during Japan's Lost Decades By Nao Sudo; Kozo Ueda; Kota Watanabe; Tsutomu Watanabe
  12. Payroll Taxation and the structure of qualications and wages in a segmented frictional labor market with intra-rm bargaining By Clément Carbonnier

  1. By: Daichi Shirai
    Abstract: This note shows that a standard real business cycle model with a specific parameter range can weakly generate a hump-shaped output response output to productivity shocks. This result requires only that the technology shocks are nearly random walk.
    Date: 2014–09
  2. By: Natacha Raffin; Thomas Seegmuller
    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
  3. By: Klaus Schmidt-Hebbel (Catholic University of Chile); José-Carlos Tello (Catholic University of Peru)
    Abstract: This paper develops a dynamic general-equilibrium political-economy model for the optimal size and composition of public spending. An analytical solution is derived from majority voting for three government spending categories: public consumption goods and transfers (valued by households), as well as productive government services (complementing private capital in an endogenous-growth technology). Inequality is reflected by a discrete distribution of infinitely-lived agents that differ by their initial capital holdings. In contrast to the previous literature that derives monotonic (typically negative) relations between inequality and growth in one-dimensional voting environments, this paper establishes conditions, in an environment of multi-dimensional voting, under which a non-monotonic, inverted U-shape relation between inequality and growth is obtained. This more general result – that inequality and growth could be negatively or positively related – could be consistent with the ambiguous or inconclusive results documented in the empirical literature on the inequality-growth nexus. The paper also shows that the political-economy equilibrium obtained under multi-dimensional voting for the initial period is time-consistent.
    Keywords: inequality, endogenous growth, multidimensional voting, endogenous taxation
    JEL: D72 E62 H11 H31
    Date: 2014–09
  4. By: Giorgio Motta; Patrizio Tirelli
    Abstract: By introducing external consumption habits and Limited Asset Market Participation in an otherwise standard New Keynesian DSGE model we uncover a causality link between limited asset market participation, consumption inequality and macroeconomic volatility. We also obtain that monetary contractions have redistributive effects in favour of asset holders, broadly confirming the findings in Coibion et al. (2012). Finally we analyze the impact of redistributive fiscal policies that target consumption inequality between households groups. Such policies have beneficial implications for macroeconomic stability, bringing the dynamic performance of the model close to the one generated by representative-agent DSGE models.
    Keywords: limited asset market participation, DGSE, determinacy, consumption habits, income inequality, redistribution
    Date: 2014
  5. By: Buera, Francisco J. (Federal Reserve Bank of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. These two frictions give rise to a nontrivial financial market in a monetary economy. A tightening of the collateral constraint results in a recession generated by a credit crunch. The model can be used to study the effects on the main macroeconomic variables, and on the welfare of each individual of alternative monetary and fiscal policies following the credit crunch. The model reproduces several features of the recent financial crisis, such as the persistent negative real interest rates, the prolonged period at the zero bound for the nominal interest rate, and the collapse in investment and low inflation in spite of the very large increases in liquidity adopted by the government. The policy implications are in sharp contrast to the prevalent view in most central banks, which is based on the New Keynesian explanation of the liquidity trap.
    Keywords: Liquidity trap; Credit crunch; Collateral constraings; Monetary policy; Ricardian equivalence;
    JEL: E44 E52 E58 E63
    Date: 2014–07–18
  6. By: Guerron-Quintana, Pablo (Federal Reserve Bank of Philadelphia); Jinnai, Ryo (Texas A &M University)
    Abstract: The authors study the impact that the liquidity crunch in 2008-2009 had on the U.S. economy’s growth trend. To this end, the authors propose a model featuring endogenous productivity a la Romer and a liquidity friction a la Kiyotaki-Moore. A key finding in the authors’ study is that liquidity declined around the Lehman Brothers’ demise, which led to the severe contraction in the economy. This liquidity shock was a tail event. Improving conditions in financial markets were crucial in the subsequent recovery. Had conditions remained at their worst level in 2008, output would have been 20 percent below its actual level in 2011. The authors show that a subsidy to entrepreneurs would have gone a long way averting the crisis.
    Keywords: Liquidity; Economic Growth
    Date: 2014–08–21
  7. By: Patrick Macnamara
    Abstract: This paper considers a model of firm dynamics to study how well aggregate shocks account for fluctuations in the entry and exit of establishments. To do this, I construct measures of aggregate financial and technology shocks. Under reasonable parameters, the model indicates that financial shocks (and not technology shocks) have contributed to the majority of cyclical fluctuations in entry and exit rates. In particular, the reduction in entry and the increase in exit during the 2007-09 recession have contributed to the slow recovery of output and hours that followed.
    Date: 2014
  8. By: Jordi Galí
    Abstract: I analyze the effects of an increase in government purchases financed entirely through seignorage, in both a classical and a New Keynesian framework, and compare them with those resulting from a more conventional debt-financed stimulus. My findings point to the importance of nominal rigidities in shaping those effects. Under a realistic calibration of such rigidities, a money-financed fiscal stimulus is shown to have very strong effects on economic activity, with relatively mild inflationary consequences. If the steady state is sufficiently inefficient, an increase in government purchases may increase welfare even if such spending is wasteful.
    Keywords: seignorage, government spending, fiscal multiplier
    JEL: E32 E52 E62
    Date: 2014–09
  9. By: Enghin Atalay
    Abstract: I quantify the contribution of sectoral shocks to business cycle fluctuations in aggregate output. I develop a multi-industry general equilibrium model in which each industry employs the material and capital goods produced by other sectors, and then estimate this model using data on U.S. industries sales, output prices, and input choices. Maximum likelihood estimates indicate that industry-specific shocks account for nearly two-thirds of the volatility of aggregate output, substantially larger than previously assessed. Identification of the relative importance of industry-specific shocks comes primarily from data on industries intermediate input purchases, data that earlier estimations of multi-industry models have ignored.
    Date: 2014–09
  10. By: A.Pizzo
    Abstract: In this paper I shed light on the issues of the (low) volatilities of labor market variables implied by the search and matching model and the (high) values of the correlations between these variables and labor productivity. On the one hand, Shimer (2005) claims that “Not only there is little amplification, but there is also no propagation of the labor productivity shock in the [search and matching] model.” On the other, starting from Galì (1999) empirical evidence about the reaction of employment to a neutral positive technological shock seems to indicate a recessionary effect in the short term, thus casting doubts about the whole transmission mechanism as described by Shimer (2005) in line with a RBC framework. I claim that a New Keynesian model with nominal rigidities is able to replicate the set of moments of both volatilities and correlations; the model presents two distinctive features: employment decreases after a positive technological shock and the calibration strategy in choosing the vacancy posting cost is different with respect of Shimer (2005) and in line with the RBC tradition. I show also that the use of the traditional separable preferences in consumption and leisure worsens the Shimer's critique, via the consequences of wealth effects on labor supply.
    Keywords: labor market fluctuations, technology shock, price rigidities.
    JEL: E24 E32 J60
    Date: 2014
  11. By: Nao Sudo (Bank of Japan); Kozo Ueda (Waseda University); Kota Watanabe (Meiji University); Tsutomu Watanabe (University of Tokyo)
    Abstract: Standard New Keynesian models have often neglected temporary sales. In this paper, we ask whether this treatment is appropriate. In the empirical part of the pa- per, we provide evidence using Japanese scanner data covering the last two decades that the frequency of sales was closely related with macroeconomic developments. Specifically, we find that the frequency of sales and hours worked move in opposite directions in response to technology shocks, producing a negative correlation be- tween the two. We then construct a dynamic stochastic general equilibrium model that takes households' decisions regarding their allocation of time for work, leisure, and bargain hunting into account. Using this model, we show that the rise in the frequency of sales, which is observed in the data, can be accounted for by the decline in hours worked during Japan's lost decades. We also find that the real effect of monetary policy shocks weakens by around 40% due to the presence of temporary sales, but monetary policy still matters.
    Keywords: sales; monetary policy; lost decades; time use
    JEL: E3 E5
    Date: 2014–09
  12. By: Clément Carbonnier (Université de Cergy-Pontoise, THEMA)
    Abstract: The present paper investigates the incidence of payroll taxation - and more generally labor income taxation - in a search and matching model. The model considers a production function with different type of workers, allowing to understand the interactions between segmented labor markets. Furthermore, the equilibrium is reach through a double process of intra-firm wage bargaining ex post and labor demand ex ante. The model is derived analytically for linear tax function differentiated for worker type, and numerically for non-linear tax functions. The bargaining power parameter is interpreted as reflecting the intra-segment substitutability, in parallel to the inter-segment substitutability deriving from the production function and the segment size and productivity. Some standard results are found, such as the wages,unemployment and incidence increasing with respect to bargaining power; or the payroll tax burden falling mainly on workers. Moreover, it is shown that over-shifting of payroll taxes on net wages may happen. It is also shown that a stronger bargaining power induced weaker direct effect of taxes but larger crossed eects on other segments. In addition, marginal incidence decreases with respect to the payroll tax level and is therefore significantly lower than mean incidence, which may induce an underestimation of overall incidence by empirical analyses. This also induces a marginally decreasing eect on loabor costs of payroll tax cuts.
    Keywords: Search and matching; segemented labor market; intra-rm bargaining; tax incidence
    JEL: H22 J31 J38
    Date: 2014

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