nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒01‒26
34 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Does interbank market matter for business cycle fluctuation? An estimated DSGE model with financial frictions for the Euro area By Giri, Federico
  2. Liquidity, Trends, and the Great Recession By Pablo Guerron-Quintana
  3. Handbook on DSGE models: some useful tips in modeling a DSGE models By Valdivia, Daney
  4. Existence of Steady-State Equilibria in Matching Models with Search Frictions By Stephan Lauermann; Georg Nöldeke
  5. Precautionary Saving and Aggregate Demand By E. Challe; J. Matheron; X. Ragot; M.F. Rubio-Ramirez
  6. A Historical Welfare Analysis of Social Security: Who Did the Program Benefit? By William Peterman
  7. Post-Crisis Slow Recovery and Monetary Policy By Daisuke Ikeda; Takushi Kurozumi
  8. Optimal pay-as-you-go social security when retirement is endogenous and labor productivity depreciates By Miyazaki, Koichi
  9. China’s financial crisis – the role of banks and monetary policy By Le, Vo Phuong Mai; Matthews, Kent; Meenagh, David; Minford, Patrick; Xiao, Zhiguo
  10. Constrained inefficiency and optimal taxation with uninsurable risks By Gottardi, Piero; Kajii, Atsushi; Nakajima, Tomoyuki
  11. The Uncertainty Multiplier and Business Cycles By Hikaru Saijo
  12. Investor borrowing heterogeneity in a Kiyotaki-Moore style macro model By Punzi, Maria Teresa; Rabitsch, Katrin
  13. Subsistence Entrepreneurs and Misallocation By Kevin Donovan
  14. Turbulence and the Employment Experience of Older Workers By Etienne Lalé
  15. Coordination Capital By Mathieu Taschereau-Dumouchel; Edouard Schaal
  16. Saving Europe? The unpleasant arithmetic of fiscal austerity in integrated economies By Mendoza, Enrique G.; Tesar, Linda L.; Zhang, Jing
  17. Information Frictions, Nominal Shocks, and the Role of Inventories in Price-Setting Decisions By Camilo Morales-Jimenez
  18. Optimality in a Stochastic OLG Model with Ambiguity By Eisei Ohtaki; Hiroyuki Ozaki
  19. Spillover effects in a monetary union: Why fiscal policy instruments matter? By Amélie Barbier-Gauchard; Thierry Betti; Giuseppe Diana
  20. Pareto-improving Immigration and Its Effect on Capital Accumulation in the Presence of Social Security By Hisahiro Naito
  21. The impact of the correlation between health expenditure and survival probability on the demand for insurance By Kai Zhao
  22. Do contractionary monetary policy shocks expand shadow banking? By Nelson, Benjamin; Pinter, Gabor; Theodoridis, Konstantinos
  23. Why Doesn't Technology Flow from Rich to Poor Countries? By Harold L. Cole; Jeremy Greenwood; Juan M. Sanchez
  24. Cyclical Reallocation of Workers Across Large and Small Employers By Henry Hyatt; Erika McEntarfer; John Haltiwanger
  25. Sovereign default and the choice of maturity By Horacio Sapriza; Emircan Yurdagul; Juan Sanchez
  26. Population Aging and Growth: the Effect of PAYG Pension Reform By Ken Tabata
  27. 'Public Spending and Transitional Dynamics of an Innovation-Based Growth Model' By Baris Alpaslan
  28. Indirect Inference Estimation of Nonlinear Dynamic General Equilibrium Models : With an Application to Asset Pricing under Skewness Risk By Francisco RUGE-MURCIA
  29. Dynamics of Factor Productivity Dispersions By Matthias Meier; Ariel Mecikovsky; Christian Bayer
  30. Pensions, Education, and Growth: A Positive Analysis By Tetsuo Ono; Yuki Uchida
  31. Are Labor or Product Markets to Blame for Recessions? By Peter Klenow; Ben Malin; Mark Bils
  32. Global Sunspots and Asset Prices in a Monetary Economy By Roger E.A. Farmer
  33. When does a central bank's balance sheet require fiscal support? By Christopher Sims; Marco Del Negro
  34. Productivity and the Welfare of Nations By Susanto Basu

  1. By: Giri, Federico
    Abstract: The aim of this paper is to assess the impact of the interbank market on the business cycle fluctuations. In order to do that, we build a DSGE model with heterogeneous households and banks. The surplus bank can allocate its resources between interbank lending and risk free government bonds. This portfolio choice is affected by an exogenous counterpart risk shock on the interbank lending. An increase of the counterpart risk diverts funds from the interbank markets toward the risk free market. This mechanism allow us to capture the collapse of the interbank market and the fly to quality mechanism underlying the 2007 financial crisis. The main result is that an interbank riskiness shock seems to explain part of the 2007 downturn and especially the rise of the interest rates on the credit market during and just after the financial turmoil.
    Keywords: DSGE model,financial frictions,interbank market,Bayesian estimation
    JEL: E30 E44 E51
    Date: 2014
  2. By: Pablo Guerron-Quintana (Federal Reserve Bank of Philadelphia)
    Abstract: We study the impact that the liquidity crunch in 2008-2009 had on the U.S. economy's growth trend. To this end, we propose a model featuring endogenous productivity a la Romer and a liquidity friction a la Kiyotaki-Moore. A key finding in our 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.
    Date: 2014
  3. By: Valdivia, Daney
    Abstract: Despite there are useful books and text books from recognized authors about modeling macroeconomics through various types of methods and methodologies, “Some Useful tips in Modeling a DSGE models” try to add special features through an economist can use to model macro and micro relations to explain different scenarios in an specific economy. In this sense, this work begin since basic conceptions of difference equations to build a Dynamic Stochastic General Equilibrium model covering special topics like rule – of – thumb consumers, monetary and fiscal policies, sticky prices, investment and problem of the firms, topics in Dynare and others.
    Keywords: Differential equation, dynamic stochastic general equilibrium refinements, policy instruments
    JEL: A33 C00 E1
    Date: 2015–01–10
  4. By: Stephan Lauermann; Georg Nöldeke (University of Basel)
    Abstract: We prove existence of steady-state equilibrium in a class of matching models<br />with search frictions.
    Keywords: Search, Matching, Bargaining, Steady-State Equilibrium
    JEL: C62 C78 D83
    Date: 2014
  5. By: E. Challe; J. Matheron; X. Ragot; M.F. Rubio-Ramirez
    Abstract: We formulate and estimate a tractable macroeconomic model with time-varying precautionary savings. We argue that the latter affect aggregate fluctuations via two main channels: a stabilizing aggregate supply effect working through the supply of capital; and a destabilizing aggregate demand effect generated by a feedback loop between unemployment risk and consumption demand. Using the estimated model to measure the contribution of precautionary savings to the propagation of recent recessions, we find strong aggregate demand effects during the Great Recession and the 1990–1991 recession. In contrast, the supply effect at least offset the demand effect during the 2001 recession.
    Keywords: Incomplete markets, DSGE model, Bayesian estimation, Great Recession.
    Date: 2015
  6. By: William Peterman (Federal Reserve Board of Governors)
    Abstract: This paper builds a computational life cycle model and simulates the Great Depression in order to assess the historical welfare implications of implementing Social Security during this business cycle episode. A well established result in the literature is that when comparing steady states with and without Social Security in a standard life cycle model, long-run welfare tends to be lower with Social Security. Consistent with these previous results, this paper determines that on average in the steady state the original Social Security program lowers welfare by the equivalent of 4.5% of expected lifetime consumption. Moreover, the likelihood that this Social Security program causes a decrease in an agent's welfare in the steady state is 92%. However, this paper finds that the welfare effects of implementing Social Security on agents in the economy at the time the program is adopted is very different than the long-run welfare effects. In particular these living agents experience an increase in their lifetime welfare due to the implementation of Social Security that is equivalent to 4.4% of their expected future lifetime consumption. Moreover, the paper finds that the likelihood that these living agents experience an increase in their lifetime welfare due to the adoption of the program is 83%. The divergence in the short-run and long-run welfare effects is primarily driven by a slow adoption of payroll taxes and a quicker adoption of benefit payments. This divergence could be one explanation for why a program that decreases long-run welfare was originally implemented.
    Date: 2014
  7. By: Daisuke Ikeda (Institute for Monetary and Economic Studies, Bank of Japan.); Takushi Kurozumi (Institute for Monetary and Economic Studies, Bank of Japan.)
    Abstract: In the aftermath of the recent financial crisis and subsequent recession, slow recoveries have been observed and slowdowns in total factor productivity (TFP) growth have been measured in many economies. This paper develops a model that can describe a slow recovery resulting from an adverse financial shock in the presence of an endogenous mechanism of TFP growth, and examines how monetary policy should react to the financial shock in terms of social welfare. It is shown that in the face of the financial shocks, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much more substantial than in the model where TFP growth is exogenously given. Moreover, compared with the welfare-maximizing rule, a strict inflation or price-level targeting rule induces a sizable welfare loss because it has no response to output, whereas a nominal GDP growth or level targeting rule performs well, although it causes high interest-rate volatility. In the presence of the endogenous TFP growth mechanism, it is crucial to take into account a welfare loss from a permanent decline in consumption caused by a slowdown in TFP growth.
    Keywords: Financial shock; Endogenous TFP growth; Slow recovery; Monetary policy; Welfare cost of business cycle
    JEL: E52 O33
    Date: 2014–12
  8. By: Miyazaki, Koichi
    Abstract: This paper considers an overlapping-generations model with pay-as-you-go social security and retirement decision making by an old agent. In addition, the paper assumes that labor productivity depreciates. Under this setting, socially optimal allocations are examined. The first-best allocation is an allocation that maximizes welfare when a social planner distributes resources and forces an old agent to work and retire as she wants. The second-best allocation is an allocation that maximizes welfare when she can use only pay-as-you-go social security in a decentralized economy. The paper finds a range of an old agent's labor productivity such that the first-best allocation is achieved in the decentralized economy. This differs from the finding in Michel and Pestieau (2013) that the first-best allocation cannot be achieved in the decentralized economy.
    Keywords: Overlapping-generations model, pay-as-you-go social security, endogenous retirement, depreciation of labor productivity, first-best allocation, second-best allocation
    JEL: D91 H21 H55 J26
    Date: 2014–12–12
  9. By: Le, Vo Phuong Mai (Cardiff Business School); Matthews, Kent (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Xiao, Zhiguo
    Abstract: This paper develops a model of the Chinese economy using a DSGE framework that accommodates a banking sector and money. The model is used to shed light on the period of the recent period of financial crisis. It differs from other applications in the use of indirect inference to estimate and test the fitted model. We find that the main shocks that hit China in the crisis were international and that domestic banking shocks were unimportant. Officially mandated bank lending and government spending were used to supplement monetary policy to aggressively offset shocks to demand. An analysis of the frequency of crises shows that crises occur on average about every half-century, with about a third accompanied by financial crises. We find that monetary policy can be used more vigorously to stabilise the economy, making direct banking controls and fiscal activism unnecessary.
    Keywords: DSGE model; Financial Frictions; China; Crises; Indirect Inference; Money; Credit
    JEL: E3 E44 E52 C1
    Date: 2015–01
  10. By: Gottardi, Piero (European University Institute); Kajii, Atsushi (Kyoto University); Nakajima, Tomoyuki (Federal Reserve Bank of Atlanta)
    Abstract: When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so, how? In a two-period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and distribution effects. This method allows us to determine how the sign of the optimal taxes on capital and labor depends on the nature of the shocks, the degree of heterogeneity among consumers' income, and the way in which the tax revenue is used to provide lump sum transfers to consumers. When shocks affect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However, in other cases, a negative tax on capital improves welfare.
    JEL: D52 H21
    Date: 2014–11–01
  11. By: Hikaru Saijo
    Abstract: I study a business cycle model where agents learn about the state of the economy by accumulating capital. During recessions, agents invest less, and this generates noisier estimates of macroeconomic conditions and an increase in uncertainty. The endogenous increase in aggregate uncertainty further reduces economic activity, which in turn leads to more uncertainty, and so on. Thus, through changes in uncertainty, learning gives rise to a multiplier effect that amplies business cycles. I use the calibrated model to measure the size of this uncertainty multiplier.
  12. By: Punzi, Maria Teresa; Rabitsch, Katrin
    Abstract: TWe allow for heterogeneity in investors' ability to borrow from collateral in a Kiyotaki-Moore style macro model. We calibrate the model to match the quintiles of the distri- bution of leverage ratios of US non-financial firms. We show that financial amplification of the model with heterogeneous investors can be orders of magnitude higher, because of more pronounced asset price reactions.
    Keywords: Collateral Constraints,Leverage,Heterogeneity,Financial Amplification
    JEL: E32 E44
    Date: 2014
  13. By: Kevin Donovan (University of Notre Dame)
    Abstract: Empirical evidence suggests that many individuals in developing countries operate businesses not due to some superior skill or idea, but because they lack the opportunity to become salaried employees. In a model with incomplete markets, occupational choice, and frictional job search, I argue that this is due to the interaction of low unemployment benefits and financial market underdevelopment. The resulting misallocation along the extensive margin between salaried positions and business ownership generates a larger left tail of firm size and a significantly smaller quantitative impact of targeted lending to poor entrepreneurs. Model predictions are then tested with individual-level surveys of both Chilean and Mexican microenterprise owners. Evidence shows that misallocated owners have lower profit conditional on observable inputs and are more likely to have left their last salaried position involuntarily. Both are consistent with the model.
    Date: 2014
  14. By: Etienne Lalé
    Abstract: This paper studies the secular employment experience of older workers on both sides of the Atlantic, using a common framework to characterize changes in the macro-economy. We embed Ljungqvist and Sargent (1998, 2008)’s turbulence story into a general equilibrium environment with an operative labor supply margin. The model can jointly explain (i) the fall in (male) labor force participation in the United States, (ii) the similar but more pronounced decline in Europe along with rising unemployment rates and (iii) the concentration of these adverse employment outcomes on older workers. We use this framework to discuss the labor market effects of early retirement benefits. These benefits generate significant incentives to retire earlier, which in turn raises tax pressure and discourages job creation. We find that these effects are more pronounced in a turbulent economic environment, and especially so under stringent employment protection legislation.
    Keywords: Job-Search, Turbulence, European Unemployment, Labor Force Participation.
    JEL: E24 J21 J64
    Date: 2015–01
  15. By: Mathieu Taschereau-Dumouchel (University of Pennsylvania - Wharton); Edouard Schaal (New York University)
    Abstract: Abstract We propose a model of coordination failures for business cycles in which agents learn to coordinate over time. The economy features an aggregate demand externality that leads to multiple equilibria under complete information. Under incomplete information, a group of informed agents receive private signals about the fundamentals of the economy, while a group of uninformed agents only observe past public realizations of aggregate demand. The economy takes a long time to recover from recessions because their coordination capital is destroyed: agents lose their ability to coordinate on the good outcome. In a recovery, informed agents wait for the uninformed to take action before resuming production, while uninformed agents infer the level of the fundamental by observing the endogenously low level of demand. As a result, uninformed agents keep pessimistic beliefs about the fundamental for an extended period of time and downturns become very protracted. The equilibrium is inefficient and we characterize optimal policy interventions.
    Date: 2014
  16. By: Mendoza, Enrique G.; Tesar, Linda L.; Zhang, Jing
    Abstract: Europe's debt crisis casts doubt on the effectiveness of fiscal austerity in highly-integrated economies. Closed-economy models overestimate its effectiveness, because they underestimate tax-base elasticities and ignore cross-country tax externalities. In contrast, we study tax responses to debt shocks in a two-country model with endogenous utilization that captures those externalities and matches the capital-tax-base elasticity. Quantitative results show that unilateral capital tax hikes cannot restore fiscal solvency in Europe, and have large negative (positive) effects at "home" ("abroad"). Restoring solvency via either Nash competition or Cooperation reduces (increases) capital (labor) taxes significantly, and leaves countries with larger debt shocks preferring autarky.
    Keywords: European debt crisis,capacity utilization,fiscal austerity,tax competition
    JEL: E61 E62 E66 F34 F42
    Date: 2014
  17. By: Camilo Morales-Jimenez (University of Maryland, College Park)
    Abstract: Models with information frictions display output and inflation dynamics that are consistent with the empirical evidence. However, an assumption in the existing literature is that pricing managers do not interact with production managers within firms. If this assumption were relaxed, nominal shocks would not have real effects on the economy. In this paper, I present a model with information frictions, output inventories, and perfect communication within firms where nominal shocks have real effects. In this model, final goods firms observe aggregate variables with one period lag but observe their nominal input price and demand at all times. Hence, firms will accumulate inventories as long as they think that they are facing a low input price (cost-smoothing role of inventories). After a contractionary nominal shock, the nominal input price goes down, and firms accumulate inventories because the probability of a good productivity shock is positive. This prevents firms' prices from decreasing, which distorts relative prices and makes current profits and households' income go down. As a consequence, the aggregate demand falls. I found that nominal shocks have a delayed effect on output, and that the responses to nominal shocks are significant, persistent, and hump-shaped. Output, capital, and total investment decrease by 0.5%, 1.8% and 3.4%, respectively, after a 1% increase in the nominal interest rate. Moreover, the peak of most of the responses is two quarters after the shock. When the model is simulated, it displays moments that are closer to the data than a comparable model with perfect information.
    Date: 2014
  18. By: Eisei Ohtaki; Hiroyuki Ozaki
    Abstract: It has been known that, in the overlapping generations (OLG) model with the complete market, we can judge optimality of an equilibrium allocation by examining the associated equilibrium price. This article reexamine this observation in a stochastic OLG model with the maxmin expected utility preference. It is shown that, under such preferences, optimality of an equilibrium allocation depends on the set of possible supporting prices, not necessarily on the associated equilibrium price itself. Therefore, observations of an equilibrium price does not necessarily tell us optimality of the equilibrium allocation.
  19. By: Amélie Barbier-Gauchard; Thierry Betti; Giuseppe Diana
    Abstract: Using a two-country DSGE model, we analyze the spillover effects of fiscal policy in a monetary union. Based on a non-Walrasian labor market and a detailed fiscal sector, our analysis focuses on the relative cross-border effects of different kinds of fiscal instruments (expenditure side and revenue side). We show that different fiscal instruments produce quite different qualitative effects on the foreign economy. For instance, a public consumption expansion or a cut in social protection tax triggers a decrease in foreign GDP and an increase in foreign unemployment. On the contrary, an increase in transfers to households or a decrease in VAT leads to an increase in foreign GDP and a decrease in foreign unemployment. Moreover, we demonstrate that the choice of the fiscal instrument strongly affects the size of the spillover effects, meaning that different fiscal instruments also produce different quantitative effects on the foreign economy.
    Keywords: Fiscal policy, spillover effects, new-Keynesian model, labor market, unemployment.
    JEL: E62 F41 F42 J20
    Date: 2015
  20. By: Hisahiro Naito
    Abstract: The effect of accepting more immigrants on welfare in the presence of a pay-as-you-go social security system is analyzed qualitatively and quantitatively. First, it is shown that if initially there exist intergenerational government transfers from the young to the old, the government can lead an economy to the (modified) golden rule level within a finite time in a Pareto-improving way by increasing the percentage of immigrants to natives (PITN). Second, using the computational overlapping generation model, the welfare gain is calculated of increasing the PITN from 15.5 percent to 25.5 percent and years needed to reach the (modified) golden rule level in a Pareto-improving way in a model economy. The simulation shows that the present value of the welfare gain of increasing the PITN comprises 23 percent of the initial GDP. It takes 112 years for the model economy to reach the golden rule level in a Pareto-improving way.
  21. By: Kai Zhao (University of Connecticut)
    Abstract: This paper studies the effects of health shocks on the demand for health insurance and annuities, along with precautionary saving in a dynamic life-cycle model. I argue that when the health shock can simultaneously increase health expenses and reduce longevity, rational agents would neither fully insure their uncertain health expenses nor fully annuitize their wealth because the correlation between health expenses and longevity provides a self insurance channel for both uncertainties. That is, when the agent is hit by a health shock (which simultaneously increases health expenses and reduces longevity), she can use the resources originally saved for consumption in the reduced period of life to pay for the increased health expenses. Since the two uncertainties partially offset each other, the precautionary saving generated in the model should be smaller than in a standard model without the correlation between health expenses and longevity. In a quantitative life-cycle model calibrated using the Medical Expenditure Panel Survey dataset, I find that the health expenses are highly correlated with the survival probabilities, and this correlation significantly reduces the demand for actuarially-fair health insurance, while its impact on the demand for annuities and precautionary saving is relatively small.
    Keywords: Health Insurance, Annuities, Precautionary Saving
    Date: 2014–12
  22. By: Nelson, Benjamin (Bank of England); Pinter, Gabor (Bank of England); Theodoridis, Konstantinos (
    Abstract: Using vector autoregressive models with either constant or time-varying parameters and stochastic volatility for the United States, we find that a contractionary monetary policy shock has a persistent negative impact on the asset growth of commercial banks, but increases the asset growth of shadow banks and securitisation activity. To explain this ‘waterbed’ effect, we propose a standard New Keynesian model featuring both commercial and shadow banking, and we show that the model comes close to explaining the empirical results. Our findings cast doubt on the idea that monetary policy can usefully ‘get in all the cracks’ of the financial sector in a uniform way.
    Keywords: Monetary policy; financial intermediaries; shadow banking; VAR; DSGE
    JEL: E43 E52 G21
    Date: 2015–01–16
  23. By: Harold L. Cole; Jeremy Greenwood; Juan M. Sanchez
    Abstract: What determines the technology that a country adopts? While many factors affect technological adoption, the efficiency of the country's financial system may also play a significant role. To address this question, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation. The ability of an intermediary to monitor and control the cash flows of a firm plays an important role in the technology adoption decision. Can such a theory help to explain the differences in total factor productivity and establishment-size distributions across India, Mexico, and the United States? A quantitative illustration suggests the answer is yes.
    JEL: D92 E13 G24 O11 O16
    Date: 2015–01
  24. By: Henry Hyatt (US Census Bureau); Erika McEntarfer (US Census Bureau); John Haltiwanger (University of Maryland)
    Abstract: Search-and-matching models with on-the-job search and firm size yield the prediction that job-to-job flows reallocate workers from smaller to larger firms. Recent papers have extended such models to explain the cyclicality of employment at large vs. small firms. In this paper, we use linked employer-employee data for the U.S. to provide direct evidence on worker reallocation by firm size. We find that job-to-job flows do not generally move workers from smaller to larger employers. Instead, we show that workers moving directly from one job to another more frequently move from large firms to small firms than the reverse. This is despite the fact that large businesses rely more on poaching workers from other firms when hiring and small businesses hire largely from the pool of nonemployed, results that are consistent with the theory. Regarding the cyclical nature of this reallocation, we find that poaching hires are highly procyclical for both large and small firms. Yet despite the cyclical nature of poaching, net reallocation across firm size classes via poaching is relatively stable across the business cycle. The implication is that net poaching by size class is relatively small in magnitude at all phases of the cycle. We find more supportive evidence of the predictions of recent theories regarding net poaching between small and large firms in times of tight labor markets when we focus on mature firms. Even here however the quantitative effects are small.
    Date: 2014
  25. By: Horacio Sapriza (Board of Governors); Emircan Yurdagul (Washington University in Saint Louis); Juan Sanchez (Federal Reserve Bank of St. Louis)
    Abstract: This paper provides a new framework to study the term structure of interest rate spreads and the maturity composition of sovereign bonds. As observed in the literature, sovereign interest rate spreads increase during crises, with short term interest rate spreads rising more than long term spreads. The inversion of the yield curve is accompanied by lower debt issuance and a shortening of the maturity structure. In addition, sovereign debt restructurings may lead to a non-monotonic term structure of interest rate spreads, as evidenced during the recent sovereign debt crisis in Greece, when the yield curve developed a humped shape. To properly capture the observed variation of expected sovereign debt collection at different horizons and thus account for the dynamics in the maturity of debt issuances and its co-movement with the level of spreads across maturities found in the data, this paper introduces a new quantitative dynamic model of the term structure of interest rate spreads of government defaultable debt under incomplete markets.
    Date: 2014
  26. By: Ken Tabata (School of Economics, Kwansei Gakuin University)
    Abstract: This paper examines how pay-as-you-go (PAYG) pension reform from a defined-benefit scheme to a defined-contribution scheme affects economic growth in an overlapping generations model with endogenous growth. We show that in economies in which the old-age dependency ratio is relatively high and the size of pension benefits under a defined-benefit scheme is relatively large, PAYG pension reform from a defined-benefit scheme to a defined-contribution scheme mitigates the negative growth effect of population aging caused by a decline in the population growth rate or an increase in life expectancy.
    Keywords: Population aging, PAYG pensions, Defined-benefit schemes, Definedcontribution schemes
    JEL: D91 H55 O41
    Date: 2015–01
  27. By: Baris Alpaslan
    Abstract: This paper extends a three-period Overlapping Generations (OLG) model of endogenous growth where the interactions between public infrastructure, human capital with R&D activities, and growth are studied. The model accounts for the externality of technical knowledge associated with human capital which promotes the innovation capacity in adopting imported technologies and developing new technologies. In order to study the transitional dynamics of the model and to illustrate the impact of public policy, the model is calibrated using average data for low-income countries and sensitivity analysis is reported under different parameter configurations. Based on the numerical analysis for a low-income country, we show that trade-offs in the allocation of public spending may inevitably emerge. However, investment in infrastructure at the expense of spending on R&D is less likely to succeed in promoting growth, whereas it may be more effective to foster economic growth through an offsetting cut in education.
    Date: 2015
  28. By: Francisco RUGE-MURCIA
    Abstract: This paper proposes a nonlinear impulse-response matching procedure explicitly designed to estimate nonlinear dynamic models, and illustrates its applicability by estimating a macro-fi…nance model of asset pricing under skewness risk. As auxiliary model, a new class of nonlinear vector autoregressions (NVAR) based on Mittnik (1990) is proposed.
    Keywords: nonlinear vector autoregression, nonlinear impulse responses, skewness risk
    JEL: C51 C58
    Date: 2014
  29. By: Matthias Meier (Universitaet Bonn); Ariel Mecikovsky (Universitaet Bonn); Christian Bayer (Universitaet Bonn)
    Abstract: This paper documents a new set of stylized facts on the joint distribution of labor and capital productivity across plants. We exploit panel data from Germany, Chile, Colombia and Indonesia and show that the basic patterns are similar in all economies. Decomposing factor productivities into high and low frequency movements, we reveal two new stylized facts. First, factor productivities are positively correlated at high frequency, while they are negatively correlated at low-frequency. Second, differences in factor productivity dispersions across countries are mostly at high frequency, while at low frequency the dissimilarity is rather small. We suggest a new structural explanation for productivity dispersions based on putty-clay technology. Our model implies the coexistence of different technologies at any point in time, which gives rise to productivity dispersions. We demonstrate that this model is able to explain our new stylized facts.
    Date: 2014
  30. By: Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Graduate School of Economics, Osaka University)
    Abstract: This study presents an overlapping generations model to capture the nature of the competition between generations regarding two redistribution policies, public education and public pensions. In addition, we investigate the effects of population aging on these policies and economic growth from a political economy viewpoint. We show that two aging factors, longevity and the political power of the old, have op- posite effects on redistribution policies and economic growth. The relative strength between the two factors is negative for pensions, but hump-shaped patterns appear for public education and economic growth.
    Keywords: economic growth; population aging; public education; public pen-sions
    JEL: D78 E24 H55
    Date: 2014–12
  31. By: Peter Klenow (Stanford University); Ben Malin (Federal Reserve Bank of Minneapolis); Mark Bils (U. of Rochester)
    Abstract: Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been labeled "the labor wedge" - a cyclical wedge between the marginal product of labor and the marginal rate of substitution. The wedge can be broken into a product market wedge (price markup) and a labor market wedge (wage markup). Based on the wages of employees, the literature has attributed the wedge almost entirely to labor market distortions (see, e.g., Gali, Gertler, Lopez-Salido (2007) or Karabarbounis (2013)). Because employee wages may be smoothed versions of the true cyclical price of labor, however, we instead decompose the labor wedge using data on intermediate inputs, work-in-process inventories, and the self-employed. We find that price markup movements are just as important as wage markup movements -- including in the Great Recession and its aftermath. Thus, sticky prices and other forms of countercyclical price markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.
    Date: 2014
  32. By: Roger E.A. Farmer
    Abstract: The representative agent (RA) model, widely used by macroeconomists, successfully explains the co-movements among consumption, investment, employment and GDP. It is much less successful at explaining asset price data. Here, I construct a simple heterogeneous agent model, driven by sunspots, that provides a bridge between macroeconomics and finance theory. Most existing sunspot models use local linear approximations: instead, I construct global sunspot equilibria. My agents are expected utility maximizers with logarithmic utility functions, there are no fundamental shocks and markets are sequentially complete. Despite the simplicity of these assumptions, I am able to go a considerable way towards explaining features of asset pricing data that have presented an obstacle to previous models that adopted similar assumptions. My model generates volatile persistent swings in asset prices, a substantial term premium for long bonds and bursts of conditional volatility in rates of return. If my explanation for asset price volatility is accepted, models that build on my framework have the potential to unify macroeconomics with finance theory in a simple and parsimonious way.
    JEL: E3 E43 G12
    Date: 2015–01
  33. By: Christopher Sims (Princeton University); Marco Del Negro (Federal Reserve Bank of New York)
    Abstract: A central bank whose assets and liabilities are both nominal cannot produce a uniquely determined price level, no matter what policies it adopts, unless it is backed by a treasury with the power to tax. If it is so backed, the backing need not be visible in equilibrium; it can be a commitment by the treasury to act in circumstances that do not occur in equilibrium, and the action required in those circumstances need not be large. A central bank, though, can require fiscal transfers on the equilibrium path even when fiscal backing makes the price level unique. The likelihood of its needing such transfers increases when its balance sheet expands and when the duration of its assets diverges from that of its interest-bearing liabilities. The need for such transfers also depends on the strictness of its control of inflation and on the nature of demand for its non-interest bearing liabilities. A model calibrated to the current situation of the US Federal Reserve System suggests that the need for transfers is unlikely to arise, even if the Fed’s net worth at market value temporarily becomes negative.
    Date: 2014
  34. By: Susanto Basu (Boston College)
    Abstract: We show that the welfare of a countrys infinitely-lived representative consumer is summarized, to a first order, by total factor productivity (TFP) and by the capital stock per capita. These variables suffice to calculate welfare changes within a country, as well as welfare differences across countries. The result holds regardless of the type of production technology and the degree of product market competition. It applies to open economies as well, if TFP is constructed using domestic absorption, instead of gross domestic product, as the measure of output. Welfare relevant TFP needs to be constructed with prices and quantities as perceived by consumers, not firms. Thus, factor shares need to be calculated using after-tax wages and rental rates, and will typically sum to less than one. These results are used to calculate welfare gaps and growth rates in a sample of advanced countries with high-quality data on output, hours worked, and capital. We also present evidence for a broader sample that includes both advanced and developing countries.
    Date: 2014

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