nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒05‒02
nineteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  2. The role of term structure in an estimated DSGE model with learning By Pablo Aguilar; Jesús Vázquez
  3. Wage Inequality By Ken Burdett; Carlos Carrillo-Tudela; Melvyn Coles
  4. Intertemporal equilibrium with financial asset and physical capital By Cuong Le Van; Ngoc-Sang Pham
  5. Worker Mobility in a Search Model with Adverse Selection By Carlos Carrillo-Tudela; Leo Kaas
  6. Limited Liability, Asset Price Bubbles and the Credit Cycle: The Role of Monetary Policy By Jakub Mateju
  7. Two-country New Keynesian DSGE Model: a Small Open Economy as a Limit Case By Marcos Antonio C. da Silveira
  8. Accounting for Labor Gaps By François Langot; Alessandra Pizzo
  9. Search Capital By Carlos Carrillo-Tudela; Eric Smith
  10. Structural Transformation, the Push-Pull Hypothesis and the Labour Market By Fabio Monteforte
  11. The Valuation Channel of International Adjustment By Ghironi, Fabio; Lee, Jaewoo; Rebucci, Alessandro
  12. Optimal Social Assistance and Unemployment Insurance in a Life-Cycle Model of Family Labor Supply and Savings By Haan, Peter; Prowse, Victoria L.
  13. Benefit Reentitlement Conditions in Unemployment Insurance Schemes By Andersen, Torben M.; Kristoffersen, Mark Strom; Svarer, Michael
  14. Dynamics of assets liquidity and inequality in economies with decentralized markets By Maurizio Iacopetta
  15. The Effects of Employment Uncertainty, Unemployment Insurance, and Wealth Shocks on the Retirement Behavior of Older Americans By Hugo Benítez-Silva; J. Ignacio García-Pérez; Sergi Jiménez-Martín
  16. An analysis on optimal taxation and on policy changes in an endogenous growth model with public expenditure By Thomas Renstrom; Luca Spataro
  17. Fiscal Policy, Interest Rate Spreads, and the Zero Lower Bound By Bredemeier, Christian; Juessen, Falko; Schabert, Andreas
  18. Deleverage and Financial Fragility By Marco Maffezzoli; Tommaso Monacelli
  19. Reducing severance costs or subsidizing permanent job creation: Which policy is more effective to reduce duality? By Osuna, Victoria

  1. By: Lilia Cavallari (University of Roma Tre)
    Abstract: This paper studies the implications of entry costs for business formation in a dynamic stochastic general equilibrium model with endogenous entry and exit. The paper first documents some facts about business formation in the US. Exit is more volatile than entry, both are more volatile than output and co-move over the cycle. Firms are less volatile than output and procyclical. Then, it shows that a model with entry and exit can replicate these facts fairly well. In addition it captures important features of the US business cycle, outperforming models with a fixed exit rate and a fixed number of firms. The performance of the model is sensitive to changes in the composition of entry costs.
    Keywords: entry costs, firm entry, firm exit, business cycle, business creation, business destruction
    JEL: E31 E32 E52
    Date: 2014
  2. By: Pablo Aguilar (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Universidad del País Vasco (UPV/EHU)); Jesús Vázquez (Universidad del País Vasco (UPV/EHU))
    Abstract: Agents can learn from financial markets to predict macroeconomic outcomes and learning dynamics can feed back into both the macroeconomy and financial markets. This paper builds on the adaptive learning (AL) model of Slobodyan andWouters (2012b) by introducing the term structure of interest rates. This feature results in more stable learning coefficients over the whole sample period. Our estimation results show that the inclusion of the term spread in the AL model results in an increase of the parameters characterizing endogenous persistence whereas the persistence of the exogenous shocks driving price and wage dynamics decreases. Moreover, the estimated model shows that the term spread innovations are an important source of persistent fluctuations under AL. This finding stands in sharp contrast to the lack of transmission of term premium shocks to the macroeconomy under rational expectations. Furthermore, our empirical results show that our extended model with term structure does an overall better job when reproducing U.S. business cycle features.
    Keywords: Term spread, adaptive learning, learning coefficients variability, medium-scale DSGE model
    JEL: C53 D84 E30 E43
    Date: 2015–04–23
  3. By: Ken Burdett (University of Pennsylvania); Carlos Carrillo-Tudela (University of Essex, CEPR, CESifo and IZA); Melvyn Coles (University of Essex)
    Abstract: The objective of this paper is to study why are some workers paid more than others. To do so we construct and quantitatively assess an equilibrium search model with on-the-job search, general human capital accumulation and two sided heterogeneity. In the model workers differ in abilities and firms differ in their productivities. The model generates a simple (log) wage variance decomposition that is used to measure the importance of firm and worker productivity differentials, frictional wage dispersion and workers' sorting dynamics. We calibrate the model using a sample of young workers for the UK. We show that heterogeneity among firms generates a lot of wage inequality. Among low skilled workers job ladder effects are small, most of the impact of experience on wages is due to learning-by-doing. High skilled workers are much more mobile. Job ladder effects have sizeable impact.
    Keywords: Job search, human capital accumulation, wage inequality, turnover
    JEL: J63 J64 J41 J42
    Date: 2015–04
  4. By: Cuong Le Van (CNRS, Paris School of Economics, IPAG Business School, VCREME); Ngoc-Sang Pham (EPEE, University of Evry)
    Abstract: We build an infinite-horizon dynamic deterministic general equilibrium model with imperfect markets (because of borrowing constraints), in which heterogeneous agents invest in capital or/and financial asset, and consume. There is a representative firm who maximizes its profit. Firstly, the existence of intertemporal equilibrium is proved even if aggregate capital is not uniformly bounded. Secondly, we study the interaction between the financial market and the productive sector. We also explore the nature of physical capital bubble and financial asset bubble as well.
    Keywords: Infinite horizon, intertemporal equilibrium, financial friction, productivity, efficiency, fluctuation, bubbles
    JEL: C62 D31 D91 G10 E44
    Date: 2015
  5. By: Carlos Carrillo-Tudela (University of Essex); Leo Kaas (University of Konstanz)
    Abstract: We analyze the effects of adverse selection on worker turnover and wage dynamics in a frictional labor market. We consider a model of on-the-job search where firms offer promotion wage contracts to workers of different ability, which is unknown to firms at the hiring stage. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts, promoting high-ability workers only. Low-ability workers have higher turnover rates and are more often employed in low-wage firms. The model replicates the negative relationship between job-to-job transitions and wages observed in the U.S. labor market.
    Keywords: Adverse Selection, On-the-job search, Worker mobility, Wage dynamics
    JEL: J63 J64
    Date: 2015–04
  6. By: Jakub Mateju
    Abstract: This paper suggests that non-fundamental component in asset prices is one of the drivers of the financial and credit cycle. The presented model builds on the financial accelerator literature by including a stock market where limitedly-liable investors trade stocks of productive firms with stochastic productivities. Investors borrow funds from the banking sector and can go bankrupt. Their limited liability induces a moral hazard problem which shifts demand for risk and drives prices of risky assets above their fundamental value. Embedding the contracting problem in a New Keynesian general equilibrium framework, the model shows that loose monetary policy induces loose credit conditions and leads to a rise in both fundamental and non-fundamental components of stock prices. Positive shock to non-fundamental component triggers a financial cycle: collateral values rise, lending and default rates decrease. These effects reverse after several quarters, inducing a credit crunch. The credit boom lasts only while stock market growth maintains sucient momentum. However, monetary policy does not reduce the volatility of inflation and output gap by reacting to asset prices.
    Keywords: credit cycle; limited liability; non-fundamental asset pricing; collateral value; monetary policy;
    JEL: E32 E44 E52 G10
    Date: 2015–03
  7. By: Marcos Antonio C. da Silveira
    Abstract: We build a two-country version of the model in Gali & Monacelli (2005), which extends for a small open economy the new Keynesain DSGE model used as tool for monetary policy analysis in closed economies. A distinctive feature of the model is that the terms of trade enters directly into the new Keynesian Phillips curve as a new pushing-cost variable feeding the inflation. Furthermore, home bias in households’ preferences allows for real exchange rate fluctuation, giving rise to alternative channels of monetary transmission. Unlike most part of the literature, the small domestic open economy is derived as a limit case of the two-coutry model, rather than assuming exogenous processes for the foreign variables. This procedure preserves the role played by foreign nominal frictions in the way as international monetary policy shocks are conveyed into the small domestic economy. O trabalho desenvolve uma versão para dois países do modelo em Gali & Monacelli (2005), o qual estende para uma pequena economia aberta o modelo de equilíbrio geral dinâmico e estocástico novo-keynesiano usado como ferramenta para análise de política monetária em economias fechadas. Uma importante característica do modelo é que os termos de troca entram diretamente na curva de Phillips novo-keynesiana, como uma nova variável pressionando os custos e alimentando a inflação. Além do mais, a hipótese de home bias nas preferências dos consumidores permite a flutuação da taxa de câmbio real, criando um canal alternativo de transmissão da política monetária. Diferente da maior parte da literatura, o modelo deriva a estrutura da pequena economia aberta como um caso limite do modelo para dois países, em vez de supor que as variáveis externas seguem processos exógenos. Esse procedimento preserva o papel das fricções nominais externas na forma como choques monetários internacionais são transmitidos para dentro da pequena economia doméstica.
    Date: 2015–01
  8. By: François Langot ((GAINS-TEPP-IRA) Université du Mans, Paris School of Economics, Banque de France & IZA); Alessandra Pizzo (Centre d'Economie de la Sorbonne & Banque de France)
    Abstract: We develop a balanced growth model with labor supply and search and matching frictions in the labor market to study the impact of economic policy variables on the two margins which constitute the (total) labor input: the extensive one (the rate of employment) and the intensive one (the hours worked per worker). We show that the dynamics of the taxes have an impact mainly on the hours worked while labor market institutions have a large influence on the rate of employment. However, our findings underline that there is an interaction between the two margins. The model is tested on four countries (US, France, Germany and UK) which experiment different tax and labor market dynamics since the sixties. Using this structural approach, we can then perform counterfactual experiments about the evolution of the policy variables and to compare welfare levels implied by policy changes
    Keywords: Taxes; labor market institutions; hours; employment; labor market search
    JEL: E20 E60 J22 J60
    Date: 2015–04
  9. By: Carlos Carrillo-Tudela (University of Essex, CEPR, CESifo and IZA); Eric Smith (University of Essex, CESifo)
    Abstract: This paper studies an environment in which workers accumulate information about employment contacts made while searching on-the-job. Workers use this search capital to improve wages and insure against job destruction. This behaviour generates voluntary and involuntary job-to-job transitions with both wage hikes and wage cuts. The equilibrium wage distribution becomes less disperse than when workers cannot recall previously met job opportunities. The impact on output depends on depreciation and the extent of on-the-job search, among other factors. If search capital does not depreciate too quickly, the insurance benefits outweigh rent seeking costs and total output is higher with search capital.
    Keywords: Search Capital, Turnover, Wage Cuts
    JEL: J62 J63 J64
    Date: 2015–04
  10. By: Fabio Monteforte
    Abstract: This paper proposes a small-scale general equilibrium model of structural transformation with an urban labour market characterized by search frictions. The model is used to investigate the role of sectoral TFPs as main drivers of structural change and a new growth accounting exercise gives a quantitative reassessment of the importance of the labour reallocation bonus in structural transformations. The model is calibrated to data for post-war Spain and its transition from dictatorship to democracy. Counterfactual simulations point towards productivity improvements in agriculture as the main driver, while modifications in labour market institutions affect mainly the labour market itself, with only a modest effect on structural change.
    Keywords: dual economies, matching frictions, urban unemployment, structural transformation, growth accounting, Solow residual.
    JEL: J40 O10 O11 O41 O47
    Date: 2015–04–20
  11. By: Ghironi, Fabio; Lee, Jaewoo; Rebucci, Alessandro
    Abstract: International financial integration has greatly increased the scope for changes in a country’s net foreign asset position through the “valuation channel” of external adjustment, namely capital gains and losses on the country’s external assets and liabilities. We examine this valuation channel theoretically in a dynamic equilibrium portfolio model with international trade in equity that encompasses complete and incomplete asset market scenarios. By separating asset prices and quantities in the definition of net foreign assets, we can characterize the first-order dynamics of both valuation effects and net foreign equity holdings. First-order excess returns are unanticipated and i.i.d. in our model, but capital gains and losses on equity positions feature persistent, anticipated dynamics in response to productivity shocks. The separation of prices and quantities in net foreign assets also enables us to characterize fully the role of capital gains and losses versus the current account in the dynamics of macroeconomic aggregates. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete, showing how these different channels contribute to dampening (or amplifying) the impact response of the cross-country consumption differential to shocks and to keeping it constant in subsequent periods.
    Keywords: current account; equity; net foreign assets; risk sharing; valuation
    JEL: F32 F41 G11 G15
    Date: 2015–04
  12. By: Haan, Peter (DIW Berlin); Prowse, Victoria L. (Cornell University)
    Abstract: We analyze empirically the optimal design of social insurance and assistance programs when families obtain insurance by making labor supply choices for both spouses. For this purpose, we specify a structural life-cycle model of the labor supply and savings decisions of singles and married couples. Partial insurance against wage and employment shocks is provided by social programs, savings and the labor supplies of all adult household members. The optimal policy mix focuses mainly on Social Assistance, which provides a permanent universal household income floor, with a minor role for temporary earnings-related Unemployment Insurance. Reflecting that married couples obtain intra-household insurance by making labor supply choices for both spouses, the optimal generosity of Social Assistance decreases in the proportion of married individuals in the population. The link between optimal program design and the family context is strongest in low-educated populations.
    Keywords: life-cycle labor supply, family labor supply, unemployment insurance, social assistance, design of benefit programs, intra-household insurance, household savings, employment risk, added worker effect
    JEL: J18 J68 H21 I38
    Date: 2015–04
  13. By: Andersen, Torben M. (Aarhus University); Kristoffersen, Mark Strom (Aarhus University); Svarer, Michael (Aarhus University)
    Abstract: Unemployment insurance schemes include conditions on past employment history as part of the eligibility conditions. This aspect is often neglected in the literature which primarily focuses on benefit levels and benefit duration. In a search-matching framework we show that benefit duration and employment requirements are substitute instruments in affecting job search incentives and thus gross unemployment. We analyse the optimal design of the unemployment insurance system (benefit levels, duration and employment requirements) under a utilitarian social welfare function. Simulations show that a higher insurance motive captured by more risk aversion implies higher benefit generosity and more lax employment requirements but also shortened benefit duration.
    Keywords: reentitlement effects, unemployment insurance, business cycle
    JEL: E32 H3 J65
    Date: 2015–04
  14. By: Maurizio Iacopetta (OFCE and SKEMA Business School)
    Abstract: An algorithm for computing Dynamic Nash Equilibria (DNE) in an extended ver- sion of Kiyotaki and Wright (1989) (hereafter KW) is proposed. The algorithm com- putes the equilibrium pro?le of (pure) strategies and the evolution of the distribution of three types of assets across three types of individuals. It has two features that together make it applicable in a wide range of macroeco- nomic experiments: (i) it works for any feasible initial distribution of assets; (ii) it allows for multiple switches of trading strategies along the transitional dynamics. The algorithm is used to study the relationship between liquidity, production, and inequality in income and in welfare, in economies where assets fetch di¤erent returns and agents have heterogeneous skills and preferences. One experiment shows a case of reversal of fortune. An economy endowed with a low-return asset takes over a similar economy endowed with a high-return asset because, in the former economy, a group of agents abandon a rent-seeking trading behavior and increase their income by trading and producing more intensively. A second experiment shows that a reduction of market frictions leads both to higher income and lower inequality. Other experiments evaluate the propagation mechanism of shocks that hit the assets?returns. A key result is that trade and liquidity tend to squeeze income inequality. Keywords :Trading Startegies, Liquidity, Matching,Decentralized Markets JEL :C61, C63, E41, E27, D63
    Date: 2014–12
  15. By: Hugo Benítez-Silva; J. Ignacio García-Pérez; Sergi Jiménez-Martín
    Abstract: Unemployment rates in developed countries recently reached levels not seen in a generation, and workers of all ages are facing increasing probabilities of losing their jobs and considerable losses in accumulated assets. These events have increased the reliance that most (older) workers have on public social insurance programs, exactly at a time that public finances are suffering from a large drop in contributions. Using administrative and household level data, we empirically characterize a Life-Cycle model of retirement and claiming decisions in terms of the employment, wage, health, and mortality uncertainty faced by individuals. We analyze the role of three intertwined factors in the recent evolution of work and retirement benefits claiming behavior in the United States; namely, higher unemployment uncertainty, higher unemployment benefits, and wealth shocks. We find that higher employment uncertainty reduces work and increases early claiming, while higher unemployment benefits mildly reduce work and reduce claiming at early ages. Finally, negative wealth shocks increase both early claiming and work. When all these factors are combined, the final outcome is a mild decline in labor supply and relatively little variation in early claiming.
    Date: 2015–04
  16. By: Thomas Renstrom (University of Durham (UK)); Luca Spataro (Dipartimento di Economia e Management, University of Pisa (Italy))
    Abstract: In this work we analyse the issue of optimal taxation and of policy changes in an endogenous growth model driven by public expenditure, in the presence of endogenous fertility and labour supply. While normative analysis confirms the Chamley-Judd result of zero capital income tax, positive analysis reveals that the presence of endogenous fertility produces different results as for the effects of taxes on total employment.
    Keywords: Taxation, endogenous fertility, critical level utilitarianism, population
    JEL: D63 E21 H21 J13 O4
    Date: 2015–04
  17. By: Bredemeier, Christian (University of Cologne); Juessen, Falko (University of Wuppertal); Schabert, Andreas (University of Cologne)
    Abstract: This paper questions unconventional fiscal policy effects when the monetary policy rate is at the zero lower bound. We provide evidence for the US that the spread between the policy rate and the US-LIBOR, which is more relevant for private sector transactions, increases with government expenditures. We introduce a corresponding spread into an otherwise standard macroeconomic model which reproduces this observation. The model predicts that the fiscal multiplier takes conventional values, regardless of whether the policy rate follows a standard feedback rule or is at its zero lower bound. Likewise, labor tax increases exert contractionary effects in both cases.
    Keywords: fiscal multiplier, tax policy, interest rate spreads, zero lower bound, liquidity premium
    JEL: E32 E42 E63
    Date: 2015–04
  18. By: Marco Maffezzoli; Tommaso Monacelli
    Abstract: Severe economic downturns, characterized by deleverage, are typically preceeded by phenomena of debt overhang. This evidence suggests that large recessions may not be the result of large shocks, but, rather, of the interaction between typical shocks and the current state of the economy. We study the transmission of deleverage shocks in a stochastic economy with heterogeneous agents and occasionally binding collateral constraints, where debt evolves endogenously. Our key finding is that the impact effect of a deleverage shock on aggregate output is a non-linear, S-shaped, function of the accumulated level of debt. At low levels of debt, deleverage is almost neutral, whereas its negative impact is largely magnified when debt reaches a critical threshold, i.e., when financial fragility is sufficiently high. At this threshold, the constraint on borrowing becomes endogenously binding. However, when the level of debt is already high before the shock hits, the borrowers are constrained both ex-ante and ex-post. In this case, the effect on output of a deleverage shock is the highest, but, at the margin, roughly insensitive to the level of debt. This non-linearity is much more pronounced for deleverage shocks than for productivity shocks. Our results cast doubts on the accuracy of gauging the effects of financial disturbances in linearized, certainty-equivalence environments.
    Date: 2015
  19. By: Osuna, Victoria
    Abstract: This paper uses the job creation and destruction model of the search and matching type proposed by García-Pérez and Osuna (2014) to study the effectiveness of subsidizing permanent job creation as a strategy to reduce labour market segmentation between permanent and temporary contracts. The 2006 and 2012 Spanish labour market reforms are used as a benchmark to compare the effects of subsidizing permanent job creation with that of reducing the severance cost gap between permanent and temporary contracts. The change in the degree of duality is measured in terms of the changes in job destruction rates and the tenure distribution. The steady-state results show that, from a fiscal point of view, reducing the severance cost gap between these two type of contracts may be more effective than subsidizing permanent job creation, provided dismissals for objective reasons are effectively made easier to justify and firms make use of that option instead of agreeing to an indemnity closer to the amount paid for unfair dismissals. The model also points to the relevance of designing appropriate penalties for those firms that do not comply with the obligations that subsidies involve. Finally, the sensitivity analysis reveals the importance of the magnitude of training costs and the relative differences in productivity between temporary and permanent workers for the effectiveness of policies involving subsidies for permanent job creation.
    Keywords: Subsidies,Severance Costs gap,Permanent and Temporary Contracts,Duality,Unemployment,Tenure Distribution,Job Destruction
    JEL: J23 J32 J63 J64 J65 J68
    Date: 2015

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