nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒06‒13
27 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Financial Frictions, Financial Shocks and Unemployment Volatility By Boeri, Tito; Garibaldi, Pietro; Moen, Espen R
  2. Social Security in an Analytically Tractable Overlapping Generations Model with Aggregate and Idiosyncratic Risk By Harenberg, Daniel; Ludwig, Alexander
  3. Income redistribution, consumer credit, and keeping up with the riches By Klein, Mathias; Krause, Christopher
  4. Intergenerational Politics, Government Debt, and Economic Growth By Tetsuo Ono
  5. Labor market reforms and current account imbalances: Beggar-thy-neighbor policies in a currency union? By Baas, Timo; Belke, Ansgar
  6. Semi-Global Solutions to DSGE Models: Perturbation around a Deterministic Path By Viktors Ajevskis
  7. Does the central bank respond to credit market factors? A Bayesian DSGE approach By Paul Kitney
  8. US Health and Aggregate Fluctuations By Aleksandar Vasilev
  9. Reviving the Limit Cycle View of Macroeconomic Fluctuations By Paul Beaudry; Dana Galizia; Franck Portier
  10. Education and Growth with Learning by Doing By Marconi, Gabriele; de Grip, Andries
  11. International Transmission of Bubble Crashes: Stationary Sunspot Equilibria in a Two-Country Overlapping Generations Model By Lise CLAINl-CHAMOSSET-YVRARD; Takashi KAMIHIGASHI
  12. Accounting for Labor GAPS By François Langot; Alessandra Pizzo
  13. The Impact of the Minimum Wage on Capital Accumulation and Employment in a Large-Firm Framework By Sofia Bauducco; Alexandre Janiak
  14. Optimal Level of Government Debt: Matching Wealth Inequality and the Fiscal Sector By Vogel, Edgar
  15. Optimal social assistance and unemployment insurance in a life-cycle model of family labor supply and savings By Haan, Peter; Prowse, Victoria
  16. A Macroeconomic Framework for Quantifying Systemic Risk By He, Zhiguo; Krishnamurthy, Arvind
  17. Capital Market Imperfections and Trade Liberalization in General Equilibrium By Irlacher, Michael; Unger, Florian
  18. Every cloud has a silver lining. The sovereign crisis and Italian potential output By Andrea Gerali; Alberto Locarno; Alessandro Notarpietro; Massimiliano Pisani
  19. Smets-Wouters '03 model revisited - an implementation in gEcon By Klima, Grzegorz; Podemski, Karol; Retkiewicz-Wijtiwiak, Kaja; Sowińska, Anna E.
  20. Financial inclusion, productivity shocks, and consumption volatility in emerging economies By Bhattacharya,Rudrani; Patnaik,Ila
  21. Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? By Philippe Bacchetta; Elena Perazzi; Eric van Wincoop
  22. Business cycles accounting for Paraguay By Koehler-Geib,Fritzi; Hnatkovska,Viktoria
  23. The Labor Wedge and Business Cycle in Chile By David Coble; Sebastián Faúndez
  24. Endogenous Grids in Higher Dimensions: Delaunay Interpolation and Hybrid Methods By Ludwig, Alexander; Schön, Matthias
  25. Informal sector and economic development: The credit supply channel By Massenot, Baptiste; Straub, Stéphane
  26. Macro-Economic Models for R&D and Innovation Policies By Francesco Di Comite; d’Artis Kancs
  27. Nonlocal Solutions to Dynamic Equilibrium Models: The Approximate Stable Manifolds Approach By Viktors Ajevskis

  1. By: Boeri, Tito; Garibaldi, Pietro; Moen, Espen R
    Abstract: Financial market shocks and imperfections, alongside productivity shocks, represent both an impulse and a propagation mechanism of aggregate fluctuations. When labor and financial markets are imperfect, firms' funding and leverage respond to productivity changes. Models of business cycle with equilibrium unemployment largely ignore financial imperfections. The paper proposes and solves a tractable equilibrium unemployment model with imperfections in two markets. Labor market frictions are modeled via a traditional Diamond Mortensen Pissarides (DMP) model with wage positing. Financial market imperfections are modeled in terms of limited pledgeability, in line with the work of Holmstrom and Tirole. We show analytically that borrowing constraints increase unemployment volatility in the aftermath of productivity shocks. We calibrate the model to match key labor and financial moments of the US labor markets, and we perform two quantitative exercises. In the first exercise we ask whether the interaction between productivity shocks and borrowing constraints increase the volatility of unemployment with respect to models that focus only on the labor market imperfections. In the general specification of the model, both leverage and non pledgeable income move with the cycle. Our calibration exercise shows that the volatility of unemployment in response to productivity shock increases by as much as 50 percent with respect to a pure DMP model with wage posting. The second quantitative exercise explores the role of pure financial shocks on aggregate equilibrium. We calibrate pledgeability shocks to match the frequency of financial crisis and define financial distress as a situation in which internal liquidity completely dries up. The second exercise shows that full dry up of internal liquidity implies an increase in unemployment as large as 60 percent. These results throw new light on the aggregate impact of financial recessions.
    Keywords: financial frictions; search; unemployment volatility
    JEL: J00
    Date: 2015–06
  2. By: Harenberg, Daniel; Ludwig, Alexander (Munich Center for the Economics of Aging (MEA))
    Abstract: When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations and demonstrate that they in- teract over the life-cycle. The interactions appear even though the two risks are orthogonal and they amplify the welfare consequences of introducing social security. On the one hand, the interactions increase the welfare benefits from insurance. On the other hand, they can in- or decrease the welfare costs from crowding out of capital formation. This ambiguous effect on crowding out means that the net effect of these two channels is positive, hence the interactions of risks increase the total welfare benefits of social security.
    JEL: C68 E27 E62 G12 H55
    Date: 2014–09–22
  3. By: Klein, Mathias; Krause, Christopher
    Abstract: In this study, the relation between consumer credit and real economic activity during the Great Moderation is studied in a dynamic stochastic general equilibrium model. Our model economy is populated by two different household types. Investors, who hold the economy's capital stock, own the firms and supply credit, and workers, who supply labor and demand credit to finance consumption. Furthermore, workers seek to minimize the difference between investors' and their own consumption level. Qualitatively, an income redistribution from labor to capital leads to consumer credit dynamics that are in line with the data. As a validation exercise, we simulate a three-shock version of the model and find that our theoretical set-up is able to reproduce important business cycle correlations.
    Keywords: income redistribution,consumer credit,relative consumption motive,business cycles
    JEL: E21 E32 E44
    Date: 2014
  4. By: Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study presents a two-period overlapping-generations model featuring in- tergenerational conflict over fiscal policy. In particular, we characterize a Markov- perfect political equilibrium of the voting game between generations and show the following three main results. First, population aging incentivizes the government to invest more in capital for future public spending, positively affecting economic growth. Second, when the government finances its spending by issuing bonds, the introduction of the balanced budget rule results in a higher public spending-to-GDP ratio and a higher growth rate. Third, to obtain a normative implication of the po- litical equilibrium, we compare it with an allocation chosen by a benevolent planner who takes care of all future generations. The planner's allocation might feature less growth and more borrowing than the political equilibrium if the planner attaches low weights to future generations.
    Keywords: Economic Growth; Government Debt; Overlapping Generations; Pop- ulation Aging; Voting
    JEL: D72 D91 H63
    Date: 2014–06
  5. By: Baas, Timo; Belke, Ansgar
    Abstract: Member countries of the European Monetary Union (EMU) initiated wideranging labor market reforms in the last decade. This process is ongoing as countries that are faced with serious labor market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. This fosters fears among observers about a beggar-thy-neighbor policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. Using a two-country, two-sector search and matching DSGE model, we analyze the impact of labor market reforms on the transmission of macroeconomic shocks in both, non-reforming and reforming countries. By analyzing the impact of reforms on foreign debt, we contribute to the debate on whether labor market reforms increase or reduce current account imbalances.
    Abstract: In den letzten zehn Jahren begannen einzelne Mitgliedstaaten der EU, weitreichende Arbeitsmarktreformen durchzuführen. Dieser Prozess hält an, da Arbeitsmarktreformen als schnellster Weg wahrgenommen werden, die Wettbewerbsfähigkeit der Volkswirtschaft zu erhöhen und Arbeitsmarktungleichgewichte zu beseitigen. Von einigen Beobachtern wird diese Politik als "beggar-thy-neighbor" kritisiert, da die erhöhte Wettbewerbsfähigkeit zu Lasten der Handelspartner innerhalb der EU gehe, die Zahlungsbilanzungleichgewichte erhöhe und so die Auslandsverschuldung erhöhe. In diesem Artikel verwenden wir ein Zwei-Länder DSGE Modell mit Arbeitsmarktfriktionen, um die Wirkung von Arbeitsmarktreformen in dem Reform- wie auch dem Nichtreformland zu analysieren. Da wir insbesondere die Auswirkungen auf die Auslandsverschuldung berücksichtigen, tragen wir zur Debatte um die Wirkung von Arbeitsmarktreformen auf Zahlungsbilanzungleichgewichte innerhalb der Eurozone bei.
    Keywords: current account deficit,labor market reforms,DSGE models,search and matching labor market
    JEL: E24 E32 J64 F32
    Date: 2014
  6. By: Viktors Ajevskis
    Abstract: This study proposes an approach based on a perturbation technique to construct global solutions to dynamic stochastic general equilibrium models (DSGE). The main idea is to expand a solution in a series of powers of a small parameter scaling the uncertainty in the economy around a solution to the deterministic model, i.e. the model where the volatility of the shocks vanishes. If a deterministic path is global in state variables, then so are the constructed solutions to the stochastic model, whereas these solutions are local in the scaling parameter. Under the assumption that a deterministic path is already known the higher order terms in the expansion are obtained recursively by solving linear rational expectations models with time-varying parameters. The present work also proposes a method rested on backward recursion for solving general systems of linear rational expectations models with time-varying parameters and determines the conditions under which the solutions of the method exist.
    Date: 2015–06
  7. By: Paul Kitney
    Abstract: This paper estimates a version of a New Keynesian Dynamic Stochastic General Equilibrium model with financial frictions for the United States using Bayesian techniques. Various Henderson-McKibbin-Taylor style monetary policy rules are examined, which react to inflation, output and credit market factors including credit spreads, financial leverage and credit growth. The central question is whether the central bank responds to credit market factors in setting the policy interest rate, which is investigated using posterior odds tests. The paper explores whether there is evidence of stabilization, if indeed the central bank is responding to credit market factors. This is conducted using impulse response analysis and an examination of parameter posterior distributions. The most compelling result during the period under study is the US Fed responded to credit spreads in setting the policy rate. The empirical results also confirm that credit spreads offer stabilization benefits. This result is robust to variations in the policy rule. It is also found that while financial leverage improves model fit when included in the policy rule, the response is pro-cyclical, which would unlikely be a feature of stabilization policy. Finally, there is no evidence that the policy interest rate responded to credit growth.
    Date: 2015–06
  8. By: Aleksandar Vasilev (American University in Bulgaria)
    Abstract: This paper aims to shed light on the importance of health considerations for business cycle uctuations and the effect of health status on labor productivity and availability of labor input for productive use. To this end, Grossman's (2000) partial-equilibrium framework with endogenous health is incorporated in an otherwise standard Real-Business-Cycle (RBC) model. Health status in this setup is modelled as a utility-enhancing, intangible, and non-transferrable capital stock, which depreciates over time. The household can improve their health ("produce health") through investment using a health-recovery technology. The main results are: (i) overall, the model compares well vis-a-vis data; (ii) the behavior of the price of healthcare is adequately approximated by the shadow price of health in the model; (iii) the model-generated health variable exhibits moderate- to high correlation with a large number of empirical health indicators.
    Keywords: real business cycles, health status, health investment
    JEL: E32 E37 I11 I13
    Date: 2015–02
  9. By: Paul Beaudry; Dana Galizia; Franck Portier
    Abstract: There is a long tradition in macroeconomics suggesting that market imperfections may explain why economies repeatedly go through periods of booms and busts, with booms sowing the seeds of the subsequent busts. This idea can be captured mathematically as a limit cycle. For several reasons, limit cycles play almost no role in current mainstream business cycle theory. In this paper we present both a general structure and a particular model with the aim of giving new life to this mostly dismissed view of fluctuations. We begin by showing why and when models with strategic complementarities—which are quite common in macroeconomics—give rise to unique equilibrium dynamics characterized by a limit cycle. We then develop and estimate a fully-specified dynamic general equilibrium model that embeds a demand complementarity to see whether the data favors a configuration supportive of a limit cycle. Booms and busts arise endogenously in our setting because agents want to concentrate their purchases of goods at times when purchases by others are high, since in such situations unemployment is low and therefore taking on debt is perceived as being less risky. A key feature of our approach is that we allow limit-cycle forces to compete with exogenous disturbances in explaining the data. Our estimation results indicate that US business cycle fluctuations in employment and output can be well explained by endogenous demand-driven cycles buffeted by technological disturbances that render those fluctuations irregular.
    JEL: E3
    Date: 2015–06
  10. By: Marconi, Gabriele (OECD); de Grip, Andries (ROA, Maastricht University)
    Abstract: We develop a general equilibrium overlapping generations model which is based on the view that education makes workers more productive by increasing their ability to learn from work experience, rather than providing skills that directly increase productivity. One important implication of the model is that the enrolment rate to education has a negative effect on the GDP in the medium term and a positive effect in the long term. This could be an explanation for the weak empirical relationship between education and economic growth that has been found in the empirical macroeconomic literature. Conversely, for a given enrolment rate, the quality of education, as measured by workers' ability to learn, has a positive effect on the GDP both in the medium and in the long term.
    Keywords: education, learning-by-doing, productivity, economic growth, overlapping generations model
    JEL: I25 J24 O11 O41
    Date: 2015–05
  11. By: Lise CLAINl-CHAMOSSET-YVRARD (Aix-Marseille University (Aix-Marseille School of Economics) and CNRS-GREQAM & EHESS, France); Takashi KAMIHIGASHI (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: We study the international transmission of bubble crashes by ana- lyzing stationary sunspot equilibria in a two-country overlapping gen- erations exchange economy with stochastic bubbles. We consider two types of stationary sunspot equilibria. The rst type of equilibrium assumes that only the foreign country receives a sunspot shock, while the second type assumes that both countries independently receive sunspot shocks. In the rst type of equilibrium, a bubble crash due to a sunspot shock in the foreign country inevitably causes the home bubble to burst. In the second type of equilibrium, the e ect of a bub- ble crash in the foreign country on the home bubble can be positive or negative. In both types of equilibria, a bubble crash in the foreign country necessarily transmits to the home country.
    Keywords: Lobby, Theorisation, Competition policy, Publishing, Japan, Resale price maintenance, Neoliberalism
    Date: 2015–06
  12. By: François Langot; Alessandra Pizzo
    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.
    Date: 2015–04
  13. By: Sofia Bauducco; Alexandre Janiak
    Abstract: We study the effect of a binding minimum wage on labor market outcomes, the accumulation of capital and welfare. We consider a large firm that invests in physical capital and hires several types of workers. Labor markets are characterized by search and matching frictions, while incomplete wage contracts allow workers to appropriate part of the return on each factor. Absent a minimum wage, the model in general gives rise to inefficient levels of capital and employment. We show that, when labor types are substitutes, the introduction of a binding minimum wage has positive effects on capital and positive and small effects on employment, and these effects depend on the ability of the minimum wage to deter rent appropriation by workers.
    Date: 2015–04
  14. By: Vogel, Edgar (Munich Center for the Economics of Aging (MEA))
    Abstract: We calibrate an incomplete markets large scale OLG model to the US income and wealth distribution and examine the effects of alternative government debt levels and adjustment policies on macroeconomic aggregates and welfare. We find that the government should hold negative debt. Due to the high degree of wealth and income dispersion ex ante lifetime utility increases with increasing wages (falling interest rates) by around 6% of lifetime consumption at optimal debt levels. The optimal level depends on the adjustment policy can vary by up to 70% of GDP (between -180% and -110%). With lower government debt, high income/wealth agents are always worse off. Adjusting transfers benefits the lowest income/wealth group. The largest gains are, however, experienced by agents in the middle of the income/wealth distribution: they benefit from higher wages and transfers but do not lose too much capital income.
    JEL: C54 C68 D52 D60 E20 E62 H2 H6
    Date: 2014–04–02
  15. By: Haan, Peter; Prowse, Victoria
    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 oor, with a minor role for temporary earnings-related Unemployment Insurance. Reecting 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
  16. By: He, Zhiguo (University of Chicago); Krishnamurthy, Arvind (Stanford University)
    Abstract: Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from "normal" states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a macroeconomic "stress test" linking a stress scenario to the probability of systemic risk states.
    JEL: E44 G12 G20
    Date: 2015–03
  17. By: Irlacher, Michael; Unger, Florian
    Abstract: This paper develops a new international trade model with capital market imperfections and endogenous borrowing costs in general equilibrium. Our theoretical model is motivated by new empirical patterns from enterprise survey data of the World Bank. Observing that a substantial fraction of the variation in financial constraints is across firms within industries, we allow for firm-specific exposure to financial constraints. This leads to credit rationing and divides producers into financially constrained and unconstrained ones. We show that endogenous adjustments of capital costs represent a new channel that reduces common gains from globalization. Trade liberalization increases the demand for capital and thus the borrowing rate. This leads to a reallocation of market shares towards financially unconstrained producers and a larger fraction of credit-rationed firms. Both effects increase the within-industry variance of firm outcomes and reduce welfare gains as consumers dislike heterogeneity in prices.
    Keywords: Credit constraints; General equilibrium; Globalization; Imperfect capital markets; Welfare
    JEL: F10 F36 L11
    Date: 2015–05–18
  18. By: Andrea Gerali (Bank of Italy); Alberto Locarno (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the direct and indirect effects of the sovereign debt crisis on Italy’s potential output. The direct effects are captured by the increase in the interest rate paid by Italian borrowers in the second half of 2011, the indirect effects by the policy responses to the crisis (fiscal consolidation and structural reforms). Using a New Keynesian dynamic general equilibrium model, we compute potential output as the “natural” level of output in the absence of nominal price and wage rigidities. The evaluation posits a no-crisis scenario in line with the pre-2011 potential output projections and government budget rules. We find first that the fiscal and financial shocks that caused the 2011-2013 recession subtracted 1.6 percentage points from potential output growth, while the structural reforms in 2013 have limited the reduction in output capacity to about 1.4 points; second, that the structural reforms have a long-run growth-enhancing impact on potential output of around 3 points from now to 2030; and third, that once budget balance is achieved in the medium term (2019), reductions in either labor or capital income taxes would boost potential output growth by about 0.2 points per year.
    Keywords: sovereign risk, fiscal policy, potential output
    JEL: C51 E31 E52
    Date: 2015–06
  19. By: Klima, Grzegorz; Podemski, Karol; Retkiewicz-Wijtiwiak, Kaja; Sowińska, Anna E.
    Abstract: This paper presents an implementation of the well-known Smets-Wouters 2003 model for Euro Area using the gEcon package - what we call the ``third generation'' DSGE modelling toolbox. Our exercise serves three goals. First, we show how gEcon can be used to implement an important - from both applications and historical perspective - model. Second, through rigorous exposition enforced by the gEcon’s block-agent paradigm we analyse all the Smets-Wouters model’s building blocks. Last, but not least, the implementation presented here serves as a natural starting point for important from applications point of view extensions, like opening the economy, introducing non-lump-sum taxes, or adding sectors to the model economy. Full model implementation is attached.
    Keywords: DSGE; monetary policy; staggered prices; staggered wages
    JEL: C88 E3 E4
    Date: 2015–02–28
  20. By: Bhattacharya,Rudrani; Patnaik,Ila
    Abstract: How does access to finance impact consumption volatility? Theory and evidence from advanced economies suggests that greater household access to finance smooths consumption. Evidence from emerging markets, where consumption is usually more volatile than income, indicates that financial reform further increases the volatility of consumption relative to output. This puzzle is addressed in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are financially constrained, with no access to financial services. Unconstrained households can respond to shocks to trend growth by raising current consumption more than the rise in current income. Financial reform increases the share of such households, leading to greater relative consumption volatility. Calibration of the model for pre- and post-financial reform in India provides support for the model?s key predictions.
    Keywords: Economic Theory&Research,Debt Markets,Emerging Markets,Economic Conditions and Volatility,Consumption
    Date: 2015–06–03
  21. By: Philippe Bacchetta; Elena Perazzi; Eric van Wincoop
    Abstract: This paper examines quantitatively the potential for monetary policy to avoid self-fullling sovereign debt crises. We combine a version of the slow-moving debt crisis model proposed by Lorenzoni and Werning (2014) with a standard New Keynesian model. We consider both conventional and unconventional monetary policy. Under conventional policy the central bank can preclude a debt crisis through inflation, lowering the real interest rate and raising output. These reduce the real value of the outstanding debt and the cost of new borrowing, and increase tax revenues and seigniorage. Unconventional policies take the form of liquidity support or debt buyback policies that raise the monetary base beyond the satiation level. We find that generally the central bank cannot credibly avoid a self-fulfilling debt crisis. Conventional policies needed to avert a crisis require excessive inflation for a sustained period of time. Unconventional monetary policy can only be effective when the economy is at a structural ZLB for a sustained length of time.
    Keywords: Monetary Policy; Sovereign Debt; Self-fulfilling Crises
    JEL: E52 E60 E63
    Date: 2015–06
  22. By: Koehler-Geib,Fritzi; Hnatkovska,Viktoria
    Abstract: This study investigates the role of domestic and external shocks in business cycle fluctuations in Paraguay during 1991?2012. Time-series methods and a structural model-based approach are used to conduct an integrated analysis of business cycles. First, structural vector autoregression is used to assess the role played by external factors and domestic shocks in driving fluctuations in gross domestic product through impulse response functions and variance decompositions. The analysis finds that external shocks such as terms of trade, world interest rate and foreign demand account for over 50 percent of real gross domestic product fluctuations. Given Paraguay?s strong dependence on agriculture, an analysis is also done for the agricultural and non-agricultural sectors separately. The analysis finds that non-agricultural gross domestic product is to a large extent driven by external shocks, which account for over 50 percent of its volatility. In contrast, the volatility in agricultural gross domestic product is primarily due to shocks to domestic variables, mainly shocks to agricultural output. A further difference between the sectors is that shocks to government consumption are more important for agricultural gross domestic product, while shocks to the domestic real interest rate play a larger role in the volatility of non-agricultural gross domestic product. Second, the paper investigates the sources of business cycle fluctuations through the lens of a neoclassical growth model with an agricultural and non-agricultural sector. The analysis finds some signs of improvements, as labor market distortions have declined, firms? access to credit improved, and agricultural efficiency rose over time. Nevertheless, challenges remain, as gaps in labor and capital returns between agriculture and non-agriculture remain large, efficiency in the non-agricultural sector shows no signs of improvement, and households? access to finance has deteriorated.
    Keywords: Economic Theory&Research,Debt Markets,Emerging Markets,Economic Conditions and Volatility,Labor Policies
    Date: 2015–06–02
  23. By: David Coble; Sebastián Faúndez
    Abstract: Recent studies have documented the importance of the labor wedge in accounting for the level of business cycle fluctuations in Chile. None of these papers, however, extensively studies the labor wedge fluctuations and its possible sources. This paper takes a closer look at the labor wedge in Chile, with special emphasis on its cyclicality. We use a flexible model to implicitly derive the Frisch elasticity of labor, and construct a set of labor wedges. We find that the labor wedge in Chile is counter-cyclical. Finally, we show that the labor wedge can be written as the sum of two components: the firm's and the household's. We find that household component is the main driver of Chilean labor market fluctuations.
    Date: 2015–04
  24. By: Ludwig, Alexander; Schön, Matthias (Munich Center for the Economics of Aging (MEA))
    Abstract: This paper investigates extensions of the method of endogenous gridpoints (ENDGM) introduced by Carroll (2006) to higher dimensions with more than one continuous endogenous state variable. We compare three dierent categories of algorithms: (i) the conventional method with exogenous grids (EXOGM), (ii) the pure method of endogenous gridpoints (ENDGM) and (iii) a hybrid method (HYBGM). ENDGM comes along with Delaunay interpolation on irregular grids. Comparison of methods is done by evaluating speed and accuracy. We nd that HYBGM and ENDGM both dominate EXOGM. In an innite horizon model, ENDGM also always dominates HYBGM. In a nite horizon model, the choice between HYBGM and ENDGM depends on the number of gridpoints in each dimension. With less than 150 gridpoints in each dimension ENDGM is faster than HYBGM, and vice versa. For a standard choice of 25 to 50 gridpoints in each dimension, ENDGM is 1:4 to 1:7 times faster than HYBGM in the nite horizon version and 2:4 to 2:5 times faster in the innite horizon version of the model.
    JEL: C63 E21
    Date: 2014–06–11
  25. By: Massenot, Baptiste; Straub, Stéphane
    Abstract: The standard view suggests that removing barriers to entry and improving judicial enforcement reduces informality and boosts investment and growth. However, a general equilibrium approach shows that this conclusion may hold to a lesser extent in countries with a constrained supply of funds because of, for example, a more concentrated banking sector or lower financial openness. When the formal sector grows larger in those countries, more entrepreneurs become creditworthy, but the higher pressure on the credit market limits further capital accumulation. We show empirical evidence consistent with these predictions.
    Date: 2015
  26. By: Francesco Di Comite (European Commission JRC-IPTS); d’Artis Kancs (European Commission JRC-IPTS)
    Abstract: This report compares R&D modelling approaches in four macroeconomic models used by the European Commission for ex-ante policy impact assessment: one Dynamic Stochastic General Equilibrium (DSGE) model – QUEST; one Spatial Computable General Equilibrium (SCGE) model – RHOMOLO; one Computable General Equilibrium (CGE) model – GEM-E3; and one macro-econometric model – NEMESIS. The report critically compares particularly those parts of the four models that are relevant to R&D transmission mechanisms and interfaces for implementing policy shocks. Given that R&D investment decisions are inherently dynamic, QUEST appears to be the most suitable model for assessing the impact of R&D and innovation policies over time, as it is the only model with inter-temporal optimisation of economic agents. In order to address questions related to geographic concentration of innovative activities and spatial knowledge spillovers, RHOMOLO has a comparative advantage, as it is the only one which models regional economies and spatial interactions between them explicitly. Due to its detailed treatment of energy sectors and environmental issues, GEM-E3 appears to be the most suitable model for assessing the impact of innovation in clean energy. For a more detailed modelling of different types of innovation measures, NEMESIS can provide valuable insights thanks to its richness in estimating and accounting for specific channels of innovation. We also identify avenues for future research, which in our view could improve the modelling of R&D and innovation policies both from a conceptual and empirical perspective.
    Keywords: RHOMOLO, QUEST, GEM-E3, NEMESIS, Macro-Economic Models, General Equilibrium, R&D Policies
    JEL: C68 D24 D58 H50 O31 O32
    Date: 2015
  27. By: Viktors Ajevskis
    Abstract: This study presents a method for constructing a sequence of approximate solutions of increasing accuracy to general equilibrium models on nonlocal domains. The method is based on a technique originated from dynamical systems theory. The approximate solutions are constructed employing the Contraction Mapping Theorem and the fact that solutions to general equilibrium models converge to a steady state. The approach allows deriving the a priori and a posteriori approximation errors of the solutions. Under certain nonlocal conditions we prove the convergence of the approximate solutions to the true solution and hence the Stable Manifold Theorem. We also show that the proposed approach can be treated as a rigorous proof of convergence for the extended path algorithm to the true solution in a class of nonlinear rational expectation models.
    Date: 2015–06

This nep-dge issue is ©2015 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.