nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2016‒10‒23
29 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Heterogeneity in decentralized asset markets By Pierre-Olivier Weill; Benjamin Lester; Julien Hugonnier
  2. Frictional Unemployment with Stochastic Bubbles By Vuillemey, Guillaume; Wasmer, Etienne
  3. Marriage, Labor Supply, and Home Production By Marion Goussé; Nicolas Jacquemet; Jean-Marc Robin
  4. Education Choices, Longevity and Optimal Policy in a Ben-Porath Economy By Yukihiro Nishimura; Pierre Pestieau; Grégory Ponthière
  5. Macroeconomic Fluctuations with HANK & SAM: An Analytical Approach By Morten O. Ravn; Vincent Sterk
  6. Non stationary additive utility and time consistency By Nicolas Drouhin
  7. How to Control Controlled School Choice: Comment By Battal Dogan
  8. Labour market frictions, monetary policy and durable goods. By Di Pace, Frederico; Hertweck, Matthias
  9. The Portfolio Rebalancing Channel of Quantitative Easing By Valentin Jouvanceau
  10. Age Gap in Voter Turnout and Size of Government Debt By Ryo Arawatari; Tetsuo Ono
  11. Liquidity Trap and Stability of Taylor Rules By Antoine Le Riche; Francesco Magris; Antoine Parent
  12. Specialization, Matching Intensity and Income Inequality of Sellers By Eleftheriou, Konstantinos; Polemis, Michael
  13. Government debt, fiscal rules and singular growth dynamics By Brito, Paulo
  14. Leverage and Risk Weighted Capital Requirements By Gambacorta, Leonardo; Karmakar, Sudipto
  15. Parental Control and Fertility History By Michele Tertilt; Alice Schoonbroodt
  16. Band or Point Inflation Targeting? An Experimental Approach By Camille Cornand; Cheick Kader M'Baye
  17. General equilibrium with endogenous trading constraints By Sebastián Cea-Echenique; Juan Pablo Torres-Martínez
  18. Measuring the Effects of Employment Protection Policies for the Disabled: Theory and Evidence from the Americans with Disabilities Act By serena Rhee; Soojin Kim
  19. Optimal fiscal policy with utility-enhancing government spending, consumption taxation and a common income tax rate: the case of Bulgaria By Vasilev, Aleksandar
  20. Money, Asset Prices and the Liquidity Premium By Lee, Seungduck
  21. Public finance and the optimal inflation rate By Di Bartolomeo Giovanni; Tirelli Patrizio
  22. Growth Regimes, Endogenous Elections, and Sovereign Default Risk By Burcu Eyigungor; Satyajit Chatterjee
  23. Firm dynamics with frictional product and labor markets By Bihemo Kimasa; Leo Kaas
  24. Structural changes in the labor market and the rise of early retirement in Europe By Anna Batyra; David de la Croix; Olivier Pierrard; Henri Sneessens
  25. Macroeconomic Dynamics with Limited Commitment in Financial and Labor Contracts By Shingo Ishiguro
  26. Financial crises, limited asset market participation, and banks balance sheet constraints By Elton Beqiraj Elton; Di Bartolomeo Giovanni; Di Pietro Marco
  28. Endogenous Specialization and Dealer Networks By Batchimeg Sambalaibat; Artem Neklyudov
  29. Urban-Rural Wage Gaps in Developing Countries: Spatial Misallocation or Efficient Sorting? By Mike Waugh; Ahmed Mobarak; David Lagakos

  1. By: Pierre-Olivier Weill (UCLA); Benjamin Lester (Federal Reserve Bank of Philadelphia); Julien Hugonnier (EPFL)
    Abstract: We study a search and bargaining model of an asset market, where investors’ heterogeneous valuations for the asset are drawn from an arbitrary distribution. Our solution technique makes the model fully tractable and allows us to provide a full characterization of the unique equilibrium, in closed-form, both in and out of steady-state. Using this characterization, we first establish that the model generates aggregate trading patterns that are consistent with those observed in many over-the-counter asset markets. Then, we show that the model can replicate empirical regularities reported from micro-level data sets, including the relationships between the length of the intermediation chains through which assets are reallocated, the network centrality of the dealers involved in these chains, and the markup charged on the asset being passed along the chain. Finally, we show that heterogeneity magnifies the price impact of search frictions, and that this impact is more pronounced on price levels than on price dispersion. Hence, using observed price dispersion to quantify the effect of search frictions on price discounts or premia can be misleading.
    Date: 2016
  2. By: Vuillemey, Guillaume; Wasmer, Etienne
    Abstract: Bubbles are recurrent events, which contribute to both macroeconomic and employment volatility. We introduce stochastic bubbles in the standard search-and-matching model of the labor market. The economy alternates between latent and bubbly states, each being associated with a distinct solution for the market value of firms (respectively, stable or explosive). Bubbles in firm value induce distortions in hiring decisions and wages, which we explicitly characterize. Faced with bubbles, the social planner optimally deviates from the standard Hosios efficiency condition. The optimal share of workers in total surplus must be above the elasticity of hiring rates, by a small but increasing amount as the bubble expands. Finally, our specification for bubbles significantly improves the quantitative ability of the model to match U.S. data, along both real and financial dimensions.
    Keywords: bubbles; labor frictions; Unemployment volatility
    JEL: E32 J60
    Date: 2016–10
  3. By: Marion Goussé (Département d'Economique, Université Laval - Université Laval [Québec]); Nicolas Jacquemet (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Jean-Marc Robin (ECON - Département d'économie - Sciences Po)
    Abstract: We extend the search-matching model of the marriage market of Shimer and Smith (2000) to allow for labor supply, home production, match-specific shocks and endogenous divorce. We study nonparametric identification using panel data on marital status, education, family values, wages, and market and non market hours, and we develop a semiparametric estimator. We estimate how much sorting results from time use specialization or homophilic preferences. We estimate how equilibrium marriage formation affects the wage elasticities of market and non market hours. We estimate individuals’ willingness to pay for marriage and quantify the redistributive effect of intra- household resource sharing
    Keywords: structural estimation, collective labor supply,Search-matching, sorting, assortative matching
    Date: 2016–01
  4. By: Yukihiro Nishimura (Osaka University [Osaka]); Pierre Pestieau (CEPR - Center for Economic Policy Research - CEPR, CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain, PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics); Grégory Ponthière (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12, PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics)
    Abstract: We develop a 3-period overlapping generations (OLG) model where individuals borrow at the young age to finance their education. Education does not only increase future wages, but, also, raises the duration of life, which, in turn, affects education choices, in line with Ben Porath (1967). We first identify conditions that guarantee the existence of a stationary equilibrium with perfect foresight. Then, we reexamine the conditions under which the Ben-Porath effect prevails, and emphasize the impact of human capital decay and preferences. We compare the laissez-faire with the social optimum, and show that the latter can be decentralized provided the laissez-faire capital stock corresponds to the one satisfying the modified Golden Rule. Finally, we introduce intracohort heterogeneity in the learning ability, and we show that, under asymmetric information, the second-best optimal non-linear tax scheme involves a downward distortion in the level of education of less able types, which, quite paradoxically, would reinforce the longevity gap in comparison with the laissez-faire.
    Keywords: Education,Life expectancy,OLG models,Optimal policy
    Date: 2015–11
  5. By: Morten O. Ravn (University College London (UCL); Centre for Macroeconomics (CFM)); Vincent Sterk (University College London (UCL); Centre for Macroeconomics (CFM))
    Abstract: New Keynesian models with unemployment and incomplete markets are rapidly becoming a new workhorse model in macroeconomics. Such models typically require heavy computational methods which may obscure intuition and overlook equilibria. We present a tractable version which can be characterized analytically. Our results highlight that - due the interaction between incomplete markets, sticky prices and endogenous unemployment risk - productivity shocks may have radically different effects than in traditional NK models, that the Taylor principle may fail, and that pessimistic beliefs may be self-fulfilling and move the economy into temporary episodes of low demand and high unemployment, as well as into a long-lasting "unemployment trap". At the Zero Lower Bound, the presence of endogenous unemployment risk can create inflation and overturn paradoxical properties of the model. We further study financial asset prices and show that non-negligible risk premia emerge.
    Keywords: Sticky prices, Incomplete asset markets, Matching frictions, Multiple equilibria, Amplification
    JEL: E10 E21 E24 E30 E52
    Date: 2016–10
  6. By: Nicolas Drouhin (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, ENS Cachan - École normale supérieure - Cachan)
    Abstract: By solving dynamic optimization programs, I study the most general class of additive intertemporal utility functionals. They are not necessarily stationary, and do not necessarily multiplicatively separate a discount factor from "per-period utility". I prove that time consistency holds if and only if the period felicity function is multiplicatively separable in t, the date of decision and in s, the date of consumption, or equivalently, if the Fisherian instantaneous subjective discount rate does not depend on t. The model allows to explain"anomalies in intertemporal choice" and various empirical regularities, even when the agents are time consistent. On the other hand, the model allows to characterize the "effective consumption profile" of naive, time-inconsistent agents mathematically.
    Keywords: intertemporal choice, life cycle theory of consumption and saving, stationarity, time consistency, time invariance, exponential discounting, hyperbolic discounting, aging
    Date: 2016–01–19
  7. By: Battal Dogan
    Abstract: The usual mechanism through which government spending can be effective in increasing output in a liquidity trap emphasizes the role of aggregate demand. Higher government spending generates a lower expected real interest rate through a higher real wage, which translates into higher inflation. This lower real rate increases aggregate demand. I present new evidence that casts doubt on the empirical relevance of this mechanism. In particular, liquidity traps occur exclusively in recessions, which appear to be situations where higher government spending generates less inflation than in expansion times. To rationalize this, I build a New Keynesian model with search and matching frictions in the labor market and a downward rigid nominal wage. When solved using global methods, this model generates asymmetric fluctuations of recruiting costs along the business cycle. This permits the model to generate (i) a higher government spending multiplier in recessions vs expansions and (ii) a significantly higher multiplier at the zero lower bound without relying on a counterfactually large reaction of wages and inflation, both of which are in line with empirical evidence.
    Keywords: Zero lower bound, New Keynesian, Government spending multiplier, Search and Matching Frictions
    JEL: E24 E31 E32 E52 E62
    Date: 2016–10
  8. By: Di Pace, Frederico (Bank of England); Hertweck, Matthias (University of Konstanz)
    Abstract: This paper provides a quantitative answer to the ‘sectoral comovement puzzle’. We extend the two-sector New Keynesian model with flexible durable good prices and sticky non-durable good prices by (i) labour search and matching frictions and (ii) internal habit formation in non-durable consumption. Search and matching frictions generate comovement and increase the persistence of sectoral outputs, whereas habit formation helps to appropriately distribute the impact of a given shock over the two sectors. As a result, our estimated model closely replicates the amplitude and the curvature of the empirical impulse responses in both sectors.
    Keywords: Durable production; labour market frictions; sectoral comovement; monetary policy
    JEL: E21 E23 E31 E52
    Date: 2016–10–10
  9. By: Valentin Jouvanceau (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - UCBL - Université Claude Bernard Lyon 1 - UL2 - Université Lumière - Lyon 2 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - ENS Lyon - École normale supérieure - Lyon)
    Abstract: This paper analyzes the portfolio rebalancing channel of Quantitative Easing (QE hereafter) interventions. First, we identify the effects of a QE shock using a Bayesian VAR on US data using a sign and zero restrictions identification scheme. We find that QE shocks have substantial effects on corporate spreads with different ratings, supportive of a portfolio rebalancing channel. Second, we build a DSGE model with a securitzation mechanism. We confront the resulting impulse response functions to those uncovered by our VAR analysis, and find a fairly good match. Finally, we show that the portfolio rebalancing channel crucially affects the transmission of QE shocks to real economy.
    Keywords: Quantitative easing, securitization, financial intermediation, portfolio rebalancing channel
    Date: 2016
  10. By: Ryo Arawatari (Graduate School of Economics, Nagoya University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: We consider a cross-country difference of age gap in voter turnout and its im- pact on fiscal policymaking in a multi-country, overlapping-generations model. We present con ict over fiscal policy between successive generations (i.e., the young and elderly). We show that higher turnout of the elderly in voting may have a non- monotone effect on the size of government debt, depending on voters' inter-temporal elasticity of substitution of public expenditure.
    Keywords: fiscal policy; voter turnout; public debt; probabilistic voting; small open economies.
    JEL: D70 E62 H63
    Date: 2016–10
  11. By: Antoine Le Riche (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix Marseille Université, Laboratoire GAINS - Université du Maine - UM - Université du Maine, CAC – IXXI - Complex Systems Institute - CAC – IXXI - Complex Systems Institute); Francesco Magris (LEO - Laboratoire d'économie d'Orleans - CNRS - Centre National de la Recherche Scientifique - UO - Université d'Orléans, CAC – IXXI - Complex Systems Institute - CAC – IXXI - Complex Systems Institute); Antoine Parent (LAET - Laboratoire Aménagement Économie Transports - UL2 - Université Lumière - Lyon 2 - École Nationale des Travaux Publics de l'État [ENTPE] - CNRS - Centre National de la Recherche Scientifique, IEP Lyon - Sciences Po Lyon - Institut d'études politiques de Lyon, CAC – IXXI - Complex Systems Institute - CAC – IXXI - Complex Systems Institute)
    Abstract: We study a productive economy with safe government bonds and fractional cash-in-advance constraint on consumption expenditures. Government issues bonds and levies taxes to finance public expenditures, while the Central Bank follows a feedback Taylor rules by pegging the nominal interest rate. We show that when the nominal interest rate is bound to be non-negative, under active policy rules a liquidity trap steady state does emerge besides the Leeper (1991) equilibrium. The stability of the two steady states depends, in turns, upon the amplitude of the liquidity constraint. When the share of consumption to be paid cash is set lower than one half, the liquidity trap equilibrium is unstable. The stability of Leeper equilibrium too depends dramatically upon the amplitude of the liquidity constraint. Policy and Taylor rules are thus theoretically rehabilitated since their targets, by contrast with a vast literature, may be now stable. We also show that a relaxation of the liquidity constraint is Pareto-improving and that the liquidity trap equilibrium Pareto-dominates the Leeper one, in view of the zero cost of money.
    Keywords: cash-in-advance,liquidity trap,monetary policy,multiple equilibria
    Date: 2016–05
  12. By: Eleftheriou, Konstantinos; Polemis, Michael
    Abstract: We develop a simple model with heterogeneous agents and search frictions to study how increases in matching intensity between buyers and sellers determine the level of income inequality among sellers. Our findings indicate that a reduction in search frictions leads to higher inequality and induces buyers to purchase goods and services only from specialized sellers.
    Keywords: game theory; income inequality; matching; technology; value functions
    JEL: C78 O30
    Date: 2016–10–12
  13. By: Brito, Paulo
    Abstract: A fiscal rule controlling the government surplus as a function of the deviation of the actual debt ratio from a target level is introduced in an otherwise benchmark endogenous growth model in which productive government expenditures are financed by taxes and government debt. This generates a feedback mechanism from the government debt ratio to expenditure that can generate impasse-singular dynamics, in the sense that rates of growth can become locally infinitely valued. We characterize locally the different impasse-singular dynamics that can exist and discuss their consequences for the existence and characterization of general equilibrium endogenous growth paths, for different parameterizations of the fiscal rule. We present some consequences of impasse-singular dynamics generated by particular fiscal rules, which are not present in regular models: existence of multiple over-determinate balanced growth paths (BGP), existence of constraints in the domain of existence of determinate equilibrium paths converging to a regular BGP, and the existence of singular BGP's.
    Keywords: government debt, fiscal rules, endogenous growth, impasse-singular dynamics
    JEL: C6
    Date: 2016–10–17
  14. By: Gambacorta, Leonardo; Karmakar, Sudipto
    Abstract: The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a bank’s Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with differing degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios.
    Keywords: Bank Capital Buffers; leverage; regulation; Risk-Weighted Assets
    JEL: G21 G28 G32
    Date: 2016–10
  15. By: Michele Tertilt (University of Mannheim); Alice Schoonbroodt (The University of Iowa)
    Abstract: Parental control over offspring has changed dramatically in Western societies. From a state, before the 19th century, where parents completely controlled their children far into adulthood, a series of laws have shifted these control rights to the current state where even younger children control many aspects of their own lives. We first document the laws that gave parents all the control and argue that these control rights, directly or indirectly, gave parents access to a large fraction of their offspring’s labor income if they so desired. This paper argues that the shift in property rights that followed has important implications for fertility choice. In a simple overlapping generations model with endogenous fertility and altruism, we show that the first-order effect of such a shift is a decrease in fertility—contributing to the decline in fertility during the demographic transition. Depending on the cost structure of children, this decrease may be followed by an increase in fertility, exacerbated by the introduction of pay-as-you-go social security in the 1930s—a confounding factor to generate the baby boom in the 1950s and 1960s.
    Date: 2016
  16. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Cheick Kader M'Baye (Université de Bamako - Université de Bamako)
    Abstract: We conduct laboratory experiments with human subjects to test the rationale of adopting a band versus point inflation targeting regime. Within the standard New Keynesian model, we evaluate the macroeconomic performances of both regimes according to the strength of shocks affecting the economy. We find that when the economy faces small shocks, the average level of inflation as well as its volatility are significantly lower in a band targeting regime, while the output gap and interest rate levels and volatility are significantly lower in a point targeting regime with tolerance bands. However, when the economy faces large shocks, choosing the suitable inflation targeting regime is irrelevant because both regimes lead to comparable performances. These findings stand in contrast to those of the literature and question the relevance of clarifying a mid-point target within the bands, especially in emerging market economies more inclined to large and frequent shocks.
    Keywords: Band inflation target, point inflation target, inflation expectations, monetary policy, New Keynesian model, macroeconomic shocks, laboratory experiments
    Date: 2016
  17. By: Sebastián Cea-Echenique (Paris School of Economics - Centre d'Economie de la Sorbonne); Juan Pablo Torres-Martínez (Department of Economics - Faculty of Economics and Business - University of Chile)
    Abstract: In a competitive model where agents are subject to endogenous trading constraints, we make the access to financial trade dependent on prices and consumption decisions. Our framework is compatible with the existence of both credit market segmentation and market exclusion. In this context, we show equilibrium existence in two scenarios. In the first one, individuals can fully hedge the payments of segmented financial contracts by trading unsegmented assets. In the second one, it is assumed that agents may compensate with increments in present demand the losses of well-being generated by reductions of future consumption
    Keywords: Incomplete Markets; General Equilibrium; Endogenous Trading Constraints
    JEL: D52
    Date: 2016–07
  18. By: serena Rhee (Department of Economics, University of Hawaii); Soojin Kim (Purdue University)
    Abstract: We evaluate the Americans with Disabilities Act(ADA) using a directed search model in which firms post health-contingent wage contracts. We theoretically show that the ADA benefits disabled workers at the expense of non-disabled workers if firms face a high penalty for preferentially hiring non-disabled, whereas the disabled are worse off if the expected cost from terminating a disabled employee is high. Our estimation results imply that disabled job-finding and job-separation rates decreased, suggesting that for firms, the cost of hiring discrimination is lower than disabled worker termination. Overall, the ADA caused a 2:2 percentage point decline in disabled employment rates.
    Keywords: Americans with Disabilities Act, employment protection, search friction, wage posting, job-finding rate
    JEL: J78 J64 J68 K31
    Date: 2016–10
  19. By: Vasilev, Aleksandar
    Abstract: This paper explores the effects of fiscal policy in an economy based on indirect taxes, and taxing all income at the same rate. The focus of the paper is on the relative importance of consumption vs. income taxation, as well as on the provision of valuable public services. To this end, a Real-Business-Cycle model, calibrated to Bulgarian data (1999-2014), was set up with a richer public finance side. Bulgarian economy was chosen as a case study due to its dependence on consumption taxation as a source of tax revenue. To illustrate the effects of fiscal policy, two regimes were compared and contrasted to one another - exogenous vs. optimal (Ramsey) policy case. The main findings from the computational experiments performed are: (i) The optimal steady-state (capital and labor income) tax rate is zero, as it is the most distortionary tax to use; (ii) The benevolent Ramsey planner provides the optimal amount of the utility-enhancing public services. (iii) The optimal steady-state consumption tax has to triple to finance the optimal level of government spending.
    Keywords: consumption tax,income tax,general equilibrium,fiscal policy
    JEL: D58
    Date: 2016
  20. By: Lee, Seungduck
    Abstract: This paper examines the effect of monetary policy on the liquidity premium, i.e., the market value of the liquidity services that financial assets provide. To guide the empirical analysis, I set up a monetary search model in which bonds provide liquidity services in addition to money. The theory predicts that money supply and the nominal interest rate are positively correlated with the liquidity premium, but the latter is negatively correlated with the bond supply. The empirical analysis over the period from 1946 and 2008 confirms the theoretical findings. This indicates that liquid bonds are substantive substitutes for money and the opportunity cost of holding money plays a key role in asset price determination. The model can rationalize the existence of negative nominal yields, when the nominal interest rate is low and liquid bond supply decreases.
    Keywords: asset price, money search model, liquidity, liquidity premium, money supply
    JEL: E31 E41 E51 E52 G12
    Date: 2016–08
  21. By: Di Bartolomeo Giovanni; Tirelli Patrizio
    Abstract: Recent literature shows that the inclusion of public transfers into New Keynesian models can solve the puzzling result of optimal zero inflation, which odds with both empirical evidence and monetary authorities' targets. The effect is due to the different incentives to finance public expenditures through taxes or seigniorage deriving from transfers and public consumption. By considering a richer framework this paper investigates how commonly-used features of New Keynesian models affect the incentive to use different instruments to finance public transfers, and, therefore, optimal inflation. Specifically, we consider the impact on inflation of different degrees of real distortions in goods and labor markets, sticky monopolistic wages, and price and wage indexation. We also take account of potentially non-unitary elasticity of the demand for money with respect to consumption by introducing consumption scale effects in the monetary transactions technology.
    Date: 2016–11
  22. By: Burcu Eyigungor (Federal Reserve Bank of Philadelphia); Satyajit Chatterjee (Federal Reserve Bank of Philadelphia)
    Abstract: A model in which the sovereign derives private benefits from public office and contests elections to stay in power is developed. The possibility of turnover (and loss of private benefits) makes the sovereign behave myopically. Consistent with evidence, the sovereign is reelected if economic growth is strong. Combined with an estimated Markov switching growth process, the model explains the average debt-to-GDP ratio, the average sovereign spreads and a large fraction of the standard deviation of spreads for three emerging economies. Existing explanations of these facts rely on very low discount factors and default costs that are asymmetric with respect to output, assumptions that are not made in this study.
    Date: 2016
  23. By: Bihemo Kimasa (University of Konstanz); Leo Kaas (University of Konstanz)
    Abstract: We examine empirically and theoretically the joint dynamics of prices, output, employment and wages across firms. We first analyze administrative firm data for the German manufacturing sector for which price and quantity information at the nine-digit product level, together with employment, working hours and wages are available. We then develop a dynamic model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Prices and wages are dispersed across firms, reflecting differences in firm productivity and demand. Productivity and demand shocks have distinct implications for the firms' employment, output and price adjustments. In a quantitative analysis, we evaluate the model predictions against the data.
    Date: 2016
  24. By: Anna Batyra (Bogazici University, Istanbul); David de la Croix (IRES - CORE, Université catholique de Louvain); Olivier Pierrard (Banque centrale du Luxembourg); Henri Sneessens (CREA, Université du Luxembourg - IRES, Université catholique de Louvain)
    Abstract: The rise of early retirement in Europe is typically attributed to the European system of taxes and transfers. Contrary to a purely neoclassical framework, a model with imperfectly competitive labor market also allows to consider the effect of the bargaining power of labor and matching efficiency on preretirement. We find that lower bargaining power of workers and less efficient labor markets characterized by the declining matching efficiency have been an important determinant of early retirement in France and Germany. These structural changes, combined with early-retirement transfers and population ageing, are also consistent with the joint evolution of employment and unemployment rates, the labor share and the seniority premium.
    Keywords: Overlapping Generations, Search Unemployment, Labor Force Participation, Aging, Labor Market Policy and Institutions
    JEL: E24 H55 J26 J64
    Date: 2016
  25. By: Shingo Ishiguro (Graduate School of Economics, Osaka University)
    Abstract: WThis paper presents a dynamic general equilibrium model to investigate the coevolution of employment and financial systems in the process of economic development when firms f commitment to financial and labor contracts is limited. We show that equilibrium modes of financial and labor contracts endogenously change from the informal contracting phase in which both of them are implicitly self-enforced to the formal contracting phase in which they are formally enforced and become more market-based as economies develop well. Furthermore, the formal contracting phase is irreversible in the sense that, once the economy enters that regime, it never returns back to the informal contracting phase.
    Keywords: Dynamic General Equilibrium, Insider Lending, Implicit and Explicit Labor Contracts, Market Lending
    JEL: D86 J41 J64
    Date: 2016–10
  26. By: Elton Beqiraj Elton; Di Bartolomeo Giovanni; Di Pietro Marco
    Abstract: Our paper focuses on the effects of financial imperfections. It considers the interaction between two kinds of imperfections in an otherwise standard medium--scale New Keynesian economy characterized by nominal price and wage frictions, habits and capital adjustment costs. The imperfection investigated are the long--run limited--asset market participation assumption and the banks' balance sheet constraints due to an agency problem between financial intermediaries and depositors. The key question of the chapter is if the simultaneous presence of both amplifies or mitigates the negative effects of a financial crises, i.e., if these are substitutes or complements for the downturn after the crisis.
    Date: 2016–11
  27. By: Gianluca Femminis (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: These notes provide an intuitive introduction to dynamic programming. The first two Sections, which can be skipped, present the standard deterministic Ramsey model using the Lagrangian approach. Section 3 reformulates the Ramsey problem by means of a Bellman equation, while Section 4 shows how to “guess” the maximum value function solving the problem (when this is possible). Section 5 is devoted to applications of the envelope theorem. Section 6 provides a “paper and pencil” introduction to the numerical techniques used in dynamic programming, and can be skipped by the uninterested reader. Sections 7 to 9 are devoted to stochastic modelling, and to the use of stochastic Bellman equations. Section 10 extends the discussion of numerical techniques. Two Appendixes provide details about the Matlab routines used to deal with the examples, and the solutions of the exercises proposed in the main text.
    Keywords: Dynamic programming, Bellman equation, Optimal growth, Numerical techniques.
    JEL: C61 O41 C63
    Date: 2016–10
  28. By: Batchimeg Sambalaibat (Indiana University); Artem Neklyudov (University of Lausanne and SFI)
    Abstract: OTC markets exhibit a core-periphery network: 10-30 central dealers trade frequently and with many dealers, while hundreds of peripheral dealers trade sparsely and with few dealers. Existing work rationalize this phenomenon with exogenous dealer heterogeneity. We build a search-based model of network formation and propose that a core-periphery network arises from specialization. Dealers endogenously specialize in different clients with different liquidity needs. The clientele difference across dealers, in turn, generates dealer heterogeneity and the core-periphery network: The dealers specializing in clients who trade frequently form the core, while the dealers specializing in buy-and-hold investors form the periphery.
    Date: 2016
  29. By: Mike Waugh (New York University); Ahmed Mobarak (Yale University); David Lagakos (University of California, San Diego)
    Abstract: To what extent do the large urban-rural wage gaps in developing countries reflect a spatial misallocation of labor? We answer this question using a dynamic model of internal migration that encompasses two broad interpretations of these gaps. The first is that workers are misallocated across space due to uninsurable migration risk and incomplete markets. The second is that workers are heterogenous and sort efficiently across space given migration costs. We discipline the model quantitatively using evidence from a controlled migration experiment in Bangladesh and new survey evidence about migration opportunities for potential migrants. We then use the model to compare the status quo to the efficient spatial allocation of workers chosen by a benevolent planner. We conclude that urban-rural wage gaps mostly reflects sorting and migration costs, though improved access to financial markets would still reduce misallocation and improve living standards substantially for some workers.
    Date: 2016

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