nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒10‒28
thirteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Cross-Sectional and Aggregate Labor Supply By Yongsung Chang; Sun-Bin Kim; Kyooho Kwon; Richard Rogerson
  2. Fiscal Policy Experiments By Ilias Georgakopoulos
  3. Minimum Wage in a Multi-Tier Search and Wage-Posting Model with Cross-Market Substitutions By C. Y. Kelvin Yuen; Ping Wang
  4. Macroeconomic Outcomes in Disaster-Prone Countries By Alessandro Cantelmo; Giovanni Melina; Chris Papageorgiou
  5. Information, VARs and DSGE Models By Paul Levine; Joseph Pearlman; Stephen Wright; Bo Yang
  6. Pollution in a globalized world: Are debt transfers among countries a solution? By Marion Davin; Mouez Fodha; Thomas Seegmuller
  7. Pecuniary Externalities in Economies with Downward Wage Rigidity By Martin Wolf
  8. R&D, innovation spillover and business cycles By Uluc Aysun; Zeynep Yom
  9. Macroeconomic Effects of Reforms on Three Diverse Oil Exporters: Russia, Saudi Arabia, and the UK By Samya Beidas-Strom; Marco Lorusso
  10. A Requiem for the Fiscal Theory of the Price Level By Roger Farmer; Pawel Zabczyk
  11. You’re the One That I Want! Public Employment and Women’s Labor Market Outcomes By Gomes, Pedro Maia; Kuehn, Zoë
  12. Brain Drain or Brain Gain? International labor mobility and human capital formation By Anelí Bongers; Carmen Díaz-Roldán; José L. Torres
  13. Fiscal multipliers in Ireland using FIR-GEM model By Varthalitis, Petros

  1. By: Yongsung Chang; Sun-Bin Kim; Kyooho Kwon; Richard Rogerson
    Abstract: Standard heterogeneous agent macro models that highlight idiosyncratic productivity shocks do not generate the near zero cross-sectional correlation between hours and wages found in the data. We ask whether matching this moment matters for business cycle properties of these models. To do this we explore two extensions of the model in Chang et al. (2019) that can match this empirical cross-section correlation. One of these departs from the assumption of balanced growth preferences. The other introduces an idiosyncratic shock to the opportunity cost of market work that is highly correlated with the shock to market productivity. While both extensions can match the empirical correlation, they have large and opposing effects on the cyclical volatility of the labor market. We conclude that the cross-sectional moment is important for business cycle analysis and that more work is needed to distinguish the potential mechanisms that can generate it.
    Date: 2019–10
  2. By: Ilias Georgakopoulos
    Abstract: This paper investigates the macroeconomic implications of alternative tax regimes. For this purpose, a one-sector general equilibrium model is constructed in which heterogeneous agents differ in productivity and holdings of capital in the sense of incurring transaction costs for participating in the capital market. A Cobb-Douglas production function is employed that can capture the capital-skill complementarity effect and the difference in productivities of the skilled and unskilled workers. With regards to fiscal policy experiments, this paper examines tax structures where a permanent reduction in each of the three main tax instruments namely, consumption, labour and capital income tax is compensated by a permanent increase in one of the remaining two policy instruments such that the government budget constraint is tax revenue neutral. The government levies taxes on consumption, labour income and capital income in order to finance its only activity, government consumption. Next, the model economy is calibrated to the Greek economy to reflect the great ratios over 1960:1-2005:4 and then, it studies the long-run, welfare and transitional effects of the undertaken analysis. The sensitivity analysis shows that the quantitative and qualitative findings are quite robust.
    Keywords: General equilibrium model; optimal taxation; business cycle.
    JEL: E24 E32 E62
    Date: 2019–11–11
  3. By: C. Y. Kelvin Yuen; Ping Wang
    Abstract: While minimum wage policy is widely adopted in the real world, can it effectively raise the average wage of lower paid jobs without having large detrimental consequences for employment? The empirical literature fails to establish robust findings. We develop a general-equilibrium search and wage-posting framework with heterogeneous workers and tasks matching in multi-tier labor markets: abstract, routine high-skilled, routine middle-skilled, manual middle-skilled and manual low-skilled. We incorporate rich cross-market spillovers and compositional effects from individual responses to market thickness. As a result of minimum wage hikes, we show that (i) the unemployment rate at the minimum wage binding market is higher, while all other markets enjoy a lower unemployment rate; (ii) employment in the manual low-skilled jobs is lower, whereas employment in the routine high-skilled and manual middle-skilled markets is higher due to cross-market substitutions; and, (iii) employment in other markets has ambiguous responses due to conflicting effects on potential worker entry and unemployment. By calibrating the model to fit the U.S. data, we evaluate the impacts of the federal minimum wage hike (2007-2009) and the on-going minimum wage increase in Seattle (2017-2021). We find that the minimum wage effects on employment on the binding markets depend crucially on the magnitudes of spillover and compositional effects and that the employment effects may be weak in a nonbinding market. Moreover, our results suggest that, while both minimum wage hikes reduce aggregate output, they only generate small effects on submarket average and overall average wages.
    JEL: D83 E24 E60 J64
    Date: 2019–10
  4. By: Alessandro Cantelmo; Giovanni Melina; Chris Papageorgiou
    Abstract: Using a dynamic stochastic general equilibrium model, we study the channels through which natural disaster shocks affect macroeconomic outcomes and welfare in disaster-prone countries. We solve the model using Taylor projection, a solution method that is shown to deal effectively with high-impact weather shocks calibrated in accordance to empirical evidence. We find large and persistent effects of weather shocks that significantly impact the income convergence path of disaster-prone countries. Relative to non-disaster-prone countries, on average, these shocks cause a welfare loss equivalent to a permanent fall in consumption of 1.6 percent. Welfare gains to countries that self-finance investments in resilient public infrastructure are found to be negligible, and international aid has to be sizable to achieve significant welfare gains. In addition, it is more cost-effective for donors to contribute to the financing of resilience before the realization of disasters, rather than disbursing aid after their realization.
    Date: 2019–10–11
  5. By: Paul Levine (University of Surrey and CIMS); Joseph Pearlman (City University); Stephen Wright (Birkbeck College); Bo Yang (Swansea University)
    Abstract: How informative is a time series representation of a given vector of observables about the structural shocks and impulse response functions in a DSGE model? In this paper we refer to this econometrician's problem as “E-invertibility" and consider the corresponding information problem of the agents in the assumed DGP, the DSGE model, which we refer to as “A-invertibility" We consider how the general nature of the agents' signal extraction problem under imperfect information impacts on the econometrician's problem of attempting to infer the nature of structural shocks and associated impulse responses from the data. We also examine a weaker condition of recoverability. A general conclusion is that validating a DSGE model by comparing its impulse response functions with those of a data VAR is more problematic when we drop the common assumption in the literature that agents have perfect information as an endowment. We develop measures of approximate fundamentalness for both perfect and imperfect information cases and illustrate our results using analytical and numerical examples.
    JEL: C11 C18 C32 E32
    Date: 2019–10
  6. By: Marion Davin (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier); Mouez Fodha (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This article analyzes the impacts of debt relief on production and pollution. We develop a two-country overlapping generations model with environmental externalities, public debts and perfect mobility of assets. Pollutant emissions arise from production, but agents may invest in pollution mitigation. Could debt relief be an efficient tool to encourage less developed countries to engage in the fight against climate change? We consider a decrease of the debt of the poor country balanced by an increase of the richer country's debt. We show that debt relief makes it possible to engage poor countries in the process of pollution abatement. Capital, environmental quality and welfare can increase in both countries. This result relies on the environmental sensitivity and the discount factor in the poor country relative to the rich one: the greater they are the more beneficial the debt relief is.
    Keywords: Capital market integration,Pollution,Abatement,Overlapping generations,Public debt
    Date: 2019–10
  7. By: Martin Wolf
    Abstract: We describe a pecuniary externality in economies with downward nominal wage rigidity that leads arms to hire too many workers in expansions, which leads to too much unemployment in recessions. The externality arises because of competitive behavior in the labor market. When ?rms hire more workers, they push up market wages for all ?rms. Firms internalize that with higher wages, it is more likely that they will be constrained by downward nominal wage rigidity in the future themselves; however, they fail to internalize the negative e?ects over other arms. In the calibrated model, when compared to a benevolent planner who chooses labor allocations on behalf of arms, the externality raises the welfare cost of downward nominal wage rigidity by a factor of 10, as it makes the economy signifcantly more exposed to unemployment crises.
    JEL: E24 E32 F41
    Date: 2019–06
  8. By: Uluc Aysun (Department of Economics, College of Business Administration, University of Central Florida); Zeynep Yom (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: This paper shows that technology shocks have the largest impact on economies when industries adopt innovations of other industries at a high rate, if costs of adopting new technologies and adjusting R&D expenditures are low, and if innovators face a high degree of competition. It is not the level but the spillover of innovations across industries that is the key determinant of these findings. Under the conditions mentioned above, R&D becomes less procyclical and smoother along the business cycle yet R&D driven innovations have a larger impact on output since these innovations spillover at a higher rate. These inferences are drawn from a dynamic stochastic general equilibrium framework describing a real economy with endogenous growth. The latter feature allows us to infer the welfare implications of R&D processes.
    Keywords: Research and development; spillover effects; endogenous growth
    JEL: E30 E32 O30 O33
    Date: 2019–10
  9. By: Samya Beidas-Strom; Marco Lorusso
    Abstract: We build and estimate open economy two-bloc DSGE models to study the transmission and impact of shocks in Russia, Saudi Arabia and the United Kingdom. After accounting for country-specific fiscal and monetary sectors, we estimate their key policy and structural parameters. Our findings suggest that not only has output responded differently to shocks due to differing levels of diversification and structural and policy settings, but also the responses to fiscal consolidation differ: Russia would benefit from a smaller state foot-print, while in Saudi Arabia, unless this is accompanied by structural reforms that remove rigidities, output would fall. We also find that lower oil prices need not be bad news given more oil-intensive production structures. However, lower oil prices have hurt these oil producers as their public finances depend heavily on oil, among other factors. Productivity gains accompanied by ambitious structural reforms, along with fiscal and monetary reforms could support these economies to achieve better outcomes when oil prices fall, including via diversifying exports.
    Date: 2019–10–11
  10. By: Roger Farmer; Pawel Zabczyk
    Abstract: The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.
    Date: 2019–10–11
  11. By: Gomes, Pedro Maia (Birkbeck, University of London); Kuehn, Zoë (Universidad Autónoma de Madrid)
    Abstract: In most countries, the public sector hires disproportionally more women than men. We document gender differences in employment, transition probabilities, hours, and wages in the public and private sector using microdata for the United States, the United Kingdom, France, and Spain. We then build a search and matching model where men and women decide if to participate and if to enter private or public sector labor markets. We calibrate our model separately to the four countries. Running counterfactual experiments, we quantify whether the selection of women into the public sector is driven by: (i) lower gender wage gaps and thus relatively higher wages for women in the public sector, (ii) possibilities of better conciliation of work and family life for public sector workers, (iii) greater job security in the public compared to the private sector, or (iv) intrinsic preferences for public sector occupations. We find that, quantitatively, women's higher public sector wage premia and their preferences for working in the public sector explain most of the selection. We calculate the monetary value of public sector job security and work-life balance premia, for both men and women, and we estimate how higher public sector wages and employment affect male and female unemployment, inactivity rates, and wages differently.
    Keywords: public sector employment, female labor force participation, gender wage gap
    JEL: J21 J16 J45 H10 E60
    Date: 2019–10
  12. By: Anelí Bongers (Department of Economics, University of Málaga); Carmen Díaz-Roldán (Department of Economics, University of Castilla-La Mancha); José L. Torres (Department of Economics, University of Málaga)
    Abstract: This paper studies the impact of international labor migration on human capital investment in both destination and origin countries using an integrated theoretical framework. We develop a two-country Dynamic Stochastic General Equilibrium human capital investment model with international labor mobility, in which both decision to migrate and to invest in skill acquisition are endogenous. We show that human capital formation process in the countries of origin is very sensible to migration policies implemented by destination countries. Our results show that human capital accumulation in the country of origin is encouraged by the possibility of emigration to higher labor productivity countries, supporting the recent view of the "brain gain" hypothesis. Productivity shocks hitting the destination country reduces human capital investment by natives but increase human capital investment in the country of origin when migration is allowed. Finally, we ?nd that migration increases world human capital, increasing the stock of human capital in both destination and origin countries.
    JEL: F22 J24 J61
    Date: 2018–12
  13. By: Varthalitis, Petros
    Date: 2019

This nep-dge issue is ©2019 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.