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on Dynamic General Equilibrium |
| By: | Ngoc-Sang Pham |
| Abstract: | We prove that a two-cycle equilibrium in a general equilibrium model with infinitely-lived agents also constitutes an equilibrium in an overlapping generations (OLG) model. Conversely, an equilibrium in an OLG model that satisfies additional conditions is part of an equilibrium in a general equilibrium model with infinitely-lived agents. Applying this result, we demonstrate that equilibrium indeterminacy and rational asset price bubbles may arise in both types of models. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.07674 |
| By: | Gideon Bornstein; Alessandra Peter |
| Abstract: | This paper studies the effect of nonlinear pricing on markups and misallocation. We develop a general equilibrium model of firms that are allowed to set a quantity-dependent pricing schedule—contrary to the typical assumption in macroeconomic models. Without the restriction to linear pricing, markup heterogeneity is no longer a sign of misallocation. Larger firms charge higher markups, yet the allocation of resources across firms is efficient. Further, we point to a new source of misallocation. In general equilibrium, high-taste consumers are allocated too much of each good, low-taste consumers too little. When labor supply is elastic, firms’ market power depresses aggregate labor, but this effect is independent of the level of the aggregate markup in the economy. Using micro data from the retail sector, we show that nonlinear pricing is prevalent and quantify the model. We find that the welfare losses from misallocation across consumers under nonlinear pricing are substantially larger than those from misallocation across firms under linear pricing. |
| JEL: | D4 E2 L1 O4 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33144 |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | The neo-Fisher effect and the central bank information (CBI) effect produce similar outcomes: under both, a monetary tightening triggers an increase in inflation and an expansion in real activity. Separate estimates of these effects run the risk of confounding one with the other. To disentangle these two channels, we introduce into a new-Keynesian model a permanent monetary shock that generates neo-Fisher effects and an aggregate demand shock to which the central bank responds that creates CBI effects. We estimate the model on U.S. data. We find that the neo-Fisherian shock is an important driver of inflation, while the CBI shock explains a significant fraction of movements in the nominal interest rate. The CBI shock explains little of inflation and output, but, through counterfactual exercises, we establish that this reflects the central bank's success in isolating the economy from aggregate demand disturbances. These results are shown to hold under full and imperfect information. |
| JEL: | E3 E5 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33136 |
| By: | Borovickova, Katarina (Federal Reserve Bank of Richmond); Shimer, Robert (University of Chicago) |
| Abstract: | We develop a random search model with two-sided heterogeneity and match-specific productivity shocks to explain why high-productivity workers tend to work at high-productivity firms despite low-productivity workers gaining about as much from such matches. Our model has two key predictions: i) the average log wage that a worker receives is increasing in the worker's and employer's productivity, with low-productivity workers gaining proportionally more at high-productivity firms and ii) there is assortative matching between a worker's productivity and that of her employer. Selective job acceptance drives these patterns. All workers are equally likely to meet all firms, but workers have higher surplus from meeting firms of similar productivity. The high surplus meetings result in matches more frequently, generating assortative matching. Only the subset of meetings that result in matches are observed in administrative wage data, shaping wages. We show that our findings are quantitatively consistent with recent empirical results. Moreover, we prove this selection is not detected using standard empirical approaches, highlighting the importance of theory-guided empirical work. Our results imply that encouraging high-wage firms to hire low-wage workers may be less effective at reducing wage inequality than wage patterns suggest. |
| JEL: | J31 J64 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17454 |