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on Dynamic General Equilibrium |
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Issue of 2005‒09‒11
fifteen papers chosen by |
| By: | Sanjay K. Chugh |
| Abstract: | We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner has access to labor income taxes, nominal riskless debt, and money creation. One main result is that sticky wages alone make price stability optimal in the face of government spending shocks, to a degree quantitatively similar as sticky prices alone. With productivity shocks also present, optimal inflation volatility is higher, but still dampened relative to the fully-flexible economy. Key for our results is an equilibrium restriction between nominal price inflation and nominal wage inflation that holds trivially in a Ramsey model featuring only sticky prices. We also show that the nominal interest rate can be used to indirectly tax the rents of monopolistic labor suppliers. Interestingly, a necessary condition for the ability to use the nominal interest rate for this purpose is positive producer profits. Taken together, our results uncover features of Ramsey fiscal and monetary policy in the presence of labor market imperfections that are widely-believed to be important. |
| Keywords: | Inflation (Finance) - Mathematical models ; Monetary policy - Mathematical models ; Fiscal policy - Mathematical models |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:834&r=dge |
| By: | Jeremy Lise (Queen's University); Shannon Seitz (Queen's University); Jeffrey Smith (University of Maryland and IZA Bonn) |
| Abstract: | This paper introduces an innovative test of search and matching models using the exogenous variation available in experimental data. We take an off-the-shelf Pissarides matching model and calibrate it to data on the control group from a randomized social experiment. We then simulate a program group from a randomized experiment within the model. As a measure of the performance of the model, we compare the outcomes of the program groups from the model and from the randomized experiment. We illustrate our methodology using the Canadian Self-Sufficiency Project (SSP), a social experiment providing a time limited earnings supplement for Income Assistance recipients who obtain full time employment within a 12 month period. We find two features of the model are consistent with the experimental results: endogenous search intensity and exogenous job destruction. We find mixed evidence in support of the assumption of fixed hours of labor supply. Finally, we find a constant job destruction rate is not consistent with the experimental data in this context. |
| Keywords: | calibration, equilibrium search and matching models, policy experiments, Self-Sufficiency Project, welfare, social experiments |
| JEL: | J2 I38 J6 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1717&r=dge |
| By: | Kris Jacobs; Stéphane Pallage; Michel A. Robe |
| Abstract: | Existing estimates of the welfare cost of business cycles suggest that it is quite low and might well be minuscule. Many of these estimates are based on aggregated U.S. consumption data. Arguably, because markets are incomplete and risk-sharing is imperfect, the welfare costs computed with aggregate consumption data are likely underestimates. Yet, incomplete-market models have not yielded significantly greater cost figures. Previous incomplete-market studies, however, have relied on model-generated consumption series that reflect optimal decsions in models calibrated using individual income data. In this paper, we maintain the assumption of incomplete markets but use observed consumption streams instead. Using state-level retail sales figures, we show that the welfare cost of macroeconomic volatility is in fact very substantial. In one half of the U.S. states, the welfare gain from the removal of business cycles can in fact exceed the gain from receiving an extra percentage point of consumption growth in perpetuity. In short, our results indicate that macroeconomic volatility has first-order welfare implications. |
| Keywords: | Incomplete markets, consumption volatility, growth, welfare |
| JEL: | E32 E60 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0524&r=dge |
| By: | Rangan Gupta (University of Connecticut and University of Pretoria) |
| Abstract: | The paper analyzes the effects of financial liberalization on inflation. We develop a monetary and endogenous growth, dynamic general equilibrium model of a small open semi-industrialized economy, with financial intermediaries subjected to obligatory "high" reserve ratio, serving as the source of financial repression. When calibrated to four Southern European semi-industrialized countries, namely Greece, Italy, Spain and Portugal, that typically had high reserve requirements, the model indicates a positive inflation-financial repression relationship irrespective of the the specification of preferences. But the strength of the relationship obtained from the model is found to be much smaller in size than the corresponding empirical estimates. |
| Keywords: | Inflation; Financial Markets and the Macroeconomy |
| JEL: | E31 E44 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2005-32&r=dge |
| By: | Keiichiro Kobayashi; Masaru Inaba |
| Abstract: | We conducted business cycle accounting (BCA) using the method developed by Chari, Kehoe, and McGrattan (2002a) on data from the 1980s--1990s in Japan and from the interwar period in Japan and the United States. The contribution of this paper is twofold. First, we find that labor wedges may have been a major contributor to the decade-long recession in the 1990s in Japan. We argue that the deterioration of the labor wedge may have been caused by sticky wages and monetary contraction, and it may have been prolonged by the continuation of asset-price declines through binding collateral constraints. Second, we performed an alternative BCA exercise using the capital wedge instead of the investment wedge to check the robustness of BCA implications for financial frictions. The accounting results with the capital wedge imply that financial frictions may have had a large depressive effect during the 1930s in the United States. This implication is the opposite of that from the original BCA findings. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:05023&r=dge |
| By: | Jordi Galí; J. David López-Salido; Javier Vallés |
| Abstract: | Recent evidence suggests that consumption rises in response to an increase in government spending. That finding cannot be easily reconciled with existing optimizing business cycle models. We extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending. |
| JEL: | E32 E62 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11578&r=dge |
| By: | Rasmus Lentz (University of Wisconsin-Madison); Dale T. Mortensen (Northwestern University) |
| Abstract: | Productivity dispersion across firms is large and persistent, and worker reallocation among firms is an important source of productivity growth. The purpose of the paper is to estimate the structure of an equilibrium model of growth through innovation that explains these facts. The model is a modified version of the Schumpeterian theory of firm evolution and growth developed by Klette and Kortum (2004). The data set is a panel of Danish firms than includes information on value added, employment, and wages. The model's fit is good and the structural parameter estimates have interesting implications for the aggregate growth rate and the contribution of worker reallocation to it. |
| Keywords: | labor productivity growth; worker reallocation; firm dynamics; firm panel data estimation |
| JEL: | E22 E24 J23 J24 L11 L25 O3 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuieca:2005_13&r=dge |
| By: | Rangan Gupta (University of Connecticut and University of Pretoria) |
| Abstract: | The paper analyzes the effects of financial liberalization on inflation. We develop a monetary and endogenous growth, dynamic general equilibrium model with financial intermediaries subjected to obligatory "high" cash reserves requirement, serving as the source of financial repression. When calibrated to four Southern European semi-industrialized countries, namely Greece, Italy, Spain and Portugal, that typically had high reserve requirements, the model indicates a positive inflation-financial repression relationship irrespective of the the specification of preferences. But the strength of the relationship obtained from the model is found to be much smaller in size than the corresponding empirical estimates. |
| Keywords: | Inflation; Financial Markets and the Macroeconomy |
| JEL: | E31 E44 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2005-31&r=dge |
| By: | Julia Fath; Clemens Fuest |
| Abstract: | The introduction of unemployment insurance is usually thought to increase welfare if workers are sufficiently risk averse. We analyse the effects of introducing mandatory unemployment insurance in the shirking model. Surprisingly, we find that introducing unemployment insurance reduces welfare irrespective of the degree of risk aversion. |
| Keywords: | Efficiency Wages, Shirking, Unemployment Insurance |
| JEL: | J0 J3 H1 |
| Date: | 2005–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0019&r=dge |
| By: | Rangan Gupta (University of Connecticut and University of Pretoria) |
| Abstract: | Using a pure-exchange overlapping generations model, characterized with tax evasion and information asymmetry between the government (the social planner) and the financial intermediaries, we try and seek for the optimal tax and seigniorage plans, derived from the welfare maximizing objective of the social planner. We show that irrespective of whether the economy is characterized by tax evasion, or asymmetric information, a benevolent social planner, maximizing welfare and simultaneously financing the budget constraint, should optimally rely on explicit rather than implicit taxation. |
| Keywords: | Tax evasion; Information Asymmetry in Financial Markets |
| JEL: | E63 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2005-33&r=dge |
| By: | Hanno Lustig; Stijn Van Nieuwerburgh |
| Abstract: | We use a standard single-agent model to conduct a simple consumption growth accounting exercise. Consumption growth is driven by news about current and expected future returns on the market portfolio. The market portfolio includes financial and human wealth. We impute the residual of consumption growth innovations that cannot be attributed to either news about financial asset returns or future labor income growth to news about expected future returns on human wealth, and we back out the implied human wealth and market return process. This accounting procedure only depends on the agent's willingness to substitute consumption over time, not her consumption risk preferences. We find that innovations in current and future human wealth returns are negatively correlated with innovations in current and future financial asset returns, regardless of the elasticity of intertemporal substitution. The evidence from the cross-section of stock returns suggests that the market return we back out of aggregate consumption innovations is a better measure of market risk than the return on the stock market. |
| JEL: | G1 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11564&r=dge |
| By: | Jang-Ting Guo; Kevin J. Lansing |
| Abstract: | This paper develops a one-sector real business cycle model in which competitive firms allocate resources for the production of goods, investment in new capital, and maintenance of existing capital. Firms also choose the utilization rate of existing capital. A higher utilization rate leads to faster capital depreciation, while an increase in maintenance activity has the opposite effect. We show that as the equilibrium ratio of maintenance expenditures to GDP rises, the required degree of increasing returns for local indeterminacy declines over a wide range of parameter combinations. When the model is calibrated to match empirical evidence on the relative size of maintenance and repair activity, we find that local indeterminacy (and belief-driven fluctuations) can occur with a mild and empirically-plausible degree of increasing returns–around 1.08. |
| Keywords: | Business cycles ; Competition |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2005-10&r=dge |
| By: | Rangan Gupta (University of Connecticut and University of Pretoria) |
| Abstract: | The paper analyzes the relationship between the "optimal" degree of tax evasion and policy decisions in a simple overlapping generations framework. The model suggests that the best way to effectively reduce tax evasion is through increases in penalty rates. |
| Keywords: | Underground Economy; Tax evasion; Macroeconomic Policy. |
| JEL: | E63 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2005-34&r=dge |
| By: | R. Quentin Grafton (The Australian National University); Tom Kompas (The Australian National University); Phan Van Ha (The Australian National University) |
| Abstract: | The paper analyses the economic payoffs from marine reserves using a stochastic optimal control model. The results show that even if the reserve and harvested populations face the same negative shocks, harvesting is optimal, the population is persistent and with no uncertainty over current stock size, a reserve can increase resource rents. Using actual fishery data we demonstrate that the payoffs from a reserve, and also optimum reserve size, increase the larger is the magnitude of the negative shock, the greater its frequency, and the larger its relative impact on the harvested population. |
| Keywords: | marine reserves, resource rents, stochastic shocks, optimal control |
| JEL: | Q20 D81 C61 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:eab:microe:580&r=dge |
| By: | R. Quentin Grafton (The Australian National University); Tom Kompas (The Australian National University); Phan Van Ha (The Australian National University) |
| Abstract: | Using data from what was once one of the world’s largest capture fisheries the economic value of a marine reserve is calculated using a stochastic optimal control model with a jump diffusion process. The results show that with a stochastic environment an optimal-sized marine reserve can generate a triple payoff that (a), raises the resource rent even when harvesting is ‘optimal’, (b) decreases the recovery time for the biomass to return to its former state and smooths fishers’ harvests and resource rents, and (c), lowers the chance of a catastrophic collapse following a negative shock. |
| Keywords: | Marine reserves, Stochastic control, Fisheries |
| JEL: | C61 Q22 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:eab:microe:616&r=dge |