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on Dynamic General Equilibrium |
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Issue of 2011‒05‒24
twenty-one papers chosen by |
| By: | Holden, Tom |
| Abstract: | This paper builds a dynamic stochastic general equilibrium (DSGE) model of endogenous growth that is capable of generating substantial degrees of endogenous persistence in productivity. When products go out of patent protection, the rush of entry into their production destroys incentives for process improvements. Consequently, old production processes are enshrined in industries producing non-protected products, resulting in aggregate productivity persistence. Our model also generates sizeable delayed movements in productivity in response to preference shocks, providing a form of endogenous news shock. Finally, if we calibrate our model to match a high aggregate mark-up then we can replicate the negative response of hours to a positive technology shock, even without the inclusion of any frictions. |
| Keywords: | productivity persistence; patent protection; oligopoly; research and development |
| JEL: | E32 E37 L16 O31 O33 O34 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:004&r=dge |
| By: | Ferman, Marcelo |
| Abstract: | This paper builds a dynamic stochastic general equilibrium (DSGE) model of endogenous growth that is capable of generating substantial degrees of endogenous persistence in productivity. When products go out of patent protection, the rush of entry into their production destroys incentives for process improvements. Consequently, old production processes are enshrined in industries producing non-protected products, resulting in aggregate productivity persistence. Our model also generates sizeable delayed movements in productivity in response to preference shocks, providing a form of endogenous news shock. Finally, if we calibrate our model to match a high aggregate mark-up then we can replicate the negative response of hours to a positive technology shock, even without the inclusion of any frictions. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:005&r=dge |
| By: | Kenichi Fukushima |
| Abstract: | This paper sets up an overlapping generations general equilibrium model with incomplete markets similar to Conesa, Kitao, and Krueger's (2009) and uses it to simulate a policy reform which replaces an optimal at tax with an optimal non-linear tax that is allowed to be arbitrarily age and history dependent. The reform shifts labor supply toward productive households and thereby increases aggregate productivity. This leads to a large increase in per capita consumption and a moderate increase in per capita hours. Under a utilitarian social welfare function that places equal weight on all current and future cohorts, the implied welfare gain amounts to more than 10% in lifetime consumption equivalents. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd10-176&r=dge |
| By: | Cristian Bartolucci |
| Abstract: | This paper analyzes the impact of downward wage rigidity on the labor market. It shows that imposing downward wage rigidity in a matching model with cyclical fluctuations in productivity, endogenous match-destruction, and on-the-job search, quits are procyclical and layoffs countercyclical. It provides evidence that downward wage rigidity is empirically relevant in ten European countries. It finally shows that layoffs are countercyclical and quits are procyclical, as predicted by the model. |
| Keywords: | Downward wage rigidity; Business cycles; Wage renegotiation |
| JEL: | J63 J41 E3 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:205&r=dge |
| By: | Marcin Kolasa (National Bank of Poland and Warsaw School of Economics.); Giovanni Lombardo (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement. JEL Classification: E52, E61, E44, F36, F41. |
| Keywords: | financial frictions, open economy, optimal monetary policy. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111338&r=dge |
| By: | Cristian Bartolucci |
| Abstract: | In standard equilibrium search models with strategic wage bargaining and on-the-job search, renegotiation is permitted without requirement of a credible threat. Workers trigger renegotiation whenever they have a new outside option that could raise their wages. In this note I modify the model to be consistent with renegotiation by mutual agreement and I show that estimating the model without imposing credible threats for renegotiation generates downward bias in the estimates of the bargaining power. |
| Keywords: | Credible Threats; On-the-job search; Wage bargaining |
| JEL: | J3 J64 C7 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:203&r=dge |
| By: | Christopher Reicher |
| Abstract: | Several authors have proposed staggered wage bargaining as a way to introduce sticky wages into search and matching models while preserving individual rationality. I evaluate the quantitative implications of such an approach. I feed through a series of estimated shocks from US data into a search and matching model with sticky prices and wages. I compare the implications of how the sticky wages enter into the hiring decision, and there seems to be a tradeoff between generating business cycle volatility and matching the lack of a long-run relationship between vacancy creation and inflation. With regard to wages, the sticky wage model unconditionally does a better job at matching wages than the flexible wage model |
| Keywords: | wages, sticky prices, staggered Nash bargaining, inflation, new hires, search and matching, business cycles |
| JEL: | E24 E25 E32 J23 J31 J63 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1674&r=dge |
| By: | Kobayashi, Keiichiro |
| Abstract: | To analyze the macroeconomic consequences of a systemic bank run, we integrate the banking model `a la Diamond and Rajan (2001a) into a simplified version of an infinite-horizon neoclassical growth model. The banking sector intermediates the collateral-secured loans from households to entrepreneurs. The entrepreneurs also deposit their working capital in the banks. The systemic bank run, which is a sunspot phenomenon in this model, results in a deep recession through causing a sudden shortage of the working capital. We show that an increase in the probability of occurrence of the systemic run can persistently lower output, consumption, labor, capital and the asset price, even if the systemic run does not actually occur. This result implies that the slowdown of economic growth after the financial crises may be caused by the increased fragility of the banking system or the raised fears of recurrence of the systemic runs. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hit:piecis:515&r=dge |
| By: | Regassa Senbeta S. |
| Abstract: | Firms in many low income countries depend entirely on imported capital and intermediate inputs. As a result, in these countries economic activity is considerably in?uenced by the capacity of the economy to import these inputs which, in turn, depends on the availability and cost of foreign exchange. In this study we introduce foreign exchange availability as an additional constraint faced by ?rms into an otherwise standard small open economy New Keynesian DSGE model. The model is then calibrated for a typical Sub Saharan African economy and the behaviour of the model in response to both domestic and external shocks is compared with the standard model. The impulse response functions of the two models are the same qualitatively for most of the variables though the model with foreign exchange constraint generates more variability in most of the variables than the standard model. This behaviour of the model with foreign exchange constraint is consistent with the stylized facts of low income countries. Furthermore, for variables for which the two models have di¤erent impulse response functions, the model with foreing exchange constraint is both theoretically consistent and matches the stylized facts. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2011004&r=dge |
| By: | Zheng Liu; Pengfei Wang; Tao Zha |
| Abstract: | We argue that positive co-movements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the co-movements by incorporating two key features into a DSGE model: We introduce land as a collateral asset in firms' credit constraints and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through the joint dynamics of land prices and business investment. |
| JEL: | E21 E27 E32 E44 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17045&r=dge |
| By: | Raouf BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), Center for Operations Research and Econometrics (CORE) and GREQAM, Université Aix-Marseille II); Giorgio FABBRI (Dipartimento di Studi Economici S. Vinci, Università di Napoli Parthenope, Naples); Fausto GOZZI (Dipartimento di Scienze Economiche ed Aziendali, Università LUISS - Guido Carli, Rome) |
| Abstract: | We reconsider the optimal population size problem in a continuous time economy populated by homogenous cohorts with a fixed life span. Linear production functions in the labor input and standard rearing costs are also considered. First, we study under which conditions the successive cohorts will be given the same consumption per capita. We show that this egalitarian rule is optimal whatever the degree of altruism when life spans are infinite. However, when life spans are finite, this rule can only be optimal in the Benthamite case, i.e. when the degree of altruism is maximal. Second, we prove that under finite life spans the Millian welfare function leads to optimal extinction at finite time whatever the lifetime. In contrast, the Benthamite case is much more involved: for isoelastic utility functions, it gives rise to two threshold lifetime values, say T0 < T1: below T0, finite time extinction is optimal; above T1, balanced growth paths are optimal. In between, asymptotic extinction is optimal. Third, optimal consumption and population dynamics are given in closed-form. |
| Keywords: | Optimal population size, Benthamite Vs Millian criterion, finite lives, optimal extinction |
| JEL: | D63 D64 C61 |
| Date: | 2011–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2011018&r=dge |
| By: | Frabrice Collard; Sujoy Mukerji; Kevin Sheppard; Jean-Marc Tallon |
| Abstract: | This paper assesses the quantitative impact of ambiguity on the historically observed equity premium. We consider a Lucas-tree pure—exchange economy with a single agent where we introduce two key non-standard assumptions. First, the agent’s beliefs about the dividend/consumption process is ambiguous, i.e., she is uncertain about the exact probability distribution governing the realization of future dividends and consumption. Second, the agent’s preferences are sensitive to this ambiguity, a property formalized using the smooth ambiguity model. The consumption and dividend process is assumed to evolve according to a hidden state model, popularized by Bansal and Yaron (2004), where a persistent latent state variable describes temporary shocks to the mean of consumption growth prospects. We further extend the model to allow for uncertainty about the magnitude of the persistence of the latent state. The agent’s beliefs are ambiguous due to the uncertainty about the conditional mean of the probability distribution on consumption and dividends in the next period. We show that in this model ambiguity is endogenously dynamic, for example, increasing during recessions. This results in an endogenously volatile and (counter-)cyclical equity premium. We calibrate the level of ambiguity aversion to match only the first moment of the risk-free rate in data, and ambiguity to match the uncertainty conditional on the historical growth path, and evaluate the model using moderate levels of risk aversion. We find that this simple modification of a Lucas-tree model accounts for a large part of the historical equity premium, both in terms of its level and variation over time. |
| Keywords: | Ambiguity aversion, asset pricing, equity premium puzzle |
| JEL: | G12 E21 D81 C63 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:550&r=dge |
| By: | Marcos R. de Castro; Solange N. Gouvea; André Minella; Rafael C. dos Santos; Nelson F. Souza-Sobrinho |
| Abstract: | We develop and estimate a DSGE model for the Brazilian economy, to be used as part of the macroeconomic modeling framework at the Central Bank of Brazil. The model combines the building blocks of standard DSGE models (e.g., price and wage rigidities and adjustment costs) with the following features that better describe the Brazilian economy: (i) a fiscal authority pursuing an explicit target for the primary surplus; (ii) administered or regulated prices as part of consumer prices; (iii) external finance for imports, amplifying the effects of changes in external financial conditions on the economy; and (iv) imported goods used in the production function of differentiated goods. It also includes the presence of financially constrained households. We estimate the model with Bayesian techniques, using data starting in 1999, when inflation targeting was implemented. Model evaluation, based on impulse response functions, moment conditions, variance error decomposition and initial forecasting exercises, suggests that the model can be a useful tool for policy analysis and forecasting. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:239&r=dge |
| By: | Christiano, Lawrence (Northwestern University; National Bureau of Economic Research); Ilut, Cosmin (Duke University); Motto, Roberto (European Central Bank); Rostagno, Massimo (European Central Bank) |
| Abstract: | Historical data and model simulations support the following conclusion. Inflation is low during stock market booms, so that an interest rate rule that is too narrowly focused on inflation destabilizes asset markets and the broader economy. Adjustments to the interest rate rule can remove this source of welfare-reducing instability. For example, allowing an independent role for credit growth (beyond its role in constructing the inflation forecast) would reduce the volatility of output and asset prices. |
| Keywords: | inflation targeting, sticky prices, sticky wages, stock price boom, DSGE model, New Keynesian model, news, interest rate rule |
| JEL: | E42 E58 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2011-005&r=dge |
| By: | Anastasia Litina (Department of Economics, University of Ioannina); Theodore Palivos (Department of Economics, University of Macedonia) |
| Abstract: | Do developed countries experience extensive corruption and if so how should they treat it? Evidence from countries in which tax evasion and various forms of corruption coexist and interact (e.g. Greece) indicates that the answer is positive. We address this problem by constructing an overlapping generations model com- prising two distinct groups of agents, citizens and politicians. Citizens decide the fraction of their income that they report to the tax authorities. Politicians decide the fraction of the public budget that they peculate. In such a context, multiple self-ful?lling equilibria can emerge: a "good"("bad") equilibrium with low (high) corruption and high (low) level of spending on education. It is shown that standard deterrence policies (e.g., fines) cannot eliminate multiplicity. Interestingly, whenever corruption may corrupt, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium. |
| Keywords: | Corruption, Tax Evasion, Multiple Equilibria, Stigma. |
| JEL: | D73 E62 H26 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2011_07&r=dge |
| By: | Kulish, Mariano; Jones, Callum |
| Abstract: | We write a New Keynesian model as an aggregate demand curve and an aggregate supply curve, relating inflation to output growth. The graphical representation shows how structural shocks move aggregate demand and supply simultaneously. We estimate the curves on US data from 1948 to 2010. The Great Recession in 2008-09 is explained by a collapse of aggregate demand driven by adverse preference and permanent technology shocks, and expectations of low inflation. |
| JEL: | E27 E37 E58 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:003&r=dge |
| By: | Adolfson, Malin (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Division of International Finance) |
| Abstract: | In this paper, we use Monte Carlo methods to study the small sample properties of the classical maximum likelihood (ML) estimator in artificial samples generated by the New- Keynesian open economy DSGE model estimated by Adolfson et al. (2008) with Bayesian techniques. While asymptotic identification tests show that some of the parameters are weakly identified in the model and by the set of observable variables we consider, we document that ML is unbiased and has low MSE for many key parameters if a suitable set of observable variables are included in the estimation. These findings suggest that we can learn a lot about many of the parameters by confronting the model with data, and hence stand in sharp contrast to the conclusions drawn by Canova and Sala (2009) and Iskrev (2008). Encouraged by our results, we estimate the model using classical techniques on actual data, where we use a new simulation based approach to compute the uncertainty bands for the parameters. From a classical viewpoint, ML estimation leads to a significant improvement in fit relative to the log-likelihood computed with the Bayesian posterior median parameters, but at the expense of some the ML estimates being implausible from a microeconomic viewpoint. We interpret these results to imply that the model at hand suffers from a substantial degree of model misspecification. This interpretation is supported by the DSGE-VAR() analysis in Adolfson et al. (2008). Accordingly, we conclude that problems with model misspecification, and not primarily weak identification, is the main challenge ahead in developing quantitative macromodels for policy analysis. |
| Keywords: | Identification; Bayesian estimation; Monte-Carlo methods; Maximum Likelihood estimation; New-Keynesian DSGE Model; Open economy. |
| JEL: | C13 C51 E30 |
| Date: | 2011–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0251&r=dge |
| By: | Akinori Tanaka (Graduate School of Economics, Osaka University); Kazuhiro Yamamoto (Graduate School of Economics, Osaka University) |
| Abstract: | In this paper, we develop an endogenous growth model with two coun- tries in which the international trade of differentiated goods requires dif- ferent trade costs and equilibrium wages in the two countries. If the labor productivity in one country's agricultural sector is higher than that of the other country, the wages will also be higher. In this model, there is a case in which the small country has a higher share of manufacturing firms than the larger country, and the innovation sector locates in the small country, since the cost for production of the manufacturing sector and innovation sector is higher in the large country than in the small country. First, when trade costs are high, the share of manufacturing firms in a large country increases with a decline in trade costs. However, the share then decreases with a decline in trade costs when trade costs are low. Finally, all firms agglomerate in the small country with lower production costs. If trade costs are very high, the innovation sector will locate in the small country. If trade costs take an intermediate value, it will locate in the large country. If trade costs become very low, it will re-locate in the small country. The growth rate moves non-monotonously in a W-shaped curve when there is a reduction in trade costs. This happens because the growth rate is affected by the number of manufacturing firms and the location of the innovation sector. |
| Keywords: | market size, wage differential, growth rates, innovation sector. |
| JEL: | F0 O31 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1116&r=dge |
| By: | Nuttapon Photchanaprasert |
| Abstract: | I theoretically analyze the effects of a strengthening IPR protection and an improvement of technology of innovation of offshoring on the rate of innovation offshoring, rate of imitation, rate of innovation, relative wages, real wages and domestic welfare. A North-South dynamic general equilibrium model of trade with endogenous imitation and innovation and production offshoring is constructed. To trade with lower Southern wages, Northern firms confront the problem of information leakage to the Southern firms and monitoring costs if they do offshore innovation and production. The model predicts that a strengthening of IPR protection decreases the rate of innovation and the rate of imitation but increases the rate of innovation offshoring. Northern real wages also decrease with a strengthening of IPR protection but Southern real wages increase. It may hurt the North but benefit the South. An improvement in technology of innovation offshoring increases the rate of innovation, the rate of imitation and the rate of innovation offshoring. Northern relative real wages decrease with such improvement but Southern real wages increase. It may benefit the North and the South. |
| Keywords: | offshoring, innovation, information leakage, productivity gap, welfare, trade policies |
| JEL: | F12 F13 F21 F23 D43 O31 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd10-185&r=dge |
| By: | Fabrice Collard (Department of Economics - University of Bern); Sujoy Mukerji (Department of Economics and University College - University of Oxford); Kevin Sheppard (Department of Economics and Oxford-Man Institute of Quantitative Finance - University of Oxford); Jean-Marc Tallon (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | This paper assesses the quantitative impact of ambiguity on the historically observed equity premium. We consider a Lucas-tree pure-exchange economy with a single agent where we introduce two key non-standard assumptions. First, the agent's beliefs about the dividend/consumption process is ambiguous. Second, the agent's preferences are sensitive to this ambiguity. We further extend the model to allow for uncertainty about the magnitude of the persistence of the latent state. The agent's beliefs are ambiguous due to the uncertainty about the conditional mean of the probability distribution on consumption and dividends in the next period. This results in an endogenously volatile and (counter-) cyclical equity premium. We calibrate the level of ambiguity aversion to match only the first moment of the risk-free rate in data, and ambiguity to match the uncertainty conditional on the historical growth path, and evaluate the model using moderate levels of risk aversion. We find that this simple modification of Lucas-tree model accounts for a large part of the historical equity premium, both in terms of its level and variation over time. |
| Keywords: | Equity premium, ambiguity. |
| JEL: | G12 E21 D81 C63 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:11032&r=dge |
| By: | Bruno Bouchard; Marcel Nutz |
| Abstract: | We provide a dynamic programming principle for stochastic optimal control problems with expectation constraints. A weak formulation, using test functions and a probabilistic relaxation of the constraint, avoids restrictions related to a measurable selection but still implies the Hamilton-Jacobi-Bellman equation in the viscosity sense. We treat open state constraints as a special case of expectation constraints and prove a comparison theorem to obtain the equation for closed state constraints. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1105.0745&r=dge |