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on Dynamic General Equilibrium |
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Issue of 2011‒09‒05
fourteen papers chosen by |
| By: | Bom, P.R.D.; Ligthart, J.E. (Tilburg University, Center for Economic Research) |
| Abstract: | We study the dynamic output and welfare effects of public infrastructure investment under a balanced budget fiscal rule, using an overlapping generations model of a small open economy. The government finances public investment by employing distortionary labor taxes. We find a negative short-run output multiplier, which (in absolute terms) exceeds the positive long-run output multiplier. In contrast to conventional results regarding public investment shocks, we obtain dampened cycles in output and the labor tax rate. The cyclical dynamics are induced by the interaction of households' finite life spans, the wealth effect on labor supply, and the balanced budget fiscal rule. Finally, we show that, for a plausible calibration of our model, households' lifetime welfare improves. |
| Keywords: | Infrastructure capital;public investment;distortionary taxation;fiscal policy;Yaari-Blanchard overlapping generations. |
| JEL: | E62 F41 H54 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011092&r=dge |
| By: | Stähler, Nikolai |
| Abstract: | The current crisis and discussions, in the euro area in particular, show that sovereign debt crises/defaults are no longer restricted to developing economies. After crises in many Latin American countries, the literature on quantitative dynamic macro-models of sovereign default has been advancing. Current debate should take notice of the findings from this literature - an extensive overview of which has been provided in this paper. This paper also discusses the difficulties involved in, but also possibilities of, integrating this type of model in standard business cycle models (RBC and DSGE models). This is likely to be particularly helpful when using models to analyse upcoming issues in the euro area, such as a suitable (sovereign) insolvency law or the assumption of joint liability. -- |
| Keywords: | Sovereign Debt,Default Risk,Endogenous Borrowing Constraints,Small Open Economy |
| JEL: | F34 F41 E21 E32 G10 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201117&r=dge |
| By: | Peter Haan; Victoria Prowse |
| Abstract: | How can public pension systems be reformed to ensure fiscal stability in the face of increasing life expectancy? To address this pressing open question in public finance, we estimate a life-cycle model in which the optimal employment, retirement and consumption decisions of forward-looking individuals depend, inter alia, on life expectancy and the design of the public pension system. We calculate that, in the case of Germany, the fiscal consequences of the 6.4 year increase in age 65 life expectancy anticipated to occur over the 40 years that separate the 1942 and 1982 birth cohorts can be offset by either an increase of 4.34 years in the full pensionable age or a cut of 37.7% in the per-year value of public pension benefits. Of these two distinct policy approaches to coping with the fiscal consequences of improving longevity, increasing the full pensionable age generates the largest responses in labor supply and retirement behavior. |
| Keywords: | Life expectancy, public pension reform, retirement, employment, life-cycle models, consumption, tax and transfer system |
| JEL: | D91 J11 J22 J26 J64 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp396&r=dge |
| By: | Oguro, Kazumasa; Sato, Motohiro |
| Abstract: | In this paper, we analyze the relationship between interest rates on government bonds (GB) and fiscal consolidation rule by using an overlapping generation model with endogenous and stochastic growth settings. Our key findings are summarized as follows. First, interest rates of GB may be declining as public debt accumulates relative to private capital, as opposed to the conventional view that buildup of public debt accompanies a rise in interest rates. Second, fiscal consolidation rule plays a key role in determining interest rates in equilibrium. Third, the economy may exhibit discrete changes with interest rates diverging, implying that our observation of relatively low GB interest rates does not assure the continuation of that trend in the future. Fourth, a preventive tax increase to contain public debt at sustainable levels will not gain the political support of existing generations, whose life span is limited. Citizens prefer to shift the ultimate burden of public debt to future generations. |
| Keywords: | Overlapping generation model, interest rate on government bond, fiscal consolidation rule, default risk |
| JEL: | E17 H30 H5 H60 E62 H63 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:hit:cisdps:517&r=dge |
| By: | Sergio Salgado I. |
| Abstract: | In this paper I study a new business cycle fact recently documented by Bachmann and Bayer (2011): the dispersion of the distribution of investment rates across firms is procyclical. Using data from German firm, the authors find a correlation coefficient between the standard deviation of investment distribution and the cyclical component of output of 0.45. They also report a correlation coefficient for US economy of 0.33. Using a model similar to Khan and Thomas's (2003), that is standard to heterogeneous firms literature, I obtain a correlation coefficient of 0.57. In the model I also consider a government sector that collects taxes on corporate profits. In such model, with a corporate tax of 23.5%, which corresponds to German economy, I obtain a correlation coefficient of 0.46 and when I consider a corporate tax rate of 18.79% that corresponds to US economy I find a correlation coefficient of 0.51. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:638&r=dge |
| By: | Carrillo-Tudela, Carlos (University of Essex); Kaas, Leo (University of Konstanz) |
| Abstract: | We consider a model of on-the-job search where firms offer long-term wage contracts to workers of different ability. Firms do not observe worker ability upon hiring but learn it gradually over time. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts designed to retain high-ability workers only. Low-ability workers have higher turnover rates, they are more often employed in low-wage firms and face an earnings distribution with a higher frictional component. Furthermore, positive sorting obtains in equilibrium. |
| Keywords: | adverse selection, on-the-job search, wage dispersion, sorting |
| JEL: | D82 J63 J64 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5936&r=dge |
| By: | Juan Pablo Medina; Alberto Naudon |
| Abstract: | In this paper we explore the channels through which the terms of trade affect labor market variables in an emerging economy such as Chile. In doing so, we analyze the cyclical properties of labor market variables and use a structural vector autoregressive model to analyze the empirical responses of variables such as unemployment rate, job finding rate, sectoral employment and sectoral average labor productivity to terms of trade shocks in the case of Chile, which come from two main sources: the mining and the non-mining sector. We then develop a multi-sector model with search frictions that generates fluctuations in the unemployment rate. Using a calibrated version of this model for Chile, we analyze the ability of the model to replicate the observed responses of labor market variables to terms of trade shocks. We find that the model can predict quantitatively the effects of labor market variables to non-mining terms of trade shocks. Although the model is able to obtain responses to mining price changes qualitatively similar to what is estimated in the data, it falls short to the estimated magnitude of reduction in unemployment that follows a rise in mining prices. The presence of very high wage rigidity can help to generate a sharper fall in unemployment after a mining terms of trade rise. Finally, the model remarks a more intense sectoral labor reallocation in response to terms of trade shocks than the amount estimated in the data. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:637&r=dge |
| By: | Hsu, Minchung |
| Abstract: | Starr-McCluer (1996) documented an empirical finding that the US households covered by health insurance saved more than those without coverage, which is inconsistent with the standard consumption-saving theory. This study provides a structural analysis and suggests that institutional factors, in particular, a social insurance (safety net) system and an employment-based health insurance system, can account for this puzzling finding. A dynamic stochastic general equilibrium model is built that incorporates these two institutions with heterogeneous agents making decisions regarding saving, labor supply and health insurance endogenously when they are young. The model, in which agents save in a precautionary manner, can generate Starr-McCluer's empirical finding and it indicates that the empirical finding is not inconsistent with the standard theory of saving under uncertainty. Counterfactual experiments are performed to provide implications for empirical analyses and illustrate the danger of empirical work without a sound theoretical background. |
| Keywords: | Precautionary Savings; Social Insurance; Employment-based Health Insurance |
| JEL: | I38 E21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32975&r=dge |
| By: | Mikhail Golosov; John Hassler; Per Krusell; Aleh Tsyvinski |
| Abstract: | We analyze a dynamic stochastic general-equilibrium (DSGE) model with an externality through climate change from using fossil energy. A central result of our paper is an analytical derivation of a simple formula for the marginal externality damage of emissions. This formula, which holds under quite plausible assumptions, reveals that the damage is proportional to current GDP, with the proportion depending only on three factors: (i) discounting, (ii) the expected damage elasticity (how many percent of the output flow is lost from an extra unit of carbon in the atmosphere), and (iii) the structure of carbon depreciation in the atmosphere. Very importantly, future values of output, consumption, and the atmospheric CO2 concentration, as well as the paths of technology and population, and so on, all disappear from the formula. The optimal tax, using a standard Pigou argument, is then equal to this marginal externality. The simplicity of the formula allows the optimal tax to be easily parameterized and computed. Based on parameter estimates that rely on updated natural-science studies, we find that the optimal tax should be a bit higher than the median, or most well-known, estimates in the literature. We also show how the optimal taxes depend on the expectations and the possible resolution of the uncertainty regarding future damages. Finally, we compute the optimal and market paths for the use of energy and the corresponding climate change. |
| JEL: | E13 E17 E6 H23 Q28 Q4 Q5 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17348&r=dge |
| By: | Peter Bardsley; Nisvan Erkal; Nikos Nikiforakis; Tom Wilkening |
| Abstract: | This paper investigates the relationship between firm longevity and rat races in an environment where long-lived firms are operated by overlapping generations of short-lived players. We first present a complete information model in which workers in the young generation are offered employment contracts designed by the firms' owners who belong to the old generation. When old, employed workers are granted ownnership rights as long as the firm continues to operate. We test the theoretical predictions of the model in a laboratory experiment. In line with our model's predictions, as firm longevity increases, the recursive nature of the contracts leads to a rat race characterized by low wages, high effort levels, and rent dissipation |
| Keywords: | Overlapping-generations models; Recursive contracts; Rat races; Experiments |
| JEL: | C91 D02 D21 D86 D92 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1122&r=dge |
| By: | Anja Sautmann |
| Abstract: | If women marry younger than men, increased population growth causes a sur- plus of women in the marriage market. This paper introduces search frictions into a matching model with transferable utility and age-dependent match payos to study if this so-called marriage squeeze has caused a dowry \in ation" in India. Using data from Karnataka it is shown that the observed shifts in the age distributions and sex ratio of unmarried men and women during the marriage squeeze lead to higher dowries conditional on the partners' ages. A GMM estimate of the model parameters suggests that average dowries have increased as well. |
| Keywords: | # |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2011-12&r=dge |
| By: | James Costain (Banco de España, C/Alcalá 48, 28014 Madrid, Spain.); Anton Nakov (Banco de España, C/Alcalá 48, 28014 Madrid, Spain and European Central Bank.) |
| Abstract: | This paper proposes two models in which price stickiness arises endogenously even though firms are free to change their prices at zero physical cost. Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices. In our first specification, firms are assumed to play a dynamic logit equilibrium, which implies that big mistakes are less likely than small ones. The second specification derives logit behavior from an assumption that precision is costly. The empirical implications of the two versions of our model are very similar. Since firms making sufficiently large errors choose to adjust, both versions generate a strong "selection effect" in response to a nominal shock that eliminates most of the monetary nonneutrality found in the Calvo model. Thus the model implies that money shocks have little impact on the real economy, as in Golosov and Lucas (2007), but fits microdata better than their specification. JEL Classification: E31, D81, C72. |
| Keywords: | Logit equilibrium, state-dependent pricing, (S,s) adjustment, near rationality, information-constrained pricing. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111375&r=dge |
| By: | Stephane Auray (CREST (Ensai), Universite du Littoral Cote d'Opale (EQUIPPE), Universite de Shebrooke (GREDI) and CIRPEE); Aureline Eyquem (GATE, UMR 5824, Universite de Lyon, and Ecole Normale Superieure de Lyon, and GREDI); Paul Gomme (Concordia University and CIREQ) |
| Abstract: | Recent financial crises in Europe as well as the periodic battles in the U.S. over the debt ceiling point to the importance of fiscal discipline among developed countries. This paper develops an open economy model, calibrated to the U.S. and a subset of the EMU, to evaluate the impact of various permanent tax changes. The first set of experiments considers a targeted one percentage point reduction in the government deficit-to-GDP ratio through raising one of: the consumption tax, the labor income tax, or the capital income tax. In terms of welfare, the consumption tax is found to be the least costly of the tax increases. A second set of experiments looks at deficit-neutral tax changes: partially replacing the capital income tax with either a higher labor income tax or higher consumption tax; and partially replacing the labor income tax with an increased consumption tax. Reducing reliance on capital income taxation is welfare-enhancing, although it leads to short term losses. Reducing labor income taxation improves international competitiveness and is welfare-improving. |
| Keywords: | Fiscal policies, open economies, public deficits, tax reforms |
| JEL: | E31 E62 F41 |
| Date: | 2011–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:11004&r=dge |
| By: | Hwee Kwan Chow (School of Economics, Singapore Management University); Paul D. McNelis (SDepartment of Finance, Graduate School of Business Administration, Fordham University) |
| Abstract: | This paper uses a DSGE-VAR model to examine the managed exchange-rate system at work in Singapore and asks if the country has any reason to fear floating the exchange rate with a Taylor rule inflation-targeting mechanism that uses the short term interest rate instead of the exchange rate as the benchmark monetary policy instrument. Our simulation results show that the use of a more flexible exchange rate system will reduce volatility in inflation and investment but consumption volatility will increase. Overall, there are neither signi ficant welfare gains or losses in the regime shift. Given the highly open and trade dependent nature of the Singapore economy where the policy preference is for exchange rate stability, there is no impetus to abandon the present monetary regime. |
| JEL: | E52 E62 F41 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:29-2010&r=dge |