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on Dynamic General Equilibrium |
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Issue of 2007‒06‒30
eighteen papers chosen by |
| By: | Satyajit Chatterjee; Dean Corbae; Makoto Nakajima; Jose-Victor Rios-Rull |
| Abstract: | The authors study, theoretically and quantitatively, the general equilibrium of an economy in which households smooth consumption by means of both a riskless asset and unsecured loans with the option to default. The default option resembles a bankruptcy filing under Chapter 7 of the U.S. Bankruptcy Code. Competitive financial intermediaries offer a menu of loan sizes and interest rates wherein each loan makes zero profits. They prove the existence of a steady-state equilibrium and characterize the circumstances under which a household defaults on its loans. They show that their model accounts for the main statistics regarding bankruptcy and unsecured credit while matching key macroeconomic aggregates and the earnings and wealth distributions. They use this model to address the implications of a recent policy change that introduces a form of “means-testing” for households contemplating a Chapter 7 bankruptcy filing. They find that this policy change yields large welfare gains. |
| Date: | 2007 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:07-16&r=dge |
| By: | Francisco M. Gonzalez; Shouyong Shi |
| Abstract: | In this paper we consider learning from search as a mechanism to understand the relationship between unemployment duration and search outcomes as a labor market equilibrium. We rely on the assumption that workers do not have precise knowledge of their job finding probabilities and therefore, learn about them from their search histories. Embedding this assumption in a model of the labor market with directed search, we provide an equilibrium theory of declining reservation wages over unemployment spells. After each period of search, unemployed workers update their beliefs about the market matching efficiency. We characterize situations where reservation wages decline with unemployment duration. Consequently, the wage distribution is non-degenerate, despite the facts that matches are homogeneous and search is directed. Moreover, aggregate matching probability decreases with unemployment duration, in contrast to individual workers' matching probability, which increases over individual unemployment spells. The difficulty in establishing these results is that learning generates non-differentiable value functions and multiple solutions to a worker's optimization problem. We overcome this difficulty by exploiting a connection between convexity of a worker's value function and the property of supermodularity. |
| Keywords: | Reservation wages; Learning; Directed search; Supermodularity |
| JEL: | E24 D83 J64 |
| Date: | 2007–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-292&r=dge |
| By: | Pourpourides, Panayiotis M. |
| Abstract: | Despite the success of Walrasian equilibrium models in explaining economic growth facts they fail to simultaneously account for the cyclical behavior of wages and the skill premium. In this paper I calibrate and solve a general equilibrium implicit contracts model where the workers are in fixed supply, homogeneous in preferences and the wage is the only insurance device available to them. I show that the Pareto optimal allocation is able to capture the weak contemporaneous correlation of wages and the skill premium with output while performing relatively well in matching other basic macroeconomic regularities. The key aspects of the model are the contracts and the capital utilization margin, and not the skill-complementarity of capital. |
| Keywords: | Implicit Contracts; Wages; Wage Inequality; Skill Premium; Business Cycles; Capital-Skill Complementarity |
| JEL: | E10 E20 E32 E37 J31 J41 |
| Date: | 2007–06 |
| URL: | https://d.repec.org/n?u=RePEc:cdf:wpaper:2007/19&r=dge |
| By: | Gabriel Cuadra; Horacio Sapriza |
| Abstract: | Emerging economies usually experience procyclical public expenditures, tax rates and private consumption, countercyclical default risk, interest rate spreads and current account and higher volatility in consumption than in output. In this article we develop a dynamic stochastic equilibrium model of a small open economy with endogenous fiscal policy, endogenous default risk and country interest rate spreads in an incomplete credit markets framework that rationalizes these empirical findings. |
| Keywords: | Procyclical fiscal policy, Sovereign default |
| JEL: | F34 F41 |
| Date: | 2007–03 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2007-03&r=dge |
| By: | Josué Fernando Cortés Espada |
| Abstract: | This paper studies optimal fiscal policy in a small open economy model under incomplete financial markets, where interest rates, government spending and productivity are stochastic and taxes are distortionary. The contributions of the paper are twofold. First, I solve the Ramsey problem and characterize the properties of the optimal fiscal policy. Second, I show that the optimal fiscal policy consists in smoothing tax distortions over time. The income tax rate, and the public debt are very persistent irrespective of the degree of autocorrelation of the shocks generating aggregate fluctuations. The government finances an increase in government spending or a decrease in the tax base partly by increasing debt and partly by increasing the tax rate. |
| Keywords: | optimal fiscal policy, taxation, incomplete markets, debt policy |
| JEL: | E60 F34 F41 H21 |
| Date: | 2006–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2006-09&r=dge |
| By: | Josué Fernando Cortés Espada |
| Abstract: | This paper characterizes the behavior of debt and tax rates in a small open economy under both complete and incomplete markets. First, I show hat when the government follows an optimal fiscal policy and agents have access to complete markets, the value of the government’s debt portfolio is negatively correlated with government spending, and positively correlated with productivity and output, while output, labor, consumption and the tax rate are uncorrelated with government spending shocks. The stochastic processes followed by these variables inherit the serial-correlation properties of the stochastic process of the productivity shock. Second, I show that if agents can only buy and sell one-period risk-free bonds, public debt shows more persistence than other variables, and it is negatively correlated with productivity and output, and positively correlated with government spending. Moreover, the tax rate is positively correlated with government spending, while consumption is negatively correlated. |
| Keywords: | Complete markets, Incomplete markets, Optimal fiscal policy |
| JEL: | E60 F34 F41 G15 H21 |
| Date: | 2007–03 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2007-07&r=dge |
| By: | Selim, Sheikh (Cardiff Business School) |
| Abstract: | In this paper we show that in a two sector economy with heterogeneous agents and competitive markets, in a steady state the optimal capital income tax rate is in general different from zero. The optimal tax policy in this setting depends on the relative price difference. In a two sector economy capital and labour margins are interdependent, which is why a difference between investment good's price and consumption good's price allows the government to tax capital income in one sector and undo the tax distortion by differential labour income taxation. This policy serves efficiency purpose as it restores production efficiency. For instance, if investment goods are more expensive than consumption goods, it is optimal to tax capital income in consumption sector, and set zero capital income tax and lower labour income tax in investment sector. This policy discourages work and investment in consumption sector, and encourages agents to shift capital and working time to investment sector. This increases production in investment sector and restores production efficiency. In a model with two classes of agents, we show that this policy can also serve redistributive purpose. |
| Keywords: | Optimal taxation; Ramsey problem; Two Sector model |
| JEL: | C61 E13 E62 H21 |
| Date: | 2007–06 |
| URL: | https://d.repec.org/n?u=RePEc:cdf:wpaper:2007/18&r=dge |
| By: | Jacco Thijssen |
| Abstract: | This paper analyses the accuracy of replicating portfolio methods in predicting asset prices. In a two-period, general equilibrium model with incomplete financial markets and heterogeneous agents, a computational study is conducted under various distributional assumptions. We focus on the price of a call option on an underlying risky asset. There is evidence that the value of the (approximate) replicating portfolio is a good approximation for the general equilibrium price for CRRA preferences, but not for CARA preferences. Furthermore, there is strong evidence that the introduction of the call option reduces market incompleteness and that the price of the underlying asset is unchanged. There is, however, inconclusive evidence on whether the availability of the option increases agents' welfare. |
| Keywords: | Asset pricing, general equilibrium, incomplete markets |
| JEL: | D52 G12 |
| Date: | 2007–06 |
| URL: | https://d.repec.org/n?u=RePEc:yor:yorken:07/16&r=dge |
| By: | Kazi Iqbal (World Bank); Stephen Turnovsky (University of Washington) |
| Abstract: | This paper studies optimal taxation in the context of provision of public goods when benefits are age-dependent. We develop a two period overlapping generations model with endogenous labor supply in both periods. We examine how the optimal Ramsey capital and labor income taxes change when the government fails to choose the optimal public provision for each cohort. The deviations of public expenditure from the optimal level create distortions at the intra and inter temporal margins and taxes are required to correct these distortions. We show that regardless of preferences, the government may choose to tax capital in the long run if spending on each cohort is not optimal. We also show that when sufficient tax instruments are available the Ramsey equilibrium can attain the first-best optimum. |
| Date: | 2007–06 |
| URL: | https://d.repec.org/n?u=RePEc:udb:wpaper:uwec-2007-21&r=dge |
| By: | Julio J. Rotemberg |
| Abstract: | This paper presents a model in which firms recruit both unemployed and employed workers by posting vacancies. Firms act monopsonistically and set wages to retain their existing workers as well as to attract new ones. The model differs from Burdett and Mortensen (1998) in that its assumptions ensure that there is an equilibrium where all firms pay the same wage. The paper analyzes the response of this wage to exogenous changes in the marginal revenue product of labor. The paper finds parameters for which the response of wages is modest relative to the response of employment, as appears to be the case in U.S. data and shows that the insistence by workers that firms act with a minimal level of altruism can be a source of dampened wage responses. The paper also considers a setting where this minimal level of altruism is subject to fluctuations and shows that, for certain parameters, the model can explain both the standard deviations of employment and wages and the correlation between these two series over time. |
| Keywords: | Employment ; Unemployment ; Wages |
| Date: | 2007 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:07-5&r=dge |
| By: | Arturo Antón Sarabia |
| Abstract: | In a recent paper, Gertler, Gilchrist and Natalucci (2006) report that the financial accelerator mechanism may account for about half of the fall in output and investment observed during the Korean crisis of 1997-1998. Using the business cycle accounting method of Chari, Kehoe and McGrattan (2006a), this paper finds that such a result is very sensitive to the value of Tobin’s q elasticity. The implication is that the adjustment cost function may be crucial in terms of the relative importance of distortions for explaining business cycle fluctuations. |
| Keywords: | Business cycle accounting, Financial accelerator, Korean crisis |
| JEL: | E1 E32 F4 |
| Date: | 2007–03 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2007-06&r=dge |
| By: | von Greiff, Camilo (Dept. of Economics, Stockholm University) |
| Abstract: | The paper combines optimal taxation theory with human capital theory and develops a theoretical model with endogenous wages and education decision, in which redistributive policy experiments are carried out and assessed. It is argued that general equilibrium effects of labor income taxation on wages may counteract fiscal redistribution. It is also shown that education subsidies may only benefit skilled workers, suggesting that this subsidy can merely be viewed as a redistribution from unskilled to skilled individuals. Therefore, optimal policy involves a lump-sum education tax in the form of a negative education subsidy. |
| Keywords: | Income Redistribution; Education Subsidies |
| JEL: | H21 H23 |
| Date: | 2007–06–27 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:sunrpe:2007_0012&r=dge |
| By: | Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]) |
| Abstract: | We propose an evaluation of the main empirical approaches used in the literature to estimate the contribution of public capital stock to growth and private factors' productivity. Our analysis is based on the replication of these approaches on pseudo-samples generated using a stochastic general equilibrium model, built as to reproduce the main long-run relations observed in US post-war historical data. <br />The results suggest that the production function approach may not be reliable to estimate this contribution. In our model, this approach largely overestimates the public capital elasticity, given the presence of a common stochastic trend shared by all non-stationary inputs |
| Keywords: | Infrastructures, Public capital, Cointegrated regressors.. |
| Date: | 2007–06–22 |
| URL: | https://d.repec.org/n?u=RePEc:hal:papers:halshs-00156684_v1&r=dge |
| By: | Cristina Arellano; Yan Bai; Jing Zhang |
| Abstract: | This paper studies how the degree of contract enforcement in a country influences firms’ financing decisions. We first document empirical facts on debt financing for two new firm-level datasets in the United Kingdom and Ecuador. In the United Kingdom, small firms borrow more relative to their assets than large firms, whereas in Ecuador small firms borrow less. We build a dynamic model of firms’ debt financing where debt is constrained by the likelihood of default, which varies across firms and economies with different degrees of enforcement. Because of their low firm values, small firms are mostly affected by abundance or scarcity of economy-wide loans generated by weak or strong contract enforcement. We calibrate our model to the datasets in the two countries and find that our mechanism can quantitatively account for the patterns observed in the data. |
| Date: | 2007 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmsr:392&r=dge |
| By: | Bergvall, Anders (National Institute of Economic Research); Forsfält, Tomas (National Institute of Economic Research); Hjelm, Göran (National Institute of Economic Research); Nilsson, Jonny (National Institute of Economic Research); Vartiainen, Juhana (National Institute of Economic Research) |
| Abstract: | KIMOD 1.0 is an annual large-scale macroeconomic model2 of the Swedish economy and is the result of a project that started in 2002 at the National Institute of Economic Research (NIER) in Sweden. In 2003, the model was used for the first time in policy analysis (see NIER, 2003) and from 2004 onwards it has also been applied for forecasting purposes. In November 2005, the time had come to document the first official version of the model, KIMOD 1.0. This document is a resulting part of the documentation project. |
| Date: | 2007–01–15 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nierwp:0100&r=dge |
| By: | KOBAYASHI Keiichiro; INABA Masaru (RIETI) |
| Abstract: | The US Great Depression and Japan's lost decade in the 1990s are both characterized as persistent stagnations of economies with debt-ridden corporate sectors subsequent to asset-price collapses. We propose a simple model, in which increases in corporate debt (and/or fluctuations in expectations about the future state of the economy) can account for these episodes. Key ingredients are the assumptions that firms are subject to collateral constraint on liquidity for financing the inputs, and that the firms can hold other firms' stocks as their assets and use them as the collateral. Collateral constraint on inputs interlinks the financial market inefficiency with the factor market inefficiencies; and that the corporate stocks are used as collateral generates an externality of self-reference in stock prices and production, that is, higher stock prices loosen the collateral constraint and lead to higher efficiencies in production, which in turn justify the higher stock prices. It is shown that there exists a continuum of steady-state equilibria indexed by the amount of debt that the firms owe to the consumers: A steady state with a larger debt can be called a debt-ridden equilibrium, since it has more inefficient factor markets, produces less output, and is characterized by lower stock prices. The model provides the policy implication that debt reduction in the corporate sector at the expense of consumers (or taxpayers) may be welfare-improving when the firms are debt-ridden. |
| Date: | 2007–06 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:07035&r=dge |
| By: | Djumashev, R |
| Abstract: | Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates. |
| Keywords: | Corruption; growth; public goods; tax evasion; uncertainty |
| JEL: | E20 O16 O41 D92 D72 E60 H26 G11 H41 |
| Date: | 2007–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:3716&r=dge |
| By: | Pierre-André Jouvet; Pierre Pestieau; Grégory Ponthière |
| Abstract: | Whereas existing OLG models with endogenous longevity neglect the impact of environmental quality on mortality, this paper studies the design of the optimal public intervention in a two-period OLG model where longevity is influenced positively by health expenditures, but negatively by pollution due to production. It is shown that if individuals, when choosing how much to spend on health, do not internalize the impact of their decision on environmental quality (i.e. the space available for each person), the decentralization of the social optimum requires a tax not only on capital income, but also, on health expenditures. The sensitivity of the optimal second-best public intervention is also explored numerically.. |
| Date: | 2007 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2007-19&r=dge |