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on Dynamic General Equilibrium |
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Issue of 2016‒06‒18
27 papers chosen by |
| By: | Benedetto Molinari (University of Malaga, Spain; The Rimini Centre for Economic Analysis, Italy); Francesco Turino (Universitat d'Alacant, Spain) |
| Abstract: | Aggregate data reveal that in the U.S. advertising absorbs approximately 2% of GDP and has a well-defined pattern over the business cycle, being strongly procyclical and highly volatile. Because the purpose of brand advertising is to foster sales, we ask whether such spending appreciably affects the dynamics of aggregate consumption and, through this avenue, the economic activity. This question is addressed by developing a dynamic general equilibrium model in which households' preferences for differentiated goods depend on the intensity of brand advertising, which is endogenously determined by profit-maximizing firms. Once the model is estimated to match the U.S. economy, it argues that in the long run the presence of advertising raises aggregate consumption, investment, and hours worked, eventually fostering the whole economic activity. We also find that advertising has a relevant impact on fluctuations in consumption and investment over the business cycle. All of the above mentioned effects are proven to depend crucially on the degree of competitiveness of advertising at the firm level. |
| Date: | 2016–06 |
| URL: | https://d.repec.org/n?u=RePEc:rim:rimwps:16-15&r=dge |
| By: | Hosseini, Roozbeh; Shourideh, Ali |
| Abstract: | We study policy reforms aimed at overhauling retirement financing. We develop a novel approach by considering optimal reforms: policy reforms that minimize the cost for the government while respecting the distribution of welfare in the economy. Our model is an OLG model with life-cycle features and bequest motives where individuals are heterogeneous in their earning ability and mortality. Theoretically, we show that due to the negative correlation between earnings ability and mortality, postretirement distortions to saving decisions are a robust feature of any optimal policy. We, then, use this framework to quantitatively analyze optimal reforms. Our quantitative exercise shows that an optimal reform relative to the status-quo must have three key features: First, post-retirement assets must be subsidized while bequests must be taxed. On average, optimal marginal subsidies on assets for individuals above age 65 is 3.2 percent, while optimal marginal tax on their bequest is 60 percent. Second, pre-retirement transfers must increase while social security benefits must become less generous in the aggregate and more progressive towards low income groups. Finally, earnings tax reform does not contribute to optimal reforms, i.e., optimal marginal taxes on earnings remain very close to the status-quo. The optimal policies reduce the present discounted value of net tax and transfers to each generation by 15 percent. |
| Keywords: | Retirement, Optimal Taxation, Social Security |
| JEL: | E6 H21 H55 |
| Date: | 2016–01–19 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:71613&r=dge |
| By: | Chun-Hung Kuo (International Univeristy of Japan); Hiroaki Miyamoto (The University of Tokyo) |
| Abstract: | This paper develops a dynamic stochastic general equilibrium model with labor market frictions and nominal wage rigidity. We estimate our model for Japan's economy using Bayesian methods. This allows us to estimate the structural parameters of the Japanese economy, the unobservable shocks and examine their transmission mechanism. We can also study how wage rigidity affects overall model performance. Our analysis demonstrates the importance of including nominal wage rigidity in explaining the Japanese data. We find that while nominal wage rigidity plays only a trivial role in inflation dynamics, it is crucial in determining the response of labor market variables to structural shocks. |
| Keywords: | DSGE models, Bayesian estimation, Labor market search, Wage rigidity |
| JEL: | E24 E32 J64 |
| Date: | 2016–05 |
| URL: | https://d.repec.org/n?u=RePEc:iuj:wpaper:ems_2016_06&r=dge |
| By: | Darracq Pariès, Matthieu; Jacquinot, Pascal; Papadopoulou, Niki |
| Abstract: | The euro area experience during the financial crisis highlighted the importance of financial and sovereign risk factors in macroeconomic propagation, as well as the constraints that bank lending fragmentation would pose for monetary policy conduct in a currency union. We design a 6-region multi-country DSGE model which provides a structural interpretation of the salient features of these developments. The model spans the relevant "financial wedges" at play during the crisis, together with its cross-country heterogeneity within the euro area, focusing on Ger- many, France, Italy, Spain, and rest-of-euro area. We construct three stylised macro-financial scenarios as a synopsis of the euro area financial crisis and argue that the adverse interactions between sovereign, banking and corporate risk, can account to a large extent for the financial repression and poor economic performance observed in some parts of the euro area. JEL Classification: E4, E5, F4 |
| Keywords: | bank lending rates, banking, cross-country spillovers, DSGE models, financial regulation |
| Date: | 2016–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20161891&r=dge |
| By: | Perri, Fabrizio (Federal Reserve Bank of Minneapolis); Krueger, Dirk (University of Pennsylvania); Mitman, Kurt (IIES) |
| Abstract: | The goal of this chapter is to study how, and by how much, household income, wealth, and preference heterogeneity amplify and propagate a macroeconomic shock. We focus on the U.S. Great Recession of 2007-2009 and proceed in two steps. First, using data from the Panel Study of Income Dynamics, we document the patterns of household income, consumption and wealth inequality before and during the Great Recession. We then investigate how households in different segments of the wealth distribution were affected by income declines, and how they changed their expenditures differentially during the aggregate downturn. Motivated by this evidence, we study several variants of a standard heterogeneous household model with aggregate shocks and an endogenous cross-sectional wealth distribution. Our key finding is that wealth inequality can significantly amplify the impact of an aggregate shock, and it does so if the distribution features a sufficiently large fraction of households with very little net worth that sharply increase their saving (i.e. they are not hand-to mouth) as the recession hits. We document that both these features are observed in the PSID. We also investigate the role that social insurance policies, such as unemployment insurance, play in shaping the cross-sectional income and wealth distribution, and through it, the dynamics of business cycles. |
| Keywords: | Recessions; Wealth Inequality; Social Insurance |
| JEL: | E21 E32 J65 |
| Date: | 2016–06–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmsr:529&r=dge |
| By: | Jacek Suda; Marek Antosiewicz |
| Abstract: | We study steady state and business cycle properties of a model with heterogeneous firms and on-the-job search in the spirit of Moscarini and Postel-Vinay (2012). We extend the setup by including capital in the production function and show how this change influences model properties. The model is solved using a novel numerical method, projection within perturbation, which uses Chebyshev polynomial approximation and Clenshaw-Curtis quadrature for dealing with heterogeneity. We analyze worker flows between firms, distribution of firm size and wages, and study how productivity and other shocks affect them. When we introduce a working capital channel into the model we find that costly borrowing that finances firms' wage and vacancy bill shifts the distribution of firms to the right. |
| Keywords: | job search, business cycle, unemployment, computation method, heterogeneous firms |
| JEL: | E32 J31 J64 |
| Date: | 2016–05 |
| URL: | https://d.repec.org/n?u=RePEc:ibt:wpaper:wp072016&r=dge |
| By: | Daniel Borowczyk-Martins (Département d'économie); Etienne Lalé (Department of Economics (University of Bristol)) |
| Abstract: | Employed individuals in the U.S. are increasingly more likely to work part-time involuntarily than to be unemployed. Spells of involuntary part-time work are different from unemployment spells: a full-time worker who takes on a part-time job suffers an earnings loss while remaining employed, and is unlikely to receive income compensation from publicly-provided insurance programs.We analyze these differences through the lens of an incomplete-market, job-search model featuring unemployment risk alongside an additional risk of involuntary part-time employment.A calibration of the model consistent with U.S. institutions and labor-market dynamics shows that involuntary part-time work generates lower welfare losses relative to unemployment. This finding relies critically on the much higher probability to return to full-time employment from part-time work. We interpret it as a premium in access to full-time work faced by involuntary part-time workers, and use our model to tabulate its value in consumption-equivalent units. |
| Keywords: | Involuntary part-time work; Unemployment; Welfare |
| Date: | 2016–06 |
| URL: | https://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/4f4eu80n0h8r28g6dadlk02mtb&r=dge |
| By: | Marta Arespa (Universitat de Barcelona); Diego Gruber (Kernel Analytics) |
| Abstract: | Two puzzling facts of international real business cycles are 1) weak or negative correlations between the terms of trade and output, and 2) a rise in relative consumption for countries where national goods become relatively more expensive. We show these puzzles either vanish or become much weaker in recent data. We propose a new mechanism that generates endogenous international price movements that are consistent with both the "old" and the "new" facts. In this mechanism, firms operating in a monopolistically competitive environment adjust price and quality of their products in response to technological shocks. This model is consistent with the old facts if price levels are not adjusted for quality. Instead, if quality adjustments to price level are introduced, the model's properties are in line with the new facts. |
| Keywords: | Quality, International Real Business Cycle, Ba kus- Smith puzzle,Hedoni Prices. |
| JEL: | E31 F44 |
| Date: | 2016 |
| URL: | https://d.repec.org/n?u=RePEc:ewp:wpaper:340web&r=dge |
| By: | Mark Gertler; Christopher Huckfeldt; Antonella Trigari |
| Abstract: | Macroeconomic models often incorporate some form of wage stickiness to help account for employment fluctuations. However, a recent literature calls in to question this approach, citing evidence of new hire wage cyclicality from panel data studies as evidence for contractual wage flexibility for new hires, which is the relevant margin for employment volatility. We analyze data from the SIPP and find that the wages for new hires coming from unemployment are no more cyclical than those of existing workers, suggesting wages are sticky at the relevant margin. The new hire wage cyclicality found in earlier studies instead appears to reflect cyclical average wage gains of workers making job-to-job transitions, which we interpret as evidence of procyclical match quality for new hires from employment. We then develop a quantitative general equilibrium model with sticky wages via staggered contracting, on-the-job search, and variable match quality, and show that it can account for both the panel data evidence and aggregate labor market regularities. An additional implication of the model is that a sullying effect of recessions emerges, along the lines originally suggested by Barlevy (2002) |
| JEL: | E32 J3 J64 |
| Date: | 2016–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:22341&r=dge |
| By: | Lechthaler, Wolfgang; Mileva, Mariya |
| Abstract: | Motivated by the increased importance of trade between industrialized and less-developed countries, we build a DSGE model featuring comparative advantage and inter-industry trade to analyze business cycle dynamics. We show that productivity shocks lead to shifts in the relative demand of exporting and import-competing sectors, implying an important role for the mobility of workers across sectors. If workers are very mobile then the aggregate implications of the two-sector model are very similar to a one-sector model. If workers are very immobile then the two-sector model features smaller responses in GDP to domestic shocks but larger responses to foreign shocks, implying larger comovement of GDP across countries. |
| Keywords: | international business cycles,inter-industry trade,comparative advantage,wage inequality |
| JEL: | E20 E25 F41 F44 F62 |
| Date: | 2016 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:2041&r=dge |
| By: | Kaplan, Greg; Moll, Benjamin; Violante, Giovanni L. |
| Abstract: | We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where intertemporal substitution drives virtually all of the transmission from interest rates to consumption. JEL Classification: D14, D31, E21, E52 |
| Keywords: | consumption, earnings kurtosis., heterogeneous agents, inequality, liquidity, monetary policy, new keynesian |
| Date: | 2016–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20161899&r=dge |
| By: | Kohlbrecher, Britta; Merkl, Christian; Nordmeier, Daniela |
| Abstract: | There is strong empirical evidence for Cobb-Douglas matching functions. We show in this paper that this widely found relation between matches on the one hand and unemployment and vacancies on the other hand can be the result of different underlying mechanisms. Obviously, it can be generated by assuming a Cobb-Douglas matching function. Less obvious, the same relationship results from a vacancy free entry condition and idiosyncratic productivity shocks. A positive aggregate productivity shock leads to more vacancy posting, a shift of the idiosyncratic selection cutoff and thereby more hiring. We calibrate a model with both mechanisms to administrative German labor market data and show that idiosyncratic productivity for new contacts is an important driver of the elasticity of the job-finding rate with respect to market tightness. Accounting for idiosyncratic productivity can explain the observed negative time trend in estimated matching efficiency and asymmetric business cycle responses to large aggregate shocks. |
| Keywords: | matching function,idiosyncratic productivity,job creation,vacancies,time trend,asymmetries |
| JEL: | E24 E32 E20 E30 |
| Date: | 2016 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwqwdp:062016&r=dge |
| By: | Kankanamge, Sumudu; Weitzenblum, Thomas |
| Abstract: | This paper examines the optimal time-consistent unemployment insurance policy in a search economy with incomplete markets. In a context of repeated choice without a commitment device, we show that the optimal replacement rate depends on how frequently in time the policy can be revised. The exact relation is dependent on the political process: if the utilitarian welfare criterion is used, the optimal rate is higher the shorter the choice periodicity. Self-insurance reduces the need for the public scheme but mostly because the policy cannot be changed often enough. The comparison with an economy where a commitment device is assumed shows that the commitment rate is close to time-consistent rates with very long choice periodicities. |
| JEL: | C63 E61 J65 |
| Date: | 2016–05 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:30491&r=dge |
| By: | Boeing-Reicher, Claire A. (Kiel Institute for the World Economy); Caponi, Vincenzo (CREST) |
| Abstract: | Based on data from a cross section of U.S. metro areas, we show that public employment correlates negatively with business cycle volatility, hinting at a stabilizing effect of public employment, while public wages correlate weakly and positively with business cycle volatility, hinting at a destabilizing effect of public wages. To explain these relationships, we set up a search and matching model that contains a government sector and a role for government spending in product markets. This latter mechanism affects how the outside option behaves, and this mechanism can help a search and matching model to generate wage-reducing and stabilizing effects of public employment. Without this mechanism, a search and matching model cannot generate these effects. |
| Keywords: | public employment, public wages, business cycle volatility, crowding out, search and matching |
| JEL: | E32 E63 J21 |
| Date: | 2016–05 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp9965&r=dge |
| By: | Anna Kormilitsina (Southern Methodist University) |
| Abstract: | Strategies to identify fiscal policies and their effects often use an idea that fiscal instruments cannot respond to realizations of macroeconomic uncertainties within one quarter. I evaluate the validity of this assumption in a standard estimated DSGE model, where informational subperiods are introduced to ensure fiscal policy choices are made before the current state of economy realizes. At the same time, fiscal instruments are allowed to partially respond to macroeconomic shocks, and these responses are estimated using the Bayesian method. The resulting estimates indicate that within one quarter, government spending is adjusted in response to the neutral technology shock, and the tax rate responds to realizations of the preference shock. Moreover, the model capturing contemporaneous responses of fiscal instruments to shocks provides a better fit to the data than the model where fiscal variables are completely predetermined. These results suggest that treating fiscal instruments as predetermined is misleading. Instead of identifying fiscal shocks, such a strategy identifies a combination of the shocks and other macroeconomic uncertainties. I demonstrate that the positive consumption response to the government spending shock in a Cholesky identified structural VAR model reflects the response to the technology shock, while the consumption response is negative in the estimated model. |
| Keywords: | Government spending shocks, DSGE model estimation, Timing, Informational subperiods |
| JEL: | E32 C11 E62 |
| Date: | 2016–06 |
| URL: | https://d.repec.org/n?u=RePEc:smu:ecowpa:1607&r=dge |
| By: | Gabriel Felbermayr; Giammario Impullitti; Julien Prat |
| Abstract: | Wage inequality between similar workers has been on the rise in many rich countries. Recent empirical research suggests that heterogeneity in firm characteristics is crucial to understand wage dispersion. Lower trade costs as well as labor and product market reforms are considered critical drivers of inequality dynamics. We ask how these factors affect wage dispersion and how much of their effect on inequality is attributable to changes in wage dispersion between and within firms. To tackle these questions, we incorporate directed job search into a dynamic model of international trade where wage inequality results from the interplay of convex adjustment costs with firms' different hiring needs along their life cycles. Fitting the model to German linked employer-employee data for the years 1996-2009, we find that firm heterogeneity explains about half of the surge in inequality. The most important mechanism is tougher product market competition driven by domestic product market deregulation and, indirectly, by international trade. |
| Keywords: | Wage Inequality, International Trade, Directed Search, Firm Dynamics, Product and Labor Market Regulation. |
| Date: | 2016 |
| URL: | https://d.repec.org/n?u=RePEc:not:notgep:16/04&r=dge |
| By: | Ramezani, Fariba |
| Abstract: | The implementation of emissions reduction policies in Australia has experienced significant volatility over the last decade and remains in doubt due to different attitudes towards such policies by policy makers. One of the critical concerns of policy makers is that the costs of these policies would adversely affect economic activity and result in larger economic volatility. This paper investigates how business cycle fluctuations of the Australian economy, arising from productivity shocks, would be affected under an abatement reduction subsidy policy in which the regulator supports abatement efforts in each period. To answer this question, a real business cycle (RBC) model is applied. The responses of economic and environmental variables to unexpected productivity shocks are presented and compared. The results indicate that the regulator should adjust the abatement subsidy to be pro-cycle, i.e. increase during expansion and decrease during recessions. |
| Keywords: | emissions reduction policy, real business cycle, productivity shock, Australia, Environmental Economics and Policy, Resource /Energy Economics and Policy, C61, H23, O56, Q58, |
| Date: | 2016–02 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aare16:235583&r=dge |
| By: | Levine,Paul Leslie; Melina,Giovanni; Onder,Harun |
| Abstract: | This paper develops a multi-sector, small open economy Dynamic Stochastic General Equilibrium model, which includes the accumulation of human capital, built via public expenditures in education and health. Four possible fiscal rules are examined for total public investment in infrastructure, education, and health in the context of a sustainable resource fund: the spend-as-you-go, bird-in-hand spending; moderate front-loading, and permanent income hypothesis approaches. There are two dimensions to this exercise: the scaling effect, which describes the level of total investment, and the composition effect, which defines the structure of investment between infrastructure, education, and health. The model is applied to Kenya. For impacts on the non-resource economy, efficiency of spending, and sustainability of fiscal outcomes, the analysis finds that, although investment frontloading would bring high growth in the short term, the permanent income hypothesis approach is overall more desirable when fiscal sustainability concerns are taken into consideration. Finally, a balanced composition is the preferred structure of investment, given the permanent income hypothesis allocation of total investment over time. |
| Keywords: | Debt Markets,Economic Theory&Research,Access to Finance,Emerging Markets,Investment and Investment Climate |
| Date: | 2016–06–06 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:7695&r=dge |
| By: | Anna Kormilitsina (Southern Methodist University); Denis Nekipelov (University of Virginia) |
| Abstract: | Laplace-type estimator has become popular in applied macroeconomics, in particular for estimation of DSGE models. It is often obtained as the mean and variance of parameter's quasi-posterior distribution, which is defined using a classical estimation objective. We demonstrate that the objective must be properly scalded; otherwise, arbirarily small confidence intervals can be obtained if calculated directly from the quasiposterior distribution. We estimate a standard DSGE model and find that scaling up the objective may be useful in estimation with problematic parameter identification. In this case, however, it is important to adjust the quasi-posterior variance to obtain valid confidence intervals. |
| Keywords: | Laplace-type estimator, GMM, DSGE model |
| JEL: | C11 C13 C15 E30 |
| Date: | 2015–05 |
| URL: | https://d.repec.org/n?u=RePEc:smu:ecowpa:1510&r=dge |
| By: | Ca' Zorzi, Michele; Kolasa, Marcin; Rubaszek, Michał |
| Abstract: | We run a real exchange rate forecasting "horse race", which highlights that two principles hold. First, forecasts should not replicate the high volatility of exchange rates observed in sample. Second, models should exploit the mean reversion of the real exchange rate over long horizons. Abiding by these principles, an open-economy DSGE model performs well in real exchange rate forecasting. However, it fails to forecast nominal exchange rates better than the random walk. We find that the root cause is its inability to predict domestic and foreign inflation. This shortcoming leads us toward simpler ways to outperform the random walk. JEL Classification: C32, F31, F37 |
| Keywords: | exchange rates, forecasting, mean reversion, new open economy macroeconomics |
| Date: | 2016–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20161905&r=dge |
| By: | Kilponen, Juha; Orjasniemi, Seppo; Ripatti, Antti; Verona, Fabio |
| Abstract: | This paper presents Aino 2.0 – the dynamic stochastic general equilibrium (DSGE) model currently used at the Bank of Finland for forecasting and policy analysis. The paper provides a detailed theoretical description of the model, its estimation and how it can be used to interpret the evolution of the Finnish economy between 1995 and 2014, including the rise and fall of the electronics industry, the global financial crisis, and the stagnant growth performance since the end of the financial crisis. |
| Keywords: | DSGE model, Finnish economy, small open economy, Bayesian estimation, aggregate shocks |
| JEL: | C11 C53 E32 E37 |
| Date: | 2016–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:bof:bofrdp:2016_016&r=dge |
| By: | Acikgoz, Omer; Kahn, James |
| Abstract: | This paper develops a quantitative model that can rationally explain a sizeable part of the dramatic rise and fall of house prices in the 2000-2009 period. The model is driven by the assumption that the government cannot resist bailing out large financial institutions, but can mitigate the consequences by limiting financial institutions' risk-taking. An episode of regulatory forbearance, modeled as a relaxation of loan-to-value limits for conforming mortgages, is welfare-reducing, results in opportunistic behavior and, for plausible parameters inflates house prices and price/rent ratios by roughly twenty percent. This "boom" is followed by a collapse with high default rates. |
| Keywords: | Too-Big-to-Fail, Financial Crisis, House Prices |
| JEL: | E02 E21 E3 G21 R31 |
| Date: | 2016–06–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:71831&r=dge |
| By: | Taber, Christopher (University of Wisconsin-Madison); Vejlin, Rune Majlund (Aarhus University) |
| Abstract: | In this paper we develop a model capturing key features of the Roy model, a search model, compensating differentials, and human capital accumulation on-the-job. We establish which features of the model can be non-parametrically identified and which cannot. We estimate the model and use it to assess the relative contribution of the different factors for overall wage inequality. We find that Roy model inequality is the most important component accounting for the majority of wage variation. We also demonstrate that there is substantial interaction between the other features – most notably the importance of the job match obtained by search frictions varies from around 9% to around 29% depending on how we account for other features. Compensating differentials and search are both very important for explaining other features of the data such as the variation in utility. Search is important for turnover, but so is compensating differentials: 1/3 of all choices between two jobs would have resulted in a different outcome if the worker only cared about wages. |
| Keywords: | search, compensating differentials, Roy Model, wage inequality |
| JEL: | J31 J32 J24 |
| Date: | 2016–05 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp9975&r=dge |
| By: | Cipriani, Giam Pietro (University of Verona) |
| Abstract: | In this paper we consider the effects of population aging on a pay-as-you-go financed defined contributions pension scheme. We show that when retirement decisions are endogenous, aging increases the retirement age and the steady state level of capital. The effect on pension payouts is in general ambiguous, except for the solution of full retirement, when this effect is unambiguously negative. |
| Keywords: | retirement, aging, PAYG pensions, overlapping generations model |
| JEL: | J13 H55 |
| Date: | 2016–05 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp9969&r=dge |
| By: | Elton Dusha |
| Abstract: | This paper introduces reputation building in directed search with adverse selection. Seller types randomly determine the quality of the asset they hold, where both a seller's type and asset quality are private information. When an exchange occurs, the quality of the asset that a seller holds is revealed and the market updates its belief about a seller's type, which I refer to as reputation. Markets where sellers have a higher reputation have lower liquidity and higher prices. With reputational concerns, the downward liquidity distortions caused by adverse selection are exacerbated. Equilibrium selection is affected by the incentives sellers have to earn a higher reputation. Shocks to entry costs have larger effects when sellers can build a reputation through multiple matches with buyers. JEL classiffications: D82,G1. Key words: Keywords: directed search, adverse selection, reputation, liquidity. |
| Date: | 2015 |
| URL: | https://d.repec.org/n?u=RePEc:edj:ceauch:318&r=dge |
| By: | Samuel Danthine (CREST - ENSAI); Michel De Vroey (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | Our paper analyzes and compares two attempts at integrating unemployment in macroeconomics. The first, due to Diamond, consists in a search model exhibiting multiple equilibria and wherein cycles may be produced. The second is due to Andolfatto and Merz who, more or less simultaneously, constructed models enabling the integration of the matching function into RBC modeling. In the first sections, we present the methodology upon which our paper is based – Leijonhufvud’s decision-tree insight – and briefly describe these three economists’ motivations and the context in which they were working. We continue with recounting the birth and further development of the search paradigm upon which Diamond’s, Andolfatto’s and Merz’s attempts were based. These preliminaries settled we address the heart of the paper, the critical analysis of their respective contributions. Our interest lies specifically in how they made their way in the development of the field. We explain why Diamond’s model, which ambitioned to rival Lucas’s explanation of business fluctuations, did not live up to its author’s expectations. Andolfatto and Merz’s project was less ambitious yet their model became an established component of the RBC program – but at the price of abandoning several constitutive traits of the search approach. |
| Keywords: | Search and Matching models, Diamond, Lucas, Andolfatto, Merz, Real Business Cycle models, Matching function, Unemployment |
| JEL: | B21 B40 D83 E24 J64 |
| Date: | 2016–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:ctl:louvir:2016012&r=dge |
| By: | Blumkin, Tomer (Ben Gurion University); Danziger, Leif (Ben Gurion University); Yashiv, Eran (Tel Aviv University) |
| Abstract: | This paper provides a novel justification for a declining time profile of unemployment benefits that does not rely on moral hazard or consumption-smoothing considerations. We consider a simple search environment with homogeneous workers and low- and high-productivity firms. By introducing a declining time profile of benefits, the government can affect the equilibrium wage profile in a manner that enhances the sorting of workers across low- and high-productivity firms. We demonstrate that optimal government policy depends on the dispersion and skewness of the firms' productivity distribution. |
| JEL: | J64 J65 |
| Date: | 2016–05 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp9967&r=dge |