2014-12-19T03:10:25Z
http://oai.repec.openlib.org/oai.php
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:696-7092010-04-12RePEc:eee:dyncon
article
Productive consumption and population dynamics in an endogenous growth model: Demographic trends and human development aid in developing economies
We find that by endogenizing the population growth rate, a growth model under the productive consumption hypothesis is more tractable than models in previous studies and has interesting implications for population dynamics. In the zero-saving phase, multiple saddle point stable steady states may exist, and the population growth rate may rise or decline along a transition path. In the positive-saving phase, such a steady state may exist uniquely, and the population growth rate may decline. With phase switching, the population growth rate may follow an inverted U-shaped curve. Human development aid may help an economy escape from an underdevelopment trap.
Endogenous growth Population dynamics Productive consumption
4
2010
34
4
696
709
http://www.sciencedirect.com/science/article/B6V85-4XSJVHR-2/2/9e9040591810c51850f05c107b4bbd62
Daitoh, Ichiroh
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:314-3292010-04-12RePEc:eee:dyncon
article
The concavity of the value function of the extended Barro-Becker model
In this paper, the model of endogenous fertility proposed by Becker and Barro (1988), and extended by Benhabib and Nishimura (1989) is considered. However, in their model, the uniqueness of the optimal path may fail to hold. Furthermore, the value function may not be concave, because of the variable discount factor with respect to the choice made about fertility. In this paper, we show that under a set of mild conditions, based on the assumption that the cost of raising a child is non-constant, there exists a unique optimal path and the value function is concave and continuously differentiable. We also show the existence of the unique steady state and a monotonically optimal path, and confirm that the steady state is saddle point stable.
The uniqueness of the optimal path Endogenous fertility Economic growth model
3
2010
34
3
314
329
http://www.sciencedirect.com/science/article/B6V85-4X9TTPV-2/2/e3a85fee39123d39623665969554dbca
Qi, Ling
Kanaya, Sadao
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:207-2302010-04-12RePEc:eee:dyncon
article
Numerical solution of the Hamilton-Jacobi-Bellman formulation for continuous time mean variance asset allocation
We solve the optimal asset allocation problem using a mean variance approach. The original mean variance optimization problem can be embedded into a class of auxiliary stochastic linear-quadratic (LQ) problems using the method in Zhou and Li (2000) and Li and Ng (2000). We use a finite difference method with fully implicit timestepping to solve the resulting nonlinear Hamilton-Jacobi-Bellman (HJB) PDE, and present the solutions in terms of an efficient frontier and an optimal asset allocation strategy. The numerical scheme satisfies sufficient conditions to ensure convergence to the viscosity solution of the HJB PDE. We handle various constraints on the optimal policy. Numerical tests indicate that realistic constraints can have a dramatic effect on the optimal policy compared to the unconstrained solution.
Optimal control Mean variance tradeoff HJB equation Viscosity solution
2
2010
34
2
207
230
http://www.sciencedirect.com/science/article/B6V85-4X7GMB3-2/2/53fc34bc90ac867b7450cdfd2dd2ec44
Wang, J.
Forsyth, P.A.
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:780-7972010-04-12RePEc:eee:dyncon
article
Euro-dollar real exchange rate dynamics in an estimated two-country model: An assessment
Several theoretical contributions using two-country models have combined alternative forms of pricing under nominal rigidities with different asset market structures to explain real exchange rate dynamics. We estimate a two-country model using data for the United States and the Euro Area, and study the importance of such alternative assumptions in fitting the data. A model with local currency pricing and incomplete markets does a good job in explaining real exchange rate volatility, and fits the dynamics of domestic variables well. The complete markets assumption delivers a similar fit only when the structure of shocks is rich enough.
Real exchange rates Bayesian estimation Model comparison
4
2010
34
4
780
797
http://www.sciencedirect.com/science/article/B6V85-4XNF6C0-1/2/c6e18822a56a1cbbbb2c5cdee8468c9b
Rabanal, Pau
Tuesta, Vicente
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:604-6222010-04-12RePEc:eee:dyncon
article
Public versus private investment and growth in a hierarchical education system
The paper studies the interaction between public and private spending in a two-stage education framework (K-12 and tertiary education) and their effects on economic growth. We find that an increase in the overall education public spending crowds out the total level of private contributions and increases the share of resources that households devote to K-12 education. For a given public budget, a higher share of K-12 public funding induces higher private education spending overall, of which a larger share goes towards higher education. The model broadly matches data on education finance in the OECD countries. The calibrated parameter values suggest that at both stages public and private inputs are good yet imperfect substitutes, with a higher degree of complementarity in basic education. We show that the growth maximizing share of public spending devoted to K-12 should be high, irrespective of the size of the public budget. Using the calibrated model to compare the structure of education funding in the EU and the US, we find that, to maximize growth, high tax countries should use more of their public resources in tertiary education relative to low tax countries. This suggests that US efforts to improve K-12 education and the reform of higher education in Europe are consistent with the objective of increased economic growth.
Basic and advanced education Private spending Public education policies Balanced growth
4
2010
34
4
604
622
http://www.sciencedirect.com/science/article/B6V85-4XSJVHR-3/2/dc19b7080a3d144919c3976b51f5920c
Arcalean, Calin
Schiopu, Ioana
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:330-3532010-04-12RePEc:eee:dyncon
article
Optimal monetary policy in a new Keynesian model with job search
This paper studies the implications for optimal monetary policy of introducing job search into the new Keynesian framework. Using the linear-quadratic approach described by Benigno and Woodford (2008), we derive a utility-based loss function that indicates that the goals of policymakers can be represented by the stabilization of inflation, output, employment, and labor-market tightness. We characterize the policy that is optimal from a timeless perspective. Complete inflation stabilization is optimal if the distortions caused by monopolistic competition and search externalities are eliminated. In cases where search externalities prevail, either in or out of the steady state, complete inflation stabilization is no longer optimal, and the optimal responses of inflation to aggregate shocks may depend on labor-market fundamentals.
Monetary policy Job search Business cycle
3
2010
34
3
330
353
http://www.sciencedirect.com/science/article/B6V85-4XBR4HC-2/2/f633f01a004e8c03a2f9699f4fe28ce1
Tang, Jenn-Hong
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:875-8962010-04-12RePEc:eee:dyncon
article
The puzzling evolution of the home bias, information processing and financial openness
This paper explains the home equity bias and its puzzling evolution in a model where investors face an information constraint and have an initial local informational advantage. After financial liberalization, local investors have a magnified informational advantage since information processed under autarky remains useful after liberalization. A gradual shift towards foreign assets occurs as the relevance of autarkic information declines over time. In the long run, home bias remains large due to the interaction between information and portfolio choices. Empirical evidence supports the main predictions of our model, namely that bias increases with information capacity and decreases with financial openness.
Home bias Rational inattention Asymmetric information Portfolio choice
5
2010
34
5
875
896
http://www.sciencedirect.com/science/article/B6V85-4Y4R46T-1/2/8ba498ca3bf64addebef316fb3452a75
Mondria, Jordi
Wu, Thomas
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:984-10022010-04-12RePEc:eee:dyncon
article
Linear rational-expectations models with lagged expectations: A synthetic method
This paper contains a solution and an estimation method for linear rational-expectations models with lagged expectations. The solution method is a synthetic approach, combining state-space and infinite-MA representations with a simple system of linear equations. The advantage lies in the particular combination of methods from the literature, providing faster execution, more general applicability, and more straightforward usage than existing algorithms. Bayesian estimation methods are employed without the Kalman filter using a recursive algorithm to evaluate the likelihood function and are used to compare small-scale sticky-information and sticky-price DSGE models. Standard truncation methods are shown to not generally be innocuous.
Lagged expectations Linear rational-expectations models Sticky prices Sticky information Likelihood estimation
5
2010
34
5
984
1002
http://www.sciencedirect.com/science/article/B6V85-4Y65S8W-1/2/3c3fb47c369cf55b4ea5009e04e1ab0b
Meyer-Gohde, Alexander
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:951-9672010-04-12RePEc:eee:dyncon
article
A structural model of debt pricing with creditor-determined liquidation
This paper develops a continuous time asset pricing model of debt and equity in a framework where equityholders decide when to default but creditors decide when to liquidate. This framework is relevant for environments where creditors exert a significant influence on the timing of liquidation, such as those of countries with creditor-friendly bankruptcy regimes, or in the case of secured debt. The interaction between the decisions of equityholders and creditors introduces an agency problem whereby equityholders default too early and creditors subsequently liquidate too early. Our model allows us to assess quantitatively how this problem affects the timing of default and liquidation, optimal capital structure, and spreads.
Defaultable debt pricing Creditor induced liquidation Premature liquidation
5
2010
34
5
951
967
http://www.sciencedirect.com/science/article/B6V85-4Y6437R-1/2/ddafb2e59b8bd95fe0847e049a705fab
Bruche, Max
Naqvi, Hassan
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:404-4162010-04-12RePEc:eee:dyncon
article
An approximate consumption function
This paper proposes an approximation to the consumption function. The approximation is based on the analytic properties of the consumption function in the buffer-stock model. In such model, the consumption function is increasing and concave and its derivative is bounded from above and below. We compare the approximation with the consumption function obtained using the endogenous grid-points algorithm and show that using the former or the latter for estimating the Euler equation leads to very similar results.
Buffer stock model of saving Computational methods Approximation methods and estimation
3
2010
34
3
404
416
http://www.sciencedirect.com/science/article/B6V85-4XBR4HC-4/2/1da53034beec1b410fafedeef8efd7d1
Padula, Mario
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:281-2952010-04-12RePEc:eee:dyncon
article
New Keynesian versus old Keynesian government spending multipliers
Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modelling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically estimated and widely cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large and with private sector employment impacts likely to be even smaller. We investigate the sensitivity of our findings with regard to the response of monetary policy, the zero bound on nominal interest rates and the inclusion of an empirically relevant degree of rule-of-thumb behaviour in the new Keynesian model. In addition, we relate our findings using estimated structural macroeconomic models to the recent literature using reduced-form regression techniques.
E62 E63 Fiscal policy Fiscal stimulus Government spending multipliers Crowding-out New-Keynesian models
3
2010
34
3
281
295
http://www.sciencedirect.com/science/article/B6V85-4YGGJ4V-1/2/5ab71b33410e3f6753ce1c6489b606c9
Cogan, John F.
Cwik, Tobias
Taylor, John B.
Wieland, Volker
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:623-6352010-04-12RePEc:eee:dyncon
article
Indeterminacy and the elasticity of substitution in one-sector models
This paper introduces a new production externality via factor substitution and explores its effects on generating indeterminacy in one-sector growth models. With the elasticity of substitution depends on the average level of capital intensity, indeterminacy is possible as long as the steady-state level of capital is below the normalized level of the CES production function. Given that the elasticity of factor substitution is decreasing in capital and the marginal product of capital is decreasing in terms of the elasticity, indeterminacy can occur because efficient factor substitution from capital deepening offsets the diminishing returns of capital.
Elasticity of substitution Indeterminacy Normalized CES production function
4
2010
34
4
623
635
http://www.sciencedirect.com/science/article/B6V85-4XJP3VB-2/2/a042d01c3b12ebd312acaadde1716779
Wong, Tsz-Nga
Yip, Chong K.
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:743-7642010-04-12RePEc:eee:dyncon
article
Heterogeneous speculators, endogenous fluctuations and interacting markets: A model of stock prices and exchange rates
We develop a discrete-time model in which the stock markets of two countries are linked via and with the foreign exchange market. The foreign exchange market is characterized by nonlinear interactions between technical and fundamental traders. Such interactions may generate complex dynamics and recurrent switching between "bull" and "bear" market phases via a well-known pitchfork and period-doubling bifurcation path, when technical traders become more aggressive. The two stock markets are populated by fundamentalists, and prices tend to evolve towards stable steady states, driven by linear laws of motion. A connection between such markets is established by allowing investors to trade abroad, and the resulting three-dimensional dynamical system is analyzed. One goal of our paper is to explore potential spill-over effects between foreign exchange and stock markets. A second, related goal is to study how the bifurcation sequence which characterizes the market with heterogeneous speculators is modified in the presence of interactions with other markets.
Financial market interactions Nonlinear dynamics and chaos Bifurcation analysis
4
2010
34
4
743
764
http://www.sciencedirect.com/science/article/B6V85-4XPB6TB-1/2/093c3078ab914ece3a1fb29c0031c1e3
Dieci, Roberto
Westerhoff, Frank
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:1003-10132010-04-12RePEc:eee:dyncon
article
Age effects, leverage and firm growth
Recent theories of firm dynamics emphasize the role of financial variables as determinants of firm growth. Empirically examining these relationships has been difficult, since there is a lack of financial data on the small, young, and private firms. Using a unique administrative data set, this paper considers the growth of new firms in Canadian manufacturing from a financial perspective. We find that financial factors, such as leverage and initial financial size, impact growth rates for new firms. Further, the inclusion of leverage has little impact on the economic significance of the conditional age and size relationships with firm growth.
Firm size dynamics Leverage Age effects Dynamic panel data
5
2010
34
5
1003
1013
http://www.sciencedirect.com/science/article/B6V85-4Y95TWS-1/2/58ad6bc78781c5174706913398914465
Huynh, Kim P.
Petrunia, Robert J.
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:585-5972010-04-12RePEc:eee:dyncon
article
Improvement in information and private investment in education
This paper uses the framework of an OLG economy for an analysis of the dynamic interaction between the precision of information about individual skills, investment in education, human capital accumulation, and social welfare. The human capital of an individual depends on both his (subjectively) random ability and his investment in education. Individual investment in education is financed through a loan contract with income-contingent terms of repayment. Investment decisions are based on public signals (test outcomes) which screen all agents for their abilities. We find that better information, which allows more efficient screening, enhances aggregate human capital formation but may, at the same time, stifle aggregate investment in education. Moreover, social welfare may increase or decline depending on the transformation technology and on the relative measure of risk aversion.
Information system Higher education Human capital Welfare
4
2010
34
4
585
597
http://www.sciencedirect.com/science/article/B6V85-4XJG5GR-1/2/455aecaa109fc06cdafa1682b6ceb60e
Eckwert, Bernhard
Zilcha, Itzhak
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:365-3872010-04-12RePEc:eee:dyncon
article
Optimal monetary policy with imperfect unemployment insurance
We consider an efficiency-wage model with the Calvo-type sticky prices and analyze the optimal monetary policy when the unemployment insurance is not perfect. With imperfect risk sharing, the strict zero-inflation policy is no longer optimal even when the zero-inflation steady-state equilibrium is made (conditionally) efficient. Quantitative results depend on how the idiosyncratic earning loss due to unemployment varies over business cycles. If the idiosyncratic income loss is acyclical, the optimal policy differs very little from the zero-inflation policy. However, if it varies countercyclically, as evidence suggests, the deviation of the optimal policy from the complete price-level stabilization becomes quantitatively significant. Furthermore, the optimal policy in such a case involves stabilization of output to a much larger extent.
Optimal monetary policy Efficiency wage Imperfect unemployment insurance Nominal rigidities
3
2010
34
3
365
387
http://www.sciencedirect.com/science/article/B6V85-4XBX70T-1/2/a219cf6b16cb417c7a0581c7a3cb7a18
Nakajima, Tomoyuki
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:825-8432010-04-12RePEc:eee:dyncon
article
Bifurcations of optimal vector fields in the shallow lake model
The solution structure of the set of optimal solutions of the shallow lake problem, a problem of optimal pollution management, is studied as we vary the values of the system parameters: the natural resilience, the relative importance of the resource for social welfare and the future discount rate. We find parameter values at which qualitative changes occur. Using theoretical results on the bifurcations of the solution structure to infinite horizon optimization problems obtained earlier, we give a fairly complete bifurcation analysis of the shallow lake problem. In particular, we show how the increase of the discount rate affects the parameter regions where an oligotrophic steady state, corresponding to low pollution level, is globally stable or locally stable under optimal dynamics. Asymptotically, an increase of the discount rate can be offset with a proportional increase of the relative social weight of the resource.
Optimal vector fields Indifference points Bifurcations Shallow lake
5
2010
34
5
825
843
http://www.sciencedirect.com/science/article/B6V85-4XV5NVV-2/2/60fc98d6f9bedd7f08bf3b2491ba8c51
Kiseleva, Tatiana
Wagener, F.O.O.
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:636-6562010-04-12RePEc:eee:dyncon
article
Portfolio selection in multidimensional general and partial moment space
This paper develops a general approach for the single period portfolio optimization problem in a multidimensional general and partial moment space. A shortage function is defined that looks for possible increases in odd moments and decreases in even moments. A main result is that this shortage function ensures sufficient conditions for global optimality. It also forms a natural basis for developing tests on the influence of additional moments. Furthermore, a link is made with an approximation of an arbitrary order of a general indirect utility function. This non-parametric efficiency measurement framework permits to differentiate mainly between portfolio efficiency and allocative efficiency. Finally, information can, in principle, be inferred about the revealed risk aversion, prudence, temperance and other higher-order risk characteristics of investors.
Shortage function Efficient frontier K-moment portfolios
4
2010
34
4
636
656
http://www.sciencedirect.com/science/article/B6V85-4XNF3X4-1/2/957d035368b81e93ae4578101d9f1499
Briec, Walter
Kerstens, Kristiaan
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:657-6802010-04-12RePEc:eee:dyncon
article
Contract adjustment under uncertainty
Consider trade in continuous time between two players. The gains from trade are divided according to a contract, and at each point in time, either player may unilaterally induce a costly adjustment of the contract. Players' payoffs from trade under the contract, as well as from trade under an adjusted contract, are exogenous and stochastic. We consider players' choice of whether and when to adjust the contract payment. We show that there exists a Nash equilibrium in thresholds, where each player adjusts the contract whenever the contract payment relative to the outcome of an adjustment passes the threshold. There is strategic substitutability in the choice of thresholds, so that if one player becomes more active by choosing a threshold closer to unity, the other player becomes more passive.
Contract adjustment Adjustment costs Renegotiation Differential games (S,s) strategy
4
2010
34
4
657
680
http://www.sciencedirect.com/science/article/B6V85-4XKHD7J-1/2/90e9db6bd14948297ff26396a0ea7bdf
Holden, Helge
Holden, Lars
Holden, Steinar
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:681-6952010-04-12RePEc:eee:dyncon
article
The dynamics of the NAIRU model with two switching regimes
We consider a model of inflation and unemployment proposed in Ferri et al. (JEBO, 2001), in which the dynamics are described by a discontinuous piecewise linear map, made up of two branches. We shall show that the bounded dynamics may be classified in two cases: we may have either regular dynamics with stable cycles of any period or quasiperiodic trajectories, or only chaotic dynamics (pure chaos in which a unique absolutely continuous invariant ergodic measure exists, and structurally stable), in a rich variety of cyclical chaotic intervals. The main results are the analytical formulation of the border collision bifurcation curves, through which we give a complete picture of the possible outcomes of the model.
Phillips curve Regime switching NAIRU Nonlinearities Discontinuous maps
4
2010
34
4
681
695
http://www.sciencedirect.com/science/article/B6V85-4XK4576-1/2/7c602ea54e42ea2c3a51f381e0522e72
Tramontana, F.
Gardini, L.
Ferri, P.
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:817-8242010-04-12RePEc:eee:dyncon
article
Global stochastic properties of dynamic models and their linear approximations
The dynamic properties of micro based stochastic macro models are often analyzed through a linearization around the associated deterministic steady state. Recent literature has investigated the errors made by such a deterministic approximation. Complementary to this literature we investigate how the linearization affects the stochastic properties of the original model. We consider a simple real business cycle model with noisy learning by doing. The solution has a stationary distribution that exhibits moment failure and has an unbounded support. The linear approximation, however, yields a stationary distribution with possibly a bounded support and all moments finite.
Linearization ARCH process Real business cycles model Stochastic difference equation
5
2010
34
5
817
824
http://www.sciencedirect.com/science/article/B6V85-4Y9SVND-1/2/21304ad8d28bd40754c3c395221bc1d5
Babus, Ana
de Vries, Casper G.
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:598-6032010-04-12RePEc:eee:dyncon
article
On the relation between the mean and variance of delay in dynamic queues with random capacity and demand
This paper investigates the distribution of delays during a repeatedly occurring demand peak in a congested facility with random capacity and demand, such as an airport or an urban road. Congestion is described in the form of a dynamic queue using the Vickrey bottleneck model and assuming Nash equilibrium in arrival times. The paper shows that the expected delay and the variance of delay vary differently over time during the peak and must hence be considered separately. The paper gives some characterization of how the expected delay and the variance of delay are related, which explain the looping phenomenon that has now been observed a number of times. Empirical illustration is provided.
Bottleneck model Random capacity Congestion Nash equilibrium Loop
4
2010
34
4
598
603
http://www.sciencedirect.com/science/article/B6V85-4XWMN8F-1/2/73f9365a315536ced8ae23d642df2ca5
Fosgerau, Mogens
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:354-3642010-04-12RePEc:eee:dyncon
article
Labour taxes and unemployment evidence from a panel unobserved component model
This paper estimates the impact of labour taxes on unemployment using a panel of yearly observations (1970-2005) for 16 OECD countries. Possible heterogeneity of the unemployment incidence of taxes is taken into account by grouping countries according to their wage-setting institutions. Panel data unit root and cointegration tests show that unemployment and labour tax rates are non-stationary but not cointegrated. As this finding may be induced by missing non-stationary variables, we set up a panel unobserved component model. Labour taxes are found to have a positive impact on unemployment only in countries characterised by strong but decentralised unions.
Labour taxes Unemployment Panel cointegration Unobserved components Kalman filter
3
2010
34
3
354
364
http://www.sciencedirect.com/science/article/B6V85-4X9TTPV-1/2/1b3880992eb3490fa5b5007b1f599fbf
Berger, Tino
Everaert, Gerdie
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:844-8572010-04-12RePEc:eee:dyncon
article
A stochastic differential Fishery game for a two species fish population with ecological interaction
We combine and extend two existing lines of research in game theoretic studies of fisheries, building up on Quirk and Smith (1977), Anderson (1975), Fisher and Mirman (1996), Sumaila (1997) and most recently Datta and Mirman (1999) who developed either static or discrete time models, not including ecological uncertainty and Jorgensen and Yeung (1996) who do include uncertainty but do not capture any features of ecological interaction. In this article we develop a continuous time framework, where ecological interaction is described by a stochastic dynamics, including the cases of predator-prey and competition. We obtain a stochastic differential game and derive Markov feedback Nash-equilibrium strategies in semi-analytic form. Furthermore we compare the results with the case where fisheries regulations restrict each fishery to harvest only one species and study the inefficiencies which arise from this. In addition to that, we also consider the case where fisheries cooperate. Here we observe quite different effects on the ecosystem, depending on whether the system is competitive or predator-prey.
Differential games Fisheries Environmental and resource economics Stochastic optimal control
5
2010
34
5
844
857
http://www.sciencedirect.com/science/article/B6V85-4XWMN8F-2/2/7c6345a20321006f97e61fa12d95de49
Wang, Wen-Kai
Ewald, Christian-Oliver
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:968-9832010-04-12RePEc:eee:dyncon
article
Monetary persistence and the labor market: A new perspective
In this paper we propose a novel way to model the labor market in the context of a New-Keynesian general equilibrium model, incorporating labor market frictions in the form of hiring and firing costs. We show that such a model is able to replicate many important stylized facts of the business cycle. The reactions to monetary and real shocks become much more sluggish. Job creation and job destruction are negatively correlated. And the volatility of unemployment is much larger than in the standard search and matching model.
Monetary persistence Labor market Business cycle dynamics Hiring and firing costs
5
2010
34
5
968
983
http://www.sciencedirect.com/science/article/B6V85-4Y70C2Y-1/2/9ab785755a4ffae8b031a71a193b4cf4
Lechthaler, Wolfgang
Merkl, Christian
Snower, Dennis J.
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:725-7422010-04-12RePEc:eee:dyncon
article
The effect of mean reversion on entry and exit decisions under uncertainty
Many economic variables of interest exhibit a tendency to revert to predictable long-run levels. However, mean reverting processes are rarely used in investment models in the literature. In most models, geometric Brownian motion processes are used for tractability. In this paper, a firm's entry and exit decisions when the output equilibrium price follows an exogenous mean reverting process are examined, and then compared to the decisions of the firm under the usually employed assumption of lognormally distributed output price, presented in Dixit (1989a). By extending previous work by Sarkar (2003) to account for costly reversibility, we show that mean reversion has a significant effect, not only on firm-specific entry and exit decisions, but also on the balance of entering and exiting firms in an industry/market. Thus it would be erroneous to use the more tractable geometric Brownian motion process as an approximation for a mean-reverting process in models and investigations of aggregate industry investment.
Investment Uncertainty Real options Mean reversion
4
2010
34
4
725
742
http://www.sciencedirect.com/science/article/B6V85-4XKXXN2-1/2/2565b338be1d13b68b7c9a07e6dd4763
Tsekrekos, Andrianos E.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:388-4032010-04-12RePEc:eee:dyncon
article
A new algorithm for solving dynamic stochastic macroeconomic models
This paper introduces a new algorithm, the recursive upwind Gauss-Seidel method, and applies it to solve a standard stochastic growth model in which the technology shocks exhibit heteroskedasticity. This method exploits the fact that the equations defining equilibrium can be viewed as a set of algebraic equations in the neighborhood of the steady-state. In a non-stochastic setting, the algorithm, in essence, continually extends a local solution to a globally accurate solution. When stochastic elements are introduced, it then uses a recursive scheme in order to determine the global solution. This method is compared to projection, perturbation, and linearization approaches and is shown to be fast and globally accurate. We also demonstrate that linearization methods perform poorly in an environment of heteroskedasticity even though the unconditional variance of technology shocks is relatively small and similar to that typically used in RBC analysis.
Numerical methods Gauss Seidel method Projection methods Real business cycles Crash state
3
2010
34
3
388
403
http://www.sciencedirect.com/science/article/B6V85-4XBR4HC-3/2/3a8c9eebd021faf8b855f52348af0cdc
Dorofeenko, Victor
Lee, Gabriel S.
Salyer, Kevin D.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:296-3132010-04-12RePEc:eee:dyncon
article
Optimal foreign investment dynamics in the presence of technological spillovers
In this paper we present a dynamic model of a firm which is deciding whether to outsource parts of its production to a less developed economy where wages and the level of technology are lower. Outsourcing reduces production costs but is associated with spillovers to foreign potential competitors. Spillovers over time increase productivity of firms in the foreign country and make them stronger competitors on the common market. The paper analyzes the inter-temporally optimal behavior of the firm and shows that two outcomes are possible in the long-run. One outcome is that there is one steady state where the firm invests a positive amount in the foreign country and the other outcome is a continuum of steady states with no investment. The paper then derives conditions such that it is optimal for the firm to invest in the foreign country and characterizes different types of optimal dynamic investment patterns. In addition, using numerical dynamic optimization methods, the effect of the speed of technology adoption and of the wage differential on total labor income in the home country is studied taking into account the transition dynamics.
Foreign direct investment Dynamic optimization Technological spill-overs Oligopoly
3
2010
34
3
296
313
http://www.sciencedirect.com/science/article/B6V85-4X97CTD-1/2/310d78fdbf459d4be4ebea0b68d67df1
Dawid, Herbert
Greiner, Alfred
Zou, Benteng
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:876-8902011-09-06RePEc:eee:dyncon
article
The welfare cost of one-size-fits-all patent protection
To analyze the welfare gain from allowing for differentiated patent protection across sectors, this study develops a two-sector quality-ladder growth model in which patent breadth is a policy variable and derives optimal patent breadth under two patent regimes. We show that (a) uniform optimal patent breadth is a weighted average of sector-specific optimal patent breadth and (b) sector-specific optimal patent breadth is larger in the sector that has a larger market size and more technological opportunities. To derive the optimal policy, we allow for an arbitrary path of patent breadth and derive the optimal path by solving a Stackelberg differential game. We find that the optimal path of patent breadth under each patent regime is stationary, time-consistent and subgame perfect. Finally, we perform a numerical investigation and find that even a moderate degree of asymmetry across sectors can generate a significant welfare cost of uniform patent protection.
Economic growth R&D Uniform patent protection Time-consistent patent policy
6
2011
35
6
876
890
http://www.sciencedirect.com/science/article/B6V85-51FGSTK-1/2/99dae68f81c814a0cd86c912599ddf86
Chu, Angus C.
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1605-16132011-09-06RePEc:eee:dyncon
article
On the role of small models in macrodynamics
This paper focuses on the role of small models in macrodynamics. It discusses the insights that I believe these models offer and the extent to which they can address some of the complex issues, such as heterogeneity and interactions among agents that are receiving increasing attention in the literature. I comment on what I view to be the most productive role for numerical simulations, and finally offer some brief comments in defense of the state of modern macroeconomic theory in light of the criticism it has received as a result of the recent financial crisis.
Small models Macrodynamics
9
2011
35
9
1605
1613
http://www.sciencedirect.com/science/article/pii/S0165188911000832
Turnovsky, Stephen J.
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1769-17882011-09-06RePEc:eee:dyncon
article
Optimal capital accumulation under price uncertainty and costly reversibility
We consider the optimal capital accumulation policy of a competitive firm operating in the presence of decreasing returns to scale, price uncertainty, and costly reversibility of investment. We characterize the optimal accumulation policy and derive the value of the firm by focusing on the marginal investment decision and solving the associated optimal timing problem characterizing the option value of the associated opportunity to either disinvest or acquire a marginal unit of capacity. We also characterize the required exercise premia associated with the optimal policies and demonstrate that hysteresis prevails within this class of accumulation problems as well.
Price uncertainty Capital accumulation Costly reversibility Expansion options Disinvestment opportunity Hysteresis
10
2011
35
10
1769
1788
http://www.sciencedirect.com/science/article/pii/S0165188911001126
Alvarez, Luis H.R.
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1405-14232011-09-06RePEc:eee:dyncon
article
Reprint to: Infrastructure provision and macroeconomic performance
This paper studies the differences between private and government provision of infrastructure. Capital utilization decisions and their differential role in determining market prices for capital goods under the two regimes of infrastructure provision serve as a critical transmission mechanism for fiscal policy. A subsidy to private providers of infrastructure is preferable to direct government provision irrespective of how the subsidy or expenditure is financed. The case for private provision is much stronger in economies characterized by high levels of congestion. The choice between private and government provision also has a crucial effect on the design of optimal fiscal policy.
Infrastructure provision Capital utilization User cost Fiscal policy Public capital Economic growth
9
2011
35
9
1405
1423
http://www.sciencedirect.com/science/article/pii/S0165188911001114
Chatterjee, Santanu
Mahbub Morshed, A.K.M.
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:413-4292011-09-06RePEc:eee:dyncon
article
Optimal R&D investment for a risk-averse entrepreneur
Entrepreneurs investing in R&D projects face technical uncertainty associated with the cost to completion of the project, which is idiosyncratic and inherently unhedgeable. We extend existing real options models of R&D investment to incorporate the cost of bearing this unhedgeable risk and find it decreases risk-averse entrepreneurs' valuations of R&D projects and increases the minimum NPVs required for continued investment in R&D (threshold NPVs) relative to 'unpriced risk' values and threshold NPVs. As in the 'unpriced risk' case, for less risk-averse entrepreneurs with small R&D projects, threshold NPVs remain negative and decrease with technical uncertainty. However, for sufficiently risk-averse entrepreneurs with sufficiently large R&D projects, threshold NPVs can become positive and increase with technical uncertainty.
R&D Technical uncertainty Entrepreneurial investment Cost of unhedgeable risk Utility maximisation
4
2011
35
4
413
429
http://www.sciencedirect.com/science/article/B6V85-514Y24G-1/2/6d587b664631b6ae694b0e2c688cc08d
Whalley, A. Elizabeth
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1710-17302011-09-06RePEc:eee:dyncon
article
Co-development ventures: Optimal time of entry and profit-sharing
We find the optimal time for entering a joint venture by two firms, and the optimal linear contract for sharing the profits. We consider risk-sharing, timing-incentive and asymmetric decisions contract designs. If the firms are risk-neutral and the cash payments are allowed, all three designs are equivalent. With risk aversion, the optimal contract parameters may vary significantly across the three designs and across varying levels of risk aversion. We also analyze a dataset of joint biomedical ventures, in which, in agreement with our theoretical predictions, both royalty and cash payments are mostly increasing in the smaller firm's experience, and the time of entry happens sooner for more experienced small firms.
Real options Joint ventures Contracts
10
2011
35
10
1710
1730
http://www.sciencedirect.com/science/article/pii/S016518891100073X
Cvitanic, Jaksa
Radas, Sonja
Sikic, Hrvoje
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1489-15012011-09-06RePEc:eee:dyncon
article
The relative income hypothesis
Despite its theoretical dominance, the empirical case in favor of the permanent income hypothesis is weak. Contrary to one of its basic implications, a growing body of evidence suggests that rich households save a higher proportion of their permanent income than poor households. We propose an overlapping-generations economy where households care about relative consumption. As a result, an individual's consumption is driven by the comparison of his lifetime income and the lifetime income of his reference group; a permanent income version of Duesenberry's (1949) relative income hypothesis. Across households the savings rate increases with income while aggregate savings are independent of the income distribution.
Interpersonal comparisons Relative income hypothesis Permanent income hypothesis
9
2011
35
9
1489
1501
http://www.sciencedirect.com/science/article/pii/S0165188911000881
Alvarez-Cuadrado, Francisco
Van Long, Ngo
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1696-17092011-09-06RePEc:eee:dyncon
article
Volatility, growth, and welfare
This paper constructs an endogenous growth model driven by self-fulfilling expectation shocks to explain the stylized fact that the average growth rate of GDP is related negatively to volatility and positively to capacity utilization. The implied welfare gain from further stabilizing the U.S. economy is about a quarter of annual consumption, which is consistent in order of magnitude with estimates based on the empirical studies of Ramey and Ramey (1995) and Alvarez and Jermann (2004). Hence, policies designed to reduce fluctuations can generate large welfare gains because smaller fluctuations are associated with permanently higher rates of growth.
Endogenous growth Welfare cost of business cycle Stabilization policy Sunspots Imperfect competition Coordination failures
10
2011
35
10
1696
1709
http://www.sciencedirect.com/science/article/pii/S0165188911000728
Wang, Peng-fei
Wen, Yi
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1800-18162011-09-06RePEc:eee:dyncon
article
Excessive risk taking and the maturity structure of debt
This paper analyses the effect of short term debt on equityholders' risk taking decisions. We show that if short term debt limits the expropriation of debtholders, it also implies a lower leverage, which prevents the firm from increasing tax shields. We then examine the incentive of equityholders to increase the firm risk when debtholders hold the option to swap a perpetual coupon bond with short term debt. We find that this option mitigates equityholders' risk shifting incentives. Compared to standard short term debt, this restructuring option deters debtholders expropriation, it increases leverage and it reduces the loss in tax shields due to asset substitution.
Asset substitution Restructuring Debt maturity Agency costs
10
2011
35
10
1800
1816
http://www.sciencedirect.com/science/article/pii/S0165188911001187
Djembissi, Bertrand
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1577-15852011-09-06RePEc:eee:dyncon
article
Bifurcation analysis of Zellner's Marshallian Macroeconomic Model
The Marshallian Macroeconomic Model in Zellner and Israilevich (2005) provides a novel way to examine sectoral dynamics through the introduction of a dynamic entry/exit equation in addition to the usual demand and supply functions found in models of this class. In this paper we examine the possibility of cyclical behavior in the Marshallian Macroeconomic Model and investigate the existence of a Hopf bifurcation with respect to the parameter in the entry/exit equation.
Marshallian Macroeconomic Model Dynamic entry/exit Hopf bifurcation Limit cycles
9
2011
35
9
1577
1585
http://www.sciencedirect.com/science/article/pii/S0165188911000935
Banerjee, Sanjibani
A. Barnett, William
A. Duzhak, Evgeniya
Gopalan, Ramu
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1557-15762011-09-06RePEc:eee:dyncon
article
Risk premia in general equilibrium
This paper shows that non-linearities from a neoclassical production function alone can generate time-varying, asymmetric risk premia and predictability over the business cycle. These empirical key features become relevant when we allow for non-normalities in the form of rare disasters. We employ analytical solutions of dynamic stochastic general equilibrium models, including a novel solution with endogenous labor supply, to obtain closed-form expressions for the risk premium in production economies. In contrast to an endowment economy with constant investment opportunities, the curvature of the consumption function affects the risk premium in production economies through controlling the individual's effective risk aversion.
Risk premium Continuous-time DSGE Effective risk aversion
9
2011
35
9
1557
1576
http://www.sciencedirect.com/science/article/pii/S0165188911000911
Posch, Olaf
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1671-16952011-09-06RePEc:eee:dyncon
article
Non-linear DSGE models and the optimized central difference particle filter
We improve the accuracy and speed of particle filtering for non-linear DSGE models with potentially non-normal shocks. This is done by introducing a new proposal distribution which (i) incorporates information from new observables and (ii) has a small optimization step that minimizes the distance to the optimal proposal distribution. A particle filter with this proposal distribution is shown to deliver a high level of accuracy even with relatively few particles, and it is therefore much more efficient than the standard particle filter.
Likelihood inference Non-linear DSGE models Non-normal shocks Particle filtering
10
2011
35
10
1671
1695
http://www.sciencedirect.com/science/article/pii/S0165188911000716
Andreasen, Martin M.
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1451-14732011-09-06RePEc:eee:dyncon
article
The long run effects of changes in tax progressivity
This paper compares the steady-state outcomes of revenue-neutral changes to the progressivity of the tax schedule. Our economy features heterogeneous households who differ in their preferences and permanent labor productivities, but it does not have idiosyncratic risk. We find that increases in the progressivity of the tax schedule are associated with long-run distributions with greater aggregate income, wealth, and labor input. Average hours generally declines as the tax schedule becomes more progressive implying that the economy substitutes away from less-productive workers toward more-productive workers. Finally, as progressivity increases, income inequality is reduced and wealth inequality rises. Many of these results are qualitatively different than those found in models with idiosyncratic risk, and therefore suggest closer attention should be paid to modeling the insurance opportunities of households.
Heterogeneity Progressive taxation Inequality
9
2011
35
9
1451
1473
http://www.sciencedirect.com/science/article/pii/S0165188911001102
Carroll, Daniel R.
Young, Eric R.
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1502-15132011-09-06RePEc:eee:dyncon
article
Hoarding international reserves versus a Pigovian tax-cum-subsidy scheme: Reflections on the deleveraging crisis of 2008-2009, and a cost benefit analysis
We outline the case for supporting self-insurance by imposing a tax on external borrowing in a model of an emerging market. Entrepreneurs finance tangible investments via bank intermediation of foreign borrowing, exposing the economy to negative fire-sale externalities at times of deleveraging; a risk that increases with the ratio of aggregate external borrowing to international reserves. Price taking economic agents ignore their marginal impact on the expected cost of a deleveraging crisis. The optimal borrowing tax reduces the distorted activity, external borrowing, and induces borrowers to co-finance the precautionary hoarding of international reserves.
Fire-sale congestion externality Deleveraging Tax-cum-subsidy International reserves
9
2011
35
9
1502
1513
http://www.sciencedirect.com/science/article/pii/S0165188911000947
Aizenman, Joshua
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1514-15302011-09-06RePEc:eee:dyncon
article
The effects of total factor productivity and export shocks on a small open economy with unemployment
The paper analyzes the dynamic effects of a supply side shock and a demand side shock, which hit an open economy with unemployment. The supply side shock is modeled as a reduction in total factor productivity, whereas the demand side shock is caused by a drop in exports. The model builds upon the small one-sector two-good open economy framework described in Turnovsky (2000, chapter 11.3). In contrast to this standard framework, in which Walrasian labor markets are assumed, search unemployment and wage bargaining are introduced, and unemployment results from time consuming and costly matching of vacancies with searching agents. Using a plausible calibration of the model, the dynamic adjustments of unemployment, output, and other economic key variables are analyzed. We find that a negative export shock primarily has effects on consumption and welfare, but not on unemployment and output, whereas the supply side shock leads to considerable responses of unemployment, output, consumption and welfare. If both shocks together hit the economy, the changes in consumption and welfare almost double.
Total factor productivity shock Export shock Search unemployment Open economies
9
2011
35
9
1514
1530
http://www.sciencedirect.com/science/article/pii/S016518891100087X
Schubert, Stefan F.
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:528-5442011-09-06RePEc:eee:dyncon
article
Environmental regulation, technological diversity, and the dynamics of technological change
Inducing technological progress is an important objective of environmental regulation. We investigate under which conditions regulation-induced technological progress pursues the best technological option. We analyze a setting with vertical and horizontal technological progress, cost uncertainty, time-limited patent protection, and a case that is typical for some emissi4on-intensive industries, like electricity generation or the chemical industry. Under taxes and standards, only the current least-cost technology is used and developed, implying a lock-in into a possibly inferior technology. Tradable permits yield slower progress but can facilitate the simultaneous development of technologies, rendering lock-ins less likely.
Technological change Regulation R&D Technological diversity Uncertainty Investment
4
2011
35
4
528
544
http://www.sciencedirect.com/science/article/B6V85-51P9T45-2/2/9607c595da9c92ee8b6f6442deeb331f
Krysiak, Frank C.
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1547-15562011-09-06RePEc:eee:dyncon
article
The Penn-Balassa-Samuelson effect through the lens of the dependent economy model
The positive correlation between per capita income and cross-country price levels is called the "Penn-Balassa-Samuelson effect." The most influential explanation of this effect centers around sectoral output productivities as the determinant of the relative price of nontraded goods. The interaction between the change in relative prices and the change in per capita income, the dynamic PBS effect, is less well known. This paper extends the Turnovsky and Sen (1995) model of a small open economy by adding external economies into the production function. The model's dynamics accord well with several features of the empirical data on the dynamic PBS effect.
Penn-Balassa-Samuelson effect Intertemporal optimization External economies Relative price of nontradables
9
2011
35
9
1547
1556
http://www.sciencedirect.com/science/article/pii/S0165188911000923
Brock, Philip L.
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1731-17432011-09-06RePEc:eee:dyncon
article
Backdating executive stock options--An ex ante valuation
When backdating executive stock options (ESOs), the exercise price is set in favor of the recipient executive. Relative to a non-backdated benchmark, we find an (ex ante) upper bound for the cost of backdating to shrink from 10% to about 3.7%, as a consequence of the regime change represented by the Sarbanes-Oxley act (SOX). We frame the backdating behavior as a (compound) exotic option, considering both simple and extended models of the underlying ESO--in the latter case we draw on the analytical ESO models of Sircar and Xiong (2007). Post-SOX, we use a Longstaff-Schwartz inspired least squares Monte Carlo approach.
Backdating of executive stock options Exotic lookback options SOX
10
2011
35
10
1731
1743
http://www.sciencedirect.com/science/article/pii/S0165188911001035
Eikseth, Hans Marius
Lindset, Snorre
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1615-16252011-09-06RePEc:eee:dyncon
article
Effects of international sharing of pollution abatement burdens on income inequality among countries
Improvements in environmental quality will boost output production and hence economic growth. However, although environmental abatement equally benefits all economies in the world, it is shown that, if the private productive resources are not yet accumulated sufficiently in low income economies, income inequality among economies can be widened in the short term not only under equal burden sharing of pollution abatement but even under income-proportional burden sharing. When the marginal productivity is diminishing, the negative effect of the burden is large relative to the positive effect of the improved environment in economies in which resources are not accumulated sufficiently.
Income inequality Global natural environment International burden sharing of pollution abatement Economic development
10
2011
35
10
1615
1625
http://www.sciencedirect.com/science/article/pii/S016518891100114X
Hirazawa, Makoto
Saito, Koichi
Yakita, Akira
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1586-16042011-09-06RePEc:eee:dyncon
article
Patent replacement and welfare gains
Patents were chosen in an era when modern public finance tools were unavailable. The same innovation outcomes can be achieved with higher welfare, if patent elements are replaced by modern features. This paper constructs two theoretical models of product innovation and simulates the welfare effects of replacing patents with an intertemporal-bounty arrangement. We find that replacing patents with this alternative has the potential to increase welfare in the United States through reform of pharmaceutical patents by $43.9-$194 billion when measured in present value terms (this is 0.3-1.3% of annual GDP) based on simulations involving four selected drug sectors. The potential to increase welfare would be higher if applied to the larger sector of drugs as a whole. In principal, patents could be replaced in other sectors as well.
Patents Innovation Intertemporal bounty Monopoly distortion Welfare
9
2011
35
9
1586
1604
http://www.sciencedirect.com/science/article/pii/S0165188911000893
Grinols, Earl L.
Lin, Hwan C.
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1744-17682011-09-06RePEc:eee:dyncon
article
The (un)importance of unemployment fluctuations for the welfare cost of business cycles
This paper studies the cost of business cycles within a real business cycle model with search and matching frictions in the labor market. We endogenously link both the cyclical fluctuations and the mean level of unemployment to the aggregate business cycle risk. The key result of the paper is that business cycles are costly: fluctuations over the cycle induce a higher average unemployment rate since employment is nonlinear in the job-finding rate and the past unemployment rate. We show this analytically for a special case of the model. We then calibrate the model to U.S. data. For the calibrated model, too, business cycles cause higher average unemployment; the welfare cost of business cycles can easily be an order of magnitude larger than Lucas's (1987) estimate. The cost of business cycles is the higher the lower the value of nonemployment is, or, equivalently, the lower is the disutility of work. The ensuing cost of business cycles rises further when workers' skills depreciate during unemployment.
Cost of business cycles Unemployment Search and matching
10
2011
35
10
1744
1768
http://www.sciencedirect.com/science/article/pii/S0165188911001072
Jung, Philip
Kuester, Keith
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1626-16512011-09-06RePEc:eee:dyncon
article
Optimal policy in Markov-switching rational expectations models
In this paper we consider the optimal quadratic control problem of Markov-switching linear rational expectation models. These models are general and flexible tools for modelling not only regime but also model or parameter uncertainty. We show, first, how to find the solution of a Markov-switching linear rational expectation model. Based on this solution we then show how to apply dynamic programming to find the optimal time-consistent policy and the resulting Nash-Stackelberg equilibrium. Suitable modifications of the algorithm allow to deal with the (non-RE) case in which the policymaker and the private sector hold different beliefs or probabilities over regime change. We also show how the optimisation procedure can be employed to obtain the optimal policy under commitment. As an illustration we compute the optimal policy in a small open economy subject to stochastic structural breaks in some of its key parameters.
Optimal monetary policy Regime switching Rational expectations Time consistency Commitment
10
2011
35
10
1626
1651
http://www.sciencedirect.com/science/article/pii/S0165188911000649
Blake, Andrew P.
Zampolli, Fabrizio
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1652-16582011-09-06RePEc:eee:dyncon
article
Some evidence on factor intensity and price rigidity
This paper establishes a new empirical finding: the degree of labor intensity and the degree of price flexibility are negatively correlated across industrial sectors in the U.S. economy. This finding suggests that varying factor intensity can potentially generate different degrees of price stickiness across sectors and remove the need to exogenously impose the latter. Of course, labor intensity is just one more feature--in addition to others like the durability of goods produced and the degree of competition--that can explain some of the heterogeneity in price durations across sectors.
Price rigidity Factor intensity
10
2011
35
10
1652
1658
http://www.sciencedirect.com/science/article/pii/S0165188911000704
Peneva, Ekaterina
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1659-16702011-09-06RePEc:eee:dyncon
article
Combining VAR and DSGE forecast densities
A popular macroeconomic forecasting strategy utilizes many models to hedge against instabilities of unknown timing; see (among others) Stock and Watson (2004), Clark and McCracken (2010), and Jore et al. (2010). Existing studies of this forecasting strategy exclude dynamic stochastic general equilibrium (DSGE) models, despite the widespread use of these models by monetary policymakers. In this paper, we use the linear opinion pool to combine inflation forecast densities from many vector autoregressions (VARs) and a policymaking DSGE model. The DSGE receives a substantial weight in the pool (at short horizons) provided the VAR components exclude structural breaks. In this case, the inflation forecast densities exhibit calibration failure. Allowing for structural breaks in the VARs reduces the weight on the DSGE considerably, but produces well-calibrated forecast densities for inflation.
Ensemble modeling Forecast densities Forecast evaluation VAR models DSGE models
10
2011
35
10
1659
1670
http://www.sciencedirect.com/science/article/pii/S0165188911000698
Wolden Bache, Ida
Sofie Jore, Anne
Mitchell, James
Vahey, Shaun P.
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1435-14502011-09-06RePEc:eee:dyncon
article
Public policies and convergence
This paper employs a dynamic framework to compare the effects of alternative government policies on convergence of industrialized economies to the technology frontier. The government's instruments include facilitating private investment and education policy. The latter enhances skills of heterogenous specialists and implies the decision on their respective shares. The analysis distinguishes between an isolated policy of a single economy and coordinated policies of various countries. Which policy maximizes the speed of convergence is crucially affected by the economy's state of development. A policy switch between the mentioned instruments while catching-up may be preferable.
Education policy Amount and structure of public expenditure Highly skilled specialists
9
2011
35
9
1435
1450
http://www.sciencedirect.com/science/article/pii/S0165188911000868
Ott, Ingrid
Soretz, Susanne
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1789-17992011-09-06RePEc:eee:dyncon
article
Impatience, pollution, and indeterminacy
This paper examines an equilibrium growth model in which production activities generate environmental pollution that has a negative welfare effect and in which individual households' subjective discount rate is a function of individual consumption, which is internal to each household, and of total pollution, which is an external factor to the individual agents. It is shown that there may exist multiple steady states and that the dynamic equilibrium may display indeterminacy, depending on the properties of the discount-rate function, the pollution-capital relationship in production technology, and the pollution-consumption relationship in instantaneous utility. The long-run effects of tighter environmental policy are subsequently examined, and the results are also found to be dependent on the above factors.
Neoclassical growth model Pollution Discount-rate function Indeterminacy of equilibrium path
10
2011
35
10
1789
1799
http://www.sciencedirect.com/science/article/pii/S0165188911001175
Yanase, Akihiko
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:246-2572011-09-06RePEc:eee:dyncon
article
Inflation expectations and macroeconomic dynamics: The case of rational versus extrapolative expectations
The motivation of this paper is to understand the effects of coupling a macroeconomic model of inflation rate dynamics, relying on an aggregate expectation, to a heterogeneous expectations framework. A standard model composed of Okun's law, an expectations-augmented Phillips curve and an aggregate demand relation is extended to allow agents to select between trend-following and rational expectations to predict the future inflation rate. Using a mixture of analytical and numerical tools we investigate the model's dynamics and discuss the conditions under which the extended model leads to endogenous fluctuations in macroeconomic variables. Some preliminary results are offered for the case in which a Taylor-like monetary policy rule is included in the model.
Heterogeneous expectations Expectation formation Dynamic macroeconomics Okun's law and Phillips curve Nonlinearities and chaos Bifurcations Intermittency
2
2010
34
2
246
257
http://www.sciencedirect.com/science/article/B6V85-4XBR4HC-1/2/023315d4b274e1aa5e39bc975f5d9371
Lines, Marji
Westerhoff, Frank
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1424-14342011-09-06RePEc:eee:dyncon
article
The environmental and macroeconomic effects of socially responsible investment
We analyze the effects of socially responsible investment and public abatement on environmental quality and the economy in a continuous-time dynamic growth model featuring optimizing households and firms. Environmental quality is modeled as a renewable resource. Consumers can invest in government bonds or firm equity. Since investors feel partly responsible for environmental pollution when holding firm equity, they require a premium on the return to equity. We show that socially responsible investment behavior by households partially offsets the positive effects on environmental quality of public abatement policies.
Socially responsible investment Economic growth Environmental economics Resource dynamics Stock market
9
2011
35
9
1424
1434
http://www.sciencedirect.com/science/article/pii/S0165188911000856
Dam, Lammertjan
Heijdra, Ben J.
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1474-14882011-09-06RePEc:eee:dyncon
article
Can progressive taxation account for cross-country variation in labor supply?
The difference between average hours worked in the US and average hours worked in Continental European countries has been increasing since the early 1970s. To explain this phenomenon, this paper develops an endogenous growth model with two key properties: agents are heterogeneous in their rates of time preference and labor skills, and the model incorporates progressive income taxes. The model is calibrated to US and German data for the periods 1971-1974 and 1986-1989. Our findings suggest that the degree of progressivity is a major factor in explaining the patterns of the US and German labor supply over time. Predictions of the model also match the distributional trends in both countries during this time period.
Labor supply Progressive income taxation Endogenous growth Income inequality
9
2011
35
9
1474
1488
http://www.sciencedirect.com/science/article/pii/S016518891100090X
Koyuncu, Murat
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1387-13922011-09-06RePEc:eee:dyncon
article
Growth, dynamics, and economic policy: Special JEDC issue in honor of Stephen J. Turnovsky
9
2011
35
9
1387
1392
http://www.sciencedirect.com/science/article/pii/S0165188911000820
Fisher, Walter H.
Kletzer, Kenneth M.
oai:RePEc:eee:dyncon:v:33:y:2009:i:4:p:777-7972010-09-17RePEc:eee:dyncon
article
Macroeconomic implications of early retirement in the public sector: The case of Brazil
Early retirement Pension reform Public sector retirement Capital accumulation
4
2009
33
4
777
797
http://www.sciencedirect.com/science/article/B6V85-4TN82D1-2/2/f99b53cd5dd1203d5c84b58692111bb2
Glomm, Gerhard
Jung, Juergen
Tran, Chung
oai:RePEc:eee:dyncon:v:33:y:2009:i:9:p:1631-16382011-03-29RePEc:eee:dyncon
article
Macroeconomic (in)stability under real interest rate targeting
We show that in a one-sector monetary endogenous growth model under real interest rate targeting, the local stability properties of the economy's balanced growth path depend crucially on the exact formulation of the cash-in-advance constraint and the degree of productive externalities. In particular, when a positive fraction (including 100%) of gross investment is subject to the liquidity constraint, the model exhibits indeterminacy and sunspots if and only if the equilibrium wage-hours locus is positively sloped and steeper than the labor supply curve. On the other hand, when real money balances are required only for the household's consumption purchases, the economy always displays saddle-path stability and equilibrium uniqueness, regardless of the strength of productive externalities.
Real interest rate targeting Endogenous growth Cash-in-advance constraint Indeterminacy
9
2009
33
9
1631
1638
http://www.sciencedirect.com/science/article/B6V85-4VW550C-1/2/0f0e7e6e0473d527d2d6e6ce1459e9f1
Chin, Chi-Ting
Guo, Jang-Ting
Lai, Ching-Chong
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:456-4712011-03-29RePEc:eee:dyncon
article
Robust monetary rules under unstructured model uncertainty
This paper revisits a widely adopted approach to robust decision making developed by (Hansen and Sargent, 2003) and (Hansen and Sargent, 2008)--henceforth HS--and applies it to monetary policy design in the face of model uncertainty. We pay particular attention to two issues: first, we distinguish three possible forms of the implied game between malign nature and the policymaker in the HS procedure each leading to a different robust and approximating equilibria. Second, we impose the zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint has serious consequences for a policymaker pursuing HS-type robustness, especially when accompanied by an inability to commit.
Robustness Unstructured uncertainty Commitment Zero lower bound interest rate constraint
3
2010
34
3
456
471
http://www.sciencedirect.com/science/article/B6V85-4XFGJ7N-1/2/73f095ab90362b4e9a696931a20f252c
Levine, Paul
Pearlman, Joseph
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:179-1902011-03-29RePEc:eee:dyncon
article
Adaptive learning with a unit root: An application to the current account
This paper develops a simple two-country, two-good model of international trade and borrowing that suppresses all previous sources of current account dynamics. Under rational expectations, international debt follows a random walk. Under adaptive learning, however, the model's unit root is eliminated and international debt is either a stationary or an explosive process, depending on agents' specific learning algorithm. Some stationary learning algorithms result in debt following an AR(1) process with an autoregressive coefficient less than 0.8. Because unit roots are a common and problematic feature of many international business cycle models, our results offer a new approach for generating stationarity.
Current account International debt movements Expectations Adaptive learning
2
2010
34
2
179
190
http://www.sciencedirect.com/science/article/B6V85-4X6FNGV-1/2/d3d57457aa0fc0c95a31112403ec6896
Davies, Ronald B.
Shea, Paul
oai:RePEc:eee:dyncon:v:34:y:2010:i:1:p:69-782011-03-29RePEc:eee:dyncon
article
Solving the incomplete markets model with aggregate uncertainty using explicit aggregation
We propose a method to solve models with heterogeneous agents and aggregate uncertainty. The law of motion describing aggregate behavior is obtained by explicitly aggregating the individual policy rule. The algorithm is simpler and faster than existing algorithms that rely on parameterization of the cross-sectional distribution and/or a computationally intensive simulation step. Explicit aggregation establishes a link between the individual policy rule and the set of necessary aggregate state variables, an insight that can be helpful in determining what state variables to include in other algorithms as well.
Numerical solutions Projection methods
1
2010
34
1
69
78
http://www.sciencedirect.com/science/article/B6V85-4WYDMW5-3/2/61e5c3a39cfd60e48c9badd0d19ce63b
Den Haan, Wouter J.
Rendahl, Pontus
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:522-5412011-03-29RePEc:eee:dyncon
article
Ability-heterogeneity, entrepreneurship, and economic growth
This paper develops an endogenous growth model of occupational choice with overlapping generations heterogeneous in entrepreneurial ability. While an increase in the number of entrepreneurs creates a growth-enhancing variety effect, the reduced overall quality of entrepreneurial ability retards growth. As a result, the number of entrepreneurs and output growth need not be positively related, in response to changes in the ability distribution. While cheaper financial operation and higher manufacturing productivity are both growth-enhancing, they have different effects on equilibrium factor prices and equilibrium financial markups. Additionally, the long-run growth consequences of subsidies to entrepreneurship and credit-market imperfections are studied.
Occupational choice Entrepreneurial ability Distribution and growth
3
2010
34
3
522
541
http://www.sciencedirect.com/science/article/B6V85-4XHCHWT-3/2/4044301ebf35be162547426e01a35c8a
Jiang, Neville
Wang, Ping
Wu, Haibin
oai:RePEc:eee:dyncon:v:34:y:2010:i:1:p:36-412011-03-29RePEc:eee:dyncon
article
Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm and non-stochastic simulations
This article describes the approach to computing the version of the stochastic growth model with idiosyncratic and aggregate risk that relies on collapsing the aggregate state space down to a small number of moments used to forecast future prices. One innovation relative to most of the literature is the use of a non-stochastic simulation routine.
Idiosyncratic risk Business cycles Numerical methods
1
2010
34
1
36
41
http://www.sciencedirect.com/science/article/B6V85-4WYDMW5-4/2/602054d13483daea5f5da0ed606e0616
Young, Eric R.
oai:RePEc:eee:dyncon:v:33:y:2009:i:11:p:1929-19442011-03-29RePEc:eee:dyncon
article
Behavioural heterogeneity and shift-contagion: Evidence from the Asian crisis
In this paper, we propose an empirical model based on the heterogeneous agents literature. Price changes are induced by fundamental, technical, and international factors. The model is estimated for Hong Kong and Thailand surrounding the Asian crisis. We find that the three sources are relevant and that their relative price impact fluctuates conditional on price impact in the previous period. Results imply that the crisis is triggered in Thailand due to an increased focus on the fundamental price, followed by an increase in chartism and finally aggravated by a focus on foreign developments. Furthermore, the crisis deepens in Hong Kong because of increased attention for foreign markets.
Heterogeneous expectations Contagion Asian crisis Dynamic models
11
2009
33
11
1929
1944
http://www.sciencedirect.com/science/article/B6V85-4WNB503-1/2/2e137b6b2812665ba6f235582edc0b4b
de Jong, Eelke
Verschoor, Willem F.C.
Zwinkels, Remco C.J.
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:191-2062011-03-29RePEc:eee:dyncon
article
Does tax competition really promote growth?
This paper considers the relationship between tax competition and growth in an endogenous growth model where there are stochastic shocks to productivity, and capital taxes fund a public good which may be for final consumption or an infrastructure input. Absent stochastic shocks, decentralized tax setting (two or more jurisdictions) maximizes the rate of growth, as the constant returns to scale present with endogenous growth implies "extreme" tax competition. Stochastic shocks imply that households face a portfolio choice problem, which dampens down tax competition and may raise taxes above the centralized level. Growth can be lower with decentralization. Our results also predict a negative relationship between output volatility and growth with decentralization.
Tax competition Uncertainty Stochastic growth
2
2010
34
2
191
206
http://www.sciencedirect.com/science/article/B6V85-4X7GMB3-1/2/23bbefce6332052aac301f77c7c8752d
Koethenbuerger, Marko
Lockwood, Ben
oai:RePEc:eee:dyncon:v:33:y:2009:i:11:p:1867-18792011-03-29RePEc:eee:dyncon
article
On nonrenewable resource oligopolies: The asymmetric case
We give a full characterization of the open-loop Nash equilibrium of a nonrenewable resource game between two types of firms differing in extraction costs. We show that (i) there almost always exists a phase where both types of firms supply simultaneously, (ii) when the high cost mines are exploited by a number of firms that goes to infinity the equilibrium approaches the cartel-versus-fringe equilibrium with the fringe firms acting as price takers, and (iii) the cheaper resource may not be exhausted first, a violation of the Herfindahl rule, that may be detrimental to social welfare.
Nonrenewable resources Nash equilibrium Cartel versus fringe Open loop
11
2009
33
11
1867
1879
http://www.sciencedirect.com/science/article/B6V85-4WDNKR5-1/2/360feabfcf9a9a71501c196d566f04a2
Benchekroun, Hassan
Halsema, Alex
Withagen, Cees
oai:RePEc:eee:dyncon:v:33:y:2009:i:7:p:1419-14362011-03-29RePEc:eee:dyncon
article
Endogenous growth and adverse selection in entrepreneurship
This paper proposes a model of Schumpeterian endogenous growth incorporating the role of market imperfections that exist due to adverse selection between investors that finance R&D and entrepreneurs that perform R&D. There is a distribution of agents indexed by a skill factor that determines one's average productivity at performing research. An entrepreneur starts-up a research venture by borrowing from an investor that funds R&D so as to invent new goods. Skill is private information, creating an adverse selection problem for the investor who designs a truth-telling mechanism. We show that an increase in the mean skill enhances growth as it leads to greater R&D productivity and investment; while an increase in the dispersion of the skill distribution dampens growth as it makes the adverse selection problem between investors and entrepreneurs more severe. The growth rate would double in the absence of adverse selection. The R&D investment of the average size firm must be subsidized threefold for the negative adverse selection effect to be nullified. We provide U.S. industry-level and European sector-level evidence in favor of the positive scale effect and negative adverse selection effect using the firm size distribution (FSD) to proxy for the entrepreneurial skill distribution.
Asymmetric information Mechanism design Innovation Technological change
7
2009
33
7
1419
1436
http://www.sciencedirect.com/science/article/B6V85-4VNKGR3-1/2/ab25afe6c1ac287349b4380402d13861
Plehn-Dujowich, Jose M.
oai:RePEc:eee:dyncon:v:33:y:2009:i:8:p:1531-15422011-03-29RePEc:eee:dyncon
article
Aging, transitional dynamics, and gains from trade
We formulate a two-country, two-good, two-factor, two-period-lived overlapping generations model to examine how population aging determines the pattern of and gains from trade. Two main results are obtained. First, the aging country endogenously becomes a small country exporting the capital-intensive good, whereas the younger country endogenously dominates the world economy determining the world prices, in the free trade steady state. Second, although uncompensated free trade cannot be Pareto superior to autarky, there exists a compensation scheme applied within each country such that free trade is Pareto superior to autarky.
Aging and trade Gains from trade Overlapping generations model Transitional dynamics Compensation scheme
8
2009
33
8
1531
1542
http://www.sciencedirect.com/science/article/B6V85-4VRX638-1/2/8e4710ccc10cd1cba1671016d97da09f
Naito, Takumi
Zhao, Laixun
oai:RePEc:eee:dyncon:v:34:y:2010:i:1:p:4-272011-03-29RePEc:eee:dyncon
article
Comparison of solutions to the incomplete markets model with aggregate uncertainty
This paper compares numerical solutions to the model of Krusell and Smith [1998. Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106, 867-896] generated by different algorithms. The algorithms have very similar implications for the correlations between different variables. Larger differences are observed for (i) the unconditional means and standard deviations of individual variables, (ii) the behavior of individual agents during particularly bad times, (iii) the volatility of the per capita capital stock, and (iv) the behavior of the higher-order moments of the cross-sectional distribution. For example, the two algorithms that differ the most from each other generate individual consumption series that have an average (maximum) difference of 1.63% (11.4%).
Numerical solutions Approximations
1
2010
34
1
4
27
http://www.sciencedirect.com/science/article/B6V85-4X01P6T-2/2/944569cdddfbca9b2444dde01e71e390
Den Haan, Wouter J.
oai:RePEc:eee:dyncon:v:33:y:2009:i:7:p:1437-14502011-03-29RePEc:eee:dyncon
article
A quantitative exploration of the Golden Age of European growth
Income per capita in some Western European countries more than tripled in the two and a half decades that followed World War II. The literature has identified several factors behind this outstanding growth episode, specifically; structural change, the Marshall Plan combined with the public provision of infrastructure, the surge of intra-European trade, and the reconstruction process that followed the war. This paper is an attempt to formalize and quantify the contribution of each one of these factors to post-war growth. Our results highlight the importance of reconstruction growth and structural change, and point to the limited role of the Marshall Plan, and the late contribution of intra-European trade.
Economic growth European economic history 1913- CGE models
7
2009
33
7
1437
1450
http://www.sciencedirect.com/science/article/B6V85-4VP665P-2/2/67c83d232e8275ebc7575840d7fa40b5
Alvarez-Cuadrado, Francisco
Pintea, Mihaela I.
oai:RePEc:eee:dyncon:v:33:y:2009:i:11:p:1858-18662011-03-29RePEc:eee:dyncon
article
Pooling forecasts in linear rational expectations models
Estimating linear rational expectations models in a limited-information setting requires replacing the expectations of future, endogenous variables either with instrumented, actual values or with forecast survey data. Applying the method of Gottfries and Persson [Empirical examinations of the information sets of economic agents. Quarterly Journal of Economics 103, 251-259], I show how to augment these methods with actual, future values of the endogenous variables to improve statistical efficiency. The method is illustrated with an application to the US hybrid new Keynesian Phillips curve, where traditional, lagged instruments and the median forecast from the Survey of Professional Forecasters both appear to miss significant information used by price-setters, so that forecast pooling with actual values improves the statistical fit to inflation.
Forecast pooling Recursive projection New Keynesian Phillips curve
11
2009
33
11
1858
1866
http://www.sciencedirect.com/science/article/B6V85-4W8VVYD-2/2/c4e35256dfc6c71ae26ea44f79b14de8
Smith, Gregor W.
oai:RePEc:eee:dyncon:v:33:y:2009:i:7:p:1398-14182011-03-29RePEc:eee:dyncon
article
Estimated U.S. manufacturing production capital and technology based on an estimated dynamic structural economic model
Production capital and total factor productivity or technology are fundamental to understanding output and productivity growth, but are unobserved except at disaggregated levels and must be estimated before being used in empirical analysis. In this paper, we develop estimates of production capital and technology for U.S. total manufacturing based on an estimated dynamic structural economic model. First, using annual U.S. total manufacturing data for 1947-1997, we estimate by maximum likelihood a dynamic structural economic model of a representative production firm. In the estimation, capital and technology are completely unobserved or latent variables. Then, we apply the Kalman filter to the estimated model and the data to compute estimates of model-based capital and technology for the sample. Finally, we describe and evaluate similarities and differences between the model-based and standard estimates of capital and technology reported by the Bureau of Labor Statistics.
Kalman filter estimation of latent variables
7
2009
33
7
1398
1418
http://www.sciencedirect.com/science/article/B6V85-4VJ4WJJ-1/2/9da7fdc2df3fec7c680a43654bfb67d8
Chen, Baoline
Zadrozny, Peter A.
oai:RePEc:eee:dyncon:v:33:y:2009:i:11:p:1837-18572011-03-29RePEc:eee:dyncon
article
Implied recovery
In the absence of forward-looking models for recovery rates, market participants tend to use exogenously assumed constant recovery rates in pricing models. We develop a flexible jump-to-default model that uses observables: the stock price and stock volatility in conjunction with credit spreads to identify implied, endogenous, dynamic functions of the recovery rate and default probability. The model in this paper is parsimonious and requires the calibration of only three parameters, enabling the identification of the risk-neutral term structures of forward default probabilities and recovery rates. Empirical application of the model shows that it is consistent with stylized features of recovery rates in the literature. The model is flexible, i.e. it may be used with different state variables, alternate recovery functional forms, and calibrated to multiple debt tranches of the same issuer. The model is robust, i.e. evidences parameter stability over time, is stable to changes in inputs, and provides similar recovery term structures for different functional specifications. Given that the model is easy to understand and calibrate, it may be used to further the development of credit derivatives indexed to recovery rates, such as recovery swaps and digital default swaps, as well as provide recovery rate inputs for the implementation of Basel II.
Credit default swaps Recovery Default probability Reduced form
11
2009
33
11
1837
1857
http://www.sciencedirect.com/science/article/B6V85-4W8VVYD-1/2/480e4555dc0e9b9ef298e2c0911c7787
Das, Sanjiv R.
Hanouna, Paul
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:101-1202011-03-29RePEc:eee:dyncon
article
Optimal stalling when bargaining
This paper analyzes an alternating offer model of bargaining over the sale of an asset in a market, such as that for housing, in which another agent may come and compete for the right to strike a deal. The analysis allows the buyer and seller to have possibly differing views as to how likely such a competition is. Hence the buyer and the seller disagree about their respective bargaining powers. These views adjust to market realizations as the parties learn. It is shown that there exists a unique subgame perfect equilibrium which can be explicitly constructed: hence, conditional on market conditions, equilibrium prices and optimal stall lengths (that is, delay) can be found. Bargaining delay can only occur if there is optimism (not pessimism) and only if the parties are open to learning as time elapses. This delay can occur even for very small levels of optimism and the delay can be for economically significant periods.
Optimism Bargaining delay Asset sales House sales Bargaining power
2
2010
34
2
101
120
http://www.sciencedirect.com/science/article/B6V85-4WD7B2K-1/2/53887f93e92bb8fbebed52c08c3dc3f2
Thanassoulis, John
oai:RePEc:eee:dyncon:v:34:y:2010:i:1:p:1-32011-03-29RePEc:eee:dyncon
article
Computational suite of models with heterogeneous agents: Incomplete markets and aggregate uncertainty
This paper describes the first model considered in the computational suite project that compares different numerical algorithms. It is an incomplete markets economy with a continuum of agents and an inequality (borrowing) constraint.
Numerical solutions Simulations Approximations
1
2010
34
1
1
3
http://www.sciencedirect.com/science/article/B6V85-4X01P6T-1/2/6c88c795995fed3eba523854830290f4
Den Haan, Wouter J.
Judd, Kenneth L.
Juillard, Michel
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:897-9122011-03-29RePEc:eee:dyncon
article
Uncertainty-driven growth
In this paper, I present a model in which firm-level uncertainty raises aggregate productivity growth. The mechanism for this is learning-by-doing in the research sector: firms undertake research to reduce uncertainty, which results in social knowledge accumulation that improves the productivity of future research. The model explains the positive correlation between TFP growth and dispersion in manufacturing industries.
Firm-level uncertainty Knowledge accumulation TFP growth and dispersion Bayesian updating
5
2010
34
5
897
912
http://www.sciencedirect.com/science/article/B6V85-4Y05DF9-1/2/1e491377fc0274d0c3285466e47a76de
Oikawa, Koki
oai:RePEc:eee:dyncon:v:33:y:2009:i:12:p:1991-20002011-03-29RePEc:eee:dyncon
article
Capital-labor substitution and equilibrium indeterminacy
This paper examines the quantitative relationship between the elasticity of capital-labor substitution in production and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector growth model. With variable capital utilization, the substitution elasticity has little quantitative impact on the minimum degree of increasing returns needed for indeterminacy. However, when capital utilization is constant, a below-unity substitution elasticity sharply raises the minimum degree of increasing returns because it imposes a higher effective adjustment cost on labor hours. Overall, our results show that empirically-plausible departures from the Cobb-Douglas production specification can make indeterminacy more difficult to achieve.
Capital-labor substitution Equilibrium indeterminacy Capital utilization Real business cycles Sunspots
12
2009
33
12
1991
2000
http://www.sciencedirect.com/science/article/B6V85-4WP47KN-1/2/7664cfb1f18c988304296f3bf2176852
Guo, Jang-Ting
Lansing, Kevin J.
oai:RePEc:eee:dyncon:v:33:y:2009:i:10:p:1824-18362011-03-29RePEc:eee:dyncon
article
Can a stochastic cusp catastrophe model explain stock market crashes?
This paper is the first attempt to fit a stochastic cusp catastrophe model to stock market data. We show that the cusp catastrophe model explains the crash of stock exchanges much better than other models. Using the data of U.S. stock markets we demonstrate that the crash of October 19, 1987, may be better explained by cusp catastrophe theory, which is not true for the crash of September 11, 2001. With the help of sentiment measures, such as the index put/call options ratio and trading volume (the former models the chartists, the latter the fundamentalists), we have found that the 1987 returns are bimodal, and the cusp catastrophe model fits these data better than alternative models. Therefore we may say that the crash has been led by internal forces. However, the causes for the crash of 2001 are external, which is also evident in much weaker presence of bifurcations in the data. In this case, alternative models explain the crash of stock exchanges better than the cusp catastrophe model.
Stochastic cusp catastrophe Bifurcations Singularity Nonlinear dynamics Stock market crash
10
2009
33
10
1824
1836
http://www.sciencedirect.com/science/article/B6V85-4W8VVYD-3/2/2eea78b69386e10727edc7d8d4ddca49
Barunik, J.
Vosvrda, M.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:437-4552011-03-29RePEc:eee:dyncon
article
On-the-job search, sticky prices, and persistence
Models of the monetary transmission mechanism often generate empirically implausible business fluctuations. This paper analyzes the role of on-the-job search in the propagation of monetary shocks in a sticky price model with labor market search frictions. Such frictions induce long-term employment relationships, such that the real marginal cost is determined by real wages and the cost of an employment relationship. On-the-job search opens up an extra channel of employment growth that dampens the response of these two components. Because real marginal cost rigidity induces small price adjustments, on-the-job search gives rise to a strong propagation of monetary shocks that increases output persistence.
On-the-job search Cost of an employment relationship Sticky prices Business fluctuations
3
2010
34
3
437
455
http://www.sciencedirect.com/science/article/B6V85-4XDCHJC-1/2/5fd7c33aa55e0aa768f4002fb6ecfe75
Van Zandweghe, Willem
oai:RePEc:eee:dyncon:v:33:y:2009:i:8:p:1617-16292011-03-29RePEc:eee:dyncon
article
Delegation, time inconsistency and sustainable equilibrium
This paper analyzes the effectiveness of delegation in solving the time inconsistency problem of monetary policy using a microfounded general equilibrium model where delegation and reappointment are explicitly included into the government's strategy. The method of Chari and Kehoe [1990. Sustainable plans. Journal of Political Economy 98 (4), 783-802] is applied to characterize the entire set of sustainable outcomes. Countering McCallum's [1995. Two fallacies concerning central-bank independence. American Economic Review 85 (2), 207-211] second fallacy, delegation is able to eliminate the time inconsistency problem, with the commitment policy being sustained under discretion for any intertemporal discount rate.
Central bank Monetary policy Institutional design
8
2009
33
8
1617
1629
http://www.sciencedirect.com/science/article/B6V85-4VTVPSW-1/2/2a930d27022c986721cb7efe91ee400e
Basso, Henrique S.
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:231-2452011-03-29RePEc:eee:dyncon
article
On the distributional consequences of epidemics
We develop a tractable general theory for the study of the economic and demographic impact of epidemics, notably its distributional consequences. To this end, we build up a three-period overlapping generations model where altruistic parents choose optimal health expenditures for their children and themselves. The survival probability of adults and children depends on such investments. Agents can be skilled or unskilled. In this paper, epidemics are modeled as one-period exogenous shocks to the adults' survival rates. We first show that such epidemics have permanent effects on the size of population and on the level of output. However, the income distribution is shown to be unaltered in the long-run. Second, we show that this distribution may be significantly altered in the medium-term: in particular, the proportion of the unskilled will necessarily increase at that term if orphans are too penalized in the access to education.
Epidemics Orphans Income distribution Endogenous survival Medium-term dynamics
2
2010
34
2
231
245
http://www.sciencedirect.com/science/article/B6V85-4X7GMB3-3/2/813474d388aa67015a6d312bb61f82bd
Boucekkine, Raouf
Laffargue, Jean-Pierre
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:158-1782011-03-29RePEc:eee:dyncon
article
Dynamic investment and capital structure under manager-shareholder conflict
This paper investigates the interactions between the investment and financing decisions of a firm under manager-shareholder conflicts arising from asymmetric information. In particular, we extend the manager-shareholder conflict problem in a real options model by incorporating debt financing. We show that manager-shareholder conflicts over investment policy increase not only the investment and default triggers but also coupon payments, which lead to a decrease in the equity value. Moreover, given the presence of manager-shareholder conflicts, debt financing increases investment and decreases total social welfare. As a result, there is a trade-off between the efficiency of investment and total social welfare with debt financing. These results fit well with the findings of previous empirical work in this area.
Real options Debt financing Agency problem Asymmetric information
2
2010
34
2
158
178
http://www.sciencedirect.com/science/article/B6V85-4X49Y9V-1/2/e682069b17c95754acb4213864612245
Shibata, Takashi
Nishihara, Michi
oai:RePEc:eee:dyncon:v:33:y:2009:i:11:p:1912-19282011-03-29RePEc:eee:dyncon
article
More hedging instruments may destabilize markets
This paper formalizes the idea that more hedging instruments may destabilize markets when traders have heterogeneous expectations and adapt their behavior according to performance-based reinforcement learning. In a simple asset pricing model with heterogeneous beliefs the introduction of additional Arrow securities may destabilize markets, and thus increase price volatility, and at the same time decrease average welfare. We also investigate whether a fully rational agent can employ additional hedging instruments to stabilize markets. It turns out that the answer depends on the composition of the population of non-rational traders and the information gathering costs for rationality.
Financial innovation Asset pricing Hedging Reinforcement learning Bifurcations
11
2009
33
11
1912
1928
http://www.sciencedirect.com/science/article/B6V85-4WJBBPJ-1/2/40e5b1ee44776e3b879835e8696d1739
Brock, W.A.
Hommes, C.H.
Wagener, F.O.O.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:472-4892011-03-29RePEc:eee:dyncon
article
A reliable and computationally efficient algorithm for imposing the saddle point property in dynamic models
This paper describes a set of algorithms for quickly and reliably solving linear rational expectations models. The utility, reliability and speed of these algorithms are a consequence of (1) the algorithm for computing the minimal dimension state space transition matrix for models with arbitrary numbers of lags or leads, (2) the availability of a simple modeling language for characterizing a linear model and (3) the use of the QR Decomposition and Arnoldi type eigenspace calculations. The paper also presents new formulae for computing and manipulating solutions for arbitrary exogenous processes.
Linear rational expectations Blanchard-Kahn Saddle point solution
3
2010
34
3
472
489
http://www.sciencedirect.com/science/article/B6V85-4XJP3VB-1/2/2970fcba269144417b87a6fc4b368cd4
Anderson, Gary S.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:503-5212011-03-29RePEc:eee:dyncon
article
Markov-perfect capital and labor taxes
This paper analyzes the Markov-perfect equilibrium of an economy were a benevolent government that lacks the ability to commit to future policy choices, uses taxes on capital and labor income to finance the provision of a public good. The main finding is that the government taxes capital and subsidizes labor so that only the dynamic inefficiency of future capital taxes remains. If agents' preference for the public good is sufficiently high, then capital is confiscated. Setting bounds on taxes alleviates the dynamic inefficiency inherent in capital taxation, but some implementations carry a high welfare cost. Allowing for endogenous capital utilization makes the current capital tax distortionary and implies capital and labor tax rates that are relatively close to those measured for the U.S. economy.
Time-consistency Markov-perfect equilibrium Optimal taxation Capital tax
3
2010
34
3
503
521
http://www.sciencedirect.com/science/article/B6V85-4XHCHWT-2/2/f132e8737850625c5ac850743c1a6fee
Martin, Fernando M.
oai:RePEc:eee:dyncon:v:34:y:2010:i:1:p:59-682011-03-29RePEc:eee:dyncon
article
Solving the incomplete markets model with aggregate uncertainty using parameterized cross-sectional distributions
This note describes how the incomplete markets model with aggregate uncertainty in Den Haan et al. [Comparison of solutions to the incomplete markets model with aggregate uncertainty. Journal of Economic Dynamics and Control, this issue] is solved using standard quadrature and projection methods. This is made possible by linking the aggregate state variables to a parameterized density that describes the cross-sectional distribution. A simulation procedure is used to find the best shape of the density within the class of approximating densities considered. This note compares several simulation procedures in which there is--as in the model--no cross-sectional sampling variation.
Numerical solutions Projection methods Simulations
1
2010
34
1
59
68
http://www.sciencedirect.com/science/article/B6V85-4X0F3P5-1/2/e9e49738b507ae98d607809c22b17b6a
Algan, Yann
Allais, Olivier
Den Haan, Wouter J.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:542-5542011-03-29RePEc:eee:dyncon
article
A lattice algorithm for pricing moving average barrier options
This paper presents a lattice algorithm for pricing both European- and American-style moving average barrier options (MABOs). We develop a finite-dimensional partial differential equation (PDE) model for discretely monitored MABOs and solve it numerically by using a forward shooting grid method. The modeling PDE for continuously monitored MABOs has infinite dimensions and cannot be solved directly by any existing numerical method. We find their approximate values indirectly by using an extrapolation technique with the prices of discretely monitored MABOs. Numerical experiments show that our algorithm is very efficient.
Barrier option Moving average Lattice algorithm Forward shooting grid method Extrapolation
3
2010
34
3
542
554
http://www.sciencedirect.com/science/article/B6V85-4XH5MF1-1/2/bab10d21859a7d34354377f78e510e02
Dai, Min
Li, Peifan
Zhang, Jin E.
oai:RePEc:eee:dyncon:v:34:y:2010:i:1:p:50-582011-03-29RePEc:eee:dyncon
article
Solving the incomplete market model with aggregate uncertainty using a perturbation method
We use a perturbation method to solve the incomplete markets model with aggregate uncertainty described in den Haan et al. [Computational suite of models with heterogeneous agents: incomplete markets and model uncertainty. Journal of Economic Dynamics & Control, this issue]. To apply that method, we use a "barrier method" to replace the original problem with occasionally binding inequality constraints by one with only equality constraints. We replace the structure with a continuum of agents by a setting in which a single infinitesimal agent faces prices generated by a representative-agent economy. We also solve a model variant with a large (but finite) number of agents. Our perturbation-based method is much simpler and faster than other methods.
Heterogeneous agents Occasionally binding inequality constraints Barrier method
1
2010
34
1
50
58
http://www.sciencedirect.com/science/article/B6V85-4WYDMW5-2/2/585b7dd21ea624d99d73b60f8a867a57
Kim, Sunghyun Henry
Kollmann, Robert
Kim, Jinill
oai:RePEc:eee:dyncon:v:34:y:2010:i:1:p:42-492011-03-29RePEc:eee:dyncon
article
Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm
This paper studies the properties of the solution to the heterogeneous agents model in Den Haan et al. [2009. Computational suite of models with heterogeneous agents: incomplete markets and aggregate uncertainty. Journal of Economic Dynamics and Control, this issue]. To solve for the individual policy rules, we use an Euler-equation method iterating on a grid of pre-specified points. To compute the aggregate law of motion, we use the stochastic-simulation approach of Krusell and Smith [1998. Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106, 868-896]. We also compare the stochastic- and non-stochastic-simulation versions of the Krusell-Smith algorithm, and we find that the two versions are similar in terms of their speed and accuracy.
Dynamic stochastic models Heterogeneous agents Aggregate uncertainty Euler-equation methods Simulations Numerical solutions
1
2010
34
1
42
49
http://www.sciencedirect.com/science/article/B6V85-4WYDMW5-1/2/d342f8cb89af29c3432db5cca8df2a88
Maliar, Lilia
Maliar, Serguei
Valli, Fernando
oai:RePEc:eee:dyncon:v:33:y:2009:i:7:p:1469-14892011-03-29RePEc:eee:dyncon
article
Optimal monetary policy in economies with dual labor markets
We present a dynamic stochastic general equilibrium (DSGE) New Keynesian model with indivisible labor and a dual labor market: a Walrasian one where wages are fully flexible and a unionized one characterized by real wage rigidity. We show that the negative effect of a productivity shock on inflation and the positive effect of a cost-push shock are crucially determined by the proportion of firms that belong to the unionized sector. The larger this number, the larger are these effects. Consequently, the larger the union coverage, the larger should be the optimal response of the nominal interest rate to exogenous productivity and cost-push shocks. The optimal inflation and output gap volatility increases as the number of the unionized firms in the economy increases.
Optimal monetary policy Trade-unions Real wage rigidity Taylor rules
7
2009
33
7
1469
1489
http://www.sciencedirect.com/science/article/B6V85-4VR242T-1/2/5bba62e4fe7f9a7326d34e8629a7707f
Mattesini, Fabrizio
Rossi, Lorenza
oai:RePEc:eee:dyncon:v:33:y:2009:i:12:p:1962-19802011-03-29RePEc:eee:dyncon
article
Optimal timing of management turnover under agency problems
We explore the timing of the replacement of a manager as an important incentive mechanism, using a real options approach in a situation where the timing of the decision to replace the manager is related to a major change in a firm's strategies that involves spending large amounts of various sunk adjustment costs. Using a continuous-time agency setting, we show that when renegotiation is not possible, the early replacement of the manager of a lower quality project (prior to the first-best trigger level) occurs only if a moral hazard or an adverse selection problem exists. We also indicate that the possibility of renegotiation drastically changes the results.
Agency CEO turnover Executive compensation Real options Renegotiation
12
2009
33
12
1962
1980
http://www.sciencedirect.com/science/article/B6V85-4WMDHDY-1/2/3dfa23d0b9cf18873e137d4878e07810
Hori, Keiichi
Osano, Hiroshi
oai:RePEc:eee:dyncon:v:33:y:2009:i:7:p:1490-15302011-03-29RePEc:eee:dyncon
article
White discrimination in provision of black education: Plantations and towns
We present a model of public provision of education for blacks in two discriminatory regimes, white plantation controlled, and white yeoman-town controlled. We show that the ability to migrate to a non-discriminating district constrains the ability of both types of regimes to discriminate. The model produces time series of educational outcomes for whites and blacks that mimic the behavior seen in Post Reconstruction South Carolina to the onset of the Civil Rights Act. It also fits the Post World War II black-white income differentials.
Discrimination Education Development Income convergence
7
2009
33
7
1490
1530
http://www.sciencedirect.com/science/article/B6V85-4VV2NFC-4/2/13b3ea6cf4d406d2ba3fe4d1c7dd9e44
Canaday, Neil
Tamura, Robert
oai:RePEc:eee:dyncon:v:33:y:2009:i:8:p:1555-15762011-03-29RePEc:eee:dyncon
article
Preferences with frames: A new utility specification that allows for the framing of risks
Experiments on decision-making show that, when people evaluate risk, they often engage in "narrow framing": that is, in contrast to the prediction of traditional utility functions defined over wealth or consumption, they often evaluate risks in isolation, separately from other risks they are already facing. While narrow framing has many potential real-world applications, there are almost no tractable preference specifications that incorporate it into the standard framework used by economists. In this paper, we propose such a specification and demonstrate its tractability in both portfolio choice and equilibrium settings.
Framing Stock market participation Diversification Equity premium
8
2009
33
8
1555
1576
http://www.sciencedirect.com/science/article/B6V85-4VV2NFC-1/2/0bbc52d6767a2a5dd7d22fcf877c17e7
Barberis, Nicholas
Huang, Ming
oai:RePEc:eee:dyncon:v:33:y:2009:i:6:p:1183-12002011-03-29RePEc:eee:dyncon
article
Real wages over the business cycle: OECD evidence from the time and frequency domains
We study differences in the adjustment of aggregate real wages in the manufacturing sector over the business cycle across OECD countries, combining results from different data and dynamic methods. Summary measures of cyclicality show genuine cross-country heterogeneity even after controlling for the impact of data and methods. We find that more open economies and countries with stronger unions tend to have less pro-cyclical (or more counter-cyclical) wages. We also find a positive correlation between the cyclicality of real wages and employment, suggesting that policy complementarities may influence the adjustment of both quantities and prices in the labor market.
Real wages Business cycle Dynamic correlation Labor market institutions
6
2009
33
6
1183
1200
http://www.sciencedirect.com/science/article/B6V85-4V761Y9-1/2/c5b6f897d26f8921d975aafd873429a2
Messina, Julian
Strozzi, Chiara
Turunen, Jarkko
oai:RePEc:eee:dyncon:v:33:y:2009:i:9:p:1719-17382011-03-29RePEc:eee:dyncon
article
Behavioral heterogeneity in dynamic search situations: Theory and experimental evidence
This paper presents models for search behavior and provides experimental evidence that behavioral heterogeneity in search is linked to heterogeneity in individual preferences. Observed search behavior is more consistent with a new model that assumes dynamic updating of utility reference points than with models that are based on expected-utility maximization. Specifically, reference point updating and loss aversion play a role for more than a third of the population. The findings are of practical relevance as well as of interest for researchers who incorporate behavioral heterogeneity into models of dynamic choice behavior in, for example, consumer economics, labor economics, finance, and decision theory.
Dynamic choice Behavioral heterogeneity Reference points Individual differences Loss aversion
9
2009
33
9
1719
1738
http://www.sciencedirect.com/science/article/B6V85-4W1SRKP-1/2/93cd4c3f2cbd46f05005e8735488ec27
Schunk, Daniel
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:490-5022011-03-29RePEc:eee:dyncon
article
An adverse selection model of optimal unemployment insurance
We ask whether offering a menu of unemployment insurance contracts is welfare-improving in a heterogeneous population. We adopt a repeated moral hazard framework as in Shavell and Weiss (1979), supplemented by unobserved heterogeneity about agents' job opportunities. Our main theoretical contribution is a quasi-recursive formulation of our adverse selection problem, including a geometric characterization of the state space. Our main economic result is that optimal contracts for "bad" searchers tend to be upward-sloping due to an adverse selection effect. This is in contrast to the well-known optimal decreasing time profile of benefits in pure moral hazard environments that continue to be optimal for "good" searchers in our model.
Unemployment insurance Recursive contracts Adverse selection Repeated moral hazard
3
2010
34
3
490
502
http://www.sciencedirect.com/science/article/B6V85-4XHCHWT-1/2/f86fc5e8653020c812ebb16ce9780b59
Hagedorn, Marcus
Kaul, Ashok
Mennel, Tim
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:417-4362011-03-29RePEc:eee:dyncon
article
Modeling structural breaks in economic relationships using large shocks
This paper introduces a new model of structural breaks in the coefficients of economic relationships which allows them to be driven by large past economic shocks. The breaks generated by these shocks can be taken to reflect stochastic changes in agents' decisions or beliefs triggered by extraordinary economic events. Our model specifies that both the timing and size of breaks are stochastic. The last property of it enables us to investigate qualitative effects that large shocks can have on economic relationships. As an empirical application of our model, the paper investigates the stability the oil-economy relationship since the early sixties. From the six large oil-shocks identified by our data, the paper shows that only the first oil shock at the end of 1973 has caused a major long term adverse effect on economic activity. All the large oil price shocks that have happened since then did not have any significant negative effects on the slope of the oil-economy relationship.
Structural breaks State space model Oil shocks
3
2010
34
3
417
436
http://www.sciencedirect.com/science/article/B6V85-4XF83N9-1/2/e94e059c18e704d8ed06f927d111130b
Kapetanios, G.
Tzavalis, E.
oai:RePEc:eee:dyncon:v:33:y:2009:i:8:p:1577-15922011-03-29RePEc:eee:dyncon
article
Modelling long memory and structural breaks in conditional variances: An adaptive FIGARCH approach
This paper introduces a new long memory volatility process, denoted by adaptive FIGARCH, or A-FIGARCH , which is designed to account for both long memory and structural change in the conditional variance process. Structural change is modeled by allowing the intercept to follow the smooth flexible functional form due to Gallant (1984. The Fourier flexible form. American Journal of Agricultural Economics 66, 204-208). A Monte Carlo study finds that the A-FIGARCH model outperforms the standard FIGARCH model when structural change is present, and performs at least as well in the absence of structural instability. An empirical application to stock market volatility is also included to illustrate the usefulness of the technique.
FIGARCH Long memory Structural change Stock market volatility
8
2009
33
8
1577
1592
http://www.sciencedirect.com/science/article/B6V85-4VV2NFC-5/2/efe25129db96605fa85f0112792ac052
Baillie, Richard T.
Morana, Claudio
oai:RePEc:eee:dyncon:v:33:y:2009:i:9:p:1639-16472011-03-29RePEc:eee:dyncon
article
Life-cycle savings, bequest, and a diminishing impact of scale on growth
The present paper shows that the savings motive critically affects the size and sign of scale effects in standard endogenous growth models. If the bequest motive dominates, the scale effect is positive. If the life-cycle motive dominates, the scale effect is ambiguous and may even be negative.
Overlapping generations Endogenous growth Scale effects
9
2009
33
9
1639
1647
http://www.sciencedirect.com/science/article/B6V85-4VWHVX8-1/2/9a8927b3b4cabeb2b95cf9aa52b67312
Dalgaard, Carl-Johan
Jensen, Martin Kaae
oai:RePEc:eee:dyncon:v:33:y:2009:i:8:p:1543-15542011-03-29RePEc:eee:dyncon
article
Stochastic adaptation in finite games played by heterogeneous populations
We analyze stochastic adaptation in finite n-player games played by heterogeneous populations containing best repliers, better repliers, and imitators. Individuals select strategies by applying a personal learning rule to a sample from a finite history of past play. We give sufficient conditions for convergence to minimal closed sets under better replies and selection of a Pareto dominant such set. Finally, we demonstrate that the stochastically stable states are sensitive to the sample size by showing convergence to the risk-dominant equilibrium for sufficiently small sample size and to the Pareto-dominant equilibrium for sufficiently large sample size in 2x2 coordination games.
Heterogeneous agents Markov chain Stochastic stability Pareto dominance Risk dominance
8
2009
33
8
1543
1554
http://www.sciencedirect.com/science/article/B6V85-4VT14CV-1/2/8b77e83f1c35788ff28345422a1226ef
Josephson, Jens
oai:RePEc:eee:dyncon:v:33:y:2009:i:7:p:1379-13972011-03-29RePEc:eee:dyncon
article
Investor heterogeneity, asset pricing and volatility dynamics
We provide an explicit characterization of the equilibrium when investors have heterogeneous risk preferences. Given market completeness, investors can achieve full risk sharing. Thus, a representative agent can be constructed, though this agent's risk aversion changes over time as the relative wealths of the individual investors change. We show that volatility depends on the covariance of aggregate risk aversion and stock returns. We find that heterogeneity increases volatility, produces volatility clustering (ARCH effects) and "leverage"-like effects. Option prices exhibit implied volatility skews. There is predictability and we assess the magnitude of investors' hedging demands and trading volume. Further, diversity is beneficial to all agents and entails welfare gains that can be substantial.
Asset pricing Preference heterogeneity Volatility
7
2009
33
7
1379
1397
http://www.sciencedirect.com/science/article/B6V85-4VC7DTK-2/2/34aad70622eba664c17d40113543d2af
Weinbaum, David
oai:RePEc:eee:dyncon:v:33:y:2009:i:10:p:1739-17562011-03-29RePEc:eee:dyncon
article
Learning games
This paper presents a model of learning about a game. Players initially have little knowledge about the game. Through playing the same game repeatedly, each player not only learns which action to choose but also constructs a personal view of the game. The model is studied using a hybrid payoff matrix of the prisoner's dilemma and coordination games. Results of computer simulations show that (1) when all the players are slow at learning the game, they have only a partial understanding of the game, but might enjoy higher payoffs than in cases with full or no understanding of the game; (2) when one player is quick in learning the game, that player obtains a higher payoff than the others. However, all can receive lower payoffs than in the case in which all players are slow learners.
Learning Subjective views Computer simulation
10
2009
33
10
1739
1756
http://www.sciencedirect.com/science/article/B6V85-4W1SRKP-2/2/0e351e1c4a4ac019be7e885a048c2780
Hanaki, Nobuyuki
Ishikawa, Ryuichiro
Akiyama, Eizo
oai:RePEc:eee:dyncon:v:34:y:2010:i:1:p:79-992011-03-29RePEc:eee:dyncon
article
Assessing the accuracy of the aggregate law of motion in models with heterogeneous agents
This paper shows that the R2 and the standard error have fatal flaws and are inadequate accuracy tests. Using data from a Krusell-Smith economy, I show that approximations for the law of motion of aggregate capital, for which the true standard deviation of aggregate capital is up to 14% (119%) higher than the implied value and which are thus clearly inaccurate, can have an R2 as high as 0.9999 (0.99). Key in generating a more powerful test is that predictions of the aggregate law of motion are not updated with the aggregated simulated individual data.
Numerical solutions Simulations Approximations
1
2010
34
1
79
99
http://www.sciencedirect.com/science/article/B6V85-4WYDMW5-5/2/c10d77bb52ecee2c4b29d7180d949266
Den Haan, Wouter J.
oai:RePEc:eee:dyncon:v:33:y:2009:i:8:p:1593-16032011-03-29RePEc:eee:dyncon
article
Single-leader-multiple-follower games with boundedly rational agents
This paper studies a class of hierarchical games called single-leader-multiple-follower games (SLMFGs) that have important applications in economics and engineering. We consider such games in the context of boundedly rational agents that are limited in the information and computational power they may possess. Agents in our SLMFG are modeled as adaptive learners that use simple reinforcement learning schemes to learn their optimal behavior. The proposed learning approach is illustrated using a well-studied problem in economics. It is shown that with a patiently learning leader the repeated plays of the game result in approximate equilibrium outcomes.
Leader-follower games Bounded rationality Reinforcement learning
8
2009
33
8
1593
1603
http://www.sciencedirect.com/science/article/B6V85-4VV2NFC-3/2/8fa15c45d6a3e3886a66bb6fa7ba297f
Tharakunnel, Kurian
Bhattacharyya, Siddhartha
oai:RePEc:eee:dyncon:v:33:y:2009:i:4:p:864-8822011-03-29RePEc:eee:dyncon
article
Comparing DSGE-VAR forecasting models: How big are the differences?
I generate priors for a vector autoregression (VAR) from a standard real business cycle (RBC) model, an RBC model with capital-adjustment costs and habit formation, and a sticky-price model with an unaccommodating monetary authority. The response of hours worked to a TFP shock differs sharply across these models. I compare the accuracy of forecasts made from each of the resulting dynamic stochastic general equilibrium vector autoregression (DSGE-VAR) models. Despite having different structural characteristics, the DSGE-VARs are comparable in terms of forecasting performance. As in previous work, DSGE-VARs compare favorably with atheoretical VARs.
Model evaluation Priors from DSGE models Economic fluctuations Hours debate Business cycles
4
2009
33
4
864
882
http://www.sciencedirect.com/science/article/B6V85-4TY9MJW-4/2/915160dda69b7fd6339b7434d25ece9b
Ghent, Andra C.
oai:RePEc:eee:dyncon:v:33:y:2009:i:2:p:477-4902011-03-29RePEc:eee:dyncon
article
Structural changes in the US economy: Is there a role for monetary policy?
This paper investigates the contribution of monetary policy to the changes in output growth and inflation dynamics in the US. We identify a policy shock and a policy rule in a time-varying coefficients VAR using robust sign restrictions. The transmission of policy shocks has been relatively stable. The variance of the policy shock has decreased over time, but policy shocks account for a small fraction of the level and the variations in inflation and output growth volatility and persistence. Finally we find little evidence of a significant increase in the long run response of the interest rate to inflation.
Monetary policy Inflation persistence Transmission of shocks Time-varying coefficients structural VARs
2
2009
33
2
477
490
http://www.sciencedirect.com/science/article/B6V85-4TCHKFX-1/2/245515b8c8731a4099ea84533fe25109
Canova, Fabio
Gambetti, Luca
oai:RePEc:eee:dyncon:v:33:y:2009:i:6:p:1201-12162011-03-29RePEc:eee:dyncon
article
Chaos in the cobweb model with a new learning dynamic
The new learning dynamic of Brown et al. [(1950). Solutions of games by differential equation. In: Kuhn, H.W., Tucker, A.W. (Eds.), Contributions to the Theory of Games I. Annals of Mathematics Studies, vol. 24. Princeton University Press, Princeton] is introduced to macroeconomic dynamics via the cobweb model with rational and naive forecasting strategies. This dynamic has appealing properties such as positive correlation and inventiveness. There is persistent heterogeneity in the forecasts and chaotic behavior with bifurcations between periodic orbits and strange attractors for the same range of parameter values as in previous studies. Unlike Brock and Hommes [(1997). A rational route to randomness. Econometrica (65), 1059-1095], however, there exist intuitively appealing steady states where one strategy dominates, and there are qualitative differences in the resulting dynamics of the two approaches. There are similar bifurcations in a parameter that represents how aggressively agents switch to better performing strategies.
Chaos Cobweb model Learning BNN
6
2009
33
6
1201
1216
http://www.sciencedirect.com/science/article/B6V85-4V70R6N-2/2/43b6f52709e46681b232370e39b9e4ed
Waters, George A.
oai:RePEc:eee:dyncon:v:34:y:2010:i:1:p:28-352011-03-29RePEc:eee:dyncon
article
Solving the incomplete markets model with aggregate uncertainty by backward induction
This paper describes a method to solve models with a continuum of agents, incomplete markets and aggregate uncertainty. I use backward induction on a finite grid of points in the aggregate state space. The aggregate state includes a small number of statistics (moments) of the cross-sectional distribution of capital. For any given set of moments, agents use a specific cross-sectional distribution, called "proxy distribution", to compute the equilibrium. Information from the steady state distribution as well as from simulations can be used to chose a suitable proxy distribution.
Heterogeneous agents Backward induction
1
2010
34
1
28
35
http://www.sciencedirect.com/science/article/B6V85-4WYDMW5-6/2/9b9d617936db9cba636eaca008aeb221
Reiter, Michael
oai:RePEc:eee:dyncon:v:33:y:2009:i:12:p:2015-20292011-03-29RePEc:eee:dyncon
article
Jealousy and underconsumption in a one-sector model with wealth preference
The present paper examines the effects of consumption externalities on economic performance in a one-sector model with wealth preference. The presence of the wealth preference generates a wealth effect in consumption growth, which plays a crucial role for consumption externalities to have impacts on the economy. Our main findings are: (i) regardless of the assumption of inelastic labor supply, the distortionary effect of consumption externalities stays in the long run; (ii) the income tax as well as the consumption tax can modify the efficiency; and (iii) the numerical simulations supplement theoretical findings.
Consumption externalities Wealth preference Wealth effect Optimal tax policy Intertemporal welfare
12
2009
33
12
2015
2029
http://www.sciencedirect.com/science/article/B6V85-4X1J705-1/2/3aafeb7b6ff9301a71d7c146839e0e11
Nakamoto, Yasuhiro
oai:RePEc:eee:dyncon:v:33:y:2009:i:9:p:1682-16982011-03-29RePEc:eee:dyncon
article
Life-cycle portfolio choice: The role of heterogeneous under-diversification
In life-cycle portfolio choice models it is standard to assume that all agents invest in a diversified stock market index. In contrast recent empirical evidence, summarized in Campbell [2006. Household finance. Journal of Finance 61, 1553-1604] suggests that households' financial portfolios are under-diversified and that there is substantial heterogeneity in diversification. In the present paper I examine the effects of heterogeneous under-diversification in a life-cycle portfolio choice model with uninsurable uncertain earnings and fixed per-period participation costs. The analysis of the model shows that realistically calibrated under-diversification gives an important contribution to the explanation of two key facts of households' portfolio allocation: the moderate stock market participation rate and the moderate stock share for participants.
Portfolio choice Life-cycle Under-diversification Retirement wealth
9
2009
33
9
1682
1698
http://www.sciencedirect.com/science/article/B6V85-4W0WJ2J-2/2/2ca74a510acfd4dd712cb88b8de7acd8
Campanale, Claudio
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:810-8202013-03-05RePEc:eee:dyncon
article
The intrinsic comparative dynamics of infinite horizon optimal control problems with a time-varying discount rate and time-distance discounting
The intrinsic comparative dynamics of a ubiquitous class of optimal control problems with a time-varying discount rate and time-distance discounting are derived and shown to be characterized by a positive semidefinite matrix. It is also shown that the said comparative dynamics are invariant to the functional form of the discount rate function and the type of agent. Consequently, if one limits econometric testing to the basic comparative dynamics of the given class of control problems, one cannot determine (i) the functional form of the discount rate function used by an agent, and thus if an agent is a time-consistent or time-inconsistent decision maker, or (ii) if an agent commits to a plan of action or takes into account the changing nature of his preferences when choosing a plan.
Comparative dynamics; Optimal control; Precommitment solution; Sophisticated solution; Time-distance discounting; Time inconsistency; Time-varying discount rate;
4
2013
37
810
820
http://www.sciencedirect.com/science/article/pii/S0165188912002321
Caputo, Michael R.
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:711-7342013-03-05RePEc:eee:dyncon
article
Deregulation shock in product market and unemployment
In a dynamic general equilibrium model with endogenous markups and labor market frictions, we investigate the effects of increased product market competition. Unlike most macroeconomic models of search, we endogenize the labor supply along the extensive margin. We find numerically that a model with endogenous labor force participation decision produces a decline in the unemployment rate which is almost three times larger than that in a model with fixed labor force. For a calibration capturing alternatively the European and the US labor markets, a deregulation episode, which lowers the markup by 3 percentage points, results in a fall in the unemployment rate by 0.17 and 0.05 percentage point, respectively, while the labor share is almost unaffected in the long-run. The sensitivity analysis reveals that product market deregulation is more effective in countries where product and labor market regulations are high, unemployment benefits are small and labor force is more responsive.
Imperfect competition; Endogenous markup; Search theory; Unemployment; Deregulation;
4
2013
37
711
734
E24
J63
L16
http://www.sciencedirect.com/science/article/pii/S0165188912002187
Bertinelli, Luisito
Cardi, Olivier
Sen, Partha
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:838-8532013-03-05RePEc:eee:dyncon
article
Oligopoly exploitation of a private property productive asset
In this paper, we build a Closed-Loop Nash Equilibrium of a private property productive asset oligopoly. We compare and contrast private with common property in terms of exploitation rates and social welfare, and provide a comparative dynamic analysis with respect to the number of firms in the industry. Contrary to previous studies on oligopolistic exploitation of productive assets, before exploitation begins, the resource is parcelled out: each firm privately owns and manages the assigned parcel over the entire planning horizon. Compared with the common property regime, we find a new set of results, both in the short- and in the long-run. As for social welfare, we provide conditions on the implicit growth rate and the initial asset stock under which the socially optimal allocation of the resource implies a natural monopoly.
Closed-Loop Nash Equilibrium; Productive assets; Private property; Common property; Oligopoly;
4
2013
37
838
853
D43
L13
Q20
C73
http://www.sciencedirect.com/science/article/pii/S0165188912002308
Colombo, Luca
Labrecciosa, Paola
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:854-8742013-03-05RePEc:eee:dyncon
article
Government education expenditures in early and late childhood
Human capital investment in early childhood can lead to large and persistent gains. Beyond this window of opportunity, human capital accumulation is more costly. Despite compelling evidence in support of this notion, government education spending is allocated disproportionately toward late childhood and young adulthood. We consider the consequences of a reallocation using an overlapping generations model with private and public spending on early and late childhood education. Taking as given the higher returns to early childhood investment, we find that the current allocation may nonetheless be appropriate. When we consider a homogeneous population, this can hold for moderate levels of government spending. With heterogeneity, this can hold for middle income workers. Lower income workers, by contrast, may benefit from a reallocation.
Government education expenditures; Human capital; Heterogeneous agents; Life-cycle model;
4
2013
37
854
874
E62
I22
H52
J24
http://www.sciencedirect.com/science/article/pii/S016518891200231X
Abington, Casey
Blankenau, William
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:756-7732013-03-05RePEc:eee:dyncon
article
Monetary regime change and business cycles
This paper proposes a method to structurally estimate a model with a regime shift and evaluates the importance of acknowledging the break in the estimation. We estimate a DSGE model on Swedish data taking into account the regime change in 1993, from exchange rate targeting to inflation targeting. Ignoring the break leads to spurious estimates. Accounting for the break suggests that monetary policy reacted strongly to exchange rate movements in the first regime, and mostly to inflation in the second. The sources of business cycles and their transmission mechanism are significantly affected by the exchange rate regime.
Bayesian estimation; DSGE models; Target zone; Inflation targeting; Regime change;
4
2013
37
756
773
C1
C5
E5
F4
http://www.sciencedirect.com/science/article/pii/S0165188912002412
Cúrdia, Vasco
Finocchiaro, Daria
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:821-8372013-03-05RePEc:eee:dyncon
article
New insights into optimal control of nonlinear dynamic econometric models: Application of a heuristic approach
Optimal control of dynamic econometric models has a wide variety of applications including economic policy relevant issues. There are several algorithms extending the basic case of a linear-quadratic optimization and taking nonlinearity and stochastics into account, but being still limited in a variety of ways, e.g., symmetry of the objective function and identical data frequencies of control variables. To overcome these problems, an alternative approach based on heuristics is suggested. To this end, we apply a ‘classical’ algorithm (OPTCON) and a heuristic approach (Differential Evolution) to three different econometric models and compare their performance. In this paper we consider scenarios of symmetric and asymmetric quadratic objective functions. Results provide a strong support for the heuristic approach encouraging its further application to optimum control problems.
Differential evolution; Dynamic programming; Nonlinear optimization; Optimal control;
4
2013
37
821
837
C54
C61
E27
E61
E62
http://www.sciencedirect.com/science/article/pii/S0165188912002400
Blueschke, D.
Blueschke-Nikolaeva, V.
Savin, I.
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:875-8962013-03-05RePEc:eee:dyncon
article
Pricing Parisian and Parasian options analytically
In this paper, two analytic solutions for the valuation of European-style Parisian and Parasian options under the Black–Scholes framework are, respectively, presented. A key feature of our solution procedure is the reduction of a three-dimensional problem to a two-dimensional problem through a coordinate transform designed to combine the two time derivatives into one. Compared with some previous analytical solutions, which still require a numerical inversion of Laplace transform, our solutions, written in terms of double integral for the case of Parisian options but multiple integrals for the case of Parasian options, are both of explicit form; numerical evaluation of these integrals is straightforward. Numerical examples are also provided to demonstrate the correctness of our newly derived analytical solutions from the numerical point of view, through comparing the results obtained from our solutions and those obtained from adopting other standard finite difference approaches.
Parisian options; Parasian options; Analytical solution; Laplace transform;
4
2013
37
875
896
G13
C02
http://www.sciencedirect.com/science/article/pii/S0165188912002424
Zhu, Song-Ping
Chen, Wen-Ting
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:774-7932013-03-05RePEc:eee:dyncon
article
A flexible matrix Libor model with smiles
We present a flexible approach for the valuation of interest rate derivatives based on affine processes. We extend the methodology proposed in Keller-Ressel et al. (in press) by changing the choice of the state space. We provide semi-closed-form solutions for the pricing of caps and floors. We then show that it is possible to price swaptions in this multifactor setting with a good degree of analytical tractability. This is done via the Edgeworth expansion approach developed in Collin-Dufresne and Goldstein (2002). A numerical exercise illustrates the flexibility of Wishart Libor model in describing the movements of the implied volatility surface.
Affine processes; Wishart process; Libor market model; Fast Fourier transform; Caps; Floors; Swaptions;
4
2013
37
774
793
G13
C51
http://www.sciencedirect.com/science/article/pii/S0165188912002291
Da Fonseca, José
Gnoatto, Alessandro
Grasselli, Martino
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:735-7552013-03-05RePEc:eee:dyncon
article
Heterogeneous beliefs and housing-market boom-bust cycles
This paper presents a business cycle model capturing the stylized features of housing-market boom-bust cycles in developed countries. The model implies that over-optimism of mortgage borrowers generates housing-market boom-bust cycles, if mortgage borrowers are credit-constrained and savers do not share their optimism. This result holds without price stickiness. If price stickiness is introduced into the model, then the model replicates a low policy interest rate during a housing boom as an endogenous reaction to a low inflation rate, given a Taylor rule. Thus, monetary easing observed during housing booms are consistent with the presence of over-optimism causing boom-bust cycles.
Asset price bubbles; Monetary policy; Financial liberalization; House prices; Credit constraints;
4
2013
37
735
755
E44
E52
http://www.sciencedirect.com/science/article/pii/S0165188912002163
Tomura, Hajime
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:794-8092013-03-05RePEc:eee:dyncon
article
Characterization of a risk sharing contract with one-sided commitment
In this paper I provide a stopping-time-based solution to a long-term contracting problem between a risk-neutral principal and a risk-averse agent. The agent faces a stochastic income stream and cannot commit to the long-term contracting relationship. To compute the optimal contract, I also design an algorithm that is more efficient than value-function iteration.
Limited commitment; Risk sharing; Stopping time; Value-function iteration;
4
2013
37
794
809
C63
D82
D86
http://www.sciencedirect.com/science/article/pii/S0165188912002266
Zhang, Yuzhe
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:897-9092013-03-05RePEc:eee:dyncon
article
The marginal welfare cost of capital taxation: Discounting matters
We interpret the marginal welfare cost of capital income taxes as the present discounted value of consumption distortions. Such an asset market interpretation emphasizes the importance of the interest rate used to value future distortions, especially in the presence of uncertainty. We find that the interest rate decreases as the tax rate increases, thus increasing the welfare cost. The variations in the interest rate are caused by amplified responses of consumption to exogenous shocks as a result of capital taxation. The welfare cost may be underestimated if variations in interest rates are ignored, especially when tax rates are high.
Welfare cost; Capital income taxes; Asset market;
4
2013
37
897
909
E22
E62
E44
H25
http://www.sciencedirect.com/science/article/pii/S0165188912002436
Santoro, Marika
Wei, Chao
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:479-4902011-03-25RePEc:eee:dyncon
article
Environmental policy and stable collusion: The case of a dynamic polluting oligopoly
We show that the imposition of a Markovian tax on emissions, that is, a tax rate which depends on the pollution stock, can induce stable cartelization in an oligopolistic polluting industry. This does not hold for a uniform tax. Thus, accounting for the feedback effect that exists within a dynamic framework, where pollution is allowed to accumulate into a stock over time, changes the result obtained within a static framework. Moreover, the cartel formation can diminish the welfare gain from environmental regulation such that welfare under environmental regulation and collusion of firms lies below that under a laissez-faire policy.
Pollution tax Oligopoly Cartel formation Coalition formation Differential game
4
2011
35
4
479
490
http://www.sciencedirect.com/science/article/B6V85-51P9T45-1/2/82d0a909075f6f6c2b2ec51a4e991d99
Benchekroun, Hassan
Ray Chaudhuri, Amrita
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2023-20372011-03-25RePEc:eee:dyncon
article
Optimal monetary policy in the generalized Taylor economy
In this paper, we use the generalized Taylor economy (GTE) framework to examine the optimal choice of inflation index. In this otherwise standard dynamic stochastic general equilibrium (DSGE) model, there can be many sectors, each with a different contract length. In the GTE framework with an empirically relevant contract structure, a simple rule under which the interest rate responds to economy-wide inflation gives a welfare outcome nearly identical to the optimal policy. This finding suggests that it may not be necessary for a well-designed monetary policy to respond to sector-specific inflations.
Inflation targeting Optimal monetary policy
10
2010
34
10
2023
2037
http://www.sciencedirect.com/science/article/B6V85-4YWYYNH-1/2/7bf32a56721aaa52b271bdbb882f0012
Kara, Engin
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:604-6152011-03-25RePEc:eee:dyncon
article
Second-order approximation of dynamic models without the use of tensors
Several approaches to finding the second-order approximation to a dynamic model have been proposed recently. This paper differs from the existing literature in that it makes use of the Magnus and Neudecker (1999) definition of the Hessian matrix. The key result is a linear system of equations that characterizes the second-order coefficients. No use is made of multi-dimensional arrays or tensors, a practical implication of which is that it is much easier to transcribe the mathematical representation of the solution into usable computer code. Matlab code is available from http://paulklein.se/newsite/codes/codes.php; Fortran 90 code is available from http://alcor.concordia.ca/~pgomme/.
Solving dynamic models Second-order approximation
4
2011
35
4
604
615
http://www.sciencedirect.com/science/article/B6V85-51BNWP6-1/2/ffe57b938b4a2bd30dfc926de025ce7c
Gomme, Paul
Klein, Paul
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2578-26002011-03-25RePEc:eee:dyncon
article
Equilibrium open interest
This paper analyses what determines an individual investor's risk-sharing demand for options and, aggregating across investors, what the equilibrium demand for options. We find that agents trade options to achieve their desired skewness; specifically, we find that portfolio holdings boil down to a three-fund separation theorem that includes a so-called skewness portfolio that agents like to attain. Our analysis indicates also, however, that the common risk-sharing setup used for option demand and pricing is incompatible with a stylized fact about open interest across strikes.
Option demand Open interest Co-skewness Skewness preference
12
2010
34
12
2578
2600
http://www.sciencedirect.com/science/article/B6V85-50PCM69-2/2/7dd224801953b179ccece0d6a03a6b2f
Judd, Kenneth L.
Leisen, Dietmar P.J.
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2232-22442011-03-25RePEc:eee:dyncon
article
Jump and volatility risk premiums implied by VIX
An estimation method is developed for extracting the latent stochastic volatility from VIX, a volatility index for the S&P 500 index return produced by the Chicago Board Options Exchange (CBOE) using the so-called model-free volatility construction. Our model specification encompasses all mean-reverting stochastic volatility option pricing models with a constant-elasticity of variance and those allowing for price jumps under stochastic volatility. Our approach is made possible by linking the latent volatility to the VIX index via a new theoretical relationship under the risk-neutral measure. Because option prices are not directly used in estimation, we can avoid the computational burden associated with option valuation for stochastic volatility/jump option pricing models. Our empirical findings are: (1) incorporating a jump risk factor is critically important; (2) the jump and volatility risks are priced; (3) the popular square-root stochastic volatility process is a poor model specification irrespective of allowing for price jumps or not. Our simulation study shows that statistical inference is reliable and not materially affected by the approximation used in the VIX index construction.
Model-free volatility Stochastic volatility Jump Options VIX Constant elasticity of variance
11
2010
34
11
2232
2244
http://www.sciencedirect.com/science/article/B6V85-506J0FH-1/2/6a9251764fe7abb6deda18b0b4dea764
Duan, Jin-Chuan
Yeh, Chung-Ying
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2245-22582011-03-25RePEc:eee:dyncon
article
Pricing of CDOs based on the multivariate Wang transform
This paper extends the one-factor Gaussian copula model, the standard market model for valuing CDOs, based on the multivariate Wang transform. Unlike the existing models, our model calibrates the parameter associated with a risk adjustment for default threshold, not correlation parameter, which always exists and is unique for any market price of CDO tranche. A Student t-copula model is also considered within the same framework to describe a fat-tail distribution observed in the actual market. Through numerical experiments, it is shown that our model provides a better fit to the market data compared with the existing models.
One-factor Gaussian copula model Merton's structural model Multivariate Wang transform Student t copula
11
2010
34
11
2245
2258
http://www.sciencedirect.com/science/article/B6V85-506H0K8-1/2/e64ac18dcbbcc8cf2243abaebca05b80
Kijima, Masaaki
Motomiya, Shin-ichi
Suzuki, Yoichi
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2420-24392011-03-25RePEc:eee:dyncon
article
Maintenance and investment: Complements or substitutes? A reappraisal
A benchmark AK optimal growth model with maintenance expenditures and endogenous utilization of capital is considered within an explicit vintage capital framework. Scrapping is endogenous, and the model allows for a clean distinction between age and usage dependent capital depreciation and obsolescence. It is also shown that in this set-up past investment profile completely determines the size of current maintenance expenditures. Among other findings, a closed-form solution to optimal dynamics is provided taking advantage of very recent development in optimal control of infinite dimensional systems. More importantly, and in contrast to the pre-existing literature, we study investment and maintenance co-movements without any postulated ad hoc depreciation function. In particular using impulse response experiments, we find that optimal investment and maintenance do move together in the short-run in response to neutral technological shocks, which seems to be more consistent with the data.
Maintenance Investment Optimal control Dynamic programming Infinite dimensional problem
12
2010
34
12
2420
2439
http://www.sciencedirect.com/science/article/B6V85-508PPN6-2/2/3fe0bc48a42b2667bbd21853c1b671e8
Boucekkine, R.
Fabbri, G.
Gozzi, F.
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2179-21912011-03-25RePEc:eee:dyncon
article
Technology shocks, capital utilization and sticky prices
We quantitatively evaluate a business-cycle environment featuring endogenous capital utilization and nominal price rigidity that illustrates a negative relationship between labor hours and technology (TFP) shocks and a positive relationship between hours and investment (MEI) shocks. Sticky prices induce firms to suppress changes in output due to TFP shocks through changes in the utilization rate of the existing capital stock and labor demand. MEI shocks have an indirect impact on output via their link with capital utilization, and are shown to be the dominant driver of post-1979 US business cycles.
Business-cycle shocks Total factor productivity Marginal efficiency of investment Nominal rigidities
10
2010
34
10
2179
2191
http://www.sciencedirect.com/science/article/B6V85-505NRX4-4/2/3d29a73b151288cd43cdec4ed4e07312
Dave, Chetan
Dressler, Scott J.
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:746-7632011-03-25RePEc:eee:dyncon
article
EKC-type transitions and environmental policy under pollutant uncertainty and cost irreversibility
Previous studies have suggested that some pollutant levels first increases due to the economic growth and then start decreasing, the pattern being called the "environmental Kuznets curve" (EKC). We examine EKC-type transitions of pollutant levels not with respect to economic growth but more generally in time. Assuming that each policy maker optimally executes the two switching options of regulation and unregulation for pollution, the switching dynamics of environmental policy can be described by an alternating renewal process. It is shown that the double Laplace transform of transition density of a pollutant level can be obtained by a novel application of renewal theory. The expected level of overall pollutants is then calculated numerically and found to exhibit either a [Lambda][hyphen (true graphic)]shaped or an N-shaped pattern in time. Our results present a simple explanation for the EKC-type transitions of pollutant levels within a real options framework.
Environmental Kuznets curve Real option Alternating renewal process Double Laplace transform
5
2011
35
5
746
763
http://www.sciencedirect.com/science/article/B6V85-51XH963-4/2/cc560764f9402da0fabb377447b8f407
Kijima, Masaaki
Nishide, Katsumasa
Ohyama, Atsuyuki
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2320-23402011-03-25RePEc:eee:dyncon
article
Shape factors and cross-sectional risk
Galluccio and Roncoroni (2006) empirically demonstrate that cross-sectional data provide relevant information when assessing dynamic risk in fixed income markets. We put forward a theoretical framework supporting that finding based on the notion of "shape factors". We devise an econometric procedure to identify shape factors, propose a dynamic model for the yield curve, develop a corresponding arbitrage pricing theory, derive interest rate pricing formulae, and study the analytical properties exhibited by a finite factor restriction of rate dynamics that is cross-sectionally consistent with a family of exponentially weighed polynomials. We also conduct an empirical analysis of cross-sectional risk affecting US swap, Euro bond, and oil markets. Results support the conclusion whereby shape factors outperform the classical yield (resp., price) factors (i.e., level, slope, and convexity) in explaining the underlying fixed income (resp., commodity) market risk. The methodology can in principle be used for understanding the intertemporal dynamics of any cross-sectional data.
Risk measures Factor analysis Cross-sectional analysis Interest rates
11
2010
34
11
2320
2340
http://www.sciencedirect.com/science/article/B6V85-508PPN6-1/2/12cd80e6f04b8b22e8e86328130b03b5
Roncoroni, Andrea
Galluccio, Stefano
Guiotto, Paolo
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2229-22292011-03-25RePEc:eee:dyncon
article
Corrigendum to "New Keynesian versus old Keynesian government spending multipliers" [J. Econ. Dynam. Control 34(3) (2010) 281-295]
10
2010
34
10
2229
2229
http://www.sciencedirect.com/science/article/B6V85-50C5X6C-1/2/eaed7a81d66f8d4925ca57b2b19b30da
Cogan, John F.
Cwik, Tobias
Taylor, John B.
Wieland, Volker
oai:RePEc:eee:dyncon:v:35:y:2011:i:2:p:229-2392011-03-25RePEc:eee:dyncon
article
Solving the multi-country real business cycle model using a Smolyak-collocation method
We describe a sparse-grid collocation method to compute recursive solutions of dynamic economies with a sizable number of state variables. We show how powerful this method can be in applications by computing the non-linear recursive solution of an international real business cycle model with a substantial number of countries, complete insurance markets and frictions that impede frictionless international capital flows. In this economy, the aggregate state vector includes the distribution of world capital across different countries as well as the exogenous country-specific technology shocks. We use the algorithm to efficiently solve models with up to 10 countries (i.e., up to 20 continuous-valued state variables).
Sparse grids Collocation International real business cycles
2
2011
35
2
229
239
http://www.sciencedirect.com/science/article/B6V85-514P5RX-6/2/cbce27c8dc59efddf50ccc02fd600e67
Malin, Benjamin A.
Krueger, Dirk
Kubler, Felix
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:730-7452011-03-25RePEc:eee:dyncon
article
Durable goods, inter-sectoral linkages and monetary policy
Durable goods pose a challenge for standard sticky-price models because the near constancy of their shadow value and their apparent price flexibility lead to perverse and counterfactual economic implications, such as the tendency of the durables and nondurables sectors to move in opposite directions following a monetary policy shock. This paper introduces input-output interactions and limited input mobility into an otherwise standard sticky-price model with durable and nondurable goods. The extended model generates substantial aggregate effects and positive sectoral comovement following a monetary policy shock, even when durable goods have flexible prices. The latter result is consistent with empirical evidence on the sectoral effects of monetary policy.
Durability Input-output interactions Roundabout production Sectoral comovement Monetary policy
5
2011
35
5
730
745
http://www.sciencedirect.com/science/article/B6V85-51YYNVF-2/2/dcef3fb370d8b50265f703cd7049f9ec
Bouakez, Hafedh
Cardia, Emanuela
Ruge-Murcia, Francisco J.
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2074-20882011-03-25RePEc:eee:dyncon
article
The method of endogenous gridpoints with occasionally binding constraints among endogenous variables
We show how the method of endogenous gridpoints can be extended to solve models with occasionally binding constraints among endogenous variables very efficiently. We present the method for a consumer problem with occasionally binding collateral constraints and non-separable utility in durable and non-durable consumption. This problem allows for a joint analysis of durable and non-durable consumption in models with uninsurable income risk which is important to understand patterns of consumption, saving and collateralized debt. We illustrate the algorithm and its efficiency by calibrating the model to US data.
Endogenous gridpoints method Occasionally binding constraints Collateralized debt Durables
10
2010
34
10
2074
2088
http://www.sciencedirect.com/science/article/B6V85-501FPFH-1/2/99844cbee168fa77aeed7d060eb58a8e
Hintermaier, Thomas
Koeniger, Winfried
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:253-2562011-03-25RePEc:eee:dyncon
article
Comment on "A dynamic portfolio choice model of tax evasion: Comparative statics of tax rates and its implication for economic growth"
3
2011
35
3
253
256
http://www.sciencedirect.com/science/article/B6V85-50S8PGC-1/2/665169c5aa0eae4eb3ff7d12e08a77c4
Dzhumashev, Ratbek
Gahramanov, Emin
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:312-3292011-03-25RePEc:eee:dyncon
article
Dividends and leverage: How to optimally exploit a non-renewable investment
In this paper we model the situation where a non-renewable investment is given, for instance a resource reservoir, and show how to optimally trade-off between dividends and leverage, in order to maximize a performance indicator for shareholders, up to the bankruptcy time. We then study the way market risk (the volatility of the market price of the resource) impacts the optimal policies and the default risk of the company. The moments when the policies are rebalanced are analyzed and we give a measure of the agency costs which appear between the shareholders and the debt-holders.
Dividend policy Capital structure Non-renewable investment Default risk Bankruptcy costs Agency costs
3
2011
35
3
312
329
http://www.sciencedirect.com/science/article/B6V85-51JPWMD-1/2/d90caf73b5f8782bb9af5b201f4fc952
Coculescu, Delia
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2141-21582011-03-25RePEc:eee:dyncon
article
Anticipated tax reforms and temporary tax cuts: A general equilibrium analysis
Macroeconomic studies of tax policy in dynamic general equilibrium usually assume that reforms hit the economy unexpectedly and last forever. Here, we explore how previous results change when we allow policy changes to be pre-announced and of finite duration and when these facts are anticipated by households and firms. Quantitatively we demonstrate a headstart advantage from pre-announcement that is never caught up by a surprising reform. The welfare gain stemming from a 5-year announcement phase of a corporate tax cut, for example, is estimated to be around 10 percent of the total gain from the reform. We show that impulse responses of important variables like firm value, dividends, and investment differ qualitatively depending on whether the reform comes expected or not. We are also able to demonstrate a genuine welfare gain from temporary tax cuts. Impulse responses generated by our numerical method can be retraced by phase diagram analysis, which facilitates explanation and interpretation of the produced results.
Tax reform Anticipation effects Investment Economic growth Welfare Corporate finance Capital taxation
10
2010
34
10
2141
2158
http://www.sciencedirect.com/science/article/B6V85-505NRX4-5/2/d495cb8eb2d07fe10b774f9d9bdcfad2
Strulik, Holger
Trimborn, Timo
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2391-24062011-03-25RePEc:eee:dyncon
article
Dynamics of brand competition: Effects of unobserved social networks
Brand competition is modelled using an agent based approach in order to examine the long run dynamics of market structure and brand characteristics. A repeated game is designed where myopic firms choose strategies based on beliefs about their rivals and consumers. Consumers are heterogeneous and can observe neighbour behaviour through social networks. Although firms do not observe them, the social networks have a significant impact on the emerging market structure. Presence of networks tends to polarize market share and leads to higher volatility in brands. Yet convergence in brand characteristics usually happens whenever the market reaches a steady state. Scale-free networks accentuate the polarization and volatility more than small world or random networks. Unilateral innovations are less frequent under social networks.
Dynamic oligopoly Evolutionary game Social network
12
2010
34
12
2391
2406
http://www.sciencedirect.com/science/article/B6V85-509W721-2/2/5250b4fae9b87a895eee9e241f5919f8
Sengupta, Abhijit
Greetham, Danica Vukadinovic
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1531-15492011-03-25RePEc:eee:dyncon
article
The parameter set in an adaptive control Monte Carlo experiment: Some considerations
Comparisons of various methods for solving stochastic control economic models can be done with Monte Carlo methods. These methods have been applied to simple one-state, one-control quadratic-linear tracking models; however, large outliers may occur in a substantial number of the Monte Carlo runs when certain parameter sets are used in these models. Building on the work of Mizrach (1991) and (Amman and Kendrick, 1994) and (Amman and Kendrick, 1995), this paper tracks the source of these outliers to two sources: (1) the use of a zero for the penalty weights on the control variables and (2) the generation of near-zero initial estimate of the control parameter in the systems equations by the Monte Carlo routine. This result leads to an understanding of why both the unsophisticated optimal feedback (certainty equivalence) and the sophisticated dual methods do poorly in some Monte Carlo comparisons relative to the moderately sophisticated expected optimal feedback method.
Active learning Dual control Optimal experimentation Stochastic optimization Time-varying parameters Numerical experiments
9
2010
34
9
1531
1549
http://www.sciencedirect.com/science/article/B6V85-50DYH0H-2/2/c36bf2647755195326d2d2934c6c7af4
Tucci, Marco P.
Kendrick, David A.
Amman, Hans M.
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:565-5782011-03-25RePEc:eee:dyncon
article
Transmission lags and optimal monetary policy
The credibility problems of monetary policy are enlarged by transmission lags whenever the welfare criterion consists of arguments with differing transmission lags. If, as usually argued, prices react to monetary policy with a longer lag than output, the discretionary bias is substantially increased under a consumer welfare maximizing policy criterion (flexible inflation targeting) in the prototype New Keynesian model. Money growth targeting can significantly reduce the discretionary bias, but is not robust to other specifications of welfare with higher valuation of output stability.
Discretion and stabilization bias Monetary policy Transmission lags Inflation targeting Money targeting
4
2011
35
4
565
578
http://www.sciencedirect.com/science/article/B6V85-51TGG0W-1/2/d86f89813b29b57d2b0f1c263e778746
Kilponen, Juha
Leitemo, Kai
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:52-662011-03-25RePEc:eee:dyncon
article
Monetary policy and learning from the central bank's forecast
We examine the expectational stability (E-stability) of rational expectations equilibrium (REE) in a standard New Keynesian model in which private agents refer to the central bank's forecast in the process of adaptive learning. To satisfy the E-stability condition in this environment, the central bank must respond more strongly to the expected inflation rate than the extent to which the Taylor principle suggests. However, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy requires responding to the current inflation rate to a certain degree.
Adaptive learning E-stability New Keynesian model Monetary policy Taylor principle
1
2011
35
1
52
66
http://www.sciencedirect.com/science/article/B6V85-50PCM69-3/2/274859ddc8984ae88e96523b30d47d46
Muto, Ichiro
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:148-1622011-03-25RePEc:eee:dyncon
article
An analysis of the effect of noise in a heterogeneous agent financial market model
Heterogeneous agent models (HAMs) in finance and economics are often characterised by high dimensional nonlinear stochastic differential or difference systems. Because of the complexity of the interaction between the nonlinearities and noise, a commonly used, often called indirect, approach to the study of HAMs combines theoretical analysis of the underlying deterministic skeleton with numerical analysis of the stochastic model. However, it is well known that this indirect approach may not properly characterise the nature of the stochastic model. This paper aims to tackle this issue by developing a direct and analytical approach to the analysis of a stochastic model of speculative price dynamics involving two types of agents, fundamentalists and chartists, and the market price equilibria of which can be characterised by the stationary measures of a stochastic dynamical system. Using the stochastic method of averaging and stochastic bifurcation theory, we show that the stochastic model displays behaviour consistent with that of the underlying deterministic model when the time lag in the formation of price trends used by the chartists is far away from zero. However, when this lag approaches zero, such consistency breaks down.
Heterogeneous agents Speculative behaviour Stochastic bifurcations Stationary measures Chartists
1
2011
35
1
148
162
http://www.sciencedirect.com/science/article/B6V85-511TN83-1/2/2553dcdb2868cfc1c1a2d09beeb6e599
Chiarella, Carl
He, Xue-Zhong
Zheng, Min
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:295-3112011-03-25RePEc:eee:dyncon
article
Invertible and non-invertible information sets in linear rational expectations models
Rational expectations solutions are usually derived by assuming that all state variables relevant to forward-looking behaviour are directly observable, or that they are "...an invertible function of observables" (Mehra and Prescott, 1980). Using a framework that nests linearised DSGE models, we give a number of results useful for the analysis of linear rational expectations models with restricted information sets. We distinguish between instantaneous and asymptotic invertibility, and show that the latter may require significantly less information than the former. We also show that non-invertibility of the information set can have significant implications for the time series properties of economies.
Imperfect information Invertibility Rational expectations Fundamental versus nonfundamental time series representations Kalman filter Dynamic stochastic general equilibrium
3
2011
35
3
295
311
http://www.sciencedirect.com/science/article/B6V85-51G9BVP-1/2/21c4da514474efaaf2b5573ef8f53caa
Baxter, Brad
Graham, Liam
Wright, Stephen
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1596-16092011-03-25RePEc:eee:dyncon
article
Out-of-sample comparison of copula specifications in multivariate density forecasts
We introduce a statistical test for comparing the predictive accuracy of competing copula specifications in multivariate density forecasts, based on the Kullback-Leibler information criterion (KLIC). The test is valid under general conditions on the competing copulas: in particular it allows for parameter estimation uncertainty and for the copulas to be nested or non-nested. Monte Carlo simulations demonstrate that the proposed test has satisfactory size and power properties in finite samples. Applying the test to daily exchange rate returns of several major currencies against the US dollar we find that the Student-t copula is favored over Gaussian, Gumbel and Clayton copulas.
Copula-based density forecast Empirical copula Kullback-Leibler information criterion Out-of-sample forecast evaluation Semi-parametric statistics
9
2010
34
9
1596
1609
http://www.sciencedirect.com/science/article/B6V85-50DYH0H-3/2/f4a53951a4f527bb4c804cb56053fe8d
Diks, Cees
Panchenko, Valentyn
van Dijk, Dick
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2126-21402011-03-25RePEc:eee:dyncon
article
Women's lifetime labor supply and labor market experience
The pattern of joining the labor force only at an advanced stage of the life-cycle was widespread among American women in the 1960s and 1970s, but not since the 1980s. To explain this change we conduct a theoretical analysis of the interrelation between women's lifetime labor supply choices and the dynamic macroeconomic environment. In our model women choose the late-entry pattern only at early stages of the growth process when wages are sufficiently low and grow sufficiently rapidly. As the economy grows, this lifetime labor profile vanishes and women either join the labor force either early in life or not at all.
Experience Labor Force Participation
10
2010
34
10
2126
2140
http://www.sciencedirect.com/science/article/B6V85-50CV7T1-2/2/77e635849522431bb01bfb423712cf50
Hazan, Moshe
Maoz, Yishay D.
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2259-22722011-03-25RePEc:eee:dyncon
article
Bayesian analysis of structural credit risk models with microstructure noises
In this paper a Markov chain Monte Carlo (MCMC) technique is developed for the Bayesian analysis of structural credit risk models with microstructure noises. The technique is based on the general Bayesian approach with posterior computations performed by Gibbs sampling. Simulations from the Markov chain, whose stationary distribution converges to the posterior distribution, enable exact finite sample inferences of model parameters. The exact inferences can easily be extended to latent state variables and any nonlinear transformation of state variables and parameters, facilitating practical credit risk applications. In addition, the comparison of alternative models can be based on deviance information criterion (DIC) which is straightforwardly obtained from the MCMC output. The method is implemented on the basic structural credit risk model with pure microstructure noises and some more general specifications using daily equity data from US and emerging markets. We find empirical evidence that microstructure noises are positively correlated with the firm values in emerging markets.
MCMC Credit risk Microstructure noise Structural models Deviance information criterion
11
2010
34
11
2259
2272
http://www.sciencedirect.com/science/article/B6V85-5033XPS-1/2/174c0427e70ec54fdfb78cab4850bce4
Huang, Shirley J.
Yu, Jun
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:676-6932011-03-25RePEc:eee:dyncon
article
Formal education and public knowledge
In this paper, I examine the transitional dynamics of an economy populated by individuals who split their time between acquiring a formal education, producing final goods, and innovating. The paper has two objectives: (i) uncovering the macroeconomic circumstances that favored the rise of formal education; (ii) to reconcile the remarkable growth of the education sector with the constancy of other key macroeconomic variables, such as the interest rate, the consumption-output ratio, and the growth rate of per capita income (Kaldor facts). The transitional dynamics of human capital growth models, such as Lucas (1998), would attribute the arrival of education to the diminishing marginal productivity of physical capital. Conversely, the model proposed here suggests that it is the rate of learning that catches up with the rate of return on physical capital. As technical knowledge expands, the rate of return on education increases, inducing individuals to stay longer in school. The model's transitional paths are matched with long run U.S. educational and economic data.
Public knowledge Learning rate Transitional dynamics Calibration
5
2011
35
5
676
693
http://www.sciencedirect.com/science/article/B6V85-51XR3DH-2/2/e23354fae7e3673e3b728775d0c1083f
Iacopetta, Maurizio
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:764-7752011-03-25RePEc:eee:dyncon
article
Fast delta computations in the swap-rate market model
We develop an efficient algorithm to implement the adjoint method that computes sensitivities of an interest rate derivative to different underlying rates in the co-terminal swap-rate market model. The order of computation per step of the new method is shown to be proportional to the number of rates times the number of factors, which is the same as the order in the LIBOR market model.
Adjoint method Delta Computational order Market model Monte Carlo simulation
5
2011
35
5
764
775
http://www.sciencedirect.com/science/article/B6V85-51YYNVF-5/2/7115d4cec5fea4c299e605d93176224c
Joshi, Mark
Yang, Chao
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:714-7292011-03-25RePEc:eee:dyncon
article
A network of options: Evaluating complex interdependent decisions under uncertainty
The present article provides a novel framework for analyzing option network problems, which is a general class of compound real option problems with an arbitrary combination of reversible and irreversible decisions. The present framework represents the interdependent structure of decisions by using a directed graph. In this framework, the option network problem is formulated as a singular stochastic control problem, whose optimality condition is then obtained as a dynamical system of generalized linear complementarity problems (GLCPs). This enables us to develop a systematic and efficient numerical method for evaluating the option value and the optimal decision policy.
Compound real options Managerial flexibility Graph theory Singular stochastic control problems Generalized complementarity problems
5
2011
35
5
714
729
http://www.sciencedirect.com/science/article/B6V85-51XR3DH-1/2/609086f3cd814a29916aea83cfca1a67
Akamatsu, Takashi
Nagae, Takeshi
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2485-24932011-03-25RePEc:eee:dyncon
article
The effects of the market structure on the adoption of evolving technologies
We study the speed at which technologies are adopted depending on how the market power is shared between the firms that sell technologies and the firms that buy them. Our results suggest that, because of a double marginalization problem, adoption is fastest when either sellers or buyers hold all the market power. Thus, competition between sides of the market may delay the adoption of technologies.
Market structures Technology adoption
12
2010
34
12
2485
2493
http://www.sciencedirect.com/science/article/B6V85-50CVPWB-1/2/d09df5e8c1fbf78e93f9cf9807a1ff59
Rivas, Javier
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:1907-19222011-03-25RePEc:eee:dyncon
article
Optimal irrational behavior in continuous time
Feigenbaum et al. (2009) showed in a two-period overlapping generations model that households can improve upon the rational, competitive equilibrium while maintaining competitive factor markets if agents coordinate upon an irrational consumption/saving rule. We generalize their findings to continuous time. The optimal consumption rule with coordination implies a U-shaped lifecycle consumption profile. Rational agents living in a standard competitive equilibrium would need a 4% increase of consumption in every period across the lifecycle to reach the level of utility that can be achieved under coordination. Most of this gain can be achieved with a linear saving rule.
Consumption Saving Coordination General equilibrium Rules of thumb Pecuniary externality Overlapping generations Optimal irrational behavior
10
2010
34
10
1907
1922
http://www.sciencedirect.com/science/article/B6V85-505NRX4-1/2/9c9e2150d488078c8948a8ce87d546c7
Feigenbaum, James
Caliendo, Frank N.
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:1993-20092011-03-25RePEc:eee:dyncon
article
International capital flows and expectation-driven boom-bust cycles in the housing market
This paper analyzes the roles of credit market conditions in endogenous formation of housing-market boom-bust cycles in a business cycle model. When households are uncertain about the duration of a temporary high income growth period, expected future house prices rise during the high growth period and fall at the end of the period. But this development causes expectation-driven boom-bust cycles in current house prices only if the economy is open to international capital flows. It is also shown that high maximum loan-to-value ratios for residential mortgages per se do not cause boom-bust cycles without international capital flows in the model.
Informational overshooting House prices Boom-bust cycles Credit market frictions Financial liberalization
10
2010
34
10
1993
2009
http://www.sciencedirect.com/science/article/B6V85-4YWYYNH-3/2/905819781cff7f0dacdcf361155b2d2d
Tomura, Hajime
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:1-242011-03-25RePEc:eee:dyncon
article
The heterogeneous expectations hypothesis: Some evidence from the lab
This paper surveys learning-to-forecast experiments (LtFEs) with human subjects to test theories of expectations and learning. Subjects must repeatedly forecast a market price, whose realization is an aggregation of individual expectations. Emphasis is given to how individual forecasting rules interact at the micro-level and which structure they cocreate at the aggregate, macro-level. In particular, we focus on the question wether the evidence from laboratory experiments is consistent with heterogeneous expectations.
Heterogeneous expectations Bounded rationality Learning Heuristics switching
1
2011
35
1
1
24
http://www.sciencedirect.com/science/article/B6V85-516664W-1/2/fa8870b9280beea17538e420d0ddeaf0
Hommes, Cars
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1582-15952011-03-25RePEc:eee:dyncon
article
On the precision of Calvo parameter estimates in structural NKPC models
We study the extent of empirical information that can be obtained from alternative structural New Keynesian inflation equations concerning the average duration of prices in the United States, given that such specifications may be hard to identify. Using four different indexation and real-wage-rigidity-based models, in conjunction with identification-robust econometric methods, we evaluate the precision of Calvo parameter estimates. While results are sensitive to calibration and instrument selection, we find confidence bounds on the average duration of prices that line up with available micro-founded studies, statistically significant coefficients for the forcing variables, and non-zero estimates on the coefficient of lagged inflation.
Sticky-price Calvo model Structural estimation Weak identification Indexation Real wage
9
2010
34
9
1582
1595
http://www.sciencedirect.com/science/article/B6V85-50XTSXC-1/2/16051a124bef0d25355e492a314a2a99
Dufour, Jean-Marie
Khalaf, Lynda
Kichian, Maral
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1627-16502011-03-25RePEc:eee:dyncon
article
The financial accelerator in an evolving credit network
We model a credit network characterized by credit relationships connecting (i) downstream (D) and upstream (U) firms and (ii) firms and banks. The net worth of D firms is the driver of fluctuations. The production of D firms and of their suppliers (U firms) in fact, is constrained by the availability of internal finance--proxied by net worth--to the D firms. The structure of credit interlinkages changes over time due to an endogeneous process of partner selection, which leads to the polarization of the network. At the aggregate level, the distribution of growth rates exhibits negative skewness and excess kurtosis. When a shock hits the macroeconomy or a significant group of agents in the credit network a bankruptcy avalanche can follow if agents' leverage is critically high. In a nutshell we want to explore the properties of a network-based financial accelerator.
Business fluctuations Financial instability Bankruptcy chains
9
2010
34
9
1627
1650
http://www.sciencedirect.com/science/article/B6V85-50CDSG9-4/2/fcb6add120052321ce59b91285e82ead
Delli Gatti, Domenico
Gallegati, Mauro
Greenwald, Bruce
Russo, Alberto
Stiglitz, Joseph E.
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:163-1742011-03-25RePEc:eee:dyncon
article
Optimal pricing of a conspicuous product during a recession that freezes capital markets
This paper considers the problem of how to price a conspicuous product when the economy is in a recession that disrupts capital markets. A conspicuous product in this context is a luxury good for which demand is increasing in brand image. Brand image here means the ability of a consumer to impress observers by conspicuously displaying consumption of the good. Brand image is built up when the good is priced high enough to make it exclusive, and eroded if the good is discounted. Recession is modeled as having two effects: it reduces demand and it freezes capital markets so borrowing is not possible. In pricing the conspicuous product the firm faces the following trade-off. Reducing price helps maintain sales volume and cash flow in the face of reduced demand, but it also damages brand image and thus long-term demand. The paper analyzes the firm's pricing policy facing scenarios of mild, intermediate and severe recessions, while taking the threat of bankruptcy into account. For an intermediate recession the optimal solution is history-dependent. The results have implications for policy interventions in capital markets and for timing of mergers and acquisitions.
Pricing Recession Conspicuous product Optimal control Skiba point
1
2011
35
1
163
174
http://www.sciencedirect.com/science/article/B6V85-512MH7N-2/2/7e4310b88ff8e2de5fe0b0c3ea8321fe
Caulkins, J.P.
Feichtinger, G.
Grass, D.
Hartl, R.F.
Kort, P.M.
Seidl, A.
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:1893-19062011-03-25RePEc:eee:dyncon
article
Inflation, volatile public spending, and endogenously sustained growth
I construct a model of an economy whose government finances volatile public spending via money creation. The model jointly accounts for the emergence of some well-known empirical observations. Specifically, it predicts a negative correlation between output growth and policy volatility. Furthermore, given that both the mean and the variance of the inflation rate are elevated by fluctuations in public spending, the model provides a novel theoretical justification for the simultaneous negative correlation of long-run growth with both average inflation and inflation variability. The model also supports the view that policy volatility reduces social welfare.
Growth Inflation Seignorage Volatility
10
2010
34
10
1893
1906
http://www.sciencedirect.com/science/article/B6V85-506RMT5-1/2/90c6e3ccee9a2e6720fcb052aa511cc3
Varvarigos, Dimitrios
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:1923-19502011-03-25RePEc:eee:dyncon
article
Learning under fear of floating
In recent years a large fraction of economies overcame the fear of floating. We study a model that describes the policy of a Central Bank uncertain about whether currency depreciations cause output to expand (textbook model) or contract (balance-sheet model). We conclude that the movement away from fear of floating may not be explained by Bayesian or Robust policies. When the private sector anticipates the Central Bank's policy and endogenously determines the model, Central Banks may fall in a learning trap. An increase in financial volatility provides an escape to such trap that replicates patterns in the data.
Balance-sheet effect Fear of floating Model uncertainty Bayesian learning Robustness
10
2010
34
10
1923
1950
http://www.sciencedirect.com/science/article/B6V85-502GGY8-1/2/b0f0a1d06d411dc73939aa54f8eeda7a
Bigio, Saki
oai:RePEc:eee:dyncon:v:33:y:2009:i:6:p:1236-12462011-03-25RePEc:eee:dyncon
article
Why does overnight liquidity cost more than intraday liquidity?
In this paper, we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design. In our environment, overnight liquidity affects output while intraday liquidity affects only the distribution of resources between money holders and non-money holders. The low cost of intraday liquidity is explained by the Friedman rule. The optimal cost differential achieves the twin objective of reducing the incentive to overuse money at night and encouraging payment-risk sharing during the day.
Overnight liquidity Intraday liquidity Friedman rule Monetary policy Random-relocation models
6
2009
33
6
1236
1246
http://www.sciencedirect.com/science/article/B6V85-4V94WWK-1/2/df1fb2cc548d4a148182a74e42a10256
Bhattacharya, Joydeep
Haslag, Joseph H.
Martin, Antoine
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:131-1472011-03-25RePEc:eee:dyncon
article
Stochastic equilibria of an asset pricing model with heterogeneous beliefs and random dividends
We investigate dynamical properties of a heterogeneous agent model with random dividends and further study the relationship between dynamical properties of the random model and those of the corresponding deterministic skeleton, which is obtained by setting the random dividends as their constant mean value. Based on our recent mathematical results, we prove the existence and stability of random fixed points as the perturbation intensity of random dividends is sufficiently small. Furthermore, we prove that the random fixed points converge almost surely to the corresponding fixed points of the deterministic skeleton as the perturbation intensity tends to zero. Moreover, simulations suggest similar behaviors in the case of more complicated attractors. Therefore, the corresponding deterministic skeleton is a good approximation of the random model with sufficiently small random perturbations of dividends. Given that dividends in real markets are generally very low, it is reasonable and significant to some extent to study the effects of heterogeneous agents' behaviors on price fluctuations by the corresponding deterministic skeleton of the random model.
Heterogeneous beliefs Random dividends Random fixed points Stability Bifurcation
1
2011
35
1
131
147
http://www.sciencedirect.com/science/article/B6V85-511BYTS-1/2/f1e886407ddad52bd7a60cdf1fa4e7f1
Zhu, Mei
Wang, Duo
Guo, Maozheng
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2510-25322011-03-25RePEc:eee:dyncon
article
Inflation targeting as a means of achieving disinflation
In this paper, we take an analytical approach to examine possible adverse effects of the use of inflation targeting as a disinflation regime. The idea is that a strict interpretation of an inflation target may preserve inflationary distortions after price stability is attained. We show that such a policy not only creates a slump in output but may increase macroeconomic volatility substantially in a model in which wages are subject to a Taylor staggering structure. The policy implication is that the problems associated with an excessively rigid inflation targeting policy are even more severe during a disinflationary episode.
Disinflation Inflation targeting Wage staggering
12
2010
34
12
2510
2532
http://www.sciencedirect.com/science/article/B6V85-50F3PDK-2/2/683d2265e93819045bb8079d0cc01b0e
Saborowski, Christian
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:793-8122011-03-25RePEc:eee:dyncon
article
Labor market institutions and inflation volatility in the euro area
Despite having had the same currency for many years, EMU countries still have quite different inflation dynamics. In this paper we explore one possible reason: country specific labor market institutions, giving rise to different inflation volatilities. When unemployment insurance schemes differ, as they do in EMU, reservation wages react differently in each country to area-wide shocks. This implies that real marginal costs and inflation also react differently. We report evidence for EMU countries supporting the existence of a cross-country link over the cycle between labor market structures on the one side and real wages and inflation on the other. We then build a DSGE model that replicates the data evidence. The inflation volatility differentials produced by asymmetric labor markets generate welfare losses at the currency area level of approximately 0.3% of steady state consumption.
Inflation volatility Labor market institutions EMU
5
2011
35
5
793
812
http://www.sciencedirect.com/science/article/B6V85-50H1WJN-1/2/2cadd1a1f9ce4d9b2b614aa4c2495441
Campolmi, Alessia
Faia, Ester
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2089-21082011-03-25RePEc:eee:dyncon
article
Examining the effectiveness of price limits in an artificial stock market
This paper proposes an agent-based framework to examine the effectiveness of price limits in an artificial stock market. The market is composed of many boundedly rational and heterogeneous traders whose learning behavior is represented by a genetic programming algorithm. We calibrate the model to replicate several stylized facts observed in real financial markets. Based on this environment, the impacts of price limits are analyzed from the perspectives of volatility, price distortion, volume, and welfare. We find that the imposition of price limits possesses both positive and negative effects. However, compared with the market without price limits, appropriate price limits help to reduce volatility and price distortion, and increase the liquidity and welfare.
Price limits Artificial stock market Agent-based modeling Genetic programming
10
2010
34
10
2089
2108
http://www.sciencedirect.com/science/article/B6V85-505NRX4-2/2/a4b2c4a32330a95dbb94f4074b20ca15
Yeh, Chia-Hsuan
Yang, Chun-Yi
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:442-4612011-03-25RePEc:eee:dyncon
article
Risk, uncertainty, and option exercise
Many economic decisions can be described as an option exercise or optimal stopping problem under uncertainty. Motivated by experimental evidence such as the Ellsberg Paradox, we follow Knight (1921) and distinguish risk from uncertainty. To capture this distinction, we adopt the multiple-priors utility model. We show that the impact of ambiguity on the option exercise decision depends on the relative degrees of ambiguity about continuation payoffs and termination payoffs. Consequently, ambiguity may accelerate or delay option exercise. We apply our results to investment and exit problems, and show that the myopic NPV rule can be optimal for an agent having an extremely high degree of ambiguity aversion.
Ambiguity Multiple-priors utility Real options Optimal stopping problem
4
2011
35
4
442
461
http://www.sciencedirect.com/science/article/B6V85-51H6YXY-1/2/52e192e82583890b023eef5cd0cc546f
Miao, Jianjun
Wang, Neng
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2215-22282011-03-25RePEc:eee:dyncon
article
Time-consistent control in nonlinear models
The paper shows how to use optimal control to compute optimal time-consistent Markovian government policies in nonlinear dynamic general equilibrium models. It extends Cohen and Michel's (1988) results for the linear-quadratic case. The method involves replacing private agents' costate variables with flexible functions of current state variables in the government's maximization problem. The functions hold in equilibrium to an arbitrarily close approximation. They can be found numerically by perturbation or projection methods. A stochastic model of optimal public spending illustrates the technique.
Optimal government policy Time consistency Control theory
10
2010
34
10
2215
2228
http://www.sciencedirect.com/science/article/B6V85-50T41D0-2/2/af876413712e2ec352e097968a9c9629
Ambler, Steve
Pelgrin, Florian
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2375-23892011-03-25RePEc:eee:dyncon
article
Portfolio choice under transitory price impact
We consider a portfolio optimization problem for a short-term investor who faces an illiquid stock market. The illiquidity of this market results from a transitory price impact that is captured by the transaction costs that are convex in the number of shares traded by an investor. The linear component in these costs defines a no-trading zone, while the nonlinear component does not allow trading the stock at an arbitrary rate. The portfolio choice problem is solved when the stock path is continuous and when the stock may crash. We find that an economy could be in states where the conditional liquidity premium is of the same order of magnitude as the historical risk premium of the stock market. If the illiquid stock undergoes crashes, then in many states, an investor demands a premium for crashes that is much higher than that in the liquid market. Finally, we study the shape of the no-trading zone when the nonlinearity in the transitory price impact is strong or moderate. We find that this shape is significantly different from that when the transitory price impact is linear.
Portfolio choice Liquidity Price impact Transaction costs
11
2010
34
11
2375
2389
http://www.sciencedirect.com/science/article/B6V85-508CCPX-1/2/a20ed7db4d014c2e77a0b92392497f9f
Isaenko, Sergei
oai:RePEc:eee:dyncon:v:35:y:2011:i:2:p:203-2062011-03-25RePEc:eee:dyncon
article
Solving the multi-country Real Business Cycle model using a perturbation method
This paper solves the multi-country RBC model described in den Haan et al. (this issue) and Juillard and Villemot (this issue), using a perturbation method. We explain how to apply first- and second-order versions of the gensys2.m algorithm to this model. The perturbation method is computationally cheap and can easily be applied to large models with possibly hundreds of state variables.
First- and second-order perturbation method Real Business Cycle model
2
2011
35
2
203
206
http://www.sciencedirect.com/science/article/B6V85-514BPCV-1/2/f85dc304f3ae6ed8acc6917cf564c1cc
Kollmann, Robert
Kim, Jinill
Kim, Sunghyun H.
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1680-16992011-03-25RePEc:eee:dyncon
article
Risk premiums and macroeconomic dynamics in a heterogeneous agent model
We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents--shareholders, bondholders and workers--that differ in participation in the capital market and in attitude towards risk and intertemporal substitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. Based on the empirical estimates for the two sources of real macroeconomic risk, the model generates significant and plausible time variation in both bond and equity risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession.
Equity Premium Bond Premium Limited participation DSGE
9
2010
34
9
1680
1699
http://www.sciencedirect.com/science/article/B6V85-50CDSG9-7/2/b41e77d1a6c508ca201dbd916860d98a
De Graeve, Ferre
Dossche, Maarten
Emiris, Marina
Sneessens, Henri
Wouters, Raf
oai:RePEc:eee:dyncon:v:33:y:2009:i:6:p:1263-12772011-03-25RePEc:eee:dyncon
article
Transaction costs and consumption
The rational expectations permanent income hypothesis (RE-PIH) fails to explain several well documented features of consumption behavior. First, the estimated marginal propensity to consume (MPC) for unanticipated transitory income shocks is often much higher than what the theory warrants. Second, the estimated MPC is typically much bigger for small shocks of this type than for large shocks. Third, consumption is often smoothed against large anticipated future income changes but not always against small changes. This paper argues that these findings can be reconciled within a RE-PIH model that includes a cash-in-advance constraint and an assumption that the agent is required to pay a fixed transaction cost to transfer wealth between cash and assets. Key results of the paper include first, the agent follows an s-S rule with respect to cash holdings when he makes wealth-transfer decisions; second, the MPC within the no-transfer band is higher than that out of the band, and can be as high as exactly equal to one; and third, the agent smoothes consumption in response to news of large future income changes but not necessarily to small ones.
Transaction costs Marginal propensity to consume Excess sensitivity
6
2009
33
6
1263
1277
http://www.sciencedirect.com/science/article/B6V85-4VDY7WH-1/2/073465bc3f9c38db5631543128c7deab
Li, Geng
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1610-16262011-03-25RePEc:eee:dyncon
article
On entrepreneurial risk-taking and the macroeconomic effects of financial constraints
This paper deals with credit market imperfections and idiosyncratic risks in a two-sector heterogeneous agent dynamic general equilibrium model of occupational choice. We focus especially on the effects of tightening financial constraints on macroeconomic performance, entrepreneurial risk-taking, and social mobility. Contrary to many models in the literature, our comparative static results cover a broad range for financial constraints, from an unrestrained to a perfectly constrained economy. We find substantial gains in output, welfare, and wealth equality associated with credit market improvements. The marginal gains from relaxing constraints are largest for empirically relevant debt-equity ratios. Interestingly, the entrepreneurship rate and social mobility respond non-monotonically to a change in the tightness of financial constraints. The results crucially depend on feedback effects in general equilibrium, where optimal firm sizes and the demand for credit are endogenously determined.
CGE Occupational choice Financial constraints Wealth distribution
9
2010
34
9
1610
1626
http://www.sciencedirect.com/science/article/B6V85-50CDSG9-2/2/9c2ca27212c9eb2ae617e0ad17276c2a
Clemens, Christiane
Heinemann, Maik
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:1859-18712011-03-25RePEc:eee:dyncon
article
State-dependent pricing, local-currency pricing, and exchange rate pass-through
This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey et al. (1999) in which firms discriminate across countries by setting prices in local currency. In this model, a domestic monetary expansion has greater spillover effects to foreign prices and foreign economic activity than an otherwise identical model with time-dependent pricing. In addition, the predictions of the state-dependent pricing model match the business-cycle moments better than the predictions of the time-dependent pricing model when driven by monetary policy shocks.
International business cycle State-dependent pricing Local-currency pricing Exchange rate pass-through
10
2010
34
10
1859
1871
http://www.sciencedirect.com/science/article/B6V85-509W721-1/2/594b5599ff764e4261e116d03ed84c50
Landry, Anthony
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:641-6582011-03-25RePEc:eee:dyncon
article
Cooperation through imitation and exclusion in networks
We study the coevolution of networks and action choices in a Prisoners' Dilemma. Agents in our model learn about both action choices and choices of interaction partners (links) by imitating successful behavior of others. The resulting dynamics yields outcomes where both cooperators and defectors coexist under a wide range of parameters. Two scenarios can arise. Either there is "full separation" of defectors and cooperators, i.e. they are found in two different, disconnected components. Or there is "marginalization" of defectors, i.e. connected networks emerge with a center of cooperators and a periphery of defectors.
Game theory Cooperation Imitation learning Network formation
5
2011
35
5
641
658
http://www.sciencedirect.com/science/article/B6V85-51N7RMN-2/2/5d5068a1c7be80ae3b1097cede68e158
Fosco, Constanza
Mengel, Friederike
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:694-7132011-03-25RePEc:eee:dyncon
article
On pricing and hedging options in regime-switching models with feedback effect
We study the pricing and hedging of European-style derivative securities in a Markov, regime-switching, model with a feedback effect depending on the economic condition. We adopt a pricing kernel which prices both financial and economic risks explicitly in a dynamically incomplete market and we provide an equilibrium analysis. A martingale representation for a European-style index option's price is established based on the price kernel. The martingale representation is then used to construct the local risk-minimizing strategy explicitly and to characterize the corresponding pricing measure.
Pricing and hedging Regime-switching Feedback effect Product price kernel Local risk-minimization
5
2011
35
5
694
713
http://www.sciencedirect.com/science/article/B6V85-51YYNVF-3/2/180c519b5b4ba8d5d8ffb6a72314bc57
Elliott, Robert J.
Siu, Tak Kuen
Badescu, Alexandru
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:776-7922011-03-25RePEc:eee:dyncon
article
Fundamentalists vs. chartists: Learning and predictor choice dynamics
In a simple, forward looking univariate model of price determination we investigate the evolution of expectations dynamics in the presence of two types of agents: fundamentalists and chartists. In particular, we combine evolutionary selection among heterogeneous classes of models through predictor choice dynamics based on a logit model, with adaptive learning in the form of parameters updating within each class of rules. We find that, for different parameterizations, it can happen that fundamentalists drive chartists completely out of the market or vice versa, and also that heterogeneous equilibria in which fundamentalists and chartists coexist are possible. Interestingly, though, only equilibria in which fundamentalists outperform chartists turn out to be adaptively learnable by agents.
Heterogeneity Expectations Predictor choice Learning
5
2011
35
5
776
792
http://www.sciencedirect.com/science/article/B6V85-51YYNVF-4/2/42c1e2211481a933c20c8f5d85ccdef9
Berardi, Michele
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1748-17672011-03-25RePEc:eee:dyncon
article
Schumpeter meeting Keynes: A policy-friendly model of endogenous growth and business cycles
This paper studies an agent-based model that bridges Keynesian theories of demand-generation and Schumpeterian theories of technology-fueled economic growth. We employ the model to investigate the properties of macroeconomic dynamics and the impact of public polices on supply, demand and the "fundamentals" of the economy. We find profound complementarities between factors influencing aggregate demand and drivers of technological change that affect both "short-run" fluctuations and long-term growth patterns. From a normative point of view, simulations show a corresponding complementarity between "Keynesian" and "Schumpeterian" policies in sustaining long-run growth paths characterized by milder fluctuations and relatively lower unemployment levels. The matching or mismatching between innovative exploration of new technologies and the conditions of demand generation appear to suggest the presence of two distinct "regimes" of growth (or absence thereof) characterized by different short-run fluctuations and unemployment levels.
Endogenous growth Business cycles Growth policies Business cycle policies Evolutionary economics Agent-based computational economics Empirical validation
9
2010
34
9
1748
1767
http://www.sciencedirect.com/science/article/B6V85-50CDSG9-3/2/7c603cb79e245bfa50fafa65b7d4c5ea
Dosi, Giovanni
Fagiolo, Giorgio
Roventini, Andrea
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:115-1302011-03-25RePEc:eee:dyncon
article
Investment shocks and the comovement problem
Recent work based on sticky price-wage estimated dynamic stochastic general equilibrium (DSGE) models suggests investment shocks are the most important drivers of post-World War II US business cycles. Consumption, however, typically falls after an investment shock. This finding sits oddly with the observed business cycle comovement where consumption, along with hours-worked and investment, moves with economic activity. We show that this comovement problem is resolved in an estimated DSGE model when (i) the cost of capital utilization is specified in terms of increased depreciation of capital, as originally proposed by Greenwood et al. (1988) in a neoclassical setting, or (ii) there is no wealth effect on labor supply. The data, however, favors the first channel. Traditionally, the cost of utilization is specified in terms of forgone consumption following Christiano et al. (2005), who studied the effects of monetary policy shocks. The alternative specification we consider has two additional implications relative to the traditional one: (i) it has a substantially better fit with the data and (ii) the contribution of investment shocks to the variance of consumption is over three times larger. The contributions to output, investment, and hours, are also relatively higher, suggesting that these shocks may be quantitatively even more important than previous estimates based on the traditional specification.
Investment shocks Comovement Estimated DSGE models
1
2011
35
1
115
130
http://www.sciencedirect.com/science/article/B6V85-511BYTS-2/2/5f17441ed667f645447d67a8b029ca43
Khan, Hashmat
Tsoukalas, John
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:579-6032011-03-25RePEc:eee:dyncon
article
The New Keynesian Phillips Curve and staggered price and wage determination in a model with firm-specific labor
We develop a DSGE model with firm-specific labor where wage and price setting are subject to Calvo-type staggering. This is in general an intractable problem due to complicated intertemporal dependencies between price and wage decisions. However, the problem is significantly simplified if we, in line with empirical evidence, assume that prices can be changed whenever wages are. We show that the price- and wage-setting relationships are substantially altered by the introduction of firm-specific labor. Specifically, the inflation response is substantially dampened, whereas the wage inflation response is increased as compared to models with freely mobile labor. These distinctive features of the model with firm-specific labor are supported by empirical evidence from a structural VAR.
Monetary policy Inflation persistence Labor market Strategic complementarity
4
2011
35
4
579
603
http://www.sciencedirect.com/science/article/B6V85-51S0WKT-1/2/fa1693af113ec48183ad9f77d30c69ca
Carlsson, Mikael
Westermark, Andreas
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:430-4412011-03-25RePEc:eee:dyncon
article
A two sector endogenous growth model with habit formation
In this paper, we study an endogenous growth model with physical and human capital in which consumption habits enter the utility function multiplicatively. We show that although the utility function with multiplicative habits is nonconcave and unbounded, an interior optimal growth path still exists, it is uniquely determined and it converges to a balanced growth path. We also find that habit formation in consumption lowers the convergence speed of the optimal path toward the balanced growth path.
Habit formation Economic growth Human capital
4
2011
35
4
430
441
http://www.sciencedirect.com/science/article/B6V85-51JF804-1/2/830e467a6d0d6744777b56c384e62e43
Hiraguchi, Ryoji
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2231-22312011-03-25RePEc:eee:dyncon
article
Preface
11
2010
34
11
2231
2231
http://www.sciencedirect.com/science/article/B6V85-502V6NV-1/2/d35089ad6509665419cca551ebaf1dbf
Chiarella, Carl
Duan, Jin-Chuan
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1572-15812011-03-25RePEc:eee:dyncon
article
Using a projection method to analyze inflation bias in a micro-founded model
Since Kydland and Prescott (1977) and Barro and Gordon (1983), most studies of the problem of the inflation bias associated with discretionary monetary policy have assumed a quadratic loss function. We depart from the conventional linear-quadratic approach in favor of a projection method approach. We investigate the size of the inflation bias that arises in a microfounded nonlinear environment with Calvo price setting. The inflation bias is found to lie between 1% and 6% for a reasonable range of parameter values, when the bias is defined as the steady-state deviation of the discretionary inflation rate from the optimal inflation rate under commitment.
Inflation bias Discretionary monetary policy Projection methods
9
2010
34
9
1572
1581
http://www.sciencedirect.com/science/article/B6V85-50F3PDK-1/2/defbc040bb358ea7222860985574551c
Anderson, Gary S.
Kim, Jinill
Yun, Tack
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:25-392011-03-25RePEc:eee:dyncon
article
Thinning and harvesting in stochastic forest models
This paper analyzes a stochastic forest growth model in which the manager is able to first thin the forest to promote better growth before harvesting. Both Wicksell single thinning and harvesting cycle and Faustmann on-going rotation problems are considered. The Wicksell problem is analyzed by first restricting the class of decision times to (thinning, harvesting) pairs that bound the growth away from infinity and imbedding the problem in an infinite-dimensional linear program on a space of triplets of measures. These measures capture the thinning and harvesting decisions along with the behavior of the growth process prior to harvest. An auxiliary linear program then leads to a nonlinear optimization problem for which an optimal value and solution are determined. The values of all the problems are be related through a set of inequalities. The solution of the nonlinear problem determines (random) thinning and harvesting times for the single thinning and harvesting cycle which demonstrate the equality of the values of these various problems. Finally for the Wicksell problem, the unrestricted class of thinning and harvest times is shown to give the same value as the restricted class. The Faustmann on-going thinning and harvesting rotation problem is reduced to a Wicksell problem which then allows for the characterization of the value as the solution to a different nonlinear optimization problem. The effects of the opportunity to thin the forest are illustrated on a mean-reverting stochastic model.
Stochastic forest models Forest rotation Wicksell Faustmann Harvest Thinning Linear programming
1
2011
35
1
25
39
http://www.sciencedirect.com/science/article/B6V85-51B1WJK-1/2/805d4c6e7f699737186d3b3f7b8ec6ff
Helmes, Kurt L.
Stockbridge, Richard H.
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2192-22142011-03-25RePEc:eee:dyncon
article
Unintended consequences of the market risk requirement in banking regulation
We analyze a bank that operates under the Basel credit and market risk requirements, and that maximizes its value through recapitalizations, dividends, and liquid asset investments. According to our model, the market risk requirement may postpone recapitalization and this way increase the bank's default probability. We show that this is indeed the case if the expected return and volatility of the liquid asset portfolio are high, i.e., then the market risk requirement raises the default probability of the bank. In this sense the market risk requirement is inefficient.
Bank capital Dividends Capital issues Investment Bank regulation
10
2010
34
10
2192
2214
http://www.sciencedirect.com/science/article/B6V85-5093N1K-1/2/890289e5685ca3a6d53961fd4a036058
Keppo, Jussi
Kofman, Leonard
Meng, Xu
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2288-23012011-03-25RePEc:eee:dyncon
article
The economic value of volatility timing using a range-based volatility model
There is growing interest in utilizing the range data of asset prices to study the role of volatility in financial markets. In this paper, a new range-based volatility model was used to examine the economic value of volatility timing in a mean-variance framework. We compared its performance with a return-based dynamic volatility model in both in-sample and out-of-sample volatility timing strategies. For a risk-averse investor, it was shown that the predictable ability captured by the dynamic volatility models is economically significant, and that a range-based volatility model performs better than a return-based one.
Asset allocation CARR DCC Economic value Range Volatility timing
11
2010
34
11
2288
2301
http://www.sciencedirect.com/science/article/B6V85-506J0FH-2/2/752f6c207cdf23a87f12e553e5af3759
Chou, Ray Yeutien
Liu, Nathan
oai:RePEc:eee:dyncon:v:35:y:2011:i:2:p:207-2282011-03-25RePEc:eee:dyncon
article
Solving the multi-country real business cycle model using ergodic set methods
We use the stochastic simulation algorithm, described in Judd et al. (2009), and the cluster-grid algorithm, developed in Judd et al. (2010a), to solve a collection of multi-country real business cycle models. The following ingredients help us reduce the cost in high-dimensional problems: an endogenous grid enclosing the ergodic set, linear approximation methods, fixed-point iteration and efficient integration methods, such as non-product monomial rules and Monte Carlo integration combined with regression. We show that high accuracy in intratemporal choice is crucial for the overall accuracy of solutions and offer two approaches, precomputation and iteration-on-allocation, that can solve for intratemporal choice both accurately and quickly. We also implement a hybrid solution algorithm that combines the perturbation and accurate intratemporal-choice methods.
Heterogeneous agents Numerical methods Stochastic simulation Parameterized expectations algorithm Projection Perturbation
2
2011
35
2
207
228
http://www.sciencedirect.com/science/article/B6V85-514P5RX-5/2/266bb3f27cd9f89f2c21a6c3e2e5dee7
Maliar, Serguei
Maliar, Lilia
Judd, Kenneth
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:40-512011-03-25RePEc:eee:dyncon
article
Inflation and output volatility under asymmetric incomplete information
The assumption of asymmetric and incomplete information in a standard New Keynesian model creates strong incentives for monetary policy transparency. We assume that the central bank has better information about its objectives than the private sector, and that the private sector has better information about shocks than the central bank. Transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised. Our analysis improves upon existing work by endogenising the volatility of both output and inflation. Improved transparency most likely manifests itself in falling output volatility.
Imperfect credibility Asymmetric information Signal extraction
1
2011
35
1
40
51
http://www.sciencedirect.com/science/article/B6V85-50T41D0-1/2/fd02e69bc8f97ff96a5baad37ab6eb64
Carboni, Giacomo
Ellison, Martin
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2273-22872011-03-25RePEc:eee:dyncon
article
Behavioral heterogeneity in the option market
This paper develops and tests a heterogeneous agents model for the option market. Our agents have different beliefs about the future level of volatility of the underlying stock index and trade accordingly. We consider two types of agents: fundamentalists and chartists, who are able to switch between groups according to a multinomial logit switching rule. The model simplifies to a GARCH-type specification with time-varying parameters. Estimation results for DAX30 index options reveal that different types of traders are actively involved in trading volatility. Our model improves frequently used standard GARCH-type models in terms of pricing performance.
Heterogeneous agents Option markets Fundamentalists Chartists GARCH
11
2010
34
11
2273
2287
http://www.sciencedirect.com/science/article/B6V85-504BSWH-1/2/0bc095d6a71e30dc1793744efe79d9e8
Frijns, Bart
Lehnert, Thorsten
Zwinkels, Remco C.J.
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:659-6672011-03-25RePEc:eee:dyncon
article
Optimal consumption and investment under time-varying relative risk aversion
We consider the continuous time consumption-investment problem originally formalized and solved by Merton in case of constant relative risk aversion. We present a complete solution for the case where relative risk aversion with respect to consumption varies with time, having in mind an investor with age-dependent risk aversion. This provides a new motivation for life-cycle investment rules. We study the optimal consumption and investment rules, in particular in the case where the relative risk aversion with respect to consumption is increasing with age.
Merton's problem Hamilton-Jacobi-Bellman equation Marginal indirect utility Life-cycle investment
5
2011
35
5
659
667
http://www.sciencedirect.com/science/article/B6V85-51R4SKJ-2/2/47c55647d4f7446b86031441e4cc10cf
Steffensen, Mogens
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:344-3622011-03-25RePEc:eee:dyncon
article
Rationally inattentive macroeconomic wedges
This paper argues that the solution to a dynamic optimization problem of consumption and labor under finite information-processing capacity can simultaneously explain the intertemporal and intratemporal labor wedges. It presents a partial equilibrium model where a representative risk adverse consumer chooses information about wealth with limited attention. The paper compares ex-post realizations of models with finite and infinite capacity. The model produces macroeconomic wedges and measures of elasticity consistent with the literature. These findings suggest that aconsumption-labor model with information-processing constraints can explain the difference between predicted and observed consumption and employment behavior.
Finite Shannon capacity Macroeconomic wedges Savings decision
3
2011
35
3
344
362
http://www.sciencedirect.com/science/article/B6V85-512MH7N-1/2/98ba23f6bd0b3ea1dadb8d25444eaffe
Tutino, Antonella
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:1872-18922011-03-25RePEc:eee:dyncon
article
Auctions and corruption: An analysis of bid rigging by a corrupt auctioneer
In many auctions, the auctioneer is an agent of the seller. This invites corruption. We analyze a model in which the auctioneer orchestrates bid rigging by inviting a bidder to either lower or raise his bid, whichever is more profitable. The interplay between these two types of corruption gives rise to a complex bidding problem that we tackle with numerical methods. Our results indicate that corruption does not only redistribute surplus away from the seller, but also distorts efficiency. We furthermore explain why both, the auctioneer and bidders, have a vested interest in maintaining corruption.
Auctions Corruption Procurement Bid rigging
10
2010
34
10
1872
1892
http://www.sciencedirect.com/science/article/B6V85-4YM7FD3-2/2/303c8ad374fab2275a707252ed853cde
Lengwiler, Yvan
Wolfstetter, Elmar
oai:RePEc:eee:dyncon:v:35:y:2011:i:2:p:175-1772011-03-25RePEc:eee:dyncon
article
Computational suite of models with heterogeneous agents II: Multi-country real business cycle models
This paper describes the second model considered in the computational suite project that compares the performance of different numerical algorithms. It is a multi-country model in which countries face different productivity shocks. Solving such models is a challenging numerical problem unless the number of countries is small. The solutions are functions of a large set of arguments and the functional forms are unknown. Moreover, the solution procedures have to deal with high-dimensional integration problems.
Numerical solutions Simulations Approximations
2
2011
35
2
175
177
http://www.sciencedirect.com/science/article/B6V85-514P5RX-2/2/ce9a5e05e84cbfb81e8566d2c9ab7379
Den Haan, Wouter J.
Judd, Kenneth L.
Juillard, Michel
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2109-21252011-03-25RePEc:eee:dyncon
article
Short-run fiscal policy: Welfare, redistribution and aggregate effects in the short and long-run
This paper quantifies the effects of two short-run fiscal policies, a temporary tax-cut and rebate transfer, that are intended to stimulate economic activities. A reduction in income taxation provides immediate incentives to work and save more, raising aggregate output and consumption. A temporary rebate is mostly saved and increases consumption marginally. Both policies improve the overall welfare of households and the rebate policy benefits especially low-income households. In the long-run, however, the debt accumulated to finance the stimulus and a higher tax to service the debt can crowd out capital and lower output and consumption, causing welfare to deteriorate.
Short-run fiscal policy Life-cycle model General equilibrium
10
2010
34
10
2109
2125
http://www.sciencedirect.com/science/article/B6V85-50393MT-1/2/e383120d68a84423e194b03c2c88ce2e
Kitao, Sagiri
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1550-15712011-03-25RePEc:eee:dyncon
article
How misleading is linearization? Evaluating the dynamics of the neoclassical growth model
This paper investigates the reliability of employing linearization to evaluate the dynamic adjustments to changes in productive government spending in a Ramsey growth model. If government expenditure is introduced as a flow and the dynamic adjustment is fast, linearization may yield a reasonably good approximation to the true dynamics, even for fairly large policy shocks. If government expenditure assumes the form of a stock, leading to more sluggish adjustment, linearization may yield misleading predictions. These errors occur at the beginning of the transition and weigh heavily in welfare calculations. The implications for temporary shocks and the speed of convergence are also considered.
Public expenditure Growth Nonlinearities Welfare analysis
9
2010
34
9
1550
1571
http://www.sciencedirect.com/science/article/B6V85-50CDSG9-1/2/ad46f583ab19770ba3c7d817e31c9c55
Atolia, Manoj
Chatterjee, Santanu
Turnovsky, Stephen J.
oai:RePEc:eee:dyncon:v:33:y:2009:i:6:p:1247-12622011-03-25RePEc:eee:dyncon
article
Happiness maintenance and asset prices
This paper constructs a simple dynamic asset pricing model that incorporates recent evidence on the influence of immediate emotions on risk preferences. Investors derive direct utility from both consumption and financial wealth and, consistent with the happiness maintenance feature documented by Isen (1999) and others, become more cautious toward their wealth in good times. Mild pro-cyclical changes in risk aversion over wealth cause large pro-cyclical fluctuations in the current price-dividend ratio which, due to general equilibrium restrictions, translate into counter-cyclical variation in the current consumption-wealth ratio and, in turn, in expected future returns. With a realistic consumption growth process and reasonable preference parameters, the model generates a sizable equity premium, a low and stable risk-free rate, volatile and predictable stock returns, and price-dividend and Sharpe ratios in line with the data.
State-dependent utility Affect and decision making Equity premium puzzle
6
2009
33
6
1247
1262
http://www.sciencedirect.com/science/article/B6V85-4V94WWK-2/2/1cd892782776f92dbecb044a32c787c5
Falato, Antonio
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2440-24602011-03-25RePEc:eee:dyncon
article
Growth, sectoral composition, and the evolution of income levels
We assert that the endowments of production factors cause cross-country differences in GDP by generating disparities in the sectoral composition. We characterize the dynamic equilibrium of a two-sector endogenous growth model with several consumption goods that are subject to minimum consumption requirements. In this model, economies with the same fundamentals but different endowments of capitals will end up growing at a common rate, although the long run sectoral composition of GDP will be different. Because the total factor productivity (TFP) in multisector models depends on sectoral structure, these differences in capital endowments will also generate sustained differences in TFPs.
Sectoral composition Two-sector growth model Minimum consumption Total factor productivity
12
2010
34
12
2440
2460
http://www.sciencedirect.com/science/article/B6V85-50BJNGK-1/2/a74d0a0690d079274df538cccb9c3cb9
Alonso-Carrera, Jaime
Raurich, Xavier
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:1951-19662011-03-25RePEc:eee:dyncon
article
Robust hidden Markov LQG problems
For linear quadratic Gaussian problems, this paper uses two risk-sensitivity operators defined by Hansen and Sargent (2007b) to construct decision rules that are robust to misspecifications of (1) transition dynamics for state variables and (2) a probability density over hidden states induced by Bayes' law. Duality of risk sensitivity to the multiplier version of min-max expected utility theory of Hansen and Sargent (2001) allows us to compute risk-sensitivity operators by solving two-player zero-sum games. Because the approximating model is a Gaussian probability density over sequences of signals and states, we can exploit a modified certainty equivalence principle to solve four games that differ in continuation value functions and discounting of time t increments to entropy. The different games express different dimensions of concerns about robustness. All four games give rise to time consistent worst-case distributions for observed signals. But in Games I-III, the minimizing players' worst-case densities over hidden states are time inconsistent, while Game IV is an LQG version of a game of Hansen and Sargent (2005) that builds in time consistency. We show how detection error probabilities can be used to calibrate the risk-sensitivity parameters that govern fear of model misspecification in hidden Markov models.
Hidden Markov models Misspecification Kalman filter Robustness Entropy Certainty equivalence
10
2010
34
10
1951
1966
http://www.sciencedirect.com/science/article/B6V85-502978M-1/2/4d1eaa6e9d55990732df2c0e49367758
Hansen, Lars Peter
Mayer, Ricardo
Sargent, Thomas
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2547-25672011-03-25RePEc:eee:dyncon
article
On the macroeconomic and welfare effects of illegal immigration
This paper uses a dynamic general equilibrium model with labor market frictions to explore the economic consequences of illegal immigration. In the baseline model, native workers and illegal foreign workers compete for jobs in the same market, but serve as imperfect substitutes in production. The calibrated model generates a U-shaped relationship between long-run domestic consumption and the population share of illegal immigrants. After taking into account both consumption and leisure, I found that an increase in illegal immigration can generate significant welfare gains for the natives. The baseline model is then extended to include heterogeneous workers in the domestic population.
Search Unemployment Illegal immigration Economic growth
12
2010
34
12
2547
2567
http://www.sciencedirect.com/science/article/B6V85-50G0636-1/2/7db6e139b1d2776e1cf5b339b7a4f34c
Liu, Xiangbo
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:623-6402011-03-25RePEc:eee:dyncon
article
Dynamic portfolio choice under ambiguity and regime switching mean returns
I examine a continuous-time intertemporal consumption and portfolio choice problem under ambiguity, where expected returns of a risky asset follow a hidden Markov chain. Investors with Chen and Epstein's (2002) recursive multiple priors utility possess a set of priors for unobservable investment opportunities. The optimal consumption and portfolio policies are explicitly characterized in terms of the Malliavin derivatives and stochastic integrals. When the model is calibrated to U.S. stock market data, I find that continuous Bayesian revisions under incomplete information generate ambiguity-driven hedging demands that mitigate intertemporal hedging demands. In addition, ambiguity aversion magnifies the importance of hedging demands in the optimal portfolio policies. Out-of-sample experiments demonstrate the economic importance of accounting for ambiguity.
Hidden Markov model Malliavin derivative Portfolio choice Recursive multiple priors
4
2011
35
4
623
640
http://www.sciencedirect.com/science/article/B6V85-51S6X5S-1/2/11f86c481a6d834438d039dc5bdd78ab
Liu, Hening
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1732-17472011-03-25RePEc:eee:dyncon
article
Money and liquidity effects: Separating demand from supply
In the canonical monetary policy model, money is endogenous to the optimal path for interest rates and output. But when liquidity provision by banks dominates the demand for transactions money from the real economy, money is likely to contain information for future output because of its impact on financial spreads. And so we decompose broad money into primitive demand and supply shocks. We find that supply shocks have played a significant role in the time series in each of the USA, UK and Eurozone in the short to medium term. We further consider to what extent the supply of broad money is related to policy or to liquidity effects from financial intermediation.
Money Liquidity Bayesian VAR identification Sign restrictions
9
2010
34
9
1732
1747
http://www.sciencedirect.com/science/article/B6V85-50CDSG9-5/2/017acac7193ee804b957f405acf6cbc4
Chadha, Jagjit S.
Corrado, Luisa
Sun, Qi
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:668-6752011-03-25RePEc:eee:dyncon
article
Time-inconsistent preferences and social security: Revisited in continuous time
Imrohoroglu et al. (2003) prove that it is impossible in a three period partial equilibrium model for social security to improve the welfare of a naive quasi-hyperbolic agent if the program has a negative net present value. This paper first generalizes their impossibility theorem to a continuous time setting and then proves analytically that no discount function exists that can rationalize a social security program with a negative net present value.
Time inconsistency Social security
5
2011
35
5
668
675
http://www.sciencedirect.com/science/article/B6V85-51R4SKJ-1/2/94df0d89998530feca86ff8519f779d1
Caliendo, Frank N.
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2461-24842011-03-25RePEc:eee:dyncon
article
Monetary shocks in a spatial overlapping generations model
In a classic paper, "The Lag in Effect of Monetary Policy," Friedman (1961) describes an expansionary open market operation as diffusing across the economy, pulling the price in one market out of line with the price in the next market as it spreads. The objective of this paper is to build a model where this process is made explicit, specifically, where money affects real economic activity by altering relative prices of goods as it spills from one market into the next. Thus the paper superimposes a monetary overlapping generations model on a simple abstract spatial structure--specifically, a graph--and then studies the effect of an expansionary monetary policy.
Spatial overlapping generations model Underlying graph Monetary shock
12
2010
34
12
2461
2484
http://www.sciencedirect.com/science/article/B6V85-50GWN3C-2/2/e312856c4400527743ee522a596809d2
Anthonisen, Niels
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:257-2722011-03-25RePEc:eee:dyncon
article
The forward method as a solution refinement in rational expectations models
This paper generalizes the standard forward method of recursive substitution to a general class of linear rational expectations models with potentially multiple fundamental solutions. It is shown that the existence and uniqueness of the well-known forward solution are preserved in a general context. We also propose a key property embedded in the forward solution - the no-bubble condition - as an economically sensible solution refinement in the class of fundamental solutions. In the literature, the no-bubble condition has been assumed to rule out non-fundamental bubble solutions. We show that the forward solution is the only rational expectations equilibrium satisfying the no-bubble condition and consequently, it is the most relevant fundamental solution within the class of fundamental equilibria. Several economic examples are provided where the fundamental solutions obtained by other solution methods and refined by other solution selection criteria violate the no-bubble condition.
Rational expectations Forward method Forward solution No-bubble condition
3
2011
35
3
257
272
http://www.sciencedirect.com/science/article/B6V85-5120JYT-2/2/367081f5d806e0fc6f48462336e52ee1
Cho, Seonghoon
Moreno, Antonio
oai:RePEc:eee:dyncon:v:35:y:2011:i:2:p:186-2022011-03-25RePEc:eee:dyncon
article
Comparison of solutions to the multi-country Real Business Cycle model
We compare the performance of perturbation, projection, and stochastic simulation algorithms for solving the multi-country RBC model described in Den Haan et al. (this issue). The main challenge of solving this model comes from its large number of continuous-valued state variables, ranging between four and 20 in the specifications we consider. The algorithms differ substantially in terms of speed and accuracy, and a clear trade-off exists between the two. Perturbation methods are very fast but invoke large approximation errors except at points close to the steady state; the projection methods considered are accurate on a large area of the state space but are very slow for specifications with many state variables; stochastic simulation methods have lower accuracy than projection methods, but their computational cost increases only moderately with the state-space dimension. Simulated series generated by different methods can differ noticeably, but only small differences are found in unconditional moments of simulated variables. On the basis of our comparison, we identify the factors that account for differences in accuracy and speed across methods, and we suggest directions for further improvement of some approaches.
Numerical solutions Simulations Approximations Algorithms
2
2011
35
2
186
202
http://www.sciencedirect.com/science/article/B6V85-514P5RX-4/2/30537afeb53da097cb6fa0cd100abf72
Kollmann, Robert
Maliar, Serguei
Malin, Benjamin A.
Pichler, Paul
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:512-5272011-03-25RePEc:eee:dyncon
article
Fiscal stimulus and the role of wage rigidity
In this paper we study the impact of an expansion in public spending in an economy characterized by limited asset market participation and sticky wages. The flexible wage version of the model implies strong expansionary effects on output and consumption but also a counterfactual increase in real wages. The introduction of sticky wages, besides being a realistic addition, solves this problem and preserves the expansionary effects on output and consumption. Moreover, once we introduce segmentation in the labor market, sticky wages are even essential to obtain expansionary effects.
Sticky wages Rule-of-thumb consumers Fiscal shocks
4
2011
35
4
512
527
http://www.sciencedirect.com/science/article/B6V85-51FXR3D-1/2/ce69a1232c81056a31a81bf1870dcc8c
Furlanetto, Francesco
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:462-4782011-03-25RePEc:eee:dyncon
article
Two state capital accumulation with heterogenous products: Disruptive vs. non-disruptive goods
The paper considers the problem of a firm that, while producing a standard product, has the option to introduce an innovative product. The innovative product competes with the standard product and will therefore reduce revenues of the standard product. A distinction is made between innovative products that do or do not become even more relatively appealing as their market share grows (e.g., because of network externalities). It is shown that in the former case, which we call a "disruptive" good, history dependent long run equilibria can occur, which are in line with recent real life economic examples.
Investment Product innovation Maximum principle Skiba curve
4
2011
35
4
462
478
http://www.sciencedirect.com/science/article/B6V85-512VTBV-1/2/f425aa0ae61cc2dbfc98f057fcb7115e
Caulkins, Jonathan P.
Feichtinger, Gustav
Grass, Dieter
Hartl, Richard F.
Kort, Peter M.
oai:RePEc:eee:dyncon:v:35:y:2011:i:2:p:240-2512011-03-25RePEc:eee:dyncon
article
Solving the multi-country Real Business Cycle model using a monomial rule Galerkin method
I propose a Galerkin projection method for solving dynamic economic models with many state variables. This method employs non-product monomial integration formulas for the computation of weighted residuals, and its computational cost therefore increases only polynomially in the model's dimensionality. I illustrate the practical implementation of the proposed algorithm by solving several specifications of the multi-country Real Business Cycle model described in Den Haan et al. [2010. Computational suite of models with heterogeneous agents: multi-country Real Business Cycle models. Journal of Economic Dynamics and Control, this issue], and briefly discuss two possible routes for further improving its numerical accuracy.
Galerkin method Weighted residuals Monomial cubature rules Curse of dimensionality Multi-country Real Business Cycle model
2
2011
35
2
240
251
http://www.sciencedirect.com/science/article/B6V85-514P5RX-1/2/fb63d739079f0ef906396d8e4116b5bf
Pichler, Paul
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:1837-18582011-03-25RePEc:eee:dyncon
article
Euro area inflation persistence in an estimated nonlinear DSGE model
We estimate the approximate non-linear solution of a small DSGE model on euro area data, using the conditional particle filter to compute the model likelihood. Our results are consistent with previous findings, based on simulated data, suggesting that this approach delivers sharper inference compared to the estimation of the linearised model. We also show that the non-linear model can account for richer economic dynamics: the impulse responses to structural shocks vary depending on initial conditions selected within our estimation sample.
DSGE models Inflation persistence Second order approximations Sequential Monte Carlo Bayesian estimation
10
2010
34
10
1837
1858
http://www.sciencedirect.com/science/article/B6V85-5046M3D-1/2/b0d8060fcdc7620068058b97d4baf7c7
Amisano, Gianni
Tristani, Oreste
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2056-20732011-03-25RePEc:eee:dyncon
article
Asset pricing implications of a New Keynesian model
We investigate the behavior of asset prices in a typical New Keynesian macro model. Using a second-order approximation, we examine bond and equity returns, the equity risk premium, and the behavior of the real and nominal term structure. As documented in the literature, our results suggest that introducing real rigidities to the model increases risk premia. Nevertheless we that find that, in a world dominated by productivity shocks, increasing nominal rigidities reduces risk premia. Such rigidities only enhance risk premia when economic dynamics are mainly driven by monetary policy shocks. The results imply that, unlike in endowment frameworks, matching asset pricing facts in macro models will require attention to the composition of shocks, not just the specification of investor preferences.
Asset prices New Keynesian Nominal rigidities
10
2010
34
10
2056
2073
http://www.sciencedirect.com/science/article/B6V85-50393MT-2/2/666547a3d7c0d01d126f807f4e0c8655
De Paoli, Bianca
Scott, Alasdair
Weeken, Olaf
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:1967-19922011-03-25RePEc:eee:dyncon
article
Learning by doing vs. learning from others in a principal-agent model
We introduce learning in a principal-agent model of output sharing under moral hazard. We use social evolutionary learning to represent social learning and reinforcement, experience-weighted attraction (EWA) and individual evolutionary learning (IEL) to represent individual learning. Learning in the principal-agent model is difficult due to: the stochastic environment; the discontinuity in payoffs at the optimal contract; and the incorrect evaluation of foregone payoffs for IEL and EWA. Social learning is much more successful in adapting to the optimal contract than standard individual learning algorithms. A modified IEL using realized payoffs evaluation performs better but still falls short of social learning.
Learning Principal-agent model Moral hazard
10
2010
34
10
1967
1992
http://www.sciencedirect.com/science/article/B6V85-4YWYYNH-2/2/265bb446a94326ffda3e9bdf870537ff
Arifovic, Jasmina
Karaivanov, Alexander
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:67-792011-03-25RePEc:eee:dyncon
article
Sources of the great moderation: A time-series analysis of GDP subsectors
Recent work finds evidence that the volatility of the U.S. economy fell dramatically around the first quarter of 1984. We trace the timing of this so-called "Great Moderation" across many subsectors of the economy in order to better understand its root cause. We find that the interest rate sensitive sectors generally experience a much earlier volatility decline than other large sectors of the economy. The changes in Federal Reserve stabilization policies that occurred during the early 1980s support the view that an improved monetary policy played an important role in stabilizing real economic activity. We find only mild evidence that "good luck" was important and little evidence to support the claim that improved inventory management was important.
Volatility reduction Endogenous break Markov regime-switching Monetary policy
1
2011
35
1
67
79
http://www.sciencedirect.com/science/article/B6V85-50PCM69-4/2/2952d46f60c5046f7e41a96bb31ee066
Enders, Walter
Ma, Jun
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:363-3852011-03-25RePEc:eee:dyncon
article
Credit and self-employment
The US personal bankruptcy system allows debtors to discharge uncollateralized debts if they give up assets in excess of a threshold known as an "exemption". However, since exemptions erode repayment incentives, they may increase borrowing costs. Our paper evaluates the tradeoff between credit costs and the insurance against failure created by bankruptcy exemptions. We find that exemptions change self-employment rates and the timing, size, and financing of projects. We also find that the positive relationship between wealth and self-employment rates may not arise from credit constraints: such a relationship is present even when credit is plentiful at low interest rates.
Self-employment Bankruptcy
3
2011
35
3
363
385
http://www.sciencedirect.com/science/article/B6V85-5120JYT-1/2/b11a8928a26699e099ff16f810468ba1
Akyol, Ahmet
Athreya, Kartik
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2494-25092011-03-25RePEc:eee:dyncon
article
Dynamic nonpoint-source pollution control policy: Ambient transfers and uncertainty
When a regulator cannot observe or infer individual emissions, corrective policy must rely on ambient pollution data. Assuming this kind of environment, we study a class of differential games of pollution control with profit functions that are polynomial in the global pollution stock. Given an open-loop emissions strategy satisfying mild regularity conditions, an ambient transfer scheme is exhibited that induces it in Markov-perfect equilibrium (MPE). Proposed transfers are a polynomial function of the difference between actual and desired pollution levels; moreover, they are designed so that in MPE no tax or subsidy is ever levied. Their applicability under stochastic pollution dynamics is studied for a symmetric game of polluting oligopolists with linear demand. We discuss a quadratic scheme that induces agents to adopt Markovian emission strategies that are stationary and linearly decreasing in total pollution. Total expected ambient transfers are non-positive and their magnitude is linearly increasing in physical volatility, the size of the economy, and the absolute value of the slope of the inverse demand function. However, if the regulator is interested in inducing a constant emissions strategy then, in expectation, transfers vanish. The total expected ambient transfer is compared to its point-source equivalent.
Differential games Nonpoint source pollution Stochastic dynamics Policy design
12
2010
34
12
2494
2509
http://www.sciencedirect.com/science/article/B6V85-50GWN3C-4/2/0ee18ff6b29532fb727b6849c37c06e6
Athanassoglou, Stergios
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1791-18122011-03-25RePEc:eee:dyncon
article
The macroeconomics of fiscal consolidations in euro area countries
We simulate a currency union dynamic general equilibrium model to assess the macroeconomic implications of permanently reducing the public debt-to-gross domestic product (GDP) ratio in euro area countries. We obtain the following results. First, tax distortions are quantitatively significant. Second, the best fiscal consolidation strategy is to permanently reduce both expenditures and tax rates. Third, under such a consolidation strategy the transition is generally not costly, as the GDP and investment would grow, while private consumption would not fall. Finally, spillovers to the rest of the euro area are generally expansionary.
Fiscal consolidation Monetary union Distortionary taxation General equilibrium models
9
2010
34
9
1791
1812
http://www.sciencedirect.com/science/article/B6V85-50CV7T1-3/2/55ed745477eceb88de941bc9feb181f7
Forni, Lorenzo
Gerali, Andrea
Pisani, Massimiliano
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2302-23192011-03-25RePEc:eee:dyncon
article
Consistent modeling of S&P 500 and VIX derivatives
This study introduces a model that identifies relationships between stylized features on S&P 500, VIX and derivatives on VIX. The paper considers a specification with discontinuous correlated jumps in stock prices and stock price volatility with state-dependent arrival intensity, and examines how these factors impact VIX option pricing and hedging. The paper finds strong evidence for jumps in volatility and jumps in returns implicit in VIX option data.
VIX option Stochastic volatility Jumps State-dependent jump frequency Delta hedging
11
2010
34
11
2302
2319
http://www.sciencedirect.com/science/article/B6V85-4YG1KTC-1/2/337ceefb1f64b04e5b6bc5420667b7a8
Lin, Yueh-Neng
Chang, Chien-Hung
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2010-20222011-03-25RePEc:eee:dyncon
article
Investment and the Taylor rule in a dynamic Keynesian model
We study monetary policy in a reduced-form dynamic model with bounded rationality and an empirically motivated investment function. Investment has important dynamic effects in our model. In particular, the cost of capital effect on investment is more important for monetary transmission than the more widely studied intertemporal substitution parameter in consumption. Furthermore, a strong Taylor rule response to unemployment in this model is more effective in stabilizing demand-induced fluctuations than a strong response to inflation. Indeed, an excessively aggressive response to inflation destabilizes the simulated output and inflation fluctuations.
Taylor rule Bounded rationality Investment
10
2010
34
10
2010
2022
http://www.sciencedirect.com/science/article/B6V85-505NRX4-3/2/223456fab07a24ad80523a700adc7808
Fazzari, Steven M.
Ferri, Piero
Greenberg, Edward
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1529-15302011-03-25RePEc:eee:dyncon
article
Introduction to the special issue: Computational perspectives in economics and finance: Methods, dynamic analysis and policy modeling
9
2010
34
9
1529
1530
http://www.sciencedirect.com/science/article/B6V85-50F3PDK-4/2/cdb24999d584a259b686033c707fb326
Dawid, H.
Semmler, W.
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:491-5112011-03-25RePEc:eee:dyncon
article
Heuristic learning and the discovery of specialization and exchange
I develop and calibrate an agent-based model of boundedly rational, adaptive agents in a two-good production and exchange economy to replicate human-subject outcomes in the same eight-person experimental economy. To test agents' ability to capture human behavior, I extend the model and use its output to make predictions about a second experimental environment in which the group of eight agents is slowly constructed by merging smaller groups. This environment improves human-subject performance in the specialization and exchange task, and commensurate improvement emerges for some parameterizations of the agent-based model. This iterative process yields incremental improvement of decision-level theories about economic discovery.
Agent-based modeling Experimental economics Exchange Specialization
4
2011
35
4
491
511
http://www.sciencedirect.com/science/article/B6V85-517S7MM-1/2/6933f5d9f74d6218b1885766ad27b0f3
Kimbrough, Erik O.
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1651-16792011-03-25RePEc:eee:dyncon
article
Global dynamics in a model with search and matching in labor and capital markets
In this paper global macroeconomic dynamics are studied when search frictions are present in both labor and capital markets. On the basis of the Merz (1995) macroeconomic model with labor market frictions and capital accumulation, our paper offers an extension to frictions in capital markets, analogously modeled as a search and matching process. Using the Merz model as limit case, we consider exogenous as well as endogenous borrowing constraints. We also allow the cost of issuing bonds to change endogenously. As we show, capital market frictions exacerbate and accentuate the interaction between the two markets and magnify the effects of shocks on output, consumption, employment, and welfare. This interaction of the frictions in labor and capital markets are also shown to give rise to multiple equilibria. On the basis of numerical solution techniques, instead of relying on first or second order approximations around a (unique) steady state, our paper uses dynamic programming techniques to compute decision variables and the value function directly and assess the local and global dynamics of the model. The steady state solutions are studied by using the Hamiltonian and the dynamics are assessed for various model variants by using dynamic programming techniques.
Search and matching frictions Global macroeconomic dynamics Credit constraints Equilibrium unemployment
9
2010
34
9
1651
1679
http://www.sciencedirect.com/science/article/B6V85-50GWN3C-1/2/83b8641f3800f462672359aef9c987e0
Ernst, Ekkehard
Semmler, Willi
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2568-25772011-03-25RePEc:eee:dyncon
article
Managing disinflation under uncertainty
In this paper we analyze disinflation policy when a central bank has imperfect information about private sector inflation expectations but learns about them from economic outcomes, which are in part the result of the disinflation policy itself. The form of uncertainty is manifested as uncertainty about the effect of past disinflation policy on the current output gap. This differs from other studies on learning and control in a monetary policy context (e.g., [Ellison, 2006] and [Svensson and Williams, 2007]) that assume uncertainty about the effects of current policy actions on the economy. We derive the central bank's optimal disinflation strategy under active learning (DOP) and compare it with two limiting cases--certainty equivalence policy (CEP), or passive learning, and a Brainard-style cautionary monetary policy (CP). It turns out that under the DOP inflation stays between the levels implied by the CEP and the CP. A novel result--e.g., unlike Beck and Wieland (2002)--is that this holds irrespective of the initial level of inflation. At high levels of inherited inflation the DOP moves closer to the CEP, at low levels of inherited inflation the DOP resembles the CP.
Learning Inflation expectations Disinflation policy Separation principle Kalman filter Optimal control Dynamic programming
12
2010
34
12
2568
2577
http://www.sciencedirect.com/science/article/B6V85-50PCM69-1/2/49d58aad8f1bd02a1f6fc9424f23b5e5
Tesfaselassie, M.F.
Schaling, E.
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:330-3432011-03-25RePEc:eee:dyncon
article
Understanding liquidity shortages during severe economic downturns
One feature of economic recessions is the appearance of aggregate liquidity shortages that can exacerbate the economic downturn. We develop a model in which the demand for liquidity arises suddenly in response to continued funding needs of partially completed investment projects whose outcomes are subject to idiosyncratic shocks and moral hazard. When the economy experiences an adverse aggregate productivity shock, incentive constraints that underlie equity contracts may bind, provided the shock is severe enough. In this case, credit-rationing appears, and the heightened demand for liquidity coincides with a greater reluctance to take on equity positions or deepen investments in on-going investment projects. The consequence is a reduction in new investment and termination of on-going projects due to a lack of liquidity, thereby worsening the economic slowdown.
Credit-rationing Moral hazard Occasionally binding constraints
3
2011
35
3
330
343
http://www.sciencedirect.com/science/article/B6V85-51D7HPS-1/2/d35b34fb98a52141b60ddd05e8da3b60
Atolia, Manoj
Einarsson, Tor
Marquis, Milton
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2407-24192011-03-25RePEc:eee:dyncon
article
A dynamic bioeconomic analysis of mountain pine beetle epidemics
In this paper, we develop a bioeconomic model of timber harvesting that includes dynamic interactions between mountain pine beetle (MPB) and a lodgepole pine forest with a disaggregated size structure. The model is used to investigate the consequences of alternative public management strategies on forest dynamics in the presence of MPB outbreaks. Management practices similar to those commonly practiced are shown to increase the severity of MPB cycles. Centrally coordinated forest management can eliminate MPB cycles and lessen the impacts of MPB outbreaks with only small reductions in the long-run stock of adult trees.
Mountain pine beetle Cycles Stock externality Public forest management
12
2010
34
12
2407
2419
http://www.sciencedirect.com/science/article/B6V85-50CV7T1-1/2/be52b9b65856f525149dce2dd324f5a8
Sims, Charles
Aadland, David
Finnoff, David
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1768-17902011-03-25RePEc:eee:dyncon
article
Learning benevolent leadership in a heterogenous agents economy
This paper studies the potential commitment value of cheap talk announcements in an agent-based dynamic extension of the Kydland-Prescott model. In every period, the policy maker makes a non-binding inflation announcement before setting the actual inflation rate. It updates its decisions using individual evolutionary learning. The private agents can choose between two different forecasting strategies: They can either set their forecast equal to the announcement or use an adaptive learning scheme to (potentially) forecast the true inflation. They switch between these two strategies as a function of information about the associated payoffs they obtain through word-of-mouth, choosing always the currently most favorable one. While all agents using the first strategy make the same forecast, those using the second strategy may generate different individual forecasts. In spite of the complexity of the environment, the boundedly rational policy maker learns to sustain a situation with a positive but fluctuating fraction of believers. This outcome is Pareto superior to the outcome predicted by standard theory. Interestingly enough, the actions taken by the policy maker undergo marked qualitative changes as a function of the prevailing heterogeneity among and learning characteristics of the private agents.
Time inconsistency Bounded rationality Forecast and agent heterogeneity Cheap talk Evolutionary learning
9
2010
34
9
1768
1790
http://www.sciencedirect.com/science/article/B6V85-50CDSG9-6/2/58fe40d30e8b4509b5ef80dbca18b3b8
Arifovic, Jasmina
Dawid, Herbert
Deissenberg, Christophe
Kostyshyna, Olena
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:825-8422011-04-12RePEc:eee:dyncon
article
The dynamics of innovation and horizontal differentiation
We study innovation in a dynamic stochastic discrete-time duopoly with endogenous horizontal differentiation. Innovation takes the form of a quality ladder; horizontal differentiation is Hotelling competition. We compute Markov-perfect equilibria and study the effects on long-run innovation of changes in taste heterogeneity (transport costs) and firms' costs of relocating products. Innovation rises as the industry's long-run position moves toward products that are permanently co-located in the space of horizontal tastes. A large enough fall in taste heterogeneity will raise long-run innovation, while more costly product relocation lowers innovation if taste heterogeneity is high, and raises it otherwise.
Dynamic duopoly Markov-perfect equilibrium Innovation Horizontal differentiation
6
2011
35
6
825
842
http://www.sciencedirect.com/science/article/B6V85-524FS8K-1/2/d675407e8ac719eb666fedc06c33a164
Narajabad, Borghan
Watson, Randal
oai:RePEc:eee:dyncon:v:33:y:2009:i:10:p:1808-18232011-04-12RePEc:eee:dyncon
article
Speculative hyperinflations and currency substitution
We propose a rational expectations framework for understanding speculative hyperinflations that end in response to 'orthodox' stabilization programs. Motivated by a strong degree of hysteresis in the stock of real balances after the end of hyperinflations, we provide a cash-and-credit model in which the money demand exhibits persistence because individuals can establish long-lasting credit relationships. We use the model to show that if hysteresis in real balances is possible then a fiscal-monetary reform that successfully stops a speculative hyperinflation may fail to prevent it. We argue that speculative hyperinflationary equilibria are consistent with some key stylized facts observed in extreme hyperinflations.
Hyperinflation Hysteresis Fiscal-monetary reform Multiple equilibria
10
2009
33
10
1808
1823
http://www.sciencedirect.com/science/article/B6V85-4W6Y32K-2/2/c096df41a492970e3ab9f9ecb549781a
Arce, Oscar J.
oai:RePEc:eee:dyncon:v:32:y:2008:i:7:p:2349-23692011-04-12RePEc:eee:dyncon
article
Aggregate stock market behavior and investors' low risk aversion
This paper studies whether investors' high risk aversion can be avoided in a representative-agent model that is able to explain aggregate stock market behavior in the US financial market. We present a consumption-based asset pricing model with a representative agent who has a 'catching up with the Joneses' preference to show that high risk aversion can be avoided in a representative-agent model that can help explain many of the empirically observed properties of the aggregate stock market return, including the equity premium and risk-free rate puzzles, the predictability of long-horizon stock returns, and the 'leverage effect' in return volatility.
7
2008
32
7
2349
2369
http://www.sciencedirect.com/science/article/B6V85-4R1KVKJ-1/1/067063b26fc59f4466465a8f70c2294a
Li, George
oai:RePEc:eee:dyncon:v:32:y:2008:i:12:p:3760-37792011-04-12RePEc:eee:dyncon
article
Public capital maintenance and congestion: Long-run growth and fiscal policies
In this paper we study an endogenous growth model, in which public maintenance expenditures affect the depreciation rate of public capital and the latter is subject to congestion. We find that economies with low congestion in public infrastructure will require a threshold level of public capital maintenance for ongoing growth. We also examine the fiscal implications of public capital maintenance policies and we find that the composition of public capital expenditures under congestion is a crucial determinant of optimal and growth-maximizing fiscal policies. The government can affect the return of public capital by re-allocating public expenditures between 'new' public investment and maintenance and hence avoid excessive taxation that is required under increasing congestion.
Public capital maintenance Congestion Optimal fiscal policies
12
2008
32
12
3760
3779
http://www.sciencedirect.com/science/article/B6V85-4S8CR29-1/2/241af0c100d13b4ef2f0d4813f95e329
Dioikitopoulos, Evangelos V.
Kalyvitis, Sarantis
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:947-9622011-04-12RePEc:eee:dyncon
article
The implications of inflation in an estimated new Keynesian model
This paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. It is found that 10 percentage points of inflation entail a steady state welfare cost as high as 13% of annual consumption. This large cost is mainly driven by staggered price contracts and price indexation. The transition from high to low inflation inflicts a welfare loss equivalent to 0.53% of annual consumption. The role of nominal/real frictions as well as that of parameter uncertainty is also addressed.
DSGE model Inflation Welfare
6
2011
35
6
947
962
http://www.sciencedirect.com/science/article/B6V85-51XR3DH-3/2/9aee7c79084bdf4e57bdada4af26fcde
Guerron-Quintana, Pablo A.
oai:RePEc:eee:dyncon:v:32:y:2008:i:7:p:2214-22392011-04-12RePEc:eee:dyncon
article
Management of a capital stock by Strotz's naive planner
The capital management problem posed by R.H. Strotz is analyzed for the case of the 'naive' planner who fails to anticipate changes in his own preferences. By imposing progressively stronger restrictions on the primitives of the problem - namely, the discounting function, the utility index function, and the investment technology - the planner's behavior is characterized first as the solution to an ordinary differential equation and then via explicit formulae. Inasmuch as these characterizations leave the discounting function essentially unrestricted, the theory can accommodate, in particular, decision makers who discount time according to the hyperbolic and 'quasi-hyperbolic' curves used in applied work and said to be supported by psychological studies. Comparative statics of the model are discussed, as are extensions of the analysis to allow for credit constraints, limited foresight, and partial commitment.
7
2008
32
7
2214
2239
http://www.sciencedirect.com/science/article/B6V85-4PV9487-1/1/2824cca187b797a8c4f60f4d6b665d75
Tyson, Christopher J.
oai:RePEc:eee:dyncon:v:32:y:2008:i:4:p:1236-12722011-04-12RePEc:eee:dyncon
article
Investigating time-variation in the marginal predictive power of the yield spread
We use Bayesian time-varying parameters VARs with stochastic volatility to investigate changes in the marginal predictive content of the yield spread for output growth in the United States and the United Kingdom, since the Gold Standard era, and in the Eurozone, Canada, and Australia over the post-WWII period. Overall, our evidence does not provide much support for either of the two dominant explanations why the yield spread may contain predictive power for output growth, the monetary policy-based one, and Harvey's [1988. The real term structure and output growth. Journal of Financial Economics 22, 305-333] 'real yield curve' one. Instead, we offer a new conjecture.
4
2008
32
4
1236
1272
http://www.sciencedirect.com/science/article/B6V85-4P00805-1/1/9d17f8e4d45cbc0981f35b57b51d0b84
Benati, Luca
Goodhart, Charles
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1187-12012011-04-12RePEc:eee:dyncon
article
Economic models for the environmental Kuznets curve: A survey
The 'environmental Kuznets curve' (EKC) refers to an inverted-U-shaped relationship between some pollutant level and per capita income, i.e., the environmental quality deteriorates at early stages of economic growth and subsequently improves at a later stage. Since the early 1990s, a considerable number of empirical studies have been conducted on the EKC and, although there is no conclusive proof, it has been recognized that the EKC emerges as an empirical regularity. However, some recent studies cast doubt on the concept and methodology of empirical results, and evidence of the existence of the EKC has been questioned. In fact, how economic growth affects the environmental quality (i.e. the shape of the EKC) is still controversial. In order to identify the actual relationship between the environmental quality and economic growth, it is essential to develop economic models from various points of view. This paper overviews the current stage of theoretical models that explain such relationship.
Environmental Kuznets curve Pollution Turning point Inverted-U-shape N-shape [Lambda]-shape Economic growth Real option
7
2010
34
7
1187
1201
http://www.sciencedirect.com/science/article/B6V85-4YVY6VX-1/2/d3ea5c9a81bbf268395e10991f62a04e
Kijima, Masaaki
Nishide, Katsumasa
Ohyama, Atsuyuki
oai:RePEc:eee:dyncon:v:32:y:2008:i:4:p:1332-13552011-04-12RePEc:eee:dyncon
article
The long-run benefits of chaos to oligopolistic firms
Conventional economic beliefs that 'equilibrium' is better than 'disequilibrium' and 'stability' is better than 'fluctuation' are challenged with a heterogeneous oligopolistic model that consists of a naive firm and a group of sophisticated firms. The naive firm is assumed to adopt a simple Cobweb strategy while the sophisticate firms, who command all market information, form a collusion and best respond the naive firm's current action. When the market equilibrium is unstable, the naive firm is able to turn an explosively diverging market into a bounded but chaotic one by adopting simultaneously a cautious adjustment strategy (that is, limiting the growth rate of output). There exists an upper-bound such that as long as the growth rate does not exceed this bound, the average profits made by all oligopolistic firms are higher than their respective equilibrium profits. Moreover, the average economic surplus can also be higher than the equilibrium surplus. In this sense, chaos is beneficial not only to all oligopolistic firms but also to the economy as a whole.
4
2008
32
4
1332
1355
http://www.sciencedirect.com/science/article/B6V85-4P2S8X3-1/1/e4888695839ca8e87b67f03ff0efa935
Huang, Weihong
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:815-8242011-04-12RePEc:eee:dyncon
article
Discrete time Wishart term structure models
This paper reveals that the class of Affine Term Structure Models (ATSMs) introduced by Duffie and Kan (1996) is larger than previously considered in the literature. In the framework of risk factors following a Wishart autoregressive process, we define the Wishart Term Structure Model (WTSM) as an extension of a subclass of Quadratic Term Structure Models (QTSMs), derive simple parameter restrictions that ensure positive bond yields at all maturities, and observe that the usual constraint on affine processes requiring that the volatility matrix be diagonal up to a path independent linear invertible transformation can be considerably relaxed.
Affine term structure Quadratic term structure CAR process Affine process Wishart process
6
2011
35
6
815
824
http://www.sciencedirect.com/science/article/B6V85-51YYNVF-1/2/6b8766d2a61dd297b82382920d0af025
Gourieroux, Christian
Sufana, Razvan
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:266-2792011-04-12RePEc:eee:dyncon
article
Implications of more precise information for technological development and economic welfare
This paper analyzes the dynamic interactions between the precision of information, technological development, and welfare within an overlapping generations model. More precise information about idiosyncratic production shocks has ambiguous effects on technological progress and welfare, which depend critically on the risk sharing capacity of the economy's financial system. Two effects, which can act in the same or in opposite directions, are at work: (i) more precise information allows agents to make better decisions but restricts the scope for risk sharing (the 'uncertainty-related effect') and (ii) more precise information, by changing R&D investment, may have a long-lasting effect due to the model's intertemporal production externality (the 'externality-related effect').
Information Technological development Risk sharing Production externality
2
2010
34
2
266
279
http://www.sciencedirect.com/science/article/B6V85-4X8CCV7-2/2/578b231fb51953c764f823de67b33041
Drees, Burkhard
Eckwert, Bernhard
oai:RePEc:eee:dyncon:v:32:y:2008:i:12:p:3847-38652011-04-12RePEc:eee:dyncon
article
The optimal carbon sequestration in agricultural soils: Do the dynamics of the physical process matter?
The Kyoto Protocol, which came into force in February 2005, allows countries to resort to 'supplementary activities', consisting particularly in carbon sequestration in agricultural soils. Existing papers studying the optimal carbon sequestration recognize the importance of the temporality of sequestration, but overlook the fact that it is an asymmetric dynamic process. This paper takes explicitly into account the temporality of sequestration. Its first contribution lies in the modelling of the asymmetry of the sequestration/de-sequestration process at a micro level, and of its consequences at a macro level. Its second contribution is empirical. We compute numerically the optimal path of sequestration/de-sequestration for specific damage and cost functions, and a calibration that mimics roughly the world conditions. We show that with these assumptions sequestration must be permanent, and that the error made when sequestration is supposed immediate can be very significant.
Environment Agriculture Carbon sequestration Kyoto Protocol Optimal control
12
2008
32
12
3847
3865
http://www.sciencedirect.com/science/article/B6V85-4SBHWWW-2/2/2a2569522877d3e58d98a91908e1d84d
Ragot, Lionel
Schubert, Katheline
oai:RePEc:eee:dyncon:v:32:y:2008:i:4:p:1212-12352011-04-12RePEc:eee:dyncon
article
Price stabilization using buffer stocks
The price stabilization problem is stated and solved for a nonlinear cobweb model with government stocks. It is shown that if the storage capacity for the commodity is sufficiently large then there exists a simple stabilization policy, called the 'keep supply at equilibrium (KSE)' policy, such that the equilibrium price is a global attractor for the corresponding closed-loop system. In addition, it is shown that if the government approximates the equilibrium supply with the average supply, stabilization is guaranteed. We refer to this policy as 'keep supply at average (KSA)'.
4
2008
32
4
1212
1235
http://www.sciencedirect.com/science/article/B6V85-4NVH7PB-4/1/5a9f0b09d5625fa4f56c2251265bb8a0
Athanasiou, George
Karafyllis, Iasson
Kotsios, Stelios
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1233-12472011-04-12RePEc:eee:dyncon
article
A risk reserve model for hedging in incomplete markets
This paper presents a new approach to the pricing and hedging problem for contingent claims in incomplete markets. We assume that traders wish to maximize the expected final payoff of the hedging portfolio and the claims, and we avoid the use of utility functions. Instead, we model how traders are punished when taking excessive risks in practice. To do so, we introduce an extra reserve bank account, which earns a smaller rate of return than a standard deposit bank account. The reserve account should always contain a minimal amount of money, which depends on the risk that the trader's portfolio is exposed to. We focus on a specific example which uses option price sensitivities (the 'Greeks') to specify the risk. The resulting optimization problem can then be solved in a rather explicit form, and we show how the solution naturally leads to bid-ask spreads, prices which depend on the trader's current position and implied volatility smiles.
Incomplete markets Risk measures Contingent claims
7
2010
34
7
1233
1247
http://www.sciencedirect.com/science/article/B6V85-4YDC3H2-1/2/b2113979725aca9b531bc1ed5a571f46
Minina, Vera
Vellekoop, Michel
oai:RePEc:eee:dyncon:v:32:y:2008:i:11:p:3478-35012011-04-12RePEc:eee:dyncon
article
A class of quadratic options for exchange rate stabilization
We propose the use of a new option which we call 'quadratic,' and that central banks could use to smooth exchange rate volatility through the hedging strategies of the issuers. We derive analytic pricing and hedging formulas. We suggest a criterion to derive the optimal (for the Central Bank) option parameters. Finally, we perform several simulation exercises which show the effectiveness of using this option, with or without conventional spot interventions.
Central Bank intervention Options Hedging strategies
11
2008
32
11
3478
3501
http://www.sciencedirect.com/science/article/B6V85-4S03RBD-1/2/cd430ae0e10e5d18d8c502ca6c64df6a
Suh, Sangwon
Zapatero, Fernando
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:922-9342011-04-12RePEc:eee:dyncon
article
Strategic real options under asymmetric information
This paper studies the effect of private information on the capital allocation decisions of firms who operate under imperfect competition. I analyze two interactive firms, one with private information and the other without, who must decide when to undertake an irreversible and uncertain investment decision. Traditional non-strategic models of irreversible investment under uncertainty involve a single decision maker and result in an optimal period of delay before the investment is undertaken. In a strategic setting, firms must balance their desire to delay against competitive advantages from early investment. I find that an equilibrium may not exist within the standard continuous framework when the private information is over revenues. Moreover, when an equilibrium does exist the competitive pressures from the uninformed firm are weak. This is in contrast to existing models with asymmetric information over costs, where an equilibrium always exists and the competitive pressures remain strong (Hsu and Lambrecht, 2007). This work shows that the investment timing decision, and thus the value of the private information, is highly sensitive to the nature of incomplete information.
Real options Asymmetric information Investment Timing game Preemption
6
2011
35
6
922
934
http://www.sciencedirect.com/science/article/B6V85-51XH963-1/2/a5e99f0cd76bb61efb7755accf34ccd1
Graham, Jeffrey
oai:RePEc:eee:dyncon:v:32:y:2008:i:8:p:2507-25112011-04-12RePEc:eee:dyncon
article
'A dynamic new Keynesian life-cycle model: Societal aging, demographics, and monetary policy' by Ippei Fujiwara and Yuki Teranishi. A comment
8
2008
32
8
2507
2511
http://www.sciencedirect.com/science/article/B6V85-4PR3G6X-3/2/a9adf202bdb908a08b16ff57af7a9371
Ripatti, Antti
oai:RePEc:eee:dyncon:v:32:y:2008:i:6:p:2013-20302011-04-12RePEc:eee:dyncon
article
Estimating the Federal Reserve's implicit inflation target: A state space approach
Existing estimates of the Federal Reserve's implicit inflation target typically rely on the assumption that it is constant for the duration of the period of analysis. This paper relaxes this assumption and estimates the implicit inflation target using a time-varying parameter model and the Kalman filter. In applying this method to the Volcker-Greenspan period, it finds significant time variation in the implicit target that is consistent with hypotheses about 'opportunistic disinflation' and the recent 'deflation scare'.
6
2008
32
6
2013
2030
http://www.sciencedirect.com/science/article/B6V85-4PNFV4H-1/1/65a5dec0097d4d67208a743c621ebbda
Leigh, Daniel
oai:RePEc:eee:dyncon:v:33:y:2009:i:5:p:1023-10352011-04-12RePEc:eee:dyncon
article
The market organism: Long-run survival in markets with heterogeneous traders
The information content of prices is a central problem in the general equilibrium analysis of competitive markets. Rational expectations equilibrium identifies conditioning simultaneously on contemporaneous prices and private information as the mechanism by which information enters prices. Here we look to the ecology of markets for an explanation of the information content of prices. Markets could select across traders with different beliefs, or, reminiscent of 'the wisdom of crowds', markets could balance the diverse information of many participants. We provide theoretical support in favor of the first mechanism, and against the second. Along the way we demonstrate that the necessary condition for long-run survival in complete markets found in Sandroni [2000. Do markets favor agents able to make accurate predictions? Econometrica 68 (6), 1303-1342] and in Blume and Easley [2006. If you're so smart, why aren't you rich? Belief selection in complete and incomplete markets. Econometrica 74 (4), 929-966] is not sufficient for long-run survival. We also demonstrate some surprising behavior of market prices when several trader types with different beliefs survive. This paper continues the research program of Blume and Easley [1992. Evolution and market behavior. Journal of Eonomic theory 58 (1), 9-40] and Beker and Chattopadhyay [2006. Consumption dynamics in general equilibrium: a characterisation when markets are incomplete, University of Warwick, unpublished].
General equilibrium Market selection hypothesis
5
2009
33
5
1023
1035
http://www.sciencedirect.com/science/article/B6V85-4VM43WF-1/2/df1debd0e5f620f3dcd86bfa02880f2c
Blume, Lawrence
Easley, David
oai:RePEc:eee:dyncon:v:33:y:2009:i:1:p:37-522011-04-12RePEc:eee:dyncon
article
Analytical methods for hedging systematic credit risk with linear factor portfolios
Multi-factor credit portfolio models are used widely today for managing economic capital and pricing collateralized debt obligations (CDOs) and asset-backed securities. Commonly, practitioners allocate capital to the portfolio components (sub-portfolios, counterparties, or transactions). The hedging of credit risk is generally also focused on the 'deltas' of underlying names. We present analytical results for hedging portfolio credit risk with linear combinations of systematic factors, based on the minimization of systematic variance of portfolio losses. We solve these problems within a multi-factor Merton-type credit portfolio model, and apply them to hedge systematic credit default losses of loan portfolios and CDOs.
Credit risk Factor models Hedging Capital allocation
1
2009
33
1
37
52
http://www.sciencedirect.com/science/article/B6V85-4SJP78T-2/2/ebf51a44c23689c8745d22a7e8670945
Rosen, Dan
Saunders, David
oai:RePEc:eee:dyncon:v:33:y:2009:i:5:p:1091-11052011-04-12RePEc:eee:dyncon
article
The reality game
We introduce an evolutionary game with feedback between perception and reality, which we call the reality game. It is a game of chance in which the probabilities for different objective outcomes (e.g. heads or tails in a coin toss) depend on the amount wagered on those outcomes. By varying the 'reality map', which relates the amount wagered to the probability of the outcome, it is possible to move continuously from a purely objective game in which probabilities have no dependence on wagers to a purely subjective game in which probabilities equal the amount wagered. We study self-reinforcing games, in which betting more on an outcome increases its odds, and self-defeating games, in which the opposite is true. This is investigated in and out of equilibrium, with and without rational players, and both numerically and analytically. We introduce a method of measuring the inefficiency of the game, similar to measuring the magnitude of the arbitrage opportunities in a financial market. We prove that the inefficiency converges to equilibrium as a power law with an extremely slow rate of convergence: the more subjective the game, the slower the convergence.
Financial markets Evolutionary games Information theory Arbitrage Market efficiency Beauty contests Noise trader models Market reflexivity
5
2009
33
5
1091
1105
http://www.sciencedirect.com/science/article/B6V85-4VM43WF-3/2/9a8c2987a08c0e80dae07071faa2fa3b
Cherkashin, Dmitriy
Farmer, J. Doyne
Lloyd, Seth
oai:RePEc:eee:dyncon:v:32:y:2008:i:12:p:3807-38192011-04-12RePEc:eee:dyncon
article
A hidden Markov model of credit quality
This paper presents a hidden Markov model of credit quality dynamics, and highlights the use of filtering-based estimation methods for models of this kind. We suppose that the Markov chain governing the 'true' credit quality evolution is hidden in 'noisy' or incomplete observations represented by posted credit ratings. Parameters of the model, namely credit transition probabilities, are estimated using the EM algorithm. Filtering methods provide recursive updates of optimal estimates so the model is 'self-calibrating'. The estimation procedure is illustrated with an application to a data set of Standard & Poor's credit ratings.
Credit quality Filtering Hidden Markov models EM algorithm
12
2008
32
12
3807
3819
http://www.sciencedirect.com/science/article/B6V85-4S8CR29-2/2/345c9443ee72d4157d5164816db88df3
Korolkiewicz, Malgorzata W.
Elliott, Robert J.
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:935-9462011-04-12RePEc:eee:dyncon
article
Buying cooperation in an asymmetric environmental differential game
We consider a two-player asymmetric differential game of pollution control. One player is non-vulnerable to pollution, or unwilling to consider damages when choosing her production policy in a non-cooperative game. We characterize the feedback-Nash equilibrium and the cooperative solution. We establish conditions under which the vulnerable player can buy the cooperation of the non-vulnerable player to control her emissions. We further use the Nash bargaining solution to allocate the total cooperative dividend between the two players and propose a time-consistent decomposition overtime of the total payoff.
Environment Differential games Cooperative solution Feedback-Nash equilibrium Time consistency Nash bargaining solution
6
2011
35
6
935
946
http://www.sciencedirect.com/science/article/B6V85-51M0N5S-1/2/c4ccd5b63d87306fa057ba4d98815746
Smala Fanokoa, Pascaux
Telahigue, Issam
Zaccour, Georges
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:963-9792011-04-12RePEc:eee:dyncon
article
Implicit contracts and the cyclicality of the skill-premium
To examine the cyclical behavior of the skill-premium, this paper introduces implicit labor contracts in a DSGE model where production is characterized by capital-skill complementarity and the utilization of capital is endogenous. It is shown that this model can reproduce the observed cyclical patterns of wages and the skill-premium. The feature of capital-skill complementarity coupled with variable capital utilization rates does not come at odds with the acyclical behavior of the skill-premium. The paper argues that the skill-complementarity of capital is not a quantitatively significant factor at high frequencies. The key aspects are the contracts and the capital utilization margin.
Implicit contracts Wages Skill-premium Business cycles Capital-Skill complementarity
6
2011
35
6
963
979
http://www.sciencedirect.com/science/article/B6V85-51M0N5S-2/2/a7fe99585e876b6f39a59a356483e892
Pourpourides, Panayiotis M.
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:909-9212011-04-12RePEc:eee:dyncon
article
Incomplete markets, ambiguity, and irreversible investment
The problem of irreversible investment with idiosyncratic risk is studied by interpreting market incompleteness as a source of ambiguity over the appropriate no-arbitrage discount factor. The maxmin utility over multiple priors framework is used to model and solve the irreversible investment problem. Multiple priors are modeled using the notion of [kappa][hyphen (true graphic)]ignorance. This set-up is used to analyze finitely lived options. For infinitely lived options the notion of constant [kappa][hyphen (true graphic)]ignorance is introduced. For these sets of density generators the corresponding optimal stopping problem is solved for general (in-)finite horizon optimal stopping problems driven by geometric Brownian motion. It is argued that an increase in the set of priors delays investment, whereas an increase in the degree of market completeness can have a non-monotonic effect on investment.
Irreversible investment Idiosyncratic risk Ambiguity
6
2011
35
6
909
921
http://www.sciencedirect.com/science/article/B6V85-51N7RMN-1/2/63b95d3acf8bd72c74c00fe26305185d
Thijssen, Jacco J.J.
oai:RePEc:eee:dyncon:v:33:y:2009:i:1:p:109-1272011-04-12RePEc:eee:dyncon
article
Risk aversion and block exercise of executive stock options
It is well documented that executives granted stock options tend to exercise early and in a few large transactions or 'blocks'. Standard risk-neutral valuation models cannot explain these patterns, and attempts to capture the exercise behavior of risk averse executives have been limited to the special case of one option. This paper solves for the optimal exercise behavior for a risk averse executive who is granted multiple stock options. We show that utility-based models do not predict block exercise behavior. Rather, the risk averse executive exercises stock options individually at a sequence of increasing price thresholds. When, in addition, the executive faces frictions such as costly exercise, he faces a trade-off between exercising little and often to maximize return, and exercising larger quantities on fewer occasions to minimize effort. This generates realistic block exercise behavior and yields new predictions. In particular, executives should begin by exercising large blocks of options, but the block sizes should become smaller over time. Our framework also allows us to study the impact of multiple exercise dates on estimates of the cost of options to the company. We find that assuming the executive can only exercise on a single occasion underestimates the cost of the options compared with allowing for optimal exercise behavior.
Stock options Compensation Risk aversion Incomplete markets Exercise Utility maximization
1
2009
33
1
109
127
http://www.sciencedirect.com/science/article/B6V85-4SMNXP4-1/2/b46527c2d30c30f4667b328f9af31fed
Grasselli, Matheus
Henderson, Vicky
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:821-8472011-04-12RePEc:eee:dyncon
article
A cobweb model with local externalities
This paper considers an extension of the standard cobweb model in a market with local externalities. In contrast with the standard cobweb model, firms must forecast both prices and local quantities; we develop new constructive stability and existence conditions for equilibria with positive outputs. We find evidence of clusters of firms whose output behavior is correlated as equilibrium is reached. We also show that an appropriately defined 'representative agent model' with a global externality exhibits the same mean or second-order properties of aggregate output as the more complex model with local externalities.
3
2008
32
3
821
847
http://www.sciencedirect.com/science/article/B6V85-4NJ7W6F-1/1/e62716a9ac82b21d31f8164965dc18c1
Choudhary, M. Ali
Michael Orszag, J.
oai:RePEc:eee:dyncon:v:35:y:2011:i:7:p:1091-11052011-07-12RePEc:eee:dyncon
article
On the role of labor supply for the optimal size of Social Security
The paper studies the welfare effects of a Social Security system in a stylized overlapping generations economy with random production and capital accumulation. Different welfare concepts including long run optimality, social optimality, and time consistency are employed to determine the optimal size of the system. When labor supply is exogenous, a unique contribution level can be identified which is optimal according to all three concepts. When labor supply is endogenous, however, this result generically fails to hold and the long-run optimal solution is only constrained socially optimal while the time-consistent policy may even lead to an inefficient equilibrium.
Overlapping generations Social Security Capital accumulation Labor supply Social optimality Long-run optimality Time consistency
7
2011
35
7
1091
1105
http://www.sciencedirect.com/science/article/pii/S0165188911000236
Hillebrand, Marten
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1288-13062011-07-12RePEc:eee:dyncon
article
Infrastructure provision and macroeconomic performance
This paper studies the differences between private and government provision of infrastructure. Capital utilization decisions and their differential role in determining market prices for capital goods under the two regimes of infrastructure provision serve as a critical transmission mechanism for fiscal policy. A subsidy to private providers of infrastructure is preferable to direct government provision irrespective of how the subsidy or expenditure is financed. The case for private provision is much stronger in economies characterized by high levels of congestion. The choice between private and government provision also has a crucial effect on the design of optimal fiscal policy.
Infrastructure provision Capital utilization User cost Fiscal policy Public capital Economic growth
8
2011
35
8
1288
1306
http://www.sciencedirect.com/science/article/pii/S0165188911000522
Chatterjee, Santanu
Mahbub Morshed, A.K.M.
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1358-13682011-07-12RePEc:eee:dyncon
article
Maximum likelihood estimation for dynamic factor models with missing data
This paper concerns estimating parameters in a high-dimensional dynamic factor model by the method of maximum likelihood. To accommodate missing data in the analysis, we propose a new model representation for the dynamic factor model. It allows the Kalman filter and related smoothing methods to evaluate the likelihood function and to produce optimal factor estimates in a computationally efficient way when missing data is present. The implementation details of our methods for signal extraction and maximum likelihood estimation are discussed. The computational gains of the new devices are presented based on simulated data sets with varying numbers of missing entries.
High-dimensional vector series Kalman filtering and smoothing Unbalanced panels of time series
8
2011
35
8
1358
1368
http://www.sciencedirect.com/science/article/pii/S0165188911000546
Jungbacker, B.
Koopman, S.J.
van der Wel, M.
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1322-13392011-07-12RePEc:eee:dyncon
article
High-growth recoveries, inventories and the Great Moderation
We present evidence about the disappearance of the high-growth recoveries from recessions with intense job creation typically observed until the eighties. This result matches the belief that recessions now have an L-shape as opposed to the old-time recessions that always had a V-shape. We also show how this change in business cycle dynamics can explain part of the Great Moderation. We postulate that these two phenomena may be due to changes in inventory management brought about by improvements in information and communications technologies.
Business cycle features Great Moderation High-growth recovery
8
2011
35
8
1322
1339
http://www.sciencedirect.com/science/article/pii/S0165188911000674
Camacho, Maximo
Perez Quiros, Gabriel
Rodriguez Mendizabal, Hugo
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1151-11712011-07-12RePEc:eee:dyncon
article
The financial instability hypothesis: A stochastic microfoundation framework
This paper examines the dynamics of financial distress and in particular the mechanism of transmission of shocks from the financial sector to the real economy. The analysis is performed by representing the linkages between microeconomic financial variables and the aggregate performance of the economy by means of a microfounded model with firms that have heterogeneous capital structures. The model is solved both numerically and analytically, by means of a stochastic approximation that is able to replicate quite well the numerical solution. These methodologies, by overcoming the restrictions imposed by the traditional microfounded approach, enable us to provide some insights into the stabilization policies which may be effective in a financially fragile system.
Financial fragility Complex dynamics Stochastic aggregation
8
2011
35
8
1151
1171
http://www.sciencedirect.com/science/article/pii/S0165188911000443
Chiarella, Carl
Di Guilmi, Corrado
oai:RePEc:eee:dyncon:v:35:y:2011:i:7:p:1000-10162011-07-12RePEc:eee:dyncon
article
Time to build capital: Revisiting investment-cash-flow sensitivities
A large body of empirical work has established the significance of cash flow in explaining investment dynamics. This finding is further taken as evidence of capital market imperfections. We show, using a perfect capital markets model, that time-to-build for capital projects creates an investment-cash-flow sensitivity as found in empirical studies that may not be indicative of capital market frictions. The result is due to mis-specification present in empirical investment-q equations under time-to-build investment. In addition, time aggregation error can give rise to cash-flow effects independently of the time-to-build effect. Importantly, both errors arise independently of potential measurement error in q. Evidence from a large panel of U.K. manufacturing firms confirms the validity of the time-to-build investment channel.
Investment Capital market imperfections Time-to-build
7
2011
35
7
1000
1016
http://www.sciencedirect.com/science/article/pii/S0165188910002800
Tsoukalas, John D.
oai:RePEc:eee:dyncon:v:35:y:2011:i:7:p:1126-11382011-07-12RePEc:eee:dyncon
article
Time varying VARs with inequality restrictions
In many applications involving time-varying parameter VARs, it is desirable to restrict the VAR coefficients at each point in time to be non-explosive. This is an example of a problem where inequality restrictions are imposed on states in a state space model. In this paper, we describe how existing MCMC algorithms for imposing such inequality restrictions can work poorly (or not at all) and suggest alternative algorithms which exhibit better performance. Furthermore, we show that previous algorithms involve an approximation relating to a key prior integrating constant. Our algorithms are exact, not involving this approximation. In an application involving a commonly used U.S. data set, we present evidence that the algorithms proposed in this paper work well.
Bayesian State space model Markov chain Monte Carlo Metropolis-Hastings
7
2011
35
7
1126
1138
http://www.sciencedirect.com/science/article/pii/S0165188911000248
Koop, Gary
Potter, Simon M.
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1229-12442011-07-12RePEc:eee:dyncon
article
Yield curve in an estimated nonlinear macro model
This paper estimates a sticky price macro model with US macro and term structure data using Bayesian methods. The model is solved by a nonlinear method. The posterior distribution of the parameters in the model is found to be bi-modal. The degree of nominal rigidity is high at one mode ("sticky price mode") but is low at the other mode ("flexible price mode"). I find that the degree of nominal rigidity is important for identifying macro shocks that affect the yield curve. When prices are more flexible, a slowly varying inflation target of the central bank is the main driver of the overall level of the yield curve by changing long-run inflation expectations. In contrast, when prices are more sticky, a highly persistent markup shock is the main driver. The posterior probability of each mode is sensitive to the use of observed proxies for inflation expectations. Ignoring additional information from survey data on inflation expectations significantly reduces the posterior probability of the flexible price mode. Incorporating this additional information suggests that yield curve fluctuations can be better understood by focusing on the flexible price mode. Considering nonlinearities of the model solution also increases the posterior probability of the flexible price mode, although to a lesser degree than using survey data information.
Bayesian econometrics DSGE model Term structure of interest rates
8
2011
35
8
1229
1244
http://www.sciencedirect.com/science/article/pii/S0165188911000480
Doh, Taeyoung
oai:RePEc:eee:dyncon:v:35:y:2011:i:7:p:1045-10602011-07-12RePEc:eee:dyncon
article
Optimal monetary policy under incomplete markets and aggregate uncertainty: A long-run perspective
This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy by changing real returns of nominal bonds via variation in expected inflation. Optimal expected inflation is procylical and on average higher than without uncertainty. Simple inflation targeting rules closely approximate the optimal monetary policy.
Optimal monetary policy Inflation targeting
7
2011
35
7
1045
1060
http://www.sciencedirect.com/science/article/pii/S0165188911000431
Kryvtsov, Oleksiy
Shukayev, Malik
Ueberfeldt, Alexander
oai:RePEc:eee:dyncon:v:35:y:2011:i:7:p:1106-11252011-07-12RePEc:eee:dyncon
article
Would the Bundesbank have prevented the Great Inflation in the United States?
Policy counterfactuals based on estimated structural VARs routinely suggest that bringing Alan Greenspan back in the 1970s United States would not have prevented the Great Inflation. We show that a standard policy counterfactual suggests that the Bundesbank--which is near-universally credited for sparing West Germany the Great Inflation--would also not have been able to prevent the Great Inflation in the United States. The implausibility of this result sounds a cautionary note on taking the outcome of SVAR-based policy counterfactuals at face value, and raises questions on the reliability of such exercises.
Bayesian VARs Time-varying parameters Stochastic volatility Identified VARs Great Inflation Policy counterfactuals
7
2011
35
7
1106
1125
http://www.sciencedirect.com/science/article/pii/S0165188911000261
Benati, Luca
oai:RePEc:eee:dyncon:v:35:y:2011:i:7:p:1017-10312011-07-12RePEc:eee:dyncon
article
Commitment, advertising and efficiency of two-sided investment in competitive search equilibrium
Competitive search entails both commitment to and advertising of pay-off relevant aspects of market participants. This paper considers incrementally the implications of each in a labor market where both workers and firms invest prior to market entry. A wide range of institutional arrangements are addressed within the same general framework. When the characteristics of jobs or workers are advertised the efficient outcome pertains. Commitment without advertising typically leads to market unravelling: the Diamond paradox. But, whenever wages and human capital are advertised, firms become residual claimants; the private and social returns to investment coincide. Absent wage commitment, the Hosios condition implies efficiency when investments are advertised.
Competitive search
7
2011
35
7
1017
1031
http://www.sciencedirect.com/science/article/pii/S0165188911000224
Masters, Adrian
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1340-13572011-07-12RePEc:eee:dyncon
article
Premia for correlated default risk
Using data on corporate default experience in the U.S. and market rates of CDX index and tranche swaps of various maturities, we estimate reduced-form models of correlated default timing in the CDX High Yield and Investment Grade portfolios under actual and risk-neutral probabilities. The striking contrast between the estimated processes followed by the actual and risk-neutral arrival intensities of defaults, and between the parameters governing the actual and risk-neutral dynamics of the risk-neutral intensities, indicates the presence of substantial default risk premia in CDX swap market rates. The effects of risk premia on swap rates covary strongly across maturities, and depend on general stock market volatility and several measures of credit spreads. Large moves in the effects of these premia on swap rates have natural interpretations in terms of economic and financial market developments during the sample period, April 2004 to October 2007. Our results suggest that a large portion of the movements in CDX swap market rates observed during the sample period may be caused by changing attitudes toward correlated default risk rather than changes in the economic factors affecting the actual risk of clustered defaults, which ultimately governs swap payoffs.
Correlated defaults Risk premium Measure change Maximum likelihood
8
2011
35
8
1340
1357
http://www.sciencedirect.com/science/article/pii/S0165188911000558
Azizpour, Shahriar
Giesecke, Kay
Kim, Baeho
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1307-13212011-07-12RePEc:eee:dyncon
article
Adaptive expectations and cobweb phenomena: Does heterogeneity matter?
This paper studies a cobweb-type commodity market characterized by a strictly monotone demand and supply, in which n types of firms operate. Types differ in a key parameter governing price expectations which are supposed to be adaptive. The unique steady state of the resulting economic dynamics is characterized in terms of stability and the impact of the number of firms types is studied: to this end the notions of structural and behavioural degree of instability, which are introduced in the paper, prove to be crucial in determining whether stability or instability prevail. The case of market integration is also considered and conditions to have stability (or instability) in terms of the original markets' parameters are given. The baseline structure is extended in two directions. The first extension assumes the point of view of an authority who is uncertain about the firms types. In this case the structural degree of instability determines how heterogeneity affects the probability of ending up with a stable outcome. The second extension consists in endogenizing the choice of predictors through a discrete choice-based evolutionary mechanism. In both cases the amount of the heterogeneity and its possible variations play a critical role in shaping the range of possible long-run outcomes of the model.
Heterogeneous expectations Bounded rationality Stability of steady states Market integration Evolutionary dynamics
8
2011
35
8
1307
1321
http://www.sciencedirect.com/science/article/pii/S0165188911000534
Colucci, Domenico
Valori, Vincenzo
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1245-12722011-07-12RePEc:eee:dyncon
article
Firm entry, credit availability and monetary policy
This paper presents a dynamic general equilibrium model that incorporates firm entry under credit rationing. Goods-producing firms in this model are bank dependent in the sense that they have no choice but to borrow funds from banks to cover labor wages that must be paid in advance of production. The results show that a cut in the policy rate enhances firm entry by mitigating the severity of credit rationing. This policy transmission is different from the conventional balance sheet channel in that a change in the policy rate directly affects borrowers' credit availability. I also show that a sudden stop in the credit supply to new firms is most likely to occur shortly after a credit boom. This is because endogenous downward wage rigidity prohibits the credit risk of prospective firms from decreasing enough to re-equilibrate the loan market.
Credit channel Credit crunch Credit rationing Firm entry Monetary policy transmission
8
2011
35
8
1245
1272
http://www.sciencedirect.com/science/article/pii/S0165188911000492
Kobayashi, Teruyoshi
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1273-12872011-07-12RePEc:eee:dyncon
article
Poverty traps, the money growth rule, and the stage of financial development
This paper investigates how monetary policy influences the emergence of local indeterminacy, local bifurcations, and multiple steady states, depending upon the degree of the commitment parameter that defines financial market imperfection, using Diamond's overlapping generations model with credit market frictions. The analytical results will show that poverty traps happen as an inevitable outcome under a wider range of money growth rates, because financial markets are less developed. Put differently, we derive analytically the positive link between financial development and per capita income.
Poverty traps Monetary policy Financial development Indivisible investment Multiple steady states Local indeterminacy Neimark-Sacker and saddle-node bifurcations
8
2011
35
8
1273
1287
http://www.sciencedirect.com/science/article/pii/S0165188911000510
Gokan, Yoichi
oai:RePEc:eee:dyncon:v:35:y:2011:i:7:p:1139-11492011-07-12RePEc:eee:dyncon
article
Price uncertainty, saving, and welfare
We analyze how commodity price uncertainty affects saving behavior and welfare in a dynamic model with multiple commodities, portfolio hedging, and a preference structure that disentangles ordinal preferences, attitudes towards risk, and attitudes towards intertemporal substitution. We show that the effect of price uncertainty on savings boils down to knowing (1) hf degree of resistance to intertemporal substitution and (2) the effect that uncertainty has on the certainty-equivalent real interest rate. We also show that, if the certainty-equivalent real interest rate is lower with uncertainty, consumers' welfare is also lower.
Price uncertainty Kreps-Porteus preferences Saving Welfare
7
2011
35
7
1139
1149
http://www.sciencedirect.com/science/article/pii/S016518891100042X
Nocetti, Diego
Smith, William T.
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1215-12282011-07-12RePEc:eee:dyncon
article
Steady-state growth and the elasticity of substitution
In a neoclassical economy with endogenous capital- and labor-augmenting technical change the steady-state growth rate of output per worker is shown to increase in the elasticity of substitution between capital and labor. This confirms the assessment of Klump and de La Grandville (2000) that a greater elasticity of substitution allows for faster of economic growth. However, unlike their findings my result applies to the steady-state growth rate. Moreover, it does not hinge on particular assumptions on how aggregate savings come about. It holds for any household sector allowing savings to grow at the same rate as aggregate output.
Capital accumulation Elasticity of substitution Direction of technical change Neoclassical growth model
8
2011
35
8
1215
1228
http://www.sciencedirect.com/science/article/pii/S0165188911000650
Irmen, Andreas
oai:RePEc:eee:dyncon:v:35:y:2011:i:7:p:1061-10902011-07-12RePEc:eee:dyncon
article
Irreversible investment and R&D spillovers in a dynamic duopoly
Investments in new production processes usually involve a significant amount of R&D, generating spillovers that lowers the second comer's investment cost. We show that these spillovers substantially affect the equilibrium of the dynamic game. Even for low spillover values, the leader delays her investment until the stochastic fundamental has gone past the level such that the follower's optimal strategy is to invest as soon as he attains the spillover. This bears several interesting implications. First, because the follower invests as he benefits from the spillover, in equilibrium the average time delay between the two investments is short, as it should be expected. Second, in case of a major innovation, an optimal public policy requires an intervention in favor of the investment activity; an increase in uncertainty - delaying the equilibrium - calls for higher subsidization rates. Third, numerical simulations show that the spillover reduces the difference between the leader's and the follower's maximum value functions. Accordingly, our model can help generate realistic market betas.
Irreversible investment Knowledge spillover Dynamic oligopoly
7
2011
35
7
1061
1090
http://www.sciencedirect.com/science/article/pii/S0165188911000509
Femminis, Gianluca
Martini, Gianmaria
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1192-12142011-07-12RePEc:eee:dyncon
article
Unemployment insurance in a sticky-price model with worker moral hazard
This paper studies the role of unemployment insurance in a sticky-price model that features an efficiency-wage view of the labor market based on unobservable effort. The risk-sharing mechanism central to the model permits, but does not force, agents to be fully insured. Structural parameters are estimated using a maximum-likelihood procedure on US data. Formal hypothesis tests reveal that the data favor a model in which agents only partially insure each other against employment risk. The results also show that limited risk sharing helps the model capture many salient properties of the business cycle that a restricted version with full insurance fails to explain.
Unemployment Partial insurance Efficiency wages Sticky prices
8
2011
35
8
1192
1214
http://www.sciencedirect.com/science/article/pii/S0165188911000479
Givens, Gregory E.
oai:RePEc:eee:dyncon:v:35:y:2011:i:7:p:981-9992011-07-12RePEc:eee:dyncon
article
Decomposing the declining volatility of long-term inflation expectations
The level and volatility of survey-based measures of long-term inflation expectations have come down dramatically over the past several decades. To capture these changes in inflation dynamics, we embed both short- and long-term expectations into a medium-scale VAR model with stochastic volatility. The model estimates attribute most of the marked decline in the volatility of expectations to smaller shocks to long-run inflation expectations. According to our estimates, the volatility of shocks plummeted in the early to mid-1980s, moved to a somewhat higher level that prevailed for much of the 1990s, and then declined to and remained at very low levels.
Surveys Stochastic volatility Bayesian econometrics
7
2011
35
7
981
999
http://www.sciencedirect.com/science/article/pii/S0165188910002794
Clark, Todd E.
Davig, Troy
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1369-13852011-07-12RePEc:eee:dyncon
article
Mean-variance portfolio selection of cointegrated assets
This paper considers the continuous-time mean-variance portfolio selection problem in a financial market in which asset prices are cointegrated. The asset price dynamics are then postulated as the diffusion limit of the corresponding discrete-time error-correction model of cointegrated time series. The problem is completely solved in the sense that solutions of the continuous-time portfolio policy and the efficient frontier are obtained as explicit and closed-form formulas. The analytical results are applied to pairs trading using cointegration techniques. Numerical examples show that identifying a cointegrated pair with a high mean-reversion rate can generate significant statistical arbitrage profits once the current state of the economy sufficiently departs from the long-term equilibrium. We propose an index to simultaneously measure the departure level of a cointegrated pair from equilibrium and the mean-reversion speed based on the mean-variance paradigm. An empirical example is given to illustrate the use of the theory in practice.
Cointegration Mean-variance portfolio theory Pairs trade
8
2011
35
8
1369
1385
http://www.sciencedirect.com/science/article/pii/S0165188911000662
Chiu, Mei Choi
Wong, Hoi Ying
oai:RePEc:eee:dyncon:v:33:y:2009:i:3:p:568-5822009-09-18RePEc:eee:dyncon
article
Dynamic R&D with spillovers: Competition vs cooperation
We investigate dynamic R&D for process innovation in a Cournot duopoly where firms may either undertake independent ventures or form a cartel for cost-reducing R&D investments. By comparing the profit and welfare performances of the two settings in steady state, we show that private and social incentives towards R&D cooperation coincide for all admissible levels of the technological spillovers characterising innovative activity. We also evaluate the whole history of the dynamic system along the transition to the steady state, showing that the conflict between private and social incentives does not necessarily emerge.
Differential games Process innovation R&D cooperation Spillovers
3
2009
33
3
568
582
http://www.sciencedirect.com/science/article/B6V85-4TCYCD8-1/2/740e238465bd3822a5aa0fba8e574b3a
Cellini, Roberto
Lambertini, Luca
oai:RePEc:eee:dyncon:v:33:y:2009:i:10:p:1761-17782009-09-18RePEc:eee:dyncon
article
R&D policy in a volatile economy
The literature on R&D-based growth establishes that market equilibrium is inefficient and derives optimal R&D policy. Normative analyses of this type use the assumption of steady state, largely motivated by analytical convenience. This paper questions this steady-state approach by introducing endogenous cycles as long-run equilibria. We show that the government fails to maximize welfare if policy which is optimal in steady state is myopically applied in cyclical equilibria. More specifically, we demonstrate that (i) cycles arise in the (very) standard R&D-based model of Grossman and Helpman [1991. Innovation and Growth in the Global Economy. MIT Press, Cambridge, MA (Chapter 3)] once the model is framed in discrete time, (ii) these cycles are inefficient in the sense that they prevent welfare maximization, (iii) optimal steady-state R&D policy fails to eliminate cycles, and can even create inefficient cycles, (iv) the application of R&D subsidies leads to a trade-off between growth and macroeconomic stability, and (v) optimal R&D policy in a fluctuating economy is state-dependent, which generalizes optimal steady-state R&D policy.
R&D Cycles Policy
10
2009
33
10
1761
1778
http://www.sciencedirect.com/science/article/B6V85-4W1SRKP-3/2/169744ee3066fac2e86205fe6e737535
Haruyama, Tetsugen
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1971-19912012-10-12RePEc:eee:dyncon
article
Optimal trade execution: A mean quadratic variation approach
We propose the use of a mean quadratic variation criteria to determine an optimal trading strategy in the presence of price impact. We derive the Hamilton Jacobi Bellman (HJB) Partial Differential Equation (PDE) for the optimal strategy, assuming the underlying asset follows Geometric Brownian Motion (GBM) or Arithmetic Brownian Motion (ABM). The exact solution of the ABM formulation is in fact identical to the static (price-independent) approximate solution for the mean–variance objective function in Almgren and Chriss (2000). The optimal trading strategy in the GBM case is in general a function of the asset price. The static strategy determined in the ABM formulation turns out to be an excellent approximation for the GBM case, even when volatility is large.
Optimal trading; Mean quadratic variation; HJB equation;
12
2012
36
1971
1991
C63
G11
http://www.sciencedirect.com/science/article/pii/S0165188912001236
Forsyth, P.A.
Kennedy, J.S.
Tse, S.T.
Windcliff, H.
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1855-18662012-10-12RePEc:eee:dyncon
article
Social interaction and conformism in a random utility model
We analyze a class of dynamic binary choice models with social interaction. Agents are heterogeneous and their degree of conformism (taste externality) changes over time endogenously. We show that social interaction in itself is not enough to observe multiple equilibria and that the equilibrium outcome is not necessarily a polarized society. The social outcome depends on the law of motion that drives the evolution of taste externality.
Conformism; Continuous time Markov chains; Mean field interaction; Random utility models; Social interaction;
12
2012
36
1855
1866
D71
D81
C62
http://www.sciencedirect.com/science/article/pii/S0165188912001406
Barucci, Emilio
Tolotti, Marco
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1831-18442012-10-12RePEc:eee:dyncon
article
Are spectral estimators useful for long-run restrictions in SVARs?
No, not really. In response to concerns about the reliability of SVARs, one proposal has been to combine OLS estimates of a VAR with non-parametric estimates of the spectral density. But as shown here, spectral estimators are no panacea for implementing long-run restrictions. They can suffer from small sample and misspecification biases just as VARs do. As a novelty, this paper uses a spectral factorization to ensure a correct representation of the data's variance. But this cannot overcome the basic small sample issues, which arise when trying to estimate long-run properties from relatively short samples of time-series data.
Structural VAR; Long-run identification; Non-parametric estimation; Spectral factorization;
12
2012
36
1831
1844
http://www.sciencedirect.com/science/article/pii/S0165188912001431
Mertens, Elmar
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1888-19082012-10-12RePEc:eee:dyncon
article
Evaluating callable and putable bonds: An eigenfunction expansion approach
We propose an efficient method to evaluate callable and putable bonds under a wide class of interest rate models, including the popular short rate diffusion models, as well as their time changed versions with jumps. The method is based on the eigenfunction expansion of the pricing operator. Given the set of call and put dates, the callable and putable bond pricing function is the value function of a stochastic game with stopping times. Under some technical conditions, it is shown to have an eigenfunction expansion in eigenfunctions of the pricing operator with the expansion coefficients determined through a backward recursion. For popular short rate diffusion models, such as CIR, Vasicek, 3/2, the method is orders of magnitude faster than the alternative approaches in the literature. In contrast to the alternative approaches in the literature that have so far been limited to diffusions, the method is equally applicable to short rate jump–diffusion and pure jump models constructed from diffusion models by Bochner's subordination with a Lévy subordinator.
Interest rate models; Callable bonds; Options embedded in bonds; Optimal stopping; Stochastic games; Eigenfunction expansions; Option pricing; Stochastic time changes;
12
2012
36
1888
1908
C63
G13
http://www.sciencedirect.com/science/article/pii/S0165188912001364
Lim, Dongjae
Li, Lingfei
Linetsky, Vadim
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1950-19702012-10-12RePEc:eee:dyncon
article
The yield curve and the macro-economy across time and frequencies
We assess the relation between the yield curve and the macroeconomy in the U.S. between 1961 and 2011. We add to the standard parametric macro-finance models, as we uncover evidence simultaneously on the time and frequency domains. We model the shape of the yield curve by latent factors corresponding to its level, slope and curvature. The macroeconomic variables measure real activity, inflation and monetary policy. The tools of wavelet analysis, the set of variables and the length of the sample allow for a thorough appraisal of the time-variation in the direction, intensity, synchronization and periodicity of the yield curve–macroeconomy relation.
Macro-finance; Yield curve; Kalman filter; Continuous wavelet transform; Wavelet coherency; Phase-difference;
12
2012
36
1950
1970
C32
C49
E43
E44
http://www.sciencedirect.com/science/article/pii/S016518891200125X
Aguiar-Conraria, Luís
Martins, Manuel M.F.
Soares, Maria Joana
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1931-19492012-10-12RePEc:eee:dyncon
article
Getting normalization right: Dealing with ‘dimensional constants’ in macroeconomics
We contribute to a recent literature on the normalization, calibration and estimation of CES production functions. The problem arises because CES ‘share’ parameters are not in fact shares, but depend on underlying dimensions—in other words they are ‘dimensional constants’. It follows that such parameters can neither be calibrated nor be estimated unless the choice of units is made explicit. We use an RBC model to demonstrate two equivalent solutions. The standard one expresses the production function in deviation form about some reference point, usually the steady state of the model. Our alternative, ‘re-parameterization’, expresses dimensional constants in terms of a new dimensionless (share) parameter and all remaining dimensionless ones. We show that our ‘re-parameterization’ method is equivalent and arguably more straightforward than the standard normalization in deviation form. We then examine a similar problem of dimensional constants for CES utility functions in a two-sector model and in a small open economy model; then re-parameterization is the only solution to the problem, showing that our approach is in fact more general.
CES production function; Normalization; CES utility function;
12
2012
36
1931
1949
E23
E32
E37
http://www.sciencedirect.com/science/article/pii/S0165188912001339
Cantore, C.
Levine, P.
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1845-18542012-10-12RePEc:eee:dyncon
article
Heterogeneity in stock prices: A STAR model with multivariate transition function
This paper applies a heterogeneous agent asset pricing model, featuring fundamentalists and chartists, to the price-dividend and price-earnings ratios of the S&P500 index. Agents update their beliefs according to macroeconomic information, as an alternative to evolutionary dynamics. For estimation, a STAR model is introduced, with a transition function depending on multiple transition variables. A procedure based on linearity testing is proposed to select the appropriate linear combination of transition variables. The results show that during periods of favorable economic conditions the fraction of chartists increases, causing stock prices to decouple from fundamentals.
Asset pricing; Heterogeneous beliefs; Smooth-transition autoregression;
12
2012
36
1845
1854
C22
E44
G12
http://www.sciencedirect.com/science/article/pii/S016518891200142X
Lof, Matthijs
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1909-19302012-10-12RePEc:eee:dyncon
article
A method for solving general equilibrium models with incomplete markets and many financial assets
This paper presents a numerical method for solving stochastic general equilibrium models with dynamic portfolio choice. The method can be applied to models with heterogeneous agents, time-varying investment opportunity sets, and incomplete asset markets. We illustrate the method using a two-country model with production. We check the accuracy of our method by comparing the numerical solution to a complete markets version of the model against its known analytic properties. We then apply the method to an incomplete markets version where no analytic solution is available. In all versions the standard accuracy tests confirm the effectiveness of our method.
Portfolio choice; Incomplete markets; Dynamic stochastic general equilibrium models;
12
2012
36
1909
1930
C68
D52
G11
http://www.sciencedirect.com/science/article/pii/S0165188912001340
Evans, Martin D.D.
Hnatkovska, Viktoria
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1867-18872012-10-12RePEc:eee:dyncon
article
Resolution of financial distress under Chapter 11
We develop a contingent claims model for a firm in financial distress with a formal account for renegotiations under the U.S. bankruptcy procedure (known as Chapter 11). Shareholders and two classes of creditors (senior and junior) alternatively propose a reorganization plan subject to a vote. The bankruptcy judge can intervene in any renegotiation round to impose a plan. The multiple-stage bargaining process is solved in a non-cooperative game-theory setting. The calibrated model yields the liquidation rate, the duration of Chapter 11 and the frequency of deviations from the Absolute Priority Rule, which are consistent with empirical evidence.
Credit risk; Chapter 11; Game theory; Dynamic programming;
12
2012
36
1867
1887
C61
C7
G33
G34
http://www.sciencedirect.com/science/article/pii/S016518891200139X
Annabi, Amira
Breton, Michèle
François, Pascal
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:561-5702013-02-12RePEc:eee:dyncon
article
Autoregression-based estimation of the new Keynesian Phillips curve
We propose an estimation method of the new Keynesian Phillips curve (NKPC) based on a univariate noncausal autoregressive model for the inflation rate. By construction, our approach avoids a number of problems related to the GMM estimation of the NKPC. We estimate the hybrid NKPC with quarterly U.S. data (1955:1–2010:3), and both expected future inflation and lagged inflation are found important in determining the inflation rate, with the former clearly dominating. Moreover, inflation persistence turns out to be intrinsic rather than inherited from a persistent driving process.
Noncausal time series; Non-Gaussian time series; Inflation; Phillips curve;
3
2013
37
561
570
C22
C51
E31
http://www.sciencedirect.com/science/article/pii/S0165188912001923
Lanne, Markku
Luoto, Jani
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:500-5152013-02-12RePEc:eee:dyncon
article
Learning about monetary policy rules when the housing market matters
In this paper we study a general equilibrium model with a housing market, and use stability under adaptive learning as a criterion to evaluate monetary policy rules. An important feature of the model is that there exist credit-constrained borrowers who use their housing assets as collateral to finance purchases. We evaluate both conventional Taylor rules and rules that incorporate other targets such as housing prices. We find that the effect of responding to housing prices, in addition to output and inflation, depends critically on the assumed information structure of the economy.
Adaptive learning; Taylor rule; Housing market; Credit channel; Monetary policy;
3
2013
37
500
515
E3
E4
E5
http://www.sciencedirect.com/science/article/pii/S0165188912002138
Xiao, Wei
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:483-4992013-02-12RePEc:eee:dyncon
article
Fiscal stimulus and labor market policies in Europe
Several contributions have recently assessed the size of fiscal multipliers both in RBC models and in New Keynesian models. This paper computes fiscal multipliers within a labor selection model with turnover costs and Nash bargained wages. We find that demand stimuli yield small multipliers, as they have little impact on hiring and firing decisions. By contrast, hiring subsidies, and short-time work (German “Kurzarbeit”) deliver large multipliers, as they stimulate job creation and employment.
Fiscal multipliers; Fiscal packages; Labor markets; Short-time work; unemployment;
3
2013
37
483
499
E62
H30
J20
H20
http://www.sciencedirect.com/science/article/pii/S0165188912001881
Faia, Ester
Lechthaler, Wolfgang
Merkl, Christian
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:693-7102013-02-12RePEc:eee:dyncon
article
Who becomes an entrepreneur? Labor market prospects and occupational choice
This paper provides new theory and evidence on the relationship between ability and entrepreneurship. I show that there is a U-shaped relationship between the probability of entrepreneurship and both a person's schooling and wage when employed. This pattern can be explained in a model of occupational choice between wage work and entrepreneurship where a firm's productivity is uncertain before entry, potential wages are heterogeneous, and expected productivity is positively related to an entrepreneur's potential wage. Search, or the ability to keep good projects and reject bad ones, attracts low-ability agents into entrepreneurship. The model also explains why low-profit firms do not always exit.
Occupational choice; Entrepreneurship; Firm entry; Selection; Search;
3
2013
37
693
710
E20
J23
L11
L16
http://www.sciencedirect.com/science/article/pii/S0165188912002175
Poschke, Markus
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:666-6792013-02-12RePEc:eee:dyncon
article
Large shareholders, monitoring, and ownership dynamics: Toward pure managerial firms?
We study ownership dynamics when the manager and the large shareholder, both risk neutral, simultaneously choose effort and monitoring level respectively to serve their non-congruent interests.We show that there is a wedge between the valuation of shares by atomistic shareholders and the large shareholder's valuation. At the Markov-perfect equilibrium, the large shareholder divests her shares. If the incongruence of their interests is mild, divestment is drastic: all her shares are sold immediately. If their interests diverge sharply, the divestment is gradual in order to prevent a sharp fall in share price. In the limit the firm becomes purely managerial.
Ownership dynamics; Managerial firms;
3
2013
37
666
679
G3
http://www.sciencedirect.com/science/article/pii/S0165188912002047
Hilli, Amal
Laussel, Didier
Van Long, Ngo
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:611-6322013-02-12RePEc:eee:dyncon
article
Option pricing where the underlying assets follow a Gram/Charlier density of arbitrary order
If a probability distribution is sufficiently close to a normal distribution, its density can be approximated by a Gram/Charlier Series A expansion. In option pricing, this has been used to fit risk-neutral asset price distributions to the implied volatility smile, ensuring an arbitrage-free interpolation of implied volatilities across exercise prices. However, the existing literature is restricted to truncating the series expansion after the fourth moment. This paper presents an option pricing formula in terms of the full (untruncated) series and discusses a fitting algorithm, which ensures that a series truncated at a moment of arbitrary order represents a valid probability density. While it is well known that valid densities resulting from truncated Gram/Charlier Series A expansions do not always have sufficient flexibility to fit all market-observed option prices perfectly, this paper demonstrates that option pricing in a model based on these densities is as tractable as the (far less flexible) original model of Black and Scholes (1973), allowing non-trivial higher moments such as skewness, excess kurtosis and so on to be incorporated into the pricing of exotic options: Generalising the Gram/Charlier Series A approach to the multiperiod, multivariate case, a model calibrated to standard option prices is developed, in which a large class of exotic payoffs can be priced in closed form. Furthermore, this approach, when applied to a foreign exchange option market involving several currencies, can be used to ensure that the volatility smiles for options on the cross exchange rate are constructed in a consistent, arbitrage-free manner.
Hermite expansion; Semi-nonparametric estimation; Risk-neutral density; Option-implied distribution; Exotic option; Currency option;
3
2013
37
611
632
C40
C63
G13
F31
http://www.sciencedirect.com/science/article/pii/S0165188912001996
Schlögl, Erik
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:680-6922013-02-12RePEc:eee:dyncon
article
Heterogeneous expectations in monetary DSGE models
This paper derives a general New Keynesian framework with heterogeneous expectations by explicitly solving the micro-foundations underpinning the model. The resulting reduced form is analytically tractable and encompasses the representative rational agent benchmark as a special case. We specify a setup in which some agents, as a result of cognitive limitations, make mistakes when forecasting future macroeconomic variables and update their beliefs as new information becomes available, while other agents have rational expectations. We then address determinacy issues related to the use of different interest rate rules and derive policy implications for a monetary authority aiming at stabilizing the economy in a dynamic feedback system in which macroeconomic variables and heterogeneous expectations co-evolve over time.
Heterogeneous expectations; Monetary policy; Determinacy; Evolutionary dynamics;
3
2013
37
680
692
E52
D83
D84
C62
http://www.sciencedirect.com/science/article/pii/S0165188912002151
Massaro, Domenico
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:591-6102013-02-12RePEc:eee:dyncon
article
Investment, matching and persistence in a modified cash-in-advance economy
We simulate and estimate a new Keynesian search and matching model with sticky wages in which capital has to be financed with cash, at least partially. Our objective is to assess the ability of this framework to account for the persistence of output and inflation observed in the data. We find that our setup generates enough output and inflation persistence with standard stickiness parameters. The key factor driving these results is the inclusion of investment in the CIA constraint, rather than any other nominal or real rigidity. The model reproduces labor market dynamics after a positive increase in productivity: hours fall, nominal wages hardly react, and real wages go up with some delay. Regarding money supply shocks, we investigate the conditions under which our model specification generates the liquidity effect, a fact which is absent in most sticky price models.
Persistence; Sticky prices; Staggered bargaining wages; Monetary facts; Labor market facts; Cash-in-advance;
3
2013
37
591
610
E32
E41
E52
http://www.sciencedirect.com/science/article/pii/S0165188912002011
Auray, Stéphane
de Blas, Beatriz
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:543-5602013-02-12RePEc:eee:dyncon
article
Changes in the effects of monetary policy on disaggregate price dynamics
Based on a time-varying factor-augmented vector autoregression, we demonstrate that the propagation mechanism of monetary policy disturbances differs across disaggregate components of personal consumption expenditures. While many disaggregate prices rise temporarily in response to a monetary tightening in the early part of the sample, there is no evidence of a price puzzle at the aggregate level. The share of disaggregate prices that exhibit the price puzzle diminishes from the early 1980s onwards. There also is evidence of a substantial decline in the dispersion of disaggregate price responses over time. This gradual decrease in cross-sectional heterogeneity of disaggregate price responses is associated with a dampening effect on aggregate real economic activity and a stronger effect on the aggregate price level. We illustrate by means of a multi-sector sticky-price model augmented by a cost channel how key structural parameters would have had to change to match this evolution of sectoral price dynamics.
Structural FAVAR; Time variation; Monetary transmission; Disaggregate prices; Heterogeneous pricing decisions;
3
2013
37
543
560
E30
E32
http://www.sciencedirect.com/science/article/pii/S0165188912001935
Baumeister, Christiane
Liu, Philip
Mumtaz, Haroon
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:649-6652013-02-12RePEc:eee:dyncon
article
Escaping expectation traps: How much commitment is required?
We study the degree of precommitment that is required to eliminate multiplicity of policy equilibria, which arise if the policy maker acts under pure discretion. We apply a framework developed by Schaumburg and Tambalotti (2007) and Debertoli and Nunes (2010) to a standard New Keynesian model with government debt. We demonstrate the existence of expectation traps under limited commitment and identify the minimum degree of commitment which is needed to escape from these traps. We find that the degree of precommitment which is sufficient to generate uniqueness of the Pareto-preferred equilibrium requires the policy maker to stay in office for a period of two to five years. This is consistent with monetary policy arrangements in many developed countries.
Limited commitment; Commitment; Discretion; Multiple equilibria; Monetary and fiscal policy interactions;
3
2013
37
649
665
E31
E52
E58
E61
C61
http://www.sciencedirect.com/science/article/pii/S016518891200214X
Himmels, Christoph
Kirsanova, Tatiana
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:633-6482013-02-12RePEc:eee:dyncon
article
Are the representative agent’s beliefs based on efficient econometric models?
No, they are not; at least not in the UK. By examining GDP dynamics we find that, over a time-span of two decades, an easy-to-perform adaptive expectations model systematically outperforms other standard predictors in terms of squared forecasting errors. This should reduce model uncertainty and thereby lead to increased homogeneity in expectations. However, data collected in surveys show that great variety in expectations persists even in this situation. Moreover, Granger tests indicate that the forecasting fitness of the best predictor can be further enhanced by the use of information provided by survey expectations. These results, based on real-time data and robust to both several predictors and nonlinearities, weaken the general validity of approaches assuming predictions based on efficient econometric models.
Survey expectations; Heterogeneous expectations; Forecasting models; Bounded rationality;
3
2013
37
633
648
C53
D83
D84
E27
http://www.sciencedirect.com/science/article/pii/S0165188912002035
Bovi, Maurizio
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:535-5422013-02-12RePEc:eee:dyncon
article
Measuring high-frequency income risk from low-frequency data
We estimate a monthly income process using annual longitudinal household-level income data, in order to understand the nature of income risk faced by households at high frequency, and to provide an input for models that wish to study household decision-making at higher frequency than available data. At both frequencies, idiosyncratic earnings shocks have a highly persistent component. At monthly frequency, transitory shocks account for most of the earnings variance; at annual frequency, the persistent component is dominant. We apply our estimates in the context of a standard incomplete-market model, and show that decision-making frequency per se makes a small difference.
Idiosyncratic income uncertainty; Frequency; Estimation;
3
2013
37
535
542
E21
E24
http://www.sciencedirect.com/science/article/pii/S016518891200200X
Klein, Paul
Telyukova, Irina A.
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:577-5902013-02-12RePEc:eee:dyncon
article
The information content of capacity utilization for detrending total factor productivity
In the production function approach, an accurate output gap assessment requires a careful evaluation of the total factor productivity (TFP) cycle. We build a common cycle model that links TFP to capacity utilization and we show that, in almost all of the pre-enlargement EU countries, using information about capacity utilization reduces both the total estimation error and the revisions in real-time estimates of the concurrent TFP cycle compared to a univariate decomposition. We also argue that relaxing the constant drift hypothesis in favour of a non-linear specification helps to offset a general tendency to underestimate the TFP cycle in the last decade.
Cobb–Douglas production function; Markov-switching and mixture innovation models; Real-time; Revisions;
3
2013
37
577
590
C32
C51
D24
E32
http://www.sciencedirect.com/science/article/pii/S0165188912001893
Planas, C.
Roeger, W.
Rossi, A.
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:571-5762013-02-12RePEc:eee:dyncon
article
A system reduction method to efficiently solve DSGE models
The paper presents a system reduction method (SRM) to improve the computational time to solve a large class of dynamic stochastic general equilibrium (DSGE) models with the methods of Anderson and Moore (1985), Klein (2000), Sims (2002) or Uhlig (1995). I measure the efficiency gains with seven models ranging from 47 to 333 equations. The time reduction for the Anderson–Moore algorithm aim ranges from 10% to 71%; Klein's function solab reduces its time between 51% and 79%; the time reduction for Sims' function gensys increases from 25% to 59%; Uhlig's function solve reduces its time between 31% and 87%. The time reduction can be crucial for Bayesian estimation of medium to large scale models.
Solution of DSGE models; System reduction algorithm; Solution of linear rational expectation models; Bayesian estimation;
3
2013
37
571
576
C63
http://www.sciencedirect.com/science/article/pii/S0165188912001972
Hernandez, Kolver
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:516-5342013-02-12RePEc:eee:dyncon
article
Dynamically optimal R&D subsidization
This paper characterizes the optimal time path of R&D and capital subsidization. Starting from the steady state under current R&D subsidization in the US, the R&D subsidy should significantly jump upwards and then slightly decrease over time. There is a small loss in welfare, however, from immediately setting the R&D subsidy to its optimal long run level, compared to a time-varying R&D subsidy. The results do not depend on the financing scheme, namely lump sum taxation or factor income taxation. The optimal capital subsidy is time-varying under factor income taxation, but time-invariant when subsidies are financed by lump sum taxes.
R&D subsidy; Transitional dynamics; Semi-endogenous growth; Welfare;
3
2013
37
516
534
H20
O30
O40
http://www.sciencedirect.com/science/article/pii/S0165188912002059
Grossmann, Volker
Steger, Thomas
Trimborn, Timo
oai:RePEc:eee:dyncon:v:32:y:2008:i:9:p:2903-29382012-10-05RePEc:eee:dyncon
article
Pricing derivatives with barriers in a stochastic interest rate environment
9
2008
32
9
2903
2938
http://www.sciencedirect.com/science/article/B6V85-4RC2NHN-2/2/0d123f4e8b084498fd768f10925778a3
Bernard, Carole
Le Courtois, Olivier
Quittard-Pinon, François
oai:RePEc:eee:dyncon:v:32:y:2008:i:4:p:1312-13312012-10-05RePEc:eee:dyncon
article
Feedback Nash equilibria for non-linear differential games in pollution control
Dynamic problems of pollution and resource management with stock externalities often require a differential games framework of analysis. In addition they are represented realistically by non-linear transition equations. However, feedback Nash equilibrium (FBNE) solutions, which are the desired ones in this case, are difficult to obtain in problems with non-linear-quadratic structure. We develop a method to obtain numerically non-linear FBNE for a class of such problems, with a specific example for shallow lake pollution control. We compare FBNE solutions, by considering the entire equilibrium trajectories, with optimal management and open-loop solutions, and we show that the value of the best FBNE is in general worse than the open-loop and optimal management solutions.
4
2008
32
4
1312
1331
http://www.sciencedirect.com/science/article/B6V85-4NXHC5Y-2/1/7aa315194fabd9f6ed5f24c6bc135073
Kossioris, G.
Plexousakis, M.
Xepapadeas, A.
de Zeeuw, A.
Mäler, K.-G.
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:1000-10142012-10-05RePEc:eee:dyncon
article
The closed-form solution for a family of four-dimension nonlinear MHDS
In this article we propose a method for solving a general class of four-dimension nonlinear modified Hamiltonian dynamic systems in closed form. This method may be used to study several intertemporal optimization problems sharing a common structure, which involves unbounded technological constraints as well as multiple controls and state variables. The method is developed by solving the first-order conditions associated with the planner's problem corresponding to the Lucas [1988. On the mechanics of economic development. Journal of Monetary Economics 22, 3-42] two-sector model of endogenous growth, and allows for explicitly showing the transitional dynamics of the model. Despite the externality, the socially optimal short-run trajectory is unique.
3
2008
32
3
1000
1014
http://www.sciencedirect.com/science/article/B6V85-4NVH7PB-1/1/3873962d70183f132fa0b99996ca5628
Ruiz-Tamarit, José Ramón
oai:RePEc:eee:dyncon:v:35:y:2011:i:11:p:1880-18972012-10-05RePEc:eee:dyncon
article
Minimum return guarantees with fund switching rights—An optimal stopping problem
Recently, there is a growing trend to offer guaranteed products where the investor is allowed to shift her account/investment value between multiple funds. The switching right is granted a finite number of times per year, i.e. it is American style with multiple exercise possibilities. In consequence, the pricing and the risk management is based on the switching strategy which maximizes the value of the guarantee put-option. We analyze the optimal stopping problem in the case of one switching right within different model classes and compare the exact price with the lower price bound implied by the optimal deterministic switching time. We show that, within the class of log-price processes with independent increments, the stopping problem is solved by a deterministic stopping time if (and only if) the price process is in addition continuous. Thus, in a sense, the Black and Scholes model is the only (meaningful) pricing model where the lower price bound gives the exact price. It turns out that even moderate deviations from the Black and Scholes model assumptions give a lower price bound which is really below the exact price. This is illustrated by means of a stylized stochastic volatility model setup.
Return guarantees; Fund switching rights; Optimal stopping; American compound option;
11
2011
35
1880
1897
G13
http://www.sciencedirect.com/science/article/pii/S0165188911001096
Mahayni, Antje
Schoenmakers, John G.M.
oai:RePEc:eee:dyncon:v:33:y:2009:i:6:p:1217-12352012-10-05RePEc:eee:dyncon
article
A geometric description of a macroeconomic model with a center manifold
This paper presents a unified framework of different algorithms to numerically compute high order expansions of invariant manifolds associated to a steady state of a dynamical system. The framework is inspired in the parameterization method of Cabré et al. [2003. The parameterization method for invariant manifolds. I. Manifolds associated to non-resonant subspaces. Indiana University Mathematics Journal 52(2), 283-328], and the semianalytical algorithms proposed by Simó [1990. On the analytical and numerical approximation of invariant manifolds. In: Benest, D., Froeschlé, C. (Eds.), Les Méthodes Modernes de la Mecánique Céleste (Course given at Goutelas, France, 1989), Editions Frontières, Paris, pp. 285-329], and those of Gomis-Porqueras and Haro [2003. Global dynamics in macroeconomics: an overlapping generations example. Journal of Economic Dynamics and Control 27, 1941-1959]. Within this methodology, one can compute high order approximations of stable, unstable and center manifolds. In this last case the use of high order approximations (not just linear) are crucial in understanding the dynamic properties of the model near the steady state. To illustrate the algorithms we consider a model economy introduced by Azariadis et al. [2001. Public and private circulating liabilities. Journal of Economic Theory 99, 59-116]. Besides its intrinsic importance, this four-dimensional macroeconomic model is an ideal testing ground because it delivers steady states with stable and unstable manifolds (of dimensions 1 or 2), and each of them has also a one-dimensional center manifold. Moreover, the numerical computations lead to a further theoretical study of the dynamical system completing some of the results in the original paper.
Invariant manifold Center manifold Global dynamics
6
2009
33
6
1217
1235
http://www.sciencedirect.com/science/article/B6V85-4VC7DTK-1/2/f0707eab2a1dd9d5a11f3b0975fbcbca
Gomis-Porqueras, Pere
Haro, Àlex
oai:RePEc:eee:dyncon:v:33:y:2009:i:9:p:1699-17182012-10-05RePEc:eee:dyncon
article
Could myopic pricing be a strategic choice in marketing channels? A game theoretic analysis
We identify the conditions under which a myopic pricing behavior could be a profit enhancing tool in the distribution channel. A channel member is myopic when he ignores the evolution of the retail prices when actual and past retail prices affect consumers' purchasing decisions. A differential game is formulated where channel members control transfer and retail prices. We start by examining a bilateral monopoly, and then introduce competition at the manufacturing level. The competing manufacturers play à la Nash and can be both myopic, both farsighted, or one myopic while the other is farsighted. We show that, for a bilateral monopoly, myopia enhances total channel profit when the effect of the reference price is small enough. This remains true under competition at the manufacturing level when products are differentiated enough.
Marketing channels Pricing Retailing Myopia Differential games
9
2009
33
9
1699
1718
http://www.sciencedirect.com/science/article/B6V85-4W0WJ2J-3/2/60f9fdc3a70fb800ff47e9cfb7c28c93
Benchekroun, Hassan
Martín-Herrán, Guiomar
Taboubi, Sihem
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:859-8752012-10-05RePEc:eee:dyncon
article
An agent-based model of payment systems
We lay out and simulate a multi-agent, multi-period model of an RTGS payment system. At the beginning of the day, banks choose how much costly liquidity to allocate to the settlement process. Then, they use it to execute an exogenous, random stream of payment orders. If a bank's liquidity stock is depleted, payments are queued until new liquidity arrives from other banks, imposing costs on the delaying bank. We study the equilibrium level of liquidity posted in the system, performing some comparative statics and obtaining insights on the efficiency of alternative system configurations.
Payment systems Liquidity RTGS Agent-based modelling Learning Fictitious play
6
2011
35
6
859
875
http://www.sciencedirect.com/science/article/B6V85-51F7PJY-1/2/4c0f60d2d0a37e47ddad613cca7d2a9d
Galbiati, Marco
Soramäki, Kimmo
oai:RePEc:eee:dyncon:v:35:y:2011:i:11:p:1817-18302012-10-05RePEc:eee:dyncon
article
Input–output interactions and optimal monetary policy
This paper deals with the implications of factor demand linkages for monetary policy design in a two-sector dynamic general equilibrium model. Part of the output of each sector serves as a production input in both sectors, in accordance with a realistic input–output structure. Strategic complementarities induced by factor demand linkages significantly alter the transmission of shocks and amplify the loss of social welfare under optimal monetary policy, compared to what is observed in standard two-sector models. The distinction between value added and gross output that naturally arises in this context is of key importance to explore the welfare properties of the model economy. A flexible inflation targeting regime is close to optimal only if the central bank balances inflation and value added variability. Otherwise, targeting gross output variability entails a substantial increase in the loss of welfare.
Input–output interactions; Multi-sector models; Optimal monetary policy;
11
2011
35
1817
1830
E23
E32
E52
http://www.sciencedirect.com/science/article/pii/S0165188911001059
Petrella, Ivan
Santoro, Emiliano
oai:RePEc:eee:dyncon:v:32:y:2008:i:6:p:1812-18292012-10-05RePEc:eee:dyncon
article
Inequality and growth: Some welfare calculations
The main lotteries individuals face during their lifetime are country and family of birth. How much consumption growth would a newborn sacrifice to avoid these lotteries? We find that he may be willing to sacrifice a large fraction, if not all, to avoid them. Critical elements for the results are time discounting and risk aversion. Both reduce the effect of growth on welfare while risk aversion increases the benefits of more equal outcomes. Another key factor is the staggering size of risk at birth. Our calculations suggest a research agenda that treats growth and inequality as priorities.
6
2008
32
6
1812
1829
http://www.sciencedirect.com/science/article/B6V85-4P8GWPX-1/1/790fb39dc19977d8136dd58be8835701
Córdoba, Juan Carlos
Verdier, Geneviève
oai:RePEc:eee:dyncon:v:36:y:2012:i:4:p:568-5842012-10-05RePEc:eee:dyncon
article
Do credit market shocks drive output fluctuations? Evidence from corporate spreads and defaults
Are exogenous shocks to lending spreads in corporate credit markets a substantial source of macroeconomic fluctuations? An alternative explanation of the data is that borrowing costs respond endogenously to expectations of future default, driven by macroeconomic shocks. We investigate by imposing restrictions on a structural vector autoregression that isolate the influence of expected default on spreads. We find that adverse credit shocks have contributed to declining output in every post-1982 recession, and account for three-fifths of the decline in output during the 2007–2009 contraction. However, on average credit shocks account for only a fifth of business cycle fluctuations.
Corporate bond spreads; Default rates; Sign restrictions; Bayesian vector autoregression;
4
2012
36
568
584
C32
E32
E43
E44
http://www.sciencedirect.com/science/article/pii/S0165188911002351
Meeks, Roland
oai:RePEc:eee:dyncon:v:32:y:2008:i:10:p:3253-32742012-10-05RePEc:eee:dyncon
article
Asset pricing with loss aversion
10
2008
32
10
3253
3274
http://www.sciencedirect.com/science/article/B6V85-4RSRDC5-1/2/43500ec0e2afb0e192fa180b8c38ac4b
Grüne, Lars
Semmler, Willi
oai:RePEc:eee:dyncon:v:36:y:2012:i:2:p:255-2652012-10-05RePEc:eee:dyncon
article
Good timing: The economics of optimal stopping
This paper presents an economic interpretation of the optimal “stopping” of perpetual project opportunities under both certainty and uncertainty. Prior to stopping, the expected rate of return from delay exceeds the rate of interest. The expected rate of return from delay is the sum of the expected rate of change in project value and the expected rate of change in the option premium associated with waiting. At stopping the expected rate of return from delay has fallen to the rate of interest. Viewing stopping in this way unifies the theoretical and practical insights of the theory of stopping under certainty and uncertainty.
Investment timing; r-Percent rule; Real options; Investment under uncertainty; Wicksell;
2
2012
36
255
265
C61
D92
E22
G12
G13
G31
Q00
http://www.sciencedirect.com/science/article/pii/S0165188911001813
Davis, Graham A.
Cairns, Robert D.
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:932-9502012-10-05RePEc:eee:dyncon
article
A theory of infrastructure-led development
This paper proposes a theory of long-run development based on public infrastructure as the engine of growth. The government, in addition to investing in infrastructure, spends on health services, which in turn raise labor productivity and lower the rate of time preference. Infrastructure affects the production of both commodities and health services. As a result of network effects, the degree of efficiency of infrastructure is nonlinearly related to the stock of public capital itself. Provided that governance is adequate enough to ensure a sufficient degree of efficiency of public investment, an increase in the share of spending on infrastructure (financed by a cut in unproductive expenditure or foreign grants) may facilitate the shift from a low growth equilibrium, characterized by low productivity and low savings, to a high growth steady state.
Infrastructure Network effects Poverty traps
5
2010
34
5
932
950
http://www.sciencedirect.com/science/article/B6V85-4Y95TWS-3/2/254deb15a967a35e7a24f23b1fd9e623
Agénor, Pierre-Richard
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:798-8152012-10-05RePEc:eee:dyncon
article
Life expectancy and the environment
We present an OLG model in which life expectancy and environmental quality dynamics are jointly determined. Agents may invest in environmental care, depending on how much they expect to live. In turn, environmental conditions affect life expectancy. As a result, our model produces a positive correlation between longevity and environmental quality, both in the long-run and along the transition path. Eventually, multiple equilibria may also arise: some countries might be caught in a low-life-expectancy/low-environmental-quality trap. This outcome is consistent with stylized facts relating life expectancy and environmental performance measures. We also discuss the welfare and policy implications of the inter-generational externalities generated by individual choices. Finally, we show that our results are robust to the introduction of growth dynamics based on physical or human capital accumulation.
Environmental quality Life expectancy Poverty traps Human capital
4
2010
34
4
798
815
http://www.sciencedirect.com/science/article/B6V85-4XV5NVV-1/2/a1cb44b87e645ce16a0a3ef04b66db2e
Mariani, Fabio
Pérez-Barahona, Agustín
Raffin, Natacha
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:709-7562012-10-05RePEc:eee:dyncon
article
On deposit volumes and the valuation of non-maturing liabilities
In this paper we propose a framework for the modelling of non-maturing liabilities, the latter referring to deposits without a specific maturity or deposits whose actual time horizon significantly differs from their contractual maturity. The set of non-maturing liabilities include most of the traditional deposit accounts like demand deposits and savings accounts and form the basis of the funding for depository institutions. Our framework consists of three pieces: models for market rates, deposit rates and deposit volumes. For the market rate an extended one-factor Vasicek model is used but the framework developed is general and any other and potentially more sophisticated and accurate model for the market rate can be applied. Deposit rates are modelled using policy functions which are allowed to depend on the current market rate and the volume deposited. Concerning deposit volumes we develop a framework in which models for deposit volumes can be derived in theoretically sound way. This is done in two steps. In the first step we propose reasonable rules or strategies based on which we attempt to capture the behaviour of the individual customer. In the second step we then define notions of homogeneity in customer behaviour and use these to derive models for the behaviour of the 'average customer' and for the volumes deposited by the 'average customer'. Finally, the pieces of the framework are integrated in a valuation formula, we here use the approach of Jarrow and Van Deventer [1998. The arbitrage-free valuation and hedging of demand deposits and credit card loans. Journal of Banking and Finance 22, 249-272], and a value is assigned to a portfolio of demand deposits. This valuation formula also forms the basis for the risk management of the interest rate risk embedded in the demand deposits.
3
2008
32
3
709
756
http://www.sciencedirect.com/science/article/B6V85-4NGKVGB-2/1/8ffd5c7a46bc21551692e7416d1f50f7
Nyström, Kaj
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:891-9082012-10-05RePEc:eee:dyncon
article
Exploration and development of U.S. oil and gas fields, 1955-2002
We study the exploration and development of oil and gas fields in the U.S. over the period 1955-2002. We make four contributions to explain the economic evolution of the oil and gas industry during this period. First, we derive a testable model of the dynamics of competitive oil and gas field exploration and development. Second, we show how to empirically distinguish Hotelling scarcity effects from effects due to technological change. Third, we test these hypotheses using statewide panel data of exploration and development drilling. We find that the time paths of exploration, development and total wells drilled are dominated by Hotelling scarcity effects. Finally, we offer an explanation for why fixed costs from exploration can make the contracting equilibrium in the mineral rights market efficient.
Exploration and development Contracting Exhaustible resources
6
2011
35
6
891
908
http://www.sciencedirect.com/science/article/B6V85-51R4SKJ-4/2/d6fff29395d2ed9cfb27695869e67ab1
Boyce, John R.
Nøstbakken, Linda
oai:RePEc:eee:dyncon:v:36:y:2012:i:4:p:550-5672012-10-05RePEc:eee:dyncon
article
S,s pricing in a dynamic equilibrium model with heterogeneous sectors
We study the impact of two-sided nominal shocks in a dynamic, equilibrium macroeconomic model. Goods complementarity differs across sectors as do the costs of changing prices. Even when strategic complementarities are equal across the sectors, the systematic differences in costs of price adjustment mean nominal shocks have a ‘sizeable’ impact on aggregate output and prices. We exploit certain fundamental properties of Markov processes to obtain analytical expressions for the stationary distributions of aggregate output and prices for the case of two sectors.
Price rigidity; (S,s) pricing; Macroeconomic dynamics;
4
2012
36
550
567
E31
E32
E37
E58
http://www.sciencedirect.com/science/article/pii/S016518891100234X
Damjanovic, Vladislav
Nolan, Charles
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2038-20552012-10-05RePEc:eee:dyncon
article
On the firm-level implications of the Bank Lending Channel of monetary policy
Standard models of the Bank Lending Channel are unable to yield predictions on the differential impact of monetary policy shocks over heterogeneous borrowers. This inability has made researchers doubt about the role played by bank credit as a transmission mechanism of monetary policy. Moreover, it has made them reject those models in favor of the Balance Sheet Channel as a transmission mechanism. In this paper we show that an "augmented" version of the Bank Lending Channel that allows for firm heterogeneity (but without any role for firms' balance sheets) reproduces well the dynamics of firm-level data. Our contribution is to show that it is not clear that the Bank Lending Channel should be rejected in favor of alternative theories on the basis of its inability to reproduce firm-level data. Thus, there is additional room for econometric tests that can provide support to the Bank Lending Channel.
Credit channel Bank Lending Channel "Flight to Quality" Transmission channels of monetary policy
10
2010
34
10
2038
2055
http://www.sciencedirect.com/science/article/B6V85-501FPFH-2/2/b7087ef158e49056d5c2cb1d65e01354
Díaz, Roger Aliaga
Olivero, María Pía
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2341-23572012-10-05RePEc:eee:dyncon
article
Estimating asset correlations from stock prices or default rates--Which method is superior?
This paper sets out to help explain why estimates of asset correlations based on equity prices tend to be considerably higher than estimates based on default rates. Resolving this empirical puzzle is highly important because, firstly, asset correlations are a key driver of credit risk and, secondly, both data sources are widely used to calibrate risk models of financial institutions. By means of a simulation study, we explore the hypothesis that differences in the correlation estimates are due to a substantial downward bias characteristic of estimates based on default rates. By varying the time horizon, the default probability, the asset correlation and the number of firms in the portfolio, we investigate these estimators in a systematic comparative study. Our results suggest that correlation estimates from equity returns are more efficient than those from default rates. This finding still holds if the model is misspecified such that asset correlations follow a Vasicek process which affects foremost the estimates from equity returns. The results lend support for the hypothesis that the downward bias of default-rate based estimates is an important although not the only factor to explain the differences in correlation estimates. Furthermore, our results help to quantify the estimation error of asset correlations dependent on the true values of default probability and asset correlation.
Asset correlation Single risk factor model Small sample properties Structural model Basel II
11
2010
34
11
2341
2357
http://www.sciencedirect.com/science/article/B6V85-508CCPX-2/2/f5e396a1e135157dc18156e9b574f3c6
Duellmann, Klaus
Küll, Jonathan
Kunisch, Michael
oai:RePEc:eee:dyncon:v:34:y:2010:i:10:p:2159-21782012-10-05RePEc:eee:dyncon
article
Does money matter for the identification of monetary policy shocks: A DSGE perspective
This paper investigates how the identification assumptions of monetary policy shocks modify the inference in a standard DSGE model. Considering SVAR models in which either the interest rate is predetermined for money or money and the interest rate are simultaneously determined, two DSGE models are estimated by minimum distance estimation. The estimation results reveal that real balance effects are necessary to replicate the high persistence implied by the simultaneity assumption. In addition, the estimated monetary policy rule is sensitive to the identification scheme. This suggests that the way money is introduced in the identification scheme is not neutral for the estimation of DSGE models.
SVAR model DSGE model Non-recursive identification Money
10
2010
34
10
2159
2178
http://www.sciencedirect.com/science/article/B6V85-505NRX4-6/2/f2c2f710240dd09a79cdb9d8fd69474a
Poilly, Céline
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1172-11912012-10-05RePEc:eee:dyncon
article
Search in the product market and the real business cycle
Empirical evidence suggests that most firms operate in imperfectly competitive markets. We develop a search-matching model between wholesalers and retailers. Firms face search costs and form long-term relationships. Price bargain results in both wholesaler and retailer mark ups, which depend on firms' relative bargaining power. We simulate the general equilibrium model and explore the role of product market search frictions for business cycles. We conclude from the simulation exercise that incorporating product market search structure and shocks improve the standard real business cycle model to reproduce US business cycle fluctuations.
Business cycle Frictions Search Product market Price bargain
8
2011
35
8
1172
1191
http://www.sciencedirect.com/science/article/pii/S0165188911000467
Mathä, Thomas Y.
Pierrard, Olivier
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:273-2812012-10-05RePEc:eee:dyncon
article
Consumption paths under prospect utility in an optimal growth model
This paper studies the Cass-Koopmans-Ramsey model of optimal economic growth in the presence of loss aversion and habit formation. The representative agent's preferences for consumption can be gradually varied between the standard constant intertemporal elasticity of substitution (CIES) case and Kahneman and Tversky's prospect utility. We find that the transitional dynamics of optimal consumption paths differ distinctly from the standard model, in particular consumption smoothing is more pronounced. We also show that prospect utility can cause the economy to remain in a steady state with low consumption and low capital.
Ramsey growth model Prospect theory Loss aversion Optimal consumption
3
2011
35
3
273
281
http://www.sciencedirect.com/science/article/B6V85-511G1KB-1/2/3c575114f58d352c76e58ba617ed890d
Foellmi, Reto
Rosenblatt-Wisch, Rina
Schenk-Hoppé, Klaus Reiner
oai:RePEc:eee:dyncon:v:36:y:2012:i:2:p:201-2192012-10-05RePEc:eee:dyncon
article
Regime switching in stochastic models of commodity prices: An application to an optimal tree harvesting problem
This paper investigates whether a regime switching model of stochastic lumber prices is better for the analysis of optimal harvesting problems in forestry than a more traditional single regime model. Prices of lumber derivatives are used to calibrate a regime switching model, with each of two regimes characterized by a different mean reverting process. A single regime, mean reverting process is also calibrated. The value of a representative stand of trees and optimal harvesting prices are determined by specifying a Hamilton–Jacobi–Bellman Variational Inequality, which is solved for both pricing models using a implicit finite difference approach. The regime switching model is found to more closely match the behavior of futures prices than the single regime model. In addition, analysis of a tree harvesting problem indicates significant differences in terms of land value and optimal harvest thresholds between the regime switching and single regime models.
Regime switching; Optimal tree harvesting; Mean reverting price; Lumber derivatives prices; Hamilton–Jacobi–Bellman variational inequality;
2
2012
36
201
219
C63
C61
Q23
D81
http://www.sciencedirect.com/science/article/pii/S0165188911001618
Chen, Shan
Insley, Margaret
oai:RePEc:eee:dyncon:v:36:y:2012:i:5:p:716-7182012-10-05RePEc:eee:dyncon
article
Rejoinder to a remark on Lin and Chang's paper ‘Consistent modeling of S&P 500 and VIX derivatives’
We appreciate the thorough review and very useful comments of Cheng, Ibraimi, Leippold, and Zhang. The suggestions have helped significantly to improve our original approximation formula and lead us to provide an exact solution under the Lin and Chang (2010) framework and we thank the editor to give us an illustration chance. This rejoinder has two parts. The first presents a VIX option pricing formula in the stochastic volatility (SV) model. The numerical results using the authors' framework and notations are illustrated, too. The second is to explain our approximate formula in Lin and Chang (2010) and points out the limitation and calibrating technique of the approximation.
VIX options; Stochastic volatility; Characteristic functions;
5
2012
36
716
718
G12
G13
http://www.sciencedirect.com/science/article/pii/S0165188912000152
Lin, Yueh-Neng
Chang, Chien-Hung
oai:RePEc:eee:dyncon:v:33:y:2009:i:6:p:1296-13132012-10-05RePEc:eee:dyncon
article
Wage or price-based inflation? Alternative targets in optimal monetary policy rules
In this paper the optimality of a specific variant of monetary policy rules à la Taylor is tested within a general equilibrium monetary model with both nominal and real rigidities. The traditional Taylor rule is amended by the inclusion of the growth rate of nominal wage, or 'wage inflation'. Nominal rigidities are inserted via quadratic adjustment costs for both prices and wages à la Rotemberg [1982. Sticky prices in the United States. Journal of Political Economy 90, 1187-1211] and Kim [2000. Constructing and estimating a realistic optimizing model of monetary policy. Journal of Monetary Economics 45, 329-359]. Cost of capital adjustment together with a positive steady state inflation rate allow the model to match the main empirical facts about US economy. The model is solved by using a second order approximation around the non-stochastic steady state, as in Kim et al. [2008. Calculating and using second order accurate solutions of discrete time dynamic equilibrium models. Journal of Economic Dynamics and Control 32 (11), 3397-3414]. The welfare metric is offered by the second order expansion of the utility function conditional to the non-stochastic steady state. The results show that wage inflation targeting is welfare improving when coupled with inflation targeting. Moreover, optimal monetary rules include also a positive coefficient for output targeting, as the need to smooth out quantity adjustments induced by real and nominal rigidities. Similar results occurs when both targets are in expected value one period-ahead. The model shows good in sample and out of sample properties.
Welfare Nominal and real rigidities Capital accumulation Inflation targeting Output targeting
6
2009
33
6
1296
1313
http://www.sciencedirect.com/science/article/B6V85-4VH4D99-1/2/2baf7028e1660622a62a3083620732b9
Marzo, Massimiliano
oai:RePEc:eee:dyncon:v:32:y:2008:i:9:p:2883-29022012-10-05RePEc:eee:dyncon
article
Can consumption spillovers be a source of equilibrium indeterminacy?
9
2008
32
9
2883
2902
http://www.sciencedirect.com/science/article/B6V85-4RCKJSY-1/2/630000c86522e46475693c24e30264e7
Alonso-Carrera, Jaime
Caballé, Jordi
Raurich, Xavier
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1393-14042012-10-05RePEc:eee:dyncon
article
A unified theory of structural change
This paper uses dynamic general equilibrium and computational methods, inspired by the multi-sector growth model structure in Stephen Turnovsky's work, to develop a theory that unifies two of the traditional explanations of structural change: sector-biased technical change and non-homothetic preferences. The theory is based on an overlapping-generations growth model with endogenous technical change and non-homothetic preferences. An expanding-variety setup with two different R&D technologies, agricultural, and non-agricultural, is employed. The analysis, based on numerical simulations, shows that the biased technical change hypothesis finds most support in the data. It also points to production-side specific factors, such as asymmetries in cross-sector knowledge spillovers, as explanatory factors of the bias in technical change.
Multi-sector growth model Structural change Agriculture and non-agriculture R&D Directed innovation Hon-homothetic preferences
9
2011
35
9
1393
1404
http://www.sciencedirect.com/science/article/pii/S0165188911000844
Dolores Guilló, María
Papageorgiou, Chris
Perez-Sebastian, Fidel
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1700-17312012-10-05RePEc:eee:dyncon
article
Stock market conditions and monetary policy in a DSGE model for the U.S.
This paper investigates the interactions between stock market fluctuations and monetary policy within a DSGE model for the U.S. economy. First, we design a framework in which fluctuations in households financial wealth are allowed--but not necessarily required--to exert an impact on current consumption. This is due to the interaction, in the financial markets, of long-time traders holding wealth accumulated over time with newcomers holding no wealth at all. Importantly, we introduce nominal wage stickiness to induce pro-cyclicality in real dividends. Additional nominal and real frictions are modeled to capture the pervasive macroeconomic persistence of the observables employed to estimate our model. We fit our model to post-WWII U.S. data, and report three main results. First, the data strongly support a significant role of stock prices in affecting real activity and the business cycle. Second, our estimates also identify a significant and counteractive response of the Fed to stock-price fluctuations. Third, we derive from our model a microfounded measure of financial slack, the "stock-price gap", which we then contrast to alternative ones, currently used in empirical studies, to assess the properties of the latter to capture the dynamic and cyclical implications of our DSGE model. The behavior of our "stock-price gap" is consistent with the episodes of stock-market booms and busts occurred in the post-WWII, as reported by independent analyses, and closely correlates with the current financial meltdown. Typically employed proxies of financial slack such as detrended log-indexes or growth rates show limited capabilities of capturing the implications of our model-consistent index of financial stress. Cyclical properties of the model as well as counterfactuals regarding shocks to our measure of financial slackness and monetary policy shocks are also proposed.
Stock prices Monetary policy Bayesian estimation Wealth effects
9
2010
34
9
1700
1731
http://www.sciencedirect.com/science/article/B6V85-50F3PDK-3/2/093d6ba12983b3d287b79af772b758c4
Castelnuovo, Efrem
Nisticò, Salvatore
oai:RePEc:eee:dyncon:v:36:y:2012:i:6:p:891-9132012-10-05RePEc:eee:dyncon
article
A structural model of firm and industry evolution: Evidence from Chile
Although there are many models that yield a simple interpretation of the basic features of firm and industry evolution, they are too stylized to confront the micro-level data in a formal quantitative analysis. By introducing heterogeneity to a stylized industry evolution model, I explain several novel features of the data, such as the shape of the size distribution and the relationships between age, size, and the hazard rate of exit. In the model, heterogeneity arises through a combination of exogenous efficiency differences and accumulated innovations resulting from R&D investments. Integrating these forces allows the model to perform well quantitatively in fitting data on Chilean manufacturers.
Industry evolution; Firm dynamics; Endogenous product scope; Innovation; Parameter estimation;
6
2012
36
891
913
L11
L6
O31
C15
http://www.sciencedirect.com/science/article/pii/S016518891200022X
Şeker, Murat
oai:RePEc:eee:dyncon:v:36:y:2012:i:5:p:708-7152012-10-05RePEc:eee:dyncon
article
A remark on Lin and Chang's paper ‘Consistent modeling of S&P 500 and VIX derivatives’
Lin and Chang (2009, 2010) establish a VIX futures and option pricing theory when modeling S&P 500 index by using a stochastic volatility process with asset return and volatility jumps. In this note, we prove that Lin and Chang's formula is not an exact solution of their pricing equation. More generally, we show that the characteristic function of their pricing equation cannot be exponentially affine, as proposed by them. Furthermore, their formula cannot serve as a reasonable approximation. Using the (Heston, 1993) model as a special case, we demonstrate that Lin and Chang formula misprices VIX futures and options in general and the error can become substantially large.
VIX option pricing; Affine jump diffusion; Characteristic function;
5
2012
36
708
715
G13
http://www.sciencedirect.com/science/article/pii/S0165188912000140
Cheng, Jun
Ibraimi, Meriton
Leippold, Markus
Zhang, Jin E.
oai:RePEc:eee:dyncon:v:35:y:2011:i:12:p:2064-20772012-10-05RePEc:eee:dyncon
article
Monetary policy when wages are downwardly rigid: Friedman meets Tobin
Monetary policy in an economy with both downwardly rigid wages and a transaction motive for money demand is studied using a dynamic stochastic general equilibrium model. The two key features of the model imply that both Tobin's “inflation grease” argument and Friedman's rule are operative, and so optimal inflation may be positive or negative. The Simulated Method of Moments is used to estimate the nonlinear model based on its second-order approximation. Results indicate that the Ramsey policy that maximizes social welfare involves an average inflation rate of about 0.4% per year. In the more realistic case where a central banker follows a simple targeting policy, the optimal inflation target is about 1% per year. We view this result as providing support for the low, but strictly positive, inflation targets used in many countries.
Downward nominal wage rigidity; Asymmetric effects of monetary policy; Optimal inflation; Nonlinear dynamics;
12
2011
35
2064
2077
E4
E5
http://www.sciencedirect.com/science/article/pii/S0165188911001527
Kim, Jinill
Ruge-Murcia, Francisco J.
oai:RePEc:eee:dyncon:v:36:y:2012:i:5:p:754-7782012-10-05RePEc:eee:dyncon
article
Spatial period-doubling agglomeration of a core–periphery model with a system of cities
The progress of spatial agglomeration of Krugman's core–periphery model is investigated by comparative static analysis of stable equilibria with respect to transport costs. We set forth theoretically possible agglomeration (bifurcation) patterns for a system of cities spread uniformly on a circle. A possible and most likely course predicted is a gradual and successive one, which is called spatial period doubling. For example, eight cities concentrate into four cities and then into two cities en route to the formation of a single city. The existence of this course is ensured by numerical simulation for the model. Such a gradual and successive agglomeration presents a sharp contrast to the agglomeration of two cities, for which spontaneous concentration to a single city is observed in core–periphery models of various kinds. Other bifurcations that do not take place in two cities, such as period tripling, are also observed. The need for study of a system of cities has thus been demonstrated.
Agglomeration of population; Bifurcation; Core–periphery model; Group theory; Spatial period doubling;
5
2012
36
754
778
R12
R13
F12
C62
http://www.sciencedirect.com/science/article/pii/S016518891200019X
Ikeda, Kiyohiro
Akamatsu, Takashi
Kono, Tatsuhito
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:555-5762012-10-05RePEc:eee:dyncon
article
The role of bank capital in the propagation of shocks
The recent financial turmoil has underlined the importance of analyzing the link between banks' balance sheets and economic activity. We develop a dynamic stochastic general equilibrium model in which bank capital mitigates an agency problem between banks and their creditors. As a result, the capital position of banks affects their ability to attract loanable funds and therefore influences the business cycle through a bank capital channel of transmission. We find that the bank capital channel greatly amplifies and propagates the effects of technology shocks on output, investment and inflation. Moreover, bank capital shocks create sizeable declines in output and investment.
Bank capital Capital adequacy ratio Financial frictions Transmission mechanism of monetary policy
3
2010
34
3
555
576
http://www.sciencedirect.com/science/article/B6V85-4XHCHWT-4/2/7365b1d92a4b497508c1ace8623d5f3f
Meh, Césaire A.
Moran, Kevin
oai:RePEc:eee:dyncon:v:35:y:2011:i:12:p:2213-22272012-10-05RePEc:eee:dyncon
article
New Keynesian dynamics in a low interest rate environment
Recent research has found that the dynamic properties of the New Keynesian model are unorthodox when the nominal interest rate is zero. Improvements in technology and reductions in the labor tax rate lower economic activity and the size of the government purchase output multiplier is very large. This paper provides evidence that these results are not empirically relevant. We show that a prototypical New Keynesian model fit to Japanese data exhibits orthodox dynamics during Japan's episode with zero interest rates. We then demonstrate that this specification is more consistent with outcomes in Japan than alternative specifications that have unorthodox properties.
Government purchases; Zero nominal interest rates; Monetary policy; Liquidity trap; Fiscal policy;
12
2011
35
2213
2227
E3
E5
E6
http://www.sciencedirect.com/science/article/pii/S0165188911001564
Braun, R. Anton
Körber, Lena Mareen
oai:RePEc:eee:dyncon:v:33:y:2009:i:6:p:1332-13442012-10-05RePEc:eee:dyncon
article
A naïve sticky information model of households' inflation expectations
This paper shows that the Michigan survey data on inflation expectations is consistent with a simple sticky information model where a significant proportion of households base their inflation expectations on the past release of actual inflation rather than the rational forward-looking forecast. In particular, the model can explain both the mean and cross-sectional distribution of households' inflation expectations.
Inflation expectations Heterogeneous expectations Survey expectations Sticky information Bayesian analysis
6
2009
33
6
1332
1344
http://www.sciencedirect.com/science/article/B6V85-4VK6N5T-2/2/575f3a90671d8c40cb84fed84b72806b
Lanne, Markku
Luoma, Arto
Luoto, Jani
oai:RePEc:eee:dyncon:v:32:y:2008:i:9:p:2826-28532012-10-05RePEc:eee:dyncon
article
Learning-or-doing in a cash-in-advance economy with costly credit
9
2008
32
9
2826
2853
http://www.sciencedirect.com/science/article/B6V85-4R7NPY1-1/2/74badd299606c710ec5a5924d735e5f0
Hromcová, Jana
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:956-9772012-10-05RePEc:eee:dyncon
article
Market clearing and price formation
Considered here is decentralized exchange of privately owned commodity bundles. Voluntary transactions take the form of repeated bilateral barters. Under broad and reasonable hypotheses the resulting process converges to competitive equilibrium. Price-taking behavior is not assumed. Prices emerge over time; they need neither be anticipated nor known at any interim stage.
3
2008
32
3
956
977
http://www.sciencedirect.com/science/article/B6V85-4NNYJ57-1/1/b0433cf8961e978cfccfda321354f98f
Flåm, S.D.
Godal, O.
oai:RePEc:eee:dyncon:v:32:y:2008:i:4:p:1041-10872012-10-05RePEc:eee:dyncon
article
Limited participation and exchange rate dynamics: Does theory meet the data?
The paper explores the empirical dimensions of a New Open Economy Macronomy model characterized by credit market frictions. We find that these frictions are essential for the model to match a large set of moments of German data. Moreover, the simulated impulse response functions to supply and nominal shocks are consistent with VAR findings. Since the model is estimated on moments rather than on conditional IRFs, this underlines the ability of the model to match the data. Finally, monetary shocks do not seem to be the primary driving force behind the aggregate dynamics, which is consistent with the VAR literature.
4
2008
32
4
1041
1087
http://www.sciencedirect.com/science/article/B6V85-4NTRT06-1/1/83e924054f25b3e19f420d447dc49c66
Karamé, Frédéric
Patureau, Lise
Sopraseuth, Thepthida
oai:RePEc:eee:dyncon:v:33:y:2009:i:3:p:758-7762012-10-05RePEc:eee:dyncon
article
Money and the natural rate of interest: Structural estimates for the United States and the euro area
We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behavior of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate.
Money Natural rate New Keynesian models
3
2009
33
3
758
776
http://www.sciencedirect.com/science/article/B6V85-4TP49JC-1/2/1fdf371e720e0b27a01207fcbcec1553
Andrés, Javier
David López-Salido, J.
Nelson, Edward
oai:RePEc:eee:dyncon:v:32:y:2008:i:6:p:1830-18562012-10-05RePEc:eee:dyncon
article
A two-level dynamic game of carbon emission trading between Russia, China, and Annex B countries
This paper proposes a computable dynamic game model of the strategic competition between Russia and developing countries (DCs), mainly represented by China, on the international market of emission permits created by the Kyoto Protocol. The model uses a formulation of (i) a demand function for permits from AnnexÂ B countries and (ii) marginal abatement costs (MAC) in Russia and China provided by two detailed models. GEMINI-E3 is a computable general equilibrium model that provides the data to estimate AnnexÂ B demand for permits and MACs in Russia. POLES is a partial equilibrium model that is used to obtain MAC curves for China. The competitive scenario is compared with a monopoly situation where only Russia is allowed to play strategically. The impact of allowing DCs to intervene on the international emission trading market is thus assessed.
6
2008
32
6
1830
1856
http://www.sciencedirect.com/science/article/B6V85-4P8B0K9-1/1/63c9e542b900a608d912149c7f6ae383
Bernard, A.
Haurie, A.
Vielle, M.
Viguier, L.
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:282-2942012-10-05RePEc:eee:dyncon
article
The role of liquid government bonds in the great transformation of American monetary policy
A fundamental shift in monetary policy occurred around 1980: the Fed went from a "passive" policy to an "active" policy. We study a model in which government bonds provide transactions services. We present two calibrations of our model, using pre- and post-1980 data. We show that estimates of pre- and post-1980 policy rules all lie within our determinacy regions. But, the pre-1980 policy was a very bad monetary policy, even if it avoided sunspot equilibria. Model simulations suggest that household welfare would have increased by 3.3 percent of permanent consumption in this period under an active policy.
Price determinacy
3
2011
35
3
282
294
http://www.sciencedirect.com/science/article/B6V85-51BNWP6-2/2/b41f6b56438827ad6dd378d210b980ed
Canzoneri, Matthew
Cumby, Robert
Diba, Behzad
López-Salido, David
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:386-3932012-10-05RePEc:eee:dyncon
article
Tapping the supercomputer under your desk: Solving dynamic equilibrium models with graphics processors
This paper shows how to build algorithms that use graphics processing units (GPUs) installed in most modern computers to solve dynamic equilibrium models in economics. In particular, we rely on the compute unified device architecture (CUDA)Â of NVIDIA GPUs. We illustrate the power of the approach by solving a simple real business cycle model with value function iteration. We document improvements in speed of around 200 times and suggest that even further gains are likely.
CUDA Dynamic programming Parallelization Growth model Business cycles
3
2011
35
3
386
393
http://www.sciencedirect.com/science/article/B6V85-517BB1F-1/2/07bba84b275cbac9fbcc21bb42114def
Aldrich, Eric M.
Fernández-Villaverde, Jesús
Ronald Gallant, A.
Rubio-Ramírez, Juan F.
oai:RePEc:eee:dyncon:v:33:y:2009:i:5:p:1159-11692012-10-05RePEc:eee:dyncon
article
Learning in a credit economy
In this paper we analyze a credit economy à la Kiyotaki and Moore [1997. Credit cycles. Journal of Political Economy 105, 211-248] enriched with learning dynamics, where both borrowers and lenders need to form expectations about the future price of the collateral. We find that under homogeneous learning, the MSV REE for this economy is E-stable and can be learned by agents, but when heterogeneous learning is allowed and uncertainty in terms of a stochastic productivity is added, expectations of lenders and borrowers can diverge and lead to bankruptcy (default) on the part of the borrowers.
Credit economy Bankruptcy Learning Heterogeneity
5
2009
33
5
1159
1169
http://www.sciencedirect.com/science/article/B6V85-4VM43WF-6/2/ad3f04d612c3e6b7ebac753b3d032405
Assenza, Tiziana
Berardi, Michele
oai:RePEc:eee:dyncon:v:33:y:2009:i:3:p:666-6752012-10-05RePEc:eee:dyncon
article
Non-constant discounting in finite horizon: The free terminal time case
This paper derives the HJB (Hamilton-Jacobi-Bellman) equation for sophisticated agents in a finite horizon dynamic optimization problem with non-constant discounting in a continuous setting, by using a dynamic programming approach. Special attention is paid to the case of free terminal time. Strotz's model (a cake-eating problem of a non-renewable resource with non-constant discounting) is revisited. A consumption-saving model is used to illustrate the results in the free terminal time case.
Non-constant discounting Naive and sophisticated agents Free terminal time
3
2009
33
3
666
675
http://www.sciencedirect.com/science/article/B6V85-4TG9HNN-4/2/2d177c62677aa83abc8c5bff49dbeadb
Marín-Solano, Jesús
Navas, Jorge
oai:RePEc:eee:dyncon:v:33:y:2009:i:3:p:597-6132012-10-05RePEc:eee:dyncon
article
The effects of permanent technology shocks on hours: Can the RBC-model fit the VAR evidence?
I show that a standard RBC-model can be used to explain why hours per capita decrease in response to a permanent technology shock when hours enter a vector autoregressive (VAR) in first differences and why hours increase when hours enter in levels. There are two parts to my argument. First, empirical evidence suggests that a positive permanent technology shock goes together with a persistent increase in the expected growth rate and the RBC-model predicts this increase in the expected growth rate to have a downward effect on hours worked (and can even result in a sizeable negative response of hours). Second, first-differencing hours in VARs results in a considerable downward bias. Using the estimated parameters for the technology process, I find (i) that the true model response of hours is positive and (ii) that when the VAR methodology is used with finite samples of simulated data then the hours' response is negative (positive) when hours enter the VAR in first differences (levels).
Permanent technology shocks Hours worked per capita Labor productivity Real business cycle model Vector autoregressions
3
2009
33
3
597
613
http://www.sciencedirect.com/science/article/B6V85-4TGS79X-1/2/8ecaa105094d550c8697555563e463b0
Lindé, Jesper
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:848-8742012-10-05RePEc:eee:dyncon
article
Competition and inflation differentials in EMU
In a monetary union, inflation rate differentials may be substantial over the business cycle. This paper parameterizes a monetary union with cross-country structural differences in (i) the elasticity of demand in the goods markets, (ii) the degree of price inertia and (iii) the preference for foreign goods in consumption. The model, calibrated to reproduce two large EMU countries, is able to generate non-negligible inflation differentials in response to symmetric shocks. The mechanism of price discrimination is the most important one, but moderate differences in the degree of openness have sizeable effects on the dispersion of inflation rates if idiosyncratic shocks predominate.
3
2008
32
3
848
874
http://www.sciencedirect.com/science/article/B6V85-4NHV4CT-1/1/d3a607f35caf25babf78df3e5d5b4dfc
Andrés, Javier
Ortega, Eva
Vallés, Javier
oai:RePEc:eee:dyncon:v:33:y:2009:i:3:p:583-5962012-10-05RePEc:eee:dyncon
article
Optimal pricing and advertising policies for an entertainment event
The paper suggests an optimal control model to determine optimal pricing and advertising policies for a one-time entertainment event. There are two periods, an initial period of regular price sales and a terminal period of last-minute sales at a (possibly) reduced price. The price in a period is constant over time. In the initial period, the organizers of the event advertise the event to potential attendees. If tickets are sold out by the end of the first period, there will be no last-minute sales. We find that advertising should be decreased over time during the first period. There are three different advertising scenarios: it may be optimal not to advertise at all, to advertise at a positive rate until the end of the first period, or to stop advertising at an earlier instant of time. In the last-minute sales, the organizers implement a feedback pricing policy such that the selected price depends on the number of tickets that have been sold in the regular sales period. Finally, we establish optimality conditions for the time instant where to switch to last-minute sales.
Advertising Pricing Capacity planning Optimal control
3
2009
33
3
583
596
http://www.sciencedirect.com/science/article/B6V85-4TBXG9J-2/2/6596a2fad8116c7c00a6feab8a73605b
Jørgensen, Steffen
Kort, Peter M.
Zaccour, Georges
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:843-8582012-10-05RePEc:eee:dyncon
article
Pricing of the time-change risks
We develop an equilibrium endowment economy with Epstein-Zin recursive utility and a Lévy time-change subordinator, which represents a clock that connects business and calendar time. Our setup provides a tractable equilibrium framework for pricing non-Gaussian jump-like risks induced by the time-change, with closed-form solutions for asset prices. Persistence of the time-change shocks leads to predictability of consumption and dividends and time-variation in asset prices and risk premia in calendar time. In numerical calibrations, we show that the risk compensation for Lévy risks accounts for about one-third of the overall equity premium.
Time deformation Risk premium Recursive utility
6
2011
35
6
843
858
http://www.sciencedirect.com/science/article/B6V85-51XH963-3/2/b8b83a2b4db4cd425fdc57a847af8935
Shaliastovich, Ivan
Tauchen, George
oai:RePEc:eee:dyncon:v:35:y:2011:i:12:p:2078-21042012-10-05RePEc:eee:dyncon
article
How much nominal rigidity is there in the US economy? Testing a new Keynesian DSGE model using indirect inference
We evaluate the Smets–Wouters New Keynesian model of the US postwar period, using indirect inference, the bootstrap and a VAR representation of the data. We find that the model is strongly rejected. While an alternative (New Classical) version of the model fares no better, adding limited nominal rigidity to it produces a ‘weighted’ model version closest to the data. But on data from 1984 onwards – the ‘great moderation’ – the best model version is one with a high degree of nominal rigidity, close to New Keynesian. Our results are robust to a variety of methodological and numerical issues.
Bootstrap; US model; DSGE; VAR; New Keynesian; New Classical; Indirect inference; Wald statistic; Regime change; Structural break; Great moderation;
12
2011
35
2078
2104
C12
C32
C52
E1
http://www.sciencedirect.com/science/article/pii/S0165188911001606
Le, Vo Phuong Mai
Meenagh, David
Minford, Patrick
Wickens, Michael
oai:RePEc:eee:dyncon:v:32:y:2008:i:12:p:3960-39772012-10-05RePEc:eee:dyncon
article
Why are similar workers paid differently? the role of social networks
We provide a matching model where identical workers are embedded in ex ante identical social networks. Job arrival rate is endogenous and wages are bargained. We study the evolution of networks over time and characterize the equilibrium distribution of unemployment rates across networks. Within our framework wage dispersion arises endogenously as the consequence of the dynamics of networks, firms' strategies and wage bargaining. We show that networks induce new search externalities which shape the dynamics of the labor market. Our endogenous framework allows us to quantify these effects.
Social networks Job search Matching Wage dispersion
12
2008
32
12
3960
3977
http://www.sciencedirect.com/science/article/B6V85-4SJP78T-1/2/8577b35c68ef7cfbf643003d7008218d
Fontaine, François
oai:RePEc:eee:dyncon:v:33:y:2009:i:1:p:183-2032012-10-05RePEc:eee:dyncon
article
Anything goes with heterogeneous, but not always with homogeneous oligopoly
Corchón and Mas-Colell [1996. On the stability of best reply and gradient systems with applications to imperfectly competitive models. Economics Letters 51, 59-65] showed that in heterogeneous oligopoly (almost) everything is possible. In order to obtain a similar result for homogeneous oligopoly, either one needs an externality in the cost function, or the reaction correspondences should fulfill a special condition.
Cournot oligopoly (In)Stability (Limit)Cycles Morse theory
1
2009
33
1
183
203
http://www.sciencedirect.com/science/article/B6V85-4SMDYWD-3/2/043bd0927df2fd4da8572d1313edc5b3
Furth, Dave
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:616-6222012-10-05RePEc:eee:dyncon
article
Production technologies in stochastic continuous time models
Properties of dynamic stochastic general equilibrium models can be revealed by either using numerical solutions or qualitative analysis. Very precise and intuition-building results are obtained by working with models which provide closed-form solutions. Closed-form solutions are known for a large class of models some of which, however, have some undesirable features such as potentially negative output. This paper offers closed-form solutions for models which are just as tractable but do not suffer from these shortcomings.
Dynamic stochastic general equilibrium models Closed-form solution Continuous time Jump diffusion
4
2011
35
4
616
622
http://www.sciencedirect.com/science/article/B6V85-5192110-2/2/c242fcdab104b4401b6741ed4d1023df
Wälde, Klaus
oai:RePEc:eee:dyncon:v:36:y:2012:i:7:p:951-9722012-10-05RePEc:eee:dyncon
article
Dynamic portfolio choice and asset pricing with narrow framing and probability weighting
This paper shows that the framework proposed by Barberis and Huang (2009) to incorporate narrow framing and loss aversion into dynamic models of portfolio choice and asset pricing can be extended to also account for probability weighting and for a value function that is convex on losses and concave on gains. We show that the addition of probability weighting and a convex–concave value function reinforces previous applications of narrow framing and cumulative prospect theory to understanding the stock market non-participation puzzle and the equity premium puzzle. Moreover, we show that a convex–concave value function generates new wealth effects that are consistent with empirical observations on stock market participation.
Narrow framing; Cumulative prospect theory; Probability weighting function; Negative skewness; Dynamic programming;
7
2012
36
951
972
D1
D8
G11
G12
http://www.sciencedirect.com/science/article/pii/S0165188912000255
De Giorgi, Enrico G.
Legg, Shane
oai:RePEc:eee:dyncon:v:36:y:2012:i:2:p:294-3132012-10-05RePEc:eee:dyncon
article
Bayesian prior elicitation in DSGE models: Macro- vs micropriors
Bayesian approaches to the estimation of DSGE models are becoming increasingly popular. Prior knowledge is normally formalized either directly on deep parameters' values (‘microprior’) or indirectly, on macroeconomic indicators, e.g. moments of observable variables (‘macroprior’). We introduce a non-parametric macroprior which is elicited from impulse response functions and assess its performance in shaping posterior estimates. We find that using a macroprior can lead to substantially different posterior estimates. We probe into the details of our result, showing that model misspecification is likely to be responsible of that. In addition, we assess to what extent the use of macropriors is impaired by the need of calibrating some hyperparameters.
DSGE models; Bayesian estimation; Prior distribution; Impulse response function;
2
2012
36
294
313
C11
C51
E30
http://www.sciencedirect.com/science/article/pii/S0165188911001849
Lombardi, Marco J.
Nicoletti, Giulio
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1421-14412012-10-05RePEc:eee:dyncon
article
Technological leadership and persistence of monopoly under endogenous entry: Static versus dynamic analysis
We build a dynamic oligopoly model with endogenous entry in which a particular firm (leader) invests in an innovation process, facing the subsequent entry of other firms (followers). We identify conditions that make it optimal for the leader in the initial oligopoly situation to undertake pre-emptive R&D investment (strategic predation) eventually resulting in the elimination of all followers. Compared to a static model, the dynamic one provides new insights into the leader's intertemporal investment choice, its optimal decision making, and the dynamics of the market structure over time. We also contrast the leader's investment decisions with those of the social planner.
Dynamic oligopoly Endogenous entry Persistence of monopoly Strategic predation Accommodation
8
2010
34
8
1421
1441
http://www.sciencedirect.com/science/article/B6V85-4YRHCM7-1/2/c40748ce9bf52b7fd75e524d489afc6c
Kovác, Eugen
Vinogradov, Viatcheslav
Zigic, Kresimir
oai:RePEc:eee:dyncon:v:32:y:2008:i:5:p:1399-14312012-10-05RePEc:eee:dyncon
article
Distributional dynamics in a neoclassical growth model: The role of elastic labor supply
We examine the evolution of the distributions of wealth and income in a Ramsey model in which agents differ in their initial capital endowment and where the labor supply is endogenous. The assumption that the utility function is homogeneous implies that the macroeconomic equilibrium is independent of the distribution of wealth and allows us to characterize fully income and wealth dynamics. We find that although the dynamics of the distribution of wealth are similar under fixed and flexible labor, those of the income distribution are not. In response to a structural change, income inequality may move in opposite ways depending on whether or not the labor supply is fixed.
5
2008
32
5
1399
1431
http://www.sciencedirect.com/science/article/B6V85-4P12J0V-1/1/df4b7fed8ab95a5dd8aadeec7ec6bd39
Turnovsky, Stephen J.
Garcia-Peñalosa, Cecilia
oai:RePEc:eee:dyncon:v:33:y:2009:i:1:p:128-1532012-10-05RePEc:eee:dyncon
article
American chooser options
This paper examines the valuation of American chooser options, i.e., American-style contracts written on the maximum of an American put and an American call. The structure of the immediate exercise region is examined. The early exercise premium representation of the chooser's price is derived and used to construct a system of coupled recursive integral equations for a pair of boundary components. Numerical implementations of the model based on this system are carried out and used to examine the boundary properties and the price behavior.
American chooser options Exercise region Early exercise premium Integral equations
1
2009
33
1
128
153
http://www.sciencedirect.com/science/article/B6V85-4SMDYWD-1/2/08bf6dd51522c7c00d8f2bd4ceb76ae9
Detemple, Jérôme
Emmerling, Thomas
oai:RePEc:eee:dyncon:v:35:y:2011:i:11:p:1852-18672012-10-05RePEc:eee:dyncon
article
Calvo vs. Rotemberg in a trend inflation world: An empirical investigation
This paper estimates and compares New-Keynesian DSGE monetary models of the business cycle derived under two different pricing schemes—Calvo (1983) and Rotemberg (1982)—under a positive trend inflation rate. Our empirical findings (i) support trend inflation as an empirically relevant feature of the U.S. great moderation; (ii) provide evidence in favor of the statistical superiority of the Calvo setting; (iii) point to a substantially lower degree of price indexation under Calvo. We show that the superiority of the Calvo model is due to the restrictions imposed by such a pricing scheme on the aggregate demand equation.
Calvo; Rotemberg; Trend inflation; Bayesian estimations;
11
2011
35
1852
1867
C32
E3
E52
http://www.sciencedirect.com/science/article/pii/S0165188911001084
Ascari, Guido
Castelnuovo, Efrem
Rossi, Lorenza
oai:RePEc:eee:dyncon:v:32:y:2008:i:7:p:2370-23962012-10-05RePEc:eee:dyncon
article
A new marked point process model for the federal funds rate target: Methodology and forecast evaluation
Forecasts of key interest rates set by central banks are of paramount concern for investors and policy makers. Recently it has been shown that forecasts of the federal funds rate target, the most anticipated indicator of the Federal Reserve Bank's monetary policy stance, can be improved considerably when its evolution is modeled as a marked point process (MPP). This is due to the fact that target changes occur in discrete time with discrete increments, have an autoregressive nature and are usually in the same direction. We propose a model which is able to account for these dynamic features of the data. In particular, we combine Hamilton and Jordà's [2002. A model for the federal funds rate target. Journal of Political Economy 110(5), 1135-1167] autoregressive conditional hazard (ACH) and Russell and Engle's [2005. A discrete-state continuous-time model of financial transactions prices and times: the autoregressive conditional multinomial-autoregressive conditional duration model. Journal of Business and Economic Statistics 23(2), 166 - 180] autoregressive conditional multinomial (ACM) model. The paper also puts forth a methodology to evaluate probability function forecasts of MPP models. By improving goodness of fit and point forecasts of the target, the ACH-ACM qualifies as a sensible modeling framework. Furthermore, our results show that MPP models deliver useful probability function forecasts at short and medium term horizons.
7
2008
32
7
2370
2396
http://www.sciencedirect.com/science/article/B6V85-4S32NHJ-1/1/b12278292bd90805bcadacd9e14f03e2
Grammig, Joachim
Kehrle, Kerstin
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:813-8132012-10-05RePEc:eee:dyncon
article
Erratum to: "On the firm-level implications of the bank lending channel of monetary policy" [J. Econ. Dynamics Control 34 (10) (2010) 2038-2055]
5
2011
35
5
813
813
http://www.sciencedirect.com/science/article/B6V85-520CTM6-1/2/9a3522a1b40ec67c3a235f33d004614a
Aliaga-Díaz, Roger
Olivero, María Pía
oai:RePEc:eee:dyncon:v:32:y:2008:i:9:p:2971-30082012-10-05RePEc:eee:dyncon
article
Business risk, credit constraints, and corporate taxation
9
2008
32
9
2971
3008
http://www.sciencedirect.com/science/article/B6V85-4RFJ4G5-1/2/8f30924d0d7a914198543def3acd376e
Meh, Césaire A.
oai:RePEc:eee:dyncon:v:35:y:2011:i:2:p:178-1852012-10-05RePEc:eee:dyncon
article
Multi-country real business cycle models: Accuracy tests and test bench
This paper describes the methodology used to compare the results of different solution algorithms for a multi-country real business cycle model. It covers in detail the structure of the model, the choice of values for the parameters, the accuracy tests used in the comparison, and the computer program specifically developed for performing the tests.
Accuracy tests Numerical solutions Heterogeneous agents
2
2011
35
2
178
185
http://www.sciencedirect.com/science/article/B6V85-514P5RX-3/2/581b6ef92634c48adb5d0f05f62de040
Juillard, Michel
Villemot, Sébastien
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:121-1312012-10-05RePEc:eee:dyncon
article
Structural vector autoregressions with Markov switching
It is argued that in structural vector autoregressive (SVAR) analysis a Markov regime switching (MS) property can be exploited to identify shocks if the reduced form error covariance matrix varies across states. The model setup is formulated and discussed and it is shown how it can be used to test restrictions which are just-identifying in a standard structural vector autoregressive analysis. The approach is illustrated by two SVAR examples which have been reported in the literature and which have features that can be accommodated by the MS structure.
Cointegration Markov regime switching model Vector error correction model Structural vector autoregression
2
2010
34
2
121
131
http://www.sciencedirect.com/science/article/B6V85-4X315D9-1/2/f21d56cdfeb3f05dd0c96e45d8ff8242
Lanne, Markku
Lütkepohl, Helmut
Maciejowska, Katarzyna
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1531-15462012-10-05RePEc:eee:dyncon
article
Ramsey policies in a small open economy with sticky prices and capital
This paper analyzes jointly optimal fiscal and monetary policies in a small open economy with capital and sticky prices. We allow for trade in consumption goods under perfect international risk-sharing. We consider balanced-budget fiscal policies where authorities use distortionary taxes on labor and capital together with monetary policy using the nominal interest rate. First, as long as a symmetric equilibrium is considered, the steady state in an open economy is isomorphic to that of a closed economy. Second, sticky prices' allocations are almost indistinguishable from flexible prices allocations both in open and closed economies. Third, the open economy dimension delivers results that are qualitatively similar to those of a closed economy but with significant quantitative changes. Tax rates are both more volatile and more persistent to undo the distortions implied by terms of trade fluctuations.
Small open economy Sticky prices Optimal monetary and fiscal policies
9
2011
35
9
1531
1546
http://www.sciencedirect.com/science/article/pii/S0165188911000959
Auray, Stéphane
de Blas, Beatriz
Eyquem, Aurélien
oai:RePEc:eee:dyncon:v:33:y:2009:i:3:p:676-6912012-10-05RePEc:eee:dyncon
article
Valuation of mortality risk via the instantaneous Sharpe ratio: Applications to life annuities
We develop a theory for valuing non-diversifiable mortality risk in an incomplete market by assuming that the company issuing a mortality-contingent claim requires compensation for this risk in the form of a pre-specified instantaneous Sharpe ratio. We apply our method to value life annuities. One result of our paper is that the value of the life annuity is identical to the upper good deal bound of Cochrane and Saá-Requejo [2000. Beyond arbitrage: good deal asset price bounds in incomplete markets. Journal of Political Economy 108, 79-119] and of Björk and Slinko [2006. Towards a general theory of good deal bounds. Review of Finance 10, 221-260] applied to our setting. A second result of our paper is that the value per contract solves a linear partial differential equation as the number of contracts approaches infinity. One can represent the limiting value as an expectation with respect to an equivalent martingale measure, and from this representation, one can interpret the instantaneous Sharpe ratio as an annuity market's price of mortality risk.
Stochastic mortality Pricing Annuities Sharpe ratio Non-linear partial differential equations Market price of risk Equivalent martingale measures
3
2009
33
3
676
691
http://www.sciencedirect.com/science/article/B6V85-4TN82D1-1/2/195c72744b36738fdc6116d376c1c9dc
Bayraktar, Erhan
Milevsky, Moshe A.
David Promislow, S.
Young, Virginia R.
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:757-7782012-10-05RePEc:eee:dyncon
article
Social security and self control preferences
We analyze the welfare effects of an unfunded social security system. We do so using an overlapping generations economy wherein agents have self-control preferences, face mortality risk, individual income risk, and borrowing constraints. Given our specification of preferences, unfunded social security helps reduce the agents' temptation to consume in every period; consequently, the welfare costs it otherwise entails are substantially mitigated. While both social security and self-control when considered separately reduce welfare, their combination renders this effect considerably less severe. Moreover, if the cost of resisting temptation is very high, the introduction of social security might even improve welfare.
3
2008
32
3
757
778
http://www.sciencedirect.com/science/article/B6V85-4NGKVGB-1/1/86af43f12172848c9cece10e9b8f818c
Kumru, Çagri S.
Thanopoulos, Athanasios C.
oai:RePEc:eee:dyncon:v:32:y:2008:i:8:p:2690-27212012-10-05RePEc:eee:dyncon
article
Evaluating an estimated new Keynesian small open economy model
8
2008
32
8
2690
2721
http://www.sciencedirect.com/science/article/B6V85-4PT7WVY-1/2/4f7d3f829e86d9e9616ad11845c08ab5
Adolfson, Malin
Laséen, Stefan
Lindé, Jesper
Villani, Mattias
oai:RePEc:eee:dyncon:v:33:y:2009:i:9:p:1648-16612012-10-05RePEc:eee:dyncon
article
Integrated assessment of energy policies: Decomposing top-down and bottom-up
The formulation of market equilibrium problems as mixed complementarity problems (MCP) permits integration of bottom-up programming models of the energy system into top-down general equilibrium models of the overall economy. Despite the general appeal of the integrated MCP approach, dimensionality imposes limitations on practical application. A complementarity representation involves both primal and dual relationships, often doubling the number of equations and thereby the scope for error in specification. When an underlying optimization model of the energy system includes upper and lower bounds on many decision variables, the explicit treatment of income effects may become intractable. We present a decomposition of the integrated MCP formulation that permits a convenient combination of top-down general equilibrium models and bottom-up energy system models for energy policy analysis. We advocate the use of complementarity methods to solve the top-down economic equilibrium model and quadratic programming to solve the underlying bottom-up energy supply model. A simple iterative procedure reconciles the equilibrium prices and quantities between both models.
Mathematical programming Mixed complementarity Top-down/bottom-up
9
2009
33
9
1648
1661
http://www.sciencedirect.com/science/article/B6V85-4VWHVX8-2/2/6bb86cc14dee1381c0b012812016e89d
Böhringer, Christoph
Rutherford, Thomos F.
oai:RePEc:eee:dyncon:v:35:y:2011:i:11:p:1898-19152012-10-05RePEc:eee:dyncon
article
Large traders and illiquid options: Hedging vs. manipulation
In this article, we study the effects on derivative pricing arising from price impacts by large traders. When a large trader issues a derivative and (partially) hedges his risk by trading in the underlying, he influences both his hedge portfolio and the derivative's payoff. In a Black–Scholes model with a price impact on the drift, we analyze the resulting trade-off by explicitly solving the utility maximization problem of a large investor endowed with an illiquid contingent claim. We find several interesting phenomena which cannot occur in frictionless markets. First, the indifference price is a convex function of the contingent claim – and not concave as in frictionless markets – implying that for any claim the buyer's indifference price is larger than the seller's indifference price. Second, the seller's indifference prices of large positions in derivatives are smaller than the Black–Scholes replication costs. Therefore, a large trader might have an incentive to issue options if they are traded at Black–Scholes prices. Furthermore, he hedges option positions only partly if he has a negative price impact and thus exploits his ability to manipulate the option's payoff. For a positive price impact he overhedges the option position leading to an extra profit from the stock position exceeding a perfect hedge. Finally, we also study a model where the large shareholder has a price impact on both drift and volatility.
Price impact; Illiquidity; Option pricing; Portfolio choice; Manipulation;
11
2011
35
1898
1915
G11
G12
G13
C61
http://www.sciencedirect.com/science/article/pii/S0165188911001060
Kraft, Holger
Kühn, Christoph
oai:RePEc:eee:dyncon:v:35:y:2011:i:7:p:1032-10442012-10-05RePEc:eee:dyncon
article
The dynamics of economic convergence: The role of alternative investment decisions
In this paper we evaluate how various investment decisions explain the macroeconomic dynamics of European transition countries. We introduce quality investment decisions into a model with other two standard investment margins assumed in the advanced trade literature, i.e., investment in new varieties and in export eligibility. We show that the standard investment margins are not sufficient to simultaneously match the dynamics in the macroeconomic variables, especially the export performance and the real exchange rate. In contrast, the extended model with quality investment provides reconciliation.
Two-country modeling Convergence Real exchange rate
7
2011
35
7
1032
1044
http://www.sciencedirect.com/science/article/pii/S0165188911000418
Bruha, Jan
Podpiera, Jirí
oai:RePEc:eee:dyncon:v:33:y:2009:i:1:p:250-2652012-10-05RePEc:eee:dyncon
article
Cournot duopoly when the competitors operate multiple production plants
This article considers a Cournot duopoly under an isoelastic demand function and cost functions with built-in capacity limits. The special feature is that each firm is assumed to operate multiple plants, which can be run alone or in combination. Each firm has two plants with different capacity limits, so each has three cost options, the third being to run both plants, dividing the load according to the principle of equal marginal costs. As a consequence, the marginal cost functions come in three disjoint pieces, so the reaction functions, derived on basis of global profit maximization, may also consist of disjoint pieces. This is reflected in a particular bifurcation structure, due to border-collision bifurcations and to particular basin boundaries, related to the discontinuities. It is shown that stable cycles may coexist, and the non-existence of unstable cycles constitutes a new property. We also compare the coexistent short periodic solutions in terms of the resulting real profits.
Duopoly Capacity limits Border-collision bifurcations Discontinuous reaction functions
1
2009
33
1
250
265
http://www.sciencedirect.com/science/article/B6V85-4SSND1X-1/2/fb62525097cd0136631a398a3361e55c
Tramontana, Fabio
Gardini, Laura
Puu, Tönu
oai:RePEc:eee:dyncon:v:36:y:2012:i:6:p:862-8752012-10-05RePEc:eee:dyncon
article
International business cycles with complete markets
Kehoe and Perri (2002) show that a two-country business cycle model with endogenously incomplete markets helps to resolve the “international comovement puzzle” (Baxter, 1995) and the “quantity anomaly” (Backus et al., 1992, 1995). We claim that a similar performance can be achieved without resorting to market incompleteness. We show that a model with complete markets driven by productivity shocks alone can account for the “international comovement puzzle”. Our model features time nonseparable preferences that allow arbitrarily small wealth effects on labor supply. It matches the data by predicting (i) positive cross-country correlations of investment and hours worked; (ii) realistic cross-country correlations of consumption. It reduces the gap between international correlations of output and consumption, but fails to change their order. Unlike models with restricted international markets, ours show little sensitivity to the parameterization of the forcing process.
Time nonseparable preferences; Wealth effects; International business cycles;
6
2012
36
862
875
E32
F41
G15
http://www.sciencedirect.com/science/article/pii/S0165188912000176
Dmitriev, Alexandre
Roberts, Ivan
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2358-23742012-10-05RePEc:eee:dyncon
article
Systemic risk, financial contagion and financial fragility
Although it is hard to arrive at a widely accepted definition for Systemic Risk; it is generally acknowledged that it is the risk of the occurrence of an event that threatens the well functioning of the system of interest (financial, payments, banking, etc.) sometimes to the point of making its operation impossible. We model systemic risk with two main components: a random shock that weakens one or more financial institutions and a transmission mechanism which transmits and possibly exacerbates such negative effects to the rest of the system. Our model could be conceptually represented by a network already described in previous works. In this work we show how is possible to estimate the distribution of losses for the banking system with our model. Additionally, we show how it is possible to separate the distribution of losses into two components: the losses incurred by the initial shock and the losses resulting from the contagion process. Finally, once the distribution is estimated, we can derive standard risk measures for the system as a whole. Another important contribution of this work is that we can follow the evolution of certain risk measures like the expected loss or the CVaR in order to evaluate if the system is becoming more or less risky, in fact, more or less fragile. Additionally, we can decompose the distribution of losses of the whole banking system into the systemic and the contagion elements and we can determine if the system is more prone to experience contagious difficulties during a certain period of time.
Systemic risk Monte Carlo simulation Financial contagion
11
2010
34
11
2358
2374
http://www.sciencedirect.com/science/article/B6V85-50DYH0H-1/2/12c673dae1554570622a96936f8d496d
Martínez-Jaramillo, Serafín
Pérez, Omar Pérez
Embriz, Fernando Avila
Dey, Fabrizio López Gallo
oai:RePEc:eee:dyncon:v:32:y:2008:i:5:p:1466-14882012-10-05RePEc:eee:dyncon
article
The new Keynesian monetary model: Does it show the comovement between GDP and inflation in the U.S.?
This paper analyzes the performance of alternative versions of the new Keynesian monetary (NKM) model in replicating the comovement observed between output and inflation. Following Den Haan [2000. The comovement between output and prices. Journal of Monetary Economics 46, 3-30], we analyze comovement by computing the correlations of VAR forecast errors of the two variables at different forecast horizons. The empirical correlation is negative and marginally significant for the one-ahead forecast horizon, but the correlations are non-significant for the other forecast horizons studied. In contrast, a simple NKM model under a standard parameterization provides a high and significant negative comovement at all forecast horizons. However, a generalized version including habit formation and a forward-looking Taylor rule is able to mimic the observed weak comovement at medium- and long-term forecast horizons.
5
2008
32
5
1466
1488
http://www.sciencedirect.com/science/article/B6V85-4P2S8X3-2/1/990cd77e04a3e343efb73cc7836de558
Maria-Dolores, Ramón
Vázquez, Jesús
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:913-9312012-10-05RePEc:eee:dyncon
article
From discrete to continuous time evolutionary finance models
This paper aims to open a new avenue for research in continuous-time financial market models with endogenous prices and heterogenous investors. To this end we introduce a discrete-time evolutionary stock market model that accommodates time periods of arbitrary length. The dynamics is time-consistent and allows the comparison of paths with different frequency of trade. The main result in this paper is the derivation of the limit model as the length of the time period tends to zero. The resulting model in continuous time generalizes the workhorse model of mathematical finance by introducing asset prices that are driven by the market interaction of investors following self-financing trading strategies. Our approach also offers a numerical scheme for the simulation of the continuous-time model that satisfies constraints such as market clearing at every time step. An illustration is provided.
Evolutionary finance Market interaction Wealth dynamics Self-financing strategies Endogenous prices Continuous-time limit
5
2010
34
5
913
931
http://www.sciencedirect.com/science/article/B6V85-4Y3JY8S-1/2/ae5841fafa349a1175c20cbb96798937
Palczewski, Jan
Schenk-Hoppé, Klaus Reiner
oai:RePEc:eee:dyncon:v:32:y:2008:i:8:p:2543-25832012-10-05RePEc:eee:dyncon
article
Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model
8
2008
32
8
2543
2583
http://www.sciencedirect.com/science/article/B6V85-4PRRBGG-3/2/9a4bf6c0d471173c3b279da0936d3d12
Coenen, Günter
McAdam, Peter
Straub, Roland
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:97-1142012-10-05RePEc:eee:dyncon
article
Pricing executive stock options under employment shocks
We obtain explicit expressions for the subjective, objective and market value of perpetual executive stock options (ESOs) under exogenous employment shocks driven by an independent Poisson process. Previously, we obtain the executive's optimal exercise policy from the subjective valuation that is necessary for the objective one, or fair value. The perpetual ESO is compared with the true finite maturity ESO finding that the approximation is reasonably good. To illustrate the usefulness of the objective valuation for accounting purposes, we analyze the statistical distribution of the fair value when there is uncertainty about the employment shock intensity. Finally, the role of ESOs in the design of executives' incentives is also discussed.
Executive stock options Risk aversion Undiversification Incentives FAS123R
1
2011
35
1
97
114
http://www.sciencedirect.com/science/article/B6V85-50S8PGC-2/2/a9547f73b84a3866c3b102ede97a851b
Carmona, Julio
León, Angel
Vaello-Sebastià, Antoni
oai:RePEc:eee:dyncon:v:36:y:2012:i:3:p:433-4542012-10-05RePEc:eee:dyncon
article
Popularity of reinforcement-based and belief-based learning models: An evolutionary approach
In an evolutionary model, players from a given population meet randomly in pairs each instant to play a coordination game. At each instant, the learning model used is determined via some replicator dynamics that respects payoff fitness. We allow for two such models: a belief-based best-response model that uses a costly predictor, and a costless reinforcement-based one. This generates dynamics over the choice of learning models and the consequent choices of endogenous variables. We report conditions under which the long run outcomes are efficient (or inefficient) and they support the exclusive use of either of the models (or their co-existence).
Co-evolution; Best-response; Aspirations; Coordination games;
3
2012
36
433
454
D01
D03
D70
http://www.sciencedirect.com/science/article/pii/S0165188911001928
Dziubiński, Marcin
Roy, Jaideep
oai:RePEc:eee:dyncon:v:33:y:2009:i:8:p:1604-16162012-10-05RePEc:eee:dyncon
article
Methods for robust control
Robust control allows policymakers to formulate policies that guard against model misspecification. The principal tools used to solve robust control problems are state-space methods [see Hansen, L.P., Sargent T.J., 2008. Robustness. Princeton University Press; Giordani, P., Söderlind, P., 2004. Solution of macromodels with Hansen-Sargent robust policies: some extensions. Journal of Economic Dynamics and Control 28 (12), 2367-2397]. In this paper we show that the structural-form methods developed by Dennis [2007. Optimal policy rules in rational-expectations models: new solution algorithms. Macroeconomic Dynamics 11 (1), 31-55] to solve control problems with rational expectations can also be applied to robust control problems, with the advantage that they bypass the task, often onerous, of having to express the reference model in state-space form. In addition, we show how to implement two different timing assumptions with distinct implications for the robust policy and the economy. We apply our methods to a New Keynesian Dynamic Stochastic General Equilibrium model and find that robustness has important effects on policy and the economy.
Robust control Misspecification Optimal policy
8
2009
33
8
1604
1616
http://www.sciencedirect.com/science/article/B6V85-4VV2NFC-2/2/a715ca6886652a56d007aa30355d1436
Dennis, Richard
Leitemo, Kai
Söderström, Ulf
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:978-9992012-10-05RePEc:eee:dyncon
article
Financial frictions, capital reallocation, and aggregate fluctuations
We address an important business cycle fact, i.e., the amplified and hump-shaped responses of output to productivity shocks, in a dynamic general equilibrium model with financial frictions. Models with financial frictions in the current literature have either the amplification mechanism or the propagation mechanism. Our model shows that the dynamic interaction of borrowing constraints, endogenous capital accumulation, and capital reallocation among agents with different productivity constitutes a mechanism through which the effects of productivity shock on aggregate output are amplified and propagated, more in line with the empirical evidence than other related models in the literature.
3
2008
32
3
978
999
http://www.sciencedirect.com/science/article/B6V85-4NMC861-3/1/38a47235a8a2c6249ca1ea636a8d4b17
von Hagen, Jürgen
Zhang, Haiping
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1813-18352012-10-05RePEc:eee:dyncon
article
Towards an understanding of tradeoffs between regional wealth, tightness of a common environmental constraint and the sharing rules
Consider a country with two regions that have developed differently so that their current levels of energy efficiency differ. Each region's production involves the emission of pollutants, on which a regulator might impose restrictions. The restrictions can be related to pollution standards that the regulator perceives as binding the whole country (e.g., imposed by international agreements like the Kyoto Protocol). We observe that the pollution standards define a common constraint upon the joint strategy space of the regions. We propose a game theoretic model with a coupled constraints equilibrium as a solution to the regulator's problem of avoiding excessive pollution. The regulator can direct the regions to implement the solution by using political pressure, or compel them to employ it by using the coupled constraints' Lagrange multipliers as taxation coefficients. We specify a stylised model of the Belgian regions of Flanders and Wallonia that face a joint constraint, for which the regulator wants to develop a sharing rule. We analytically and numerically analyse the equilibrium regional production levels as a function of the pollution standards and of the sharing rules. We thus provide the regulator with an array of equilibria that he (or she) can select for implementation. For the computational results, we use NIRA, which is a piece of software designed to min-maximise the associated Nikaido-Isoda function.
Coupled constraints Generalised Nash equilibrium Nikaido-Isoda function Regional economics Environmental regulations
9
2010
34
9
1813
1835
http://www.sciencedirect.com/science/article/B6V85-4YH4PV0-1/2/a5f48ccdd4f016a09365a36710bdc475
Boucekkine, Raouf
Krawczyk, Jacek B.
Vallée, Thomas
oai:RePEc:eee:dyncon:v:35:y:2011:i:11:p:1831-18512012-10-05RePEc:eee:dyncon
article
On the ingredients for bubble formation: Informed traders and communication
Bubbles in asset markets have been documented in numerous experiments. Most experiments in which bubbles occur feature a declining fundamental value. This feature has been criticized for being atypical of real financial markets. Here, we experimentally study other ingredients for bubble formation that are common in such markets, namely the existence of inside information and communication among traders. We find that bubbles and mirages can occur if these additional ingredients are present. In particular, the mere possibility that some traders are better informed than others can create bubbles. Surprisingly, communication turns out to be counterproductive for bubble formation.
Asset markets; Bubbles; Experiment; Mirages; Dividends;
11
2011
35
1831
1851
C92
G12
D8
http://www.sciencedirect.com/science/article/pii/S0165188911001199
Oechssler, Jörg
Schmidt, Carsten
Schnedler, Wendelin
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:545-5642012-10-05RePEc:eee:dyncon
article
Does trade integration alter monetary policy transmission?
This paper explores the role of trade integration--or openness--for monetary policy transmission in a medium-scale new Keynesian model. Allowing for strategic complementarities in price setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation: a monetary contraction which appreciates the exchange rate lowers the local currency price of imported goods; this, in turn, induces domestic producers to lower their prices too. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on time series for the US relative to the euro area. Our estimation procedure yields plausible parameter values and suggests a strong role for strategic complementarities. Counterfactual simulations show that openness alters monetary transmission significantly. While the contractionary effect of a monetary policy shock on inflation and output tends to increase in openness, we find that monetary policy's control over inflation increases, as the output decline which is necessary to bring about a given reduction of inflation is smaller in more open economies.
Monetary policy transmission Open economy Trade integration Exchange rate channel Strategic complementarity
4
2011
35
4
545
564
http://www.sciencedirect.com/science/article/B6V85-51H6YXY-2/2/206c6bfc5d1c69bfef187b818e6744fc
Cwik, Tobias
Müller, Gernot J.
Wolters, Maik H.
oai:RePEc:eee:dyncon:v:36:y:2012:i:5:p:736-7532012-10-05RePEc:eee:dyncon
article
Renewable resource management with stochastic recharge and environmental threats
Exploitation diminishes the capacity of renewable resources to withstand environmental stress, increasing their vulnerability to extreme conditions that may trigger abrupt changes. The onset of such events depends on the coincidence of extreme environmental conditions and on the resource state (determining its resilience). When the former is uncertain and the latter evolves stochastically, the uncertainty regarding the event occurrence is the result of the combined effect of these two uncertain components. We study optimal management in this setting. The environmental threat renders the single-period discount factor policy-dependent and, as a result, the compound discount factor becomes history-dependent. Existence of an optimal Markovian–deterministic stationary policy is established and the optimal state process is shown to converge to a steady state distribution.
Stochastic stock dynamics; Catastrophic event; Endogenous discounting; Markov decision process; Optimal stationary policy;
5
2012
36
736
753
C62
Q20
http://www.sciencedirect.com/science/article/pii/S0165188912000280
Leizarowitz, Arie
Tsur, Yacov
oai:RePEc:eee:dyncon:v:36:y:2012:i:3:p:315-3302012-10-05RePEc:eee:dyncon
article
Vacancy posting, job separation and unemployment fluctuations
What is the relative importance of hiring and separation in driving unemployment fluctuations? This paper presents a framework to decompose the moments of unemployment and study the respective contributions of vacancy posting, a measure of firms’ hiring efforts, and separation. Separation accounts for about 40% of unemployment's variance, compared to 60% for vacancy posting, and contributes to about 60% of unemployment steepness asymmetry, the fact that unemployment increases faster than it decreases. Further, while vacancy posting is, on average, the most important contributor of unemployment fluctuations, the opposite is true around business cycle turning points, when separation is responsible for most of unemployment movements.
Unemployment; Job finding rate; Job separation rate; Matching function; Asymmetry;
3
2012
36
315
330
E24
E32
J6
http://www.sciencedirect.com/science/article/pii/S0165188911001795
Barnichon, Regis
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:132-1572012-10-05RePEc:eee:dyncon
article
A damped diffusion framework for financial modeling and closed-form maximum likelihood estimation
Asset price bubbles can arise unintentionally when one uses continuous-time diffusion processes to model financial quantities. We propose a flexible damped diffusion framework that is able to break many types of bubbles and preserve the martingale pricing approach. Damping can be done on either the diffusion or drift function. Oftentimes, certain solutions to the valuation PDE can be ruled out by requiring the solution to be a limit of martingale prices for damped diffusion models. Monte Carlo study shows that with finite time-series length, maximum likelihood estimation often fails to detect the damped diffusion function while fabricates nonlinear drift function. An alternative method based on Aït-Sahalia's specification test on parametric models is proposed.
Damped diffusion Asset price bubbles Martingale pricing Maximum likelihood estimation
2
2010
34
2
132
157
http://www.sciencedirect.com/science/article/B6V85-4X2DCW2-1/2/ba65f3e1ae7858fb737270379970b78d
Li, Minqiang
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:765-7792012-10-05RePEc:eee:dyncon
article
A banking explanation of the US velocity of money: 1919-2004
The paper shows that US GDP velocity of M1 money has exhibited long cycles around a 1.25% per year upward trend, during the 1919-2004 period. It explains the velocity cycles through shocks constructed from a DSGE model and annual time series data (Ingram et al., 1994). Model velocity is stable along the balanced growth path, which features endogenous growth and decentralized banking that produces exchange credit. Positive shocks to credit productivity and money supply increase velocity, as money demand falls, while a positive goods productivity shock raises temporary output and velocity. The paper explains such velocity volatility at both business cycle and long run frequencies. With filtered velocity turning negative, starting during the 1930s and the 1987 crashes, and again around 2003, results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times.
Volatility Business cycle Credit shocks Velocity
4
2010
34
4
765
779
http://www.sciencedirect.com/science/article/B6V85-4XSJVHR-1/2/342759507207fa67c3067d6c2cd758ed
Benk, Szilárd
Gillman, Max
Kejak, Michal
oai:RePEc:eee:dyncon:v:33:y:2009:i:6:p:1278-12952012-10-05RePEc:eee:dyncon
article
Is there a majority to support a capital tax cut?
A capital income tax cut must in general be financed by increasing other taxes, and thus will have redistributive effects. This paper studies analytically the redistribution implied by a capital income tax cut in the Ramsey-Cass-Koopmans neoclassical growth model when agents differ in wealth and human capital and markets are frictionless. A few parameters affect the efficiency costs and redistributive benefits of capital taxation, and determine the set of agents who are in favor of a capital income tax cut. For plausible parameter values, a majority would lose from the tax cut, i.e. high capital taxes may be politically sustainable.
Heterogeneity Redistribution Capital taxation Optimal taxation
6
2009
33
6
1278
1295
http://www.sciencedirect.com/science/article/B6V85-4VDS87V-1/2/60e9351d4f429df045465e3e2043afe5
Gourio, François
oai:RePEc:eee:dyncon:v:33:y:2009:i:4:p:817-8312012-10-05RePEc:eee:dyncon
article
Do stylised facts of order book markets need strategic behaviour?
This paper studies the role of the order book market mechanism in shaping price movements and the order flow in a zero-intelligence agent model of a dynamic limit-order market. The results indicate that many stylised facts of limit-order markets are not dependent on individual strategic behaviour; they can be obtained from the interaction of the market mechanism and non-strategic agents. Positive correlation in order types, the shape of the order book and short term price predictability, for instance, do not require strategic considerations by individual traders. In contrast the absolute probabilities of order submission highlight the contribution of strategic behaviour to market dynamics.
Order book markets Stylised facts Market dynamics Limit orders Non-strategic behaviour
4
2009
33
4
817
831
http://www.sciencedirect.com/science/article/B6V85-4TTMJKX-1/2/58ee1b881e58863e8107867a4cd91a56
Ladley, Dan
Schenk-Hoppé, Klaus Reiner
oai:RePEc:eee:dyncon:v:36:y:2012:i:3:p:331-3482012-10-05RePEc:eee:dyncon
article
Growth and inequality: Dependence on the time path of productivity increases (and other structural changes)
This paper examines the significance of the time path of a given productivity increase on growth and inequality. Whereas the time path impacts only the transitional paths of aggregate quantities, it has both transitional and permanent consequences for wealth and income distribution. Hence, the growth–inequality tradeoff generated by a given discrete increase in productivity contrasts sharply with that obtained when the same productivity increase occurs gradually. The latter can generate a Kuznets-type relationship between inequality and per-capita income. Our results suggest that economies with similar aggregate structural characteristics may have different outcomes for income and wealth inequality, depending on the nature of the productivity growth path.
Growth; Inequality; Path dependence;
3
2012
36
331
348
D31
O41
http://www.sciencedirect.com/science/article/pii/S0165188911001643
Atolia, Manoj
Chatterjee, Santanu
Turnovsky, Stephen J.
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:394-4122012-10-05RePEc:eee:dyncon
article
Time-varying (S, s) band models: Properties and interpretation
A recent strand of empirical work uses (S, s) models with time-varying stochastic bands to describe infrequent adjustments of prices and other variables. The present paper examines some properties of this model, which encompasses most micro-founded adjustment rules rationalizing infrequent changes. We illustrate that this model is flexible enough to fit data characterized by infrequent adjustment and variable adjustment size. We show that, to the extent that there is variability in the size of adjustments (e.g. if both small and large price changes are observed), (i) a large band parameter is needed to fit the data and (ii) the average band of inaction underlying the model may differ strikingly from the typical observed size of adjustment. The paper thus provides a rationalization for a recurrent empirical result: very large estimated values for the parameters measuring the band of inaction.
(S, s) models Adjustment costs Menu costs
3
2011
35
3
394
412
http://www.sciencedirect.com/science/article/B6V85-5192110-1/2/4c594ba19b9531486a2d3562f3b27deb
Gautier, Erwan
Le Bihan, Hervé
oai:RePEc:eee:dyncon:v:32:y:2008:i:12:p:3978-40152012-10-05RePEc:eee:dyncon
article
Capturing common components in high-frequency financial time series: A multivariate stochastic multiplicative error model
We model high-frequency trading processes by a multivariate multiplicative error model that is driven by component-specific observation driven dynamics as well as a common latent autoregressive factor. The model is estimated using efficient importance sampling techniques. Applying the model to 5Â min return volatilities, trade sizes and trading intensities from four liquid stocks traded at the NYSE, we show that a subordinated common process drives the individual components and captures a substantial part of the dynamics and cross-dependencies of the variables. Common shocks mainly affect the return volatility and the trade size. Moreover, we identify effects that capture rather genuine relationships between the individual trading variables.
Multiplicative error model Common factor Efficient importance sampling Intra-day trading process
12
2008
32
12
3978
4015
http://www.sciencedirect.com/science/article/B6V85-4SK62S2-1/2/295e015d1d3442759d4071d526039042
Hautsch, Nikolaus
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:80-962012-10-05RePEc:eee:dyncon
article
Asset prices in an exchange economy when agents have heterogeneous homothetic recursive preferences and no risk free bond is available
We study a pure exchange economy under incomplete markets where households have heterogeneous homothetic recursive preferences and lending and borrowing are precluded. We fully characterize the properties of the efficient allocations and the equilibrium asset price. The ownership distribution dynamics reveal the emergence of a dominant agent, who after some finite time, remains the only investor that increases asset holdings until asymptotically owning the entire wealth. Investors can be ranked according to a unique parameter that aggregates agents' preference characteristics and we show how time discount rate, attitude towards risk and intertemporal substitution contribute to capital accumulation.
Recursive preferences Heterogeneous agents General equilibrium Ownership distribution
1
2011
35
1
80
96
http://www.sciencedirect.com/science/article/B6V85-50THX5V-1/2/dda4f11689a079b5bd0133a587986a2e
Roche, Hervé
oai:RePEc:eee:dyncon:v:36:y:2012:i:3:p:416-4322012-10-05RePEc:eee:dyncon
article
A stochastic dynamic model of trade and growth: Convergence and diversification
There is a growing literature that studies the properties of models that combine international trade and neoclassical growth theory, but mostly in a deterministic setting. In this paper we introduce uncertainty in a dynamic Heckscher–Ohlin model and characterize the equilibrium of a small open economy in such an environment. We show that, when trade is balanced period-by-period, the per capita output and consumption of a small open economy converge to an invariant distribution that is independent of the initial wealth. Further, at the invariant distribution, there are periods in which the small economy diversifies. Numerical simulations show that the speed of convergence increases with the size of the shocks. In the limit, when there is no uncertainty, there is no convergence and countries may specialize permanently. The paper highlights the role of market incompleteness, as a result of the period-by-period trade balance, in this setup. Through an analytical example we also illustrate the importance of country specific risk in delivering our results.
Economic growth; International trade; Heckscher–Ohlin; Stochastic growth theory; Convergence; Diversification; Incomplete markets; Risk;
3
2012
36
416
432
http://www.sciencedirect.com/science/article/pii/S0165188911001941
Chatterjee, Partha
Shukayev, Malik
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:710-7242012-10-05RePEc:eee:dyncon
article
Dynamic hedging of synthetic CDO tranches with spread risk and default contagion
The paper is concerned with the hedging of credit derivatives, in particular synthetic CDO tranches, in a dynamic portfolio credit risk model with spread risk and default contagion. The model is constructed and studied via Markov-chain techniques. We discuss the immunization of a CDO tranche against spread- and event risk in the Markov-chain model and compare the results with market-standard hedge ratios obtained in a Gauss copula model. In the main part of the paper we derive model-based dynamic hedging strategies and study their properties in numerical experiments.
Dynamic hedging Portfolio credit risk Credit derivatives Incomplete markets Default contagion
4
2010
34
4
710
724
http://www.sciencedirect.com/science/article/B6V85-4XJ17KT-1/2/0526928ef1ceabd8691fdc2c6830c7af
Frey, Rüdiger
Backhaus, Jochen
oai:RePEc:eee:dyncon:v:32:y:2008:i:4:p:1181-12032012-10-05RePEc:eee:dyncon
article
A dynamic model of food and clean energy
In the midwestern United States, ethanol produced from corn is mixed with gasoline to meet clean air standards. Allocating land to produce clean fuel means taking away land from farming. We examine the use of a scarce fossil fuel that causes pollution but may be substituted by a clean fuel produced from land. When land is scarce, it is gradually shifted away from farming to energy production. However, when land is abundant, there may be a jump in the supply of clean energy. When the stock of pollution is regulated, the supply of clean energy may exhibit multiple discontinuities.
4
2008
32
4
1181
1203
http://www.sciencedirect.com/science/article/B6V85-4NVH7PB-6/1/87871ff2509a8ea9efd2ccf04f2512dc
Chakravorty, Ujjayant
Magné, Bertrand
Moreaux, Michel
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:858-8742012-10-05RePEc:eee:dyncon
article
The new Keynesian Phillips curve revisited
Several authors have questioned the evidence claimed by Galí and Gertler (1999) and Galí et al. (2001) that a hybrid version of the new Keynesian Phillips curve approximates European and US inflation dynamics quite well. We re-examine the evidence using the vector autoregressive framework and likelihood based methods, paying particular attention to the stationary and nonstationary, and possibly cointegrated, nature of variables involved. Our results show that the exact as well as the inexact form of the hybrid NKPC are clearly at odds with the European data. On the other hand, Galí and Gertler (1999) finding that the inexact hybrid NKPC is a "good first approximation" to the US inflation dynamics seems less at odds with the data. However, the assumption of the model that the stochastic term forms a sequence of innovations may be problematic as we find indication of autocorrelation in the estimated residuals. The exact form of the hybrid NKPC is firmly rejected by the US data.
European and US inflation The new Keynesian Phillips curve Exact and inexact rational expectations Vector autoregressive models Likelihood based methods
5
2010
34
5
858
874
http://www.sciencedirect.com/science/article/B6V85-4Y7P4GT-1/2/56846a50fed41282cb3061bb7570164c
Boug, Pål
Cappelen, Adne
Swensen, Anders Rygh
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1077-10912012-10-05RePEc:eee:dyncon
article
Convergence of iterative tâtonnement without price normalization
This paper presents global convergence conditions for a non-normalized fixed-point iteration in computing the equilibria of exchange economies. The usual conditions for the stability of Walras' tâtonnement are obtained as a limiting case from these conditions. The iteration leads to an equilibrium under a strengthened form of the weak axiom of revealed preferences introduced in the paper. Results for economies with global gross substitutability and no trade at equilibrium are also presented. Furthermore, it is shown that a rather general class of non-normalized iterations converges under the same conditions as the fixed-point iteration.
Equilibrium Iteration Tatonnement Convergence Computation
6
2010
34
6
1077
1091
http://www.sciencedirect.com/science/article/B6V85-4Y95TWS-4/2/481b1d7166577ceb21850be4d2b063a8
Kitti, Mitri
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:258-2652012-10-05RePEc:eee:dyncon
article
A dynamic game of waste management
The paper studies a differential game of waste management (disposal). Each of three neighbouring regions is endowed with a stock of waste, but no additional waste is generated in any region and waste does not decay from natural reasons. A region's stock of waste can be reduced only by dumping on its neighbours. The model features two externalities: a strategic externality caused by the fact that the payoff of a coalition depends on the actions of players outside the coalition, and a stock externality caused by the fixed overall amount of waste. The game has a finite time horizon and it is shown that intertemporal core-theoretic cooperation can be sustained under intuitive conditions.
Differential games Core-theoretic cooperation Waste disposal
2
2010
34
2
258
265
http://www.sciencedirect.com/science/article/B6V85-4X8CCV7-1/2/092a19853747c9a54112fc8ef7986906
Jørgensen, Steffen
oai:RePEc:eee:dyncon:v:36:y:2012:i:7:p:1057-10742012-10-05RePEc:eee:dyncon
article
Inflation, human capital and Tobin's q
A strong US postwar low frequency negative correlation exists between inflation and Tobin's q. To explain this, a production-based monetary asset pricing model is formulated with a rising marginal cost of investment, cash-in-advance and human capital based endogenous growth. Higher money supply growth causes higher inflation, lower output growth, and a lower q in the long run. The baseline model simulates well correlations of the US inflation rate and Tobin's q at each frequency of high, business cycle, low, and the “medium term.” It also performs well in correlations and volatilities compared to related exogenous growth versions.
Tobin's q; Low frequency; Endogenous growth;
7
2012
36
1057
1074
E44
G12
http://www.sciencedirect.com/science/article/pii/S0165188912000413
Basu, Parantap
Gillman, Max
Pearlman, Joseph
oai:RePEc:eee:dyncon:v:33:y:2009:i:11:p:1880-18962012-10-05RePEc:eee:dyncon
article
Learning about monetary policy rules when the cost-channel matters
We study how monetary policy may affect determinacy and expectational stability (E-stability) of rational expectations equilibrium when the cost channel of monetary policy matters. Focusing on instrumental Taylor-type rules and optimal target rules, we show that standard policies can induce indeterminacy and expectational instability when the cost channel is present. A naïve application of the traditional Taylor principle could be misleading, and expectations-based reaction function under discretion does not always induce determinate and E-stable equilibrium. This result contrasts with the findings of Bullard and Mitra [2002. Learning about monetary policy rules. Journal of Monetary Economics 49, 1105-1129] and Evans and Honkapohja [2003. Expectations and stability problem for optimal monetary policies. Review of Economic Studies 70, 807-824] for the standard new Keynesian model. The ability of the central bank to commit to an optimal policy is an antidote to these problems.
Learning Monetary policy rules Cost channel Indeterminacy
11
2009
33
11
1880
1896
http://www.sciencedirect.com/science/article/B6V85-4WD7B2K-3/2/375be661ea22e25ca81a519c2e4448e6
Llosa, Luis-Gonzalo
Tuesta, Vicente
oai:RePEc:eee:dyncon:v:32:y:2008:i:10:p:3218-32522012-10-05RePEc:eee:dyncon
article
Robust monetary policy in a small open economy
10
2008
32
10
3218
3252
http://www.sciencedirect.com/science/article/B6V85-4RWBSVN-1/2/e1a1d0ff09036faf1838f0fe1b1b9bd3
Leitemo, Kai
Söderström, Ulf
oai:RePEc:eee:dyncon:v:33:y:2009:i:7:p:1451-14682012-10-05RePEc:eee:dyncon
article
Monopoly behaviour with speculative storage
We analyze the effects of competitive storage when the production of the good is controlled by a monopolist. The existence of competitive storers serves to reduce the monopolist's effective demand when speculators are selling and to increase it when they are buying. This results in the monopolist manipulating the frequency of stockouts, and hence the price-smoothing effects of competitive storage. We find that competitive storage affects both the level and the volatility of price under monopoly. The average price level is higher with storage due to the monopolist's desire to induce stockouts by occasionally keeping the price just at the level that induces a stockout. Although storage does reduce the volatility of prices under monopoly production, prices are more volatile than they would be under perfectly competitive production, even though stockouts occur less frequently under monopoly. These results are demonstrated through closed-form solutions of the two-period version of the model and computational solutions to the infinite horizon version of the model.
Inventories Monopoly Speculation Price distribution
7
2009
33
7
1451
1468
http://www.sciencedirect.com/science/article/B6V85-4VPD6J1-2/2/8b85a1ab2437c6d68af31feb8e16001b
Mitraille, Sébastien
Thille, Henry
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1295-13042012-10-05RePEc:eee:dyncon
article
The butterfly effect of small open economies
The rational expectations equilibrium of a small open economy can be subject to indeterminacy if foreign monetary policy does not satisfy the Taylor principle. We study the implications of foreign induced indeterminacy in the two-country version of the sticky-price small open economy model. Our main finding is that 'smallness' is a property of the unique rational expectations equilibrium of the large economy, and not a general property of the small open economy model. If the large economy fails to anchor expectations, shocks to the small economy can affect the large one. This form of indeterminacy gives rise to a 'butterfly effect'. Additional assumptions are required to preserve the 'smallness' of the small economy.
Indeterminacy Small open economy Rational expectations
7
2010
34
7
1295
1304
http://www.sciencedirect.com/science/article/B6V85-4YDKJS5-2/2/1ec8c100a262584c4b6769bd1d01942e
Jääskelä, Jarkko P.
Kulish, Mariano
oai:RePEc:eee:dyncon:v:36:y:2012:i:4:p:629-6412012-10-05RePEc:eee:dyncon
article
Variety matters
Countercyclical markups are a key transmission mechanism in many endogenous business cycle models. Yet, recent findings suggest that aggregate markups in the US are procyclical. The current model addresses this issue. It extends Galí's (1994) composition of aggregate demand model by endogenous entry and exit of firms and by product variety effects. Endogenous business cycles emerge with procyclical markups that are within empirically plausible ranges.
Sunspot equilibria; Indeterminacy; Markups; Variety effects; Business cycles;
4
2012
36
629
641
E32
http://www.sciencedirect.com/science/article/pii/S0165188911002363
Pavlov, Oscar
Weder, Mark
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2533-25462012-10-05RePEc:eee:dyncon
article
Harvesting and recovery decisions under uncertainty
A stochastic forest rotation model in the Faustmann tradition is presented and exemplified. The model combines harvesting decisions with the potential to recover or clean up to restore the land after very unfavorable evolutions of the stochastic growth process. Uncertainty is shown to have a generally ambiguous effect on the optimal choice of investment strategy. It is also shown how such models can be related to theory of optimal inventory control.
Investment Uncertainty Forest growth Real options
12
2010
34
12
2533
2546
http://www.sciencedirect.com/science/article/B6V85-50GWN3C-3/2/2cbcc29a2cffa402da738d6efd54b928
Shackleton, Mark B.
Sødal, Sigbjørn
oai:RePEc:eee:dyncon:v:36:y:2012:i:7:p:1042-10562012-10-05RePEc:eee:dyncon
article
Trade policy in a growth model with technology gap dynamics and simulations for South Africa
We extend an open economy Ramsey model to include the technology gap to the world technology frontier. The setting is a middle income country with productivity growth driven by technology adoption and foreign capital goods stimulating spillover and catching up. The interaction of technology adoption and capital accumulation generates prolonged transition growth and strengthens the growth effect of increased openness. Model simulations reproduce the changing openness in South Africa 1960–2005. International sanctions and protectionism are represented by a calibrated tariff equivalent, and the counterfactual elimination of the tariff equivalent shows large potential for GDP growth. According to our preferred parameterization increased trade share by 10% points raises GDP level over time by about 12%. Separating the effects of openness between investment and productivity we find that almost 60% of the increase in GDP is due to increased productivity, partly because of interaction with higher investment.
Growth model; Technology gap; World technology frontier; Trade policy; South Africa;
7
2012
36
1042
1056
F14
F43
O33
O41
O55
http://www.sciencedirect.com/science/article/pii/S0165188912000425
Rattsø, Jørn
Stokke, Hildegunn E.
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:577-5842012-10-05RePEc:eee:dyncon
article
Perfect simulation of stationary equilibria
Using a variation of the coupling from the past technique, this paper develops algorithms which generate independent observations from the stationary distributions of various dynamic economic models. These variates can be used for calibration, calculation of steady state phenomena, and simulation-based estimation. As an application, we demonstrate how to generate exact samples from the stationary distribution of an incomplete markets model routinely calibrated by macroeconomists. Our implementation generates 100,000 independent draws from the stationary distribution in less than 3Â s.
Stationarity Coupling from the past Perfect sampling
4
2010
34
4
577
584
http://www.sciencedirect.com/science/article/B6V85-4XHM13H-1/2/61ccd1175bfcbccbebfa60aefa08b124
Nishimura, Kazuo
Stachurski, John
oai:RePEc:eee:dyncon:v:33:y:2009:i:1:p:221-2362012-10-05RePEc:eee:dyncon
article
Specialization and efficiency with labor-market matching
This paper constructs a labor-market matching model with heterogeneous workers. Due to matching frictions, there may be a mismatch of talents within a production team, forcing a worker to specialize in a task at which she is not talented. We consider a partnership model where production takes place in teams consisting of two workers. We characterize the steady-state of the matching equilibrium. The constrained efficiency of the matching equilibrium depends on the distribution of talents. The constrained-efficient allocation can always be implemented by a type-specific tax. We also examine an alternative model with Diamond-Mortensen-Pissarides type matching between firms and workers.
Matching Heterogeneity Specialization
1
2009
33
1
221
236
http://www.sciencedirect.com/science/article/B6V85-4ST3YC5-1/2/befb8b5f3bf05e7c5441cc17344955ff
Mukoyama, Toshihiko
Sahin, Aysegül
oai:RePEc:eee:dyncon:v:33:y:2009:i:12:p:1981-19902012-10-05RePEc:eee:dyncon
article
Imitators and optimizers in Cournot oligopoly
We analyze a symmetric n-firm Cournot oligopoly with a heterogeneous population of optimizers and imitators. Imitators mimic the output decision of the most successful firms of the previous round à la Vega-Redondo, F., [1997. The evolution of Walrasian behavior. Econometrica 65, 375-384]. Optimizers play a myopic best response to the opponents' previous output. Firms make mistakes and deviate from their decision rules with a small probability. Applying stochastic stability analysis, we find that the long run distribution converges to a recurrent set of states in which imitators are better off than are optimizers.
Profit maximization hypothesis Bounded rationality Learning Stackelberg Quasisubmodularity
12
2009
33
12
1981
1990
http://www.sciencedirect.com/science/article/B6V85-4WNRJXB-1/2/5acc98f2683c71362d4823deb6ec49d3
Schipper, Burkhard C.
oai:RePEc:eee:dyncon:v:33:y:2009:i:12:p:2030-20462010-01-15RePEc:eee:dyncon
article
Chaos and sector-specific externalities
Benhabib and Farmer [1996. Indeterminacy and sector specific externalities. Journal of Monetary Economics 37, 397-419] explore the possibility of local indeterminacy in a two-sector model with sector-specific externalities. They find that very small sector-specific externalities are sufficient for local indeterminacy. In this case, it is possible to construct sunspot equilibria where extrinsic uncertainty matters. In this paper, I provide a global analysis of their model revealing the existence of Euler equation branching. This branching allows for regime switching equilibria with cycles and chaotic behavior. These equilibria occur whether the "local dynamics" are determinate or indeterminate.
Two-sector model Regime switching Global indeterminacy Cycles Chaos Differential inclusion
12
2009
33
12
2030
2046
http://www.sciencedirect.com/science/article/B6V85-4X1J705-2/2/e1618893d1cb5c3a38dbce9f371afd46
Stockman, David R.
oai:RePEc:eee:dyncon:v:33:y:2009:i:12:p:1945-19612010-01-15RePEc:eee:dyncon
article
Option hedging theory under transaction costs
The problem of option hedging in the presence of proportional transaction costs can be formulated as a singular stochastic control problem. Hodges and Neuberger [1989. Optimal replication of contingent claims under transactions costs. Review of Futures Markets 8, 222-239] introduced an approach that is based on maximization of the expected utility of terminal wealth. We develop a new algorithm to solve the corresponding singular stochastic control problem and introduce a new approach to option hedging which is closer in spirit to the pathwise replication of Black and Scholes [1973. The pricing of options and corporate liabilities. Journal of Political Economy 81, 637-654]. This new approach is based on minimization of a Black-Scholes-type measure of pathwise risk, defined in terms of a market delta, subject to an upper bound on the hedging cost. We provide an efficient backward induction algorithm for the problem of cost-constrained risk minimization, whose associated singular stochastic control problem is shown to be equivalent to an optimal stopping problem. This algorithm is then modified to solve the singular stochastic control problem associated with utility maximization, which cannot be reduced to an optimal stopping problem. We propose to choose an optimal parameter (risk-aversion coefficient or Lagrange multiplier) in either approach by minimizing the mean squared hedging error and demonstrate that with this "best" choice of the parameter, both approaches have similar performance. We also discuss the different notions of risk in both approaches and propose a volatility adjustment for the risk-minimization approach, which is analogous to that introduced by Zakamouline [2006. European option pricing and hedging with both fixed and proportional transaction costs. Journal of Economic Dynamics and Control 30, 1-25] for the utility maximization approach, thereby providing a unified treatment of both approaches.
Option hedging Singular stochastic control Optimal stopping Backward induction Transaction costs Volatility adjustment
12
2009
33
12
1945
1961
http://www.sciencedirect.com/science/article/B6V85-4WN2XP1-1/2/f9244aac116f4ec91cb4f836c69907d4
Lai, Tze Leung
Lim, Tiong Wee
oai:RePEc:eee:dyncon:v:33:y:2009:i:12:p:2001-20142010-01-15RePEc:eee:dyncon
article
E-stability and stability of adaptive learning in models with private information
The paper demonstrates how the E-stability principle introduced by Evans and Honkapohja [2001. Learning and Expectations in Macroeconomics. Princeton University Press, Princeton, NJ] can be applied to models with heterogeneous and private information in order to assess the stability of rational expectations equilibria under learning. The paper extends already known stability results for the Grossman and Stiglitz [1980. On the impossibility of informationally efficient markets. American Economic Review 70, 393-408] model to a more general case with many differentially informed agents and to the case where information is endogenously acquired by optimizing agents. In both cases it turns out that the rational expectations equilibrium of the model is inherently E-stable and thus locally stable under recursive least squares learning.
Recursive least squares learning E-stability Rational expectations Private information
12
2009
33
12
2001
2014
http://www.sciencedirect.com/science/article/B6V85-4X0F3P5-2/2/c22cdb54c9844a96a3c53d0573dd3ea1
Heinemann, Maik
oai:RePEc:eee:dyncon:v:17:y:1993:i:1-2:p:207-2312010-04-16RePEc:eee:dyncon
article
Low frequency filtering and real business cycles
1-2
1993
17
207
231
http://www.sciencedirect.com/science/article/B6V85-4NR4YRN-B/2/848408cb7cb1edef53ce85b9f46727e1
King, Robert G.
Rebelo, Sergio T.
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:195-2092012-12-07RePEc:eee:dyncon
article
Target-driven investing: Optimal investment strategies in defined contribution pension plans under loss aversion
Assuming the loss aversion framework of Tversky and Kahneman (1992), stochastic investment and labour income processes, and a path-dependent fund target, we show that the optimal investment strategy for defined contribution pension plan members is a target-driven ‘threshold’ strategy, whereby the equity allocation is increased if the accumulating fund is below target and is decreased if it is above. However, if the fund is sufficiently above target, the optimal investment strategy switches to ‘portfolio insurance’. We show that the risk of failing to attain the target replacement ratio is significantly lower with target-driven strategies than with those associated with the maximisation of expected utility.
Defined contribution pension plan; Investment strategy; Loss aversion; Target replacement ratio; Threshold strategy; Portfolio insurance; Dynamic programming;
1
2013
37
195
209
C63
D91
G11
G23
http://www.sciencedirect.com/science/article/pii/S0165188912001704
Blake, David
Wright, Douglas
Zhang, Yumeng
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:137-1532012-12-07RePEc:eee:dyncon
article
Options and structured products in behavioral portfolios
Options and structured products have no roles in mean–variance portfolios, but they have roles in behavioral portfolios. Behavioral portfolios are composed of mental account sub-portfolios, each associated with a goal, such as retirement income or bequest. Investors optimize each mental account by finding the assets and asset allocation that maximizes the expected return of each mental account sub-portfolio subject to the condition that the probability of failing to reach a preset threshold aspiration level not exceed a preset probability. Put options are useful in ‘downside protection’ mental accounts whose goal is avoiding poverty, whereas call options are useful in ‘upside potential’ mental accounts whose goal is a shot at riches. We also explore the roles in behavioral portfolios of option collars, capital guaranteed notes, and barrier range notes.
Behavioral portfolios; Options; Structured products;
1
2013
37
137
153
G2
G11
http://www.sciencedirect.com/science/article/pii/S0165188912001595
Das, Sanjiv R.
Statman, Meir
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:1-172012-12-07RePEc:eee:dyncon
article
Pairwise trade, asset prices, and monetary policy
We construct a search-theoretic model where fiat money coexists with real assets, and all assets can be used as a media of exchange. The terms of trade in bilateral matches are determined by a pairwise Pareto-efficient pricing mechanism. We do not have to appeal to exogenous liquidity constraints to generate asset prices that are consistent with the following facts: (i) fiat money can be valued despite being dominated in its rate of return; (ii) real assets with identical dividend flows can have different rates of return; and (iii) an increase in inflation raises asset prices, lowers their returns, and widens the rate-of-return differences between assets. On the normative side we show that there is a range of inflation rates that implement the first-best allocation.
Search; Money; Bilateral trades; Inflation; Asset prices;
1
2013
37
1
17
E40
E50
http://www.sciencedirect.com/science/article/pii/S0165188912001601
Nosal, Ed
Rocheteau, Guillaume
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:231-2502012-12-07RePEc:eee:dyncon
article
An inverse finite element method for pricing American options
The pricing of American options has been widely acknowledged as “a much more intriguing” problem in financial engineering. In this paper, a “convergency-proved” IFE (inverse finite element) approach is introduced to the field of financial engineering to price American options for the first time. Without involving any linearization process at all, the current approach deals with the nonlinearity of the pricing problem through an “inverse” approach. Numerical results show that the IFE approach is quite accurate and efficient, and can be easily extended to multi-asset or stochastic volatility pricing problems. The key contribution of this paper to the literature is that we have managed to provide a comprehensive convergence analysis for the IFE approach, including not only an error estimate of the adopted discrete scheme but also the convergence of the adopted iterative scheme, which ensures that our numerical solution does indeed converge to the exact one of the original nonlinear system.
Inverse finite elements; Convergence analysis; American options; Black–Scholes model;
1
2013
37
231
250
G13
http://www.sciencedirect.com/science/article/pii/S0165188912001716
Zhu, Song-Ping
Chen, Wen-Ting
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1775-17952012-12-07RePEc:eee:dyncon
article
Global refunding and climate change
We design a global refunding scheme as a new international approach to address climate change. Participating in the global refunding system requires an initial payment. It allows each country to set its carbon emission tax, while aggregate tax revenues are partially refunded to member countries in proportion to the relative emission reductions they achieve within a given period. The refunding scheme reduces the intertemporal climate change problem into a static public goods problem. In a simple model we show that a suitably designed global refunding scheme achieves the social global optimum, provided that all countries participate. We discuss several procedures to achieve initial participation.
Climate change mitigation; Global refunding scheme; International agreements; Incentive-compatible mechanisms;
11
2012
36
1775
1795
H23
Q54
H41
http://www.sciencedirect.com/science/article/pii/S0165188912001352
Gersbach, Hans
Winkler, Ralph
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1796-18132012-12-07RePEc:eee:dyncon
article
Valuation of power options under Heston's stochastic volatility model
We derive semi-analytic solutions for power option prices under the Heston model; specifically, the pricing formula is shown to be valid whenever the power of the underlying asset price has a finite moment. Unlike the majority of stochastic volatility models, there remains a significant problem to check the existence of moments of assets prices of order higher than one. Fortunately, the moment explosion property under the Heston model is examined systematically in Andersen and Piterbarg (2000). Incorporating with their results, we present explicit formulas for moment generating function of log price and for power option prices under the circumstances when the corresponding moments are finite. In case that the corresponding moment explodes, we provide two numerical methods to derive prices of power put and capped power call options. In spite of a simple idea, numerical examples show that the approximations are extremely accurate and efficient.
Power option; Stochastic volatility; Heston model; Change of numeraire; Fourier transform;
11
2012
36
1796
1813
C02
G13
http://www.sciencedirect.com/science/article/pii/S0165188912001121
Kim, Jerim
Kim, Bara
Moon, Kyoung-Sook
Wee, In-Suk
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:345-3642012-12-07RePEc:eee:dyncon
article
Optimal monetary policy and downward nominal wage rigidity in frictional labor markets
This paper studies the optimal long-run inflation rate in a labor search and matching framework in the presence of downward nominal wage rigidity. Optimal monetary policy features positive inflation in the long run; the optimal annual long-run inflation rate for the U.S. economy is slightly below 1 percent with a money demand motive and around 2 percent otherwise. Positive inflation facilitates real wage adjustments and hence it eases job creation and prevents excessive increase in unemployment following adverse productivity shocks. The findings of the paper can also be related to standard Ramsey theory of “wedge smoothing”; with positive inflation under sticky prices, the size and the volatility of the intertemporal wedge are significantly reduced.
Downward nominal wage rigidity; Optimal monetary policy; Long-run inflation rate; Labor market frictions; Intertemporal wedge smoothing;
1
2013
37
345
364
E31
E32
E52
E58
http://www.sciencedirect.com/science/article/pii/S016518891200187X
Abo-Zaid, Salem
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:125-1362012-12-07RePEc:eee:dyncon
article
Strategic exploitation of a common resource under environmental risk
We study the effect of environmental risk on the extraction of a common resource. Using a dynamic and non-cooperative game in which an environmental event impacts the renewability and the quality of the resource, we show that the anticipation of such an event has an ambiguous effect on extraction and the tragedy of the commons. A risk of a reduction in the renewability induces the agents to extract less today while a risk of a deterioration in the quality has the opposite effect. Moreover, when environmental risk induces conservation, the tragedy of the commons is worsened.
Conservation; Dynamic games; Environmental risk; Renewable resources; Tragedy of the commons;
1
2013
37
125
136
C72
C73
D43
D90
L13
O13
Q20
Q54
http://www.sciencedirect.com/science/article/pii/S0165188912001467
Fesselmeyer, Eric
Santugini, Marc
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1688-16992012-12-07RePEc:eee:dyncon
article
A Krylov subspace approach to large portfolio optimization
With a large number of securities (N) and fewer observations (T), deriving the global minimum variance portfolio requires the inversion of the singular sample covariance matrix of security returns. We introduce the Break-Down Free Generalized Minimum RESidual (BFGMRES), a Krylov subspaces method, as a fully automated approach for deriving the minimum variance portfolio. BFGMRES is a numerical algorithm that provides solutions to singular linear systems without requiring ex-ante assumptions on the covariance structure. Moreover, it is robust to illiquidity and potentially faulty data. US and international stock data are used to demonstrate the relative robustness of BFGMRES to illiquidity when compared to the “shrinkage to market” methodology developed by Ledoit and Wolf (2003). The two methods have similar performance as assessed by the Sharpe ratios and standard deviations for filtered data. In a simulation study, we show that BFGMRES is more robust than shrinkage to market in the presence of data irregularities. Indeed, when there is an illiquid stock shrinkage to market allocates almost 100% of the portfolio weights to this stock, whereas BFGMRES does not. In further simulations, we also show that when there is no illiquidity, BFGMRES exhibits superior performance than shrinkage to market when the number of stocks is high and the sample covariance matrix is highly singular.
Krylov subspaces; Singular systems; Algorithm; Sample covariance matrix; Global minimum portfolio;
11
2012
36
1688
1699
C02
G11
http://www.sciencedirect.com/science/article/pii/S0165188912000991
Bajeux-Besnainou, Isabelle
Bandara, Wachindra
Bura, Efstathia
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:154-1752012-12-07RePEc:eee:dyncon
article
Socially optimal social security and education subsidization in a dynastic model with human capital externalities, fertility and endogenous growth
This paper considers socially optimal government policies in a dynastic family model with physical capital, human capital, endogenous fertility and positive spillovers from average human capital. Such spillovers reduce human capital investment but raise fertility from their social optimum. We first characterize the social optimum with a non-convex feasible set due to the quantity–quality tradeoff concerning children. We then show that social security and education subsidization together, financed by labor income taxes, can fully eliminate the efficiency losses of the spillovers and achieve the social optimum under plausible conditions. However, none of the policies can do so alone.
Social security; Education subsidization; Fertility; Human capital externalities;
1
2013
37
154
175
H52
H55
J13
O41
http://www.sciencedirect.com/science/article/pii/S0165188912001583
Yew, Siew Ling
Zhang, Jie
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:32-512012-12-07RePEc:eee:dyncon
article
The anatomy of standard DSGE models with financial frictions
We compare two standard extensions to the New Keynesian framework that feature financial frictions. The first model, originating from Kiyotaki and Moore (1997), is based on collateral constraints. The second, developed by Carlstrom and Fuerst (1997) and Bernanke et al. (1999), accentuates the role of external finance premia. We tweak the models and calibrate them in a way that allows for both qualitative and quantitative comparisons. Next, we thoroughly analyze the two variants using moment matching, impulse response analysis and business cycle accounting. Overall, we find that the business cycle properties of the external finance premium framework are more in line with empirical evidence. In particular, the collateral constraint model fails to produce hump-shaped impulse responses and generates volatilities of the price of capital and rate of return on capital that are inconsistent with the data by a large margin.
Financial frictions; DSGE models; Business cycle accounting;
1
2013
37
32
51
E30
E44
http://www.sciencedirect.com/science/article/pii/S0165188912001443
Brzoza-Brzezina, Michał
Kolasa, Marcin
Makarski, Krzysztof
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:18-312012-12-07RePEc:eee:dyncon
article
Bounded rationality as a source of loss aversion and optimism: A study of psychological adaptation under incomplete information
We develop a formal model to investigate the implications of bounded rationality for the origin and structure of loss aversion and optimism in marketplaces. Based on Simon's original description, we explicitly model bounded rationality as a decision mechanism that captures incomplete information, psychological adaptation, and rational behavior. We find that the endogenous loss aversion and optimism emerge when the degree of information incompleteness reaches a certain threshold, and both grow to be more prominent when information becomes sparser. Our results highlight that the psychological biases could be expected to take advantage of perceived information incompleteness in terms of value creation.
Loss aversion; Optimism; Bounded rationality; Incomplete information; Dynamic portfolio choice;
1
2013
37
18
31
D03
D8
G11
http://www.sciencedirect.com/science/article/pii/S0165188912001571
Yao, Jing
Li, Duan
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:176-1942012-12-07RePEc:eee:dyncon
article
Defensive strategies in quality ladders
This paper analyses the potentially defensive behaviour of patent-race winners and the ensuing effect on aggregate R&D effort. We propose a quality-ladder model where leaders strategically acquire a technology advantage and are able to innovate. In this context, product-market regulation, by affecting this strategic behaviour, may have either a positive or negative effect on aggregate R&D intensity. The negative effect is likely to pertain in liberal markets, whereas the positive influence arises in more regulated environments, and can be stronger for larger jumps in innovation. These steady-state equilibrium outcomes are consistent with the puzzling patterns in data from manufacturing industries in 14 OECD countries over the 1987–2003 period.
Innovative leaders; Quality ladders; Product market regulation; R&D;
1
2013
37
176
194
L13
O31
O33
http://www.sciencedirect.com/science/article/pii/S0165188912001613
Ledezma, Ivan
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1700-17172012-12-07RePEc:eee:dyncon
article
The environmental Kuznets curve and equilibrium indeterminacy
We illustrate that the existence of the environmental Kuznets curve (EKC) could be the result of indeterminacy of equilibria. In a simple neoclassical growth model with a single environmental externality in households’ utility function and with public abatement, we characterize the condition on the parameters in preferences and in the pollution technology leading to local indeterminacy of equilibrium. Estimates of the crucial parameters of the model using data from economies that display the EKC satisfy the theoretical indeterminacy condition. We find that the presence of abatement activities is not a necessary condition for indeterminacy equilibria and hence, an EKC to arise. On the other hand, non-separability of consumption and pollution in the utility function is crucial.
Environmental Kuznets curve; Local indeterminacy; Environmental taxes; Pollution; Public abatement;
11
2012
36
1700
1717
H23
O41
Q28
http://www.sciencedirect.com/science/article/pii/S016518891200111X
Fernández, Esther
Pérez, Rafaela
Ruiz, Jesús
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1659-16722012-12-07RePEc:eee:dyncon
article
Changes in the output Euler equation and asset markets participation
Recent estimates of the output Euler equation for the United States indicate that the elasticity of aggregate demand to interest rates is not significantly different from zero. We first argue that this result may hide a structural break: the estimated elasticity is a convolution of two coefficients with opposite signs across the samples 1965–1979 and 1982–2003. The sign of the coefficient in the earlier sample is inconsistent with standard economic theory and intuition. We outline a model with limited asset markets participation that can generate this change in sign when asset market participation changes from low to high, and provide institutional evidence for such a change in the United States in the late 1970s and early 1980s.
IS curve; Euler equation for output; Limited asset markets participation; Aggregate demand; Rule-of-thumb consumers;
11
2012
36
1659
1672
E32
G11
E44
E31
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188912001418
Bilbiie, Florin O.
Straub, Roland
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:265-2952012-12-07RePEc:eee:dyncon
article
Determining the motives for a positive optimal tax on capital
Previous literature demonstrates that in a standard life cycle model the optimal tax on capital is large. This paper highlights that after changing two assumptions in the standard model the optimal tax drops by almost half. First, the utility function is altered such that it implies that an agent's Frisch labor supply elasticity is constant over his lifetime. Second, the government is allowed to tax accidental bequests and ordinary capital income at separate rates. Quantifying the effect of these assumptions is important because the first has limited empirical evidence and the second confounds a motive for taxing capital and accidental bequests.
Optimal taxation; Capital taxation;
1
2013
37
265
295
E62
H21
http://www.sciencedirect.com/science/article/pii/S016518891200173X
Peterman, William B.
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:329-3442012-12-07RePEc:eee:dyncon
article
Productivity growth, transparency, and monetary policy
This study examines whether central bank transparency about views of future productivity growth contributes to stabilizing macroeconomic fluctuations. In a standard New Keynesian model, the central bank and private agents make their subjective estimates on the persistence of productivity growth. In this situation, if private agents believe that the central bank's projections include forecast errors on future productivity growth, these beliefs can destabilize private agents' own expectations because the central bank's forecast errors may lead to policy mistakes in the future. Consequently, central bank transparency does not necessarily stabilize the variations of the output gap and inflation rate. The central bank should respond strongly to the inflation rate, if the impact of transparency is uncertain.
Monetary policy; Transparency; Productivity growth;
1
2013
37
329
344
E52
http://www.sciencedirect.com/science/article/pii/S0165188912001741
Muto, Ichiro
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1673-16872012-12-07RePEc:eee:dyncon
article
Imperfect interbank markets and the lender of last resort
This paper presents a monetary model in which interbank markets have limited commitment to contracts. Limited commitment reduces the proportion of assets that can be used as collateral, and thus banks with high liquidity demands face borrowing constraints in interbank markets. These constraints can be relieved by the central bank (a lender of last resort) through the provision of liquidity loans. I show that the constrained-efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited. Otherwise, a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency.
Overlapping generations; Money; Interbank markets; Limited commitment; The lender of last resort;
11
2012
36
1673
1687
E42
E51
G21
http://www.sciencedirect.com/science/article/pii/S0165188912001108
Matsuoka, Tarishi
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:312-3282012-12-07RePEc:eee:dyncon
article
Violence and property rights
Since the middle ages, when Europe was still at a Malthusian stage of development, interpersonal violence has been in steady decline, and institutions and norms limiting violence – in particular property rights – have expanded. Here we put forward a Malthusian model of violence where these trends can be interpreted as a response to easing population pressure, following an acceleration in technological progress. The idea is that agents rationally risk dying in violent resource competition in order to make more of their children survive starvation. Violence carries a positive externality, because those who die free up resources for survivors. This generates a socially optimal level of violence, which can be implemented with the right amount of property rights protection. It is shown that faster technological progress can lead to a decline in violence and improved property rights protection, similar to the path followed by Europe.
Violence; Growth model; Malthusian; Property rights;
1
2013
37
312
328
K42
O13
N40
N50
http://www.sciencedirect.com/science/article/pii/S0165188912001753
Lagerlöf, Nils-Petter
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1718-17282012-12-07RePEc:eee:dyncon
article
Uncertainty and the trade-off between scale and flexibility in investment
This paper analyzes the behavior of a firm that chooses both the scale and timing of its investment. Sensitivity analysis shows that greater demand volatility is associated with the firm investing in larger increments, less frequently. This is in contrast to the conventional wisdom, which is that greater volatility leads to investment in smaller increments, more frequently. Overall, the reduced frequency dominates the greater scale, so that the long-run average rate of investment is a decreasing function of demand volatility. The timing and scale of investment are most sensitive to volatility when there are substantial investment economies of scale.
Investment; Uncertainty; Real options; Economies of scale;
11
2012
36
1718
1728
D21
D92
G31
http://www.sciencedirect.com/science/article/pii/S016518891200098X
Guthrie, Graeme
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:296-3112012-12-07RePEc:eee:dyncon
article
Robust monetary policy with the consumption-wealth channel
This paper studies how the central bank's concerns about model uncertainty affect the design of monetary policy in the presence of wealth effects. If all exogenous disturbances are white noises, increasing the preference for robustness or the size of wealth effects implies more aggressive policy responses to cost shocks. Under persistent shocks, numerical simulations show that increasing the preference for robustness continues to imply more aggressive responses to cost shocks. By contrast, stronger wealth effects lead to less aggressive responses, dampening the effect of model uncertainty on interest rate dynamics.
Optimal monetary policy; Robustness; Wealth effects;
1
2013
37
296
311
E21
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188912001856
Araújo, Eurilton
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:210-2302012-12-07RePEc:eee:dyncon
article
Productivity shocks, stabilization policies and the dynamics of net foreign assets
In this paper we investigate the role of macroeconomic stabilization policies for the international transmission of productivity shocks and their effects on the external sector. We develop a two-country stochastic Dynamic New-Keynesian “perpetual youth” model of the business cycle with incomplete international financial markets. Our OLG structure implies stationary net foreign asset dynamics and allows for a thorough analysis of the interaction of monetary policy with non-balanced budget fiscal policy. We derive the dynamic and cyclical properties of fiscal deficit feedback rules and their implications for net foreign assets dynamics. Our results imply that the degree of “fiscal discipline”, i.e. the extent to which the fiscal rule responds to debt dynamics, is crucial for the dynamics of net foreign assets. We show that under a counter-cyclical fiscal rule with low fiscal discipline temporary positive productivity shocks may result in substantial deteriorations of the Net Foreign Asset position in the medium run. This result crucially hinges on the interplay among nominal rigidities, non-balanced budget fiscal policy, and the wealth effects on consumption that are implied by our OLG structure.
Fiscal deficit; Net Foreign Assets; DSGE models; Monetary and Fiscal policy;
1
2013
37
210
230
E43
E44
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188912001868
Di Giorgio, Giorgio
Nisticò, Salvatore
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:84-1032012-12-07RePEc:eee:dyncon
article
Economic growth under money illusion
Empirical and experimental evidence documents that money illusion is persistent and widespread. This paper incorporates money illusion into a stochastic continuous-time monetary model of endogenous growth. We model an agent's money illusion behavior by assuming that he maximizes nonstandard utility derived from both nominal and real quantities. Money illusion affects an agent's perception of the growth and riskiness of real wealth and distorts his consumption/savings decisions. It influences long-run growth via this channel. We show that the welfare cost of money illusion is negligible, whereas its impact on long-run growth is noticeable even if the degree of money illusion is low.
Money illusion; Inflation; Growth; Welfare cost; Behavioral macroeconomics;
1
2013
37
84
103
D92
E21
E31
E52
http://www.sciencedirect.com/science/article/pii/S0165188912001480
Miao, Jianjun
Xie, Danyang
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1814-18292012-12-07RePEc:eee:dyncon
article
Life-cycle stock market participation in taxable and tax-deferred accounts
The stock market participation patterns differ significantly in taxable (TAs) and tax-deferred accounts (TDAs). This paper develops a quantitative life-cycle model to study the optimal stock market participation choice for households with assets in both TAs and TDAs. We find that differential costs of stock market participation in the two accounts explain the higher participation rate in TDAs early in life relative to TAs and the increasing stock market participation rate in TAs over the life cycle. We also show that the differential tax treatment between TAs and TDAs is responsible for the decline in the participation rate in TDAs late in life, while the basis-reset provision of the tax code is not quantitatively important.
Portfolio choice; Stock market participation; Entry costs; Tax-deferred accounts;
11
2012
36
1814
1829
G11
H20
http://www.sciencedirect.com/science/article/pii/S016518891200108X
Zhou, Jie
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:68-832012-12-07RePEc:eee:dyncon
article
A simple model of quality heterogeneity and international trade
This paper develops a trade model with firm-specific quality heterogeneity in markets where firms face the threat of imitation and engage in limit-pricing strategies. Firms producing high-quality (high-price) products export, whereas firms producing lower-quality (lower-price) products serve the domestic market. Trade liberalization raises the average domestic markup and increases the number of products consumed in each country. However, the impact of trade liberalization on the average export markup depends on the nature of liberalization. Although the presence of markups renders the laissez-faire equilibrium suboptimal, trade liberalization increases national and global welfare.
Firm heterogeneity; Monopolistic competition; Product quality; Trade costs; Trade liberalization;
1
2013
37
68
83
F10
F12
F13
http://www.sciencedirect.com/science/article/pii/S0165188912001625
Dinopoulos, Elias
Unel, Bulent
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:251-2642012-12-07RePEc:eee:dyncon
article
Fitted value function iteration with probability one contractions
This paper studies a value function iteration algorithm based on nonexpansive function approximation and Monte Carlo integration that can be applied to almost all stationary dynamic programming problems. The method can be represented using a randomized fitted Bellman operator and a corresponding algorithm that is shown to be globally convergent with probability one. When additional restrictions are imposed, an OP(n−1/2) rate of convergence for Monte Carlo error is obtained.
Dynamic programming; Value function iteration; Monte Carlo;
1
2013
37
251
264
C61
C63
http://www.sciencedirect.com/science/article/pii/S0165188912001728
Pál, Jenő
Stachurski, John
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1760-17742012-12-07RePEc:eee:dyncon
article
Oligopolistic competition and optimal monetary policy
This paper studies optimal monetary policy in a DSGE model with supply side strategic complementarity, as arising from oligopolistic competition, and nominal rigidities. Firms' oligopolistic rents induce inefficient fluctuations through both, intra-temporal and intertemporal time-varying wedges. Optimality requires the use of state contingent inflation taxes to smooth and reduce firms' rents. Hence, under optimal (Ramsey) policy PPI deviates significantly from zero. A comparison of welfare costs for a set of operational rules relatively to the Ramsey plan shows that targeting the output gap, the mark-up and the asset price improves upon a rule with aggressive response to inflation.
Product market frictions; Oligopolistic competition; Optimal monetary policy;
11
2012
36
1760
1774
E3
E4
E5
http://www.sciencedirect.com/science/article/pii/S016518891200156X
Faia, Ester
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1729-17592012-12-07RePEc:eee:dyncon
article
Spatial discounting, Fourier, and racetrack economy: A recipe for the analysis of spatial agglomeration models
We provide an analytical approach that facilitates understanding the bifurcation mechanism of a wide class of economic models involving spatial agglomeration of economic activities. The proposed method overcomes the limitations of the Turing (1952) approach that has been used to analyze the emergence of agglomeration in the multi-regional core–periphery (CP) model of Krugman (1993, 1996). In other words, the proposed method allows us to examine whether agglomeration of mobile factors emerges from a uniform distribution and to analytically trace the evolution of spatial agglomeration patterns (i.e., bifurcations from various polycentric patterns as well as a uniform pattern) that these models exhibit when the values of some structural parameters change steadily. Applying the proposed method to a multi-regional CP model, we uncover a number of previously unknown properties of the CP model, and notably, the occurrence of “spatial period doubling bifurcation” in the CP model is proved.
Economic geography; Agglomeration; Stability; Bifurcation; Gravity laws;
11
2012
36
1729
1759
R12
R13
F12
F15
F22
C62
C65
http://www.sciencedirect.com/science/article/pii/S0165188912001388
Akamatsu, Takashi
Takayama, Yuki
Ikeda, Kiyohiro
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:52-672012-12-07RePEc:eee:dyncon
article
Social security reform with impure intergenerational altruism
This paper studies the long-run aggregate and welfare effects of eliminating Social Security in a quantitative dynamic general equilibrium life-cycle model where parents and their children are linked by voluntary and accidental bequests. Social Security in this model with impure altruism has a smaller effect on capital accumulation than in a pure life-cycle model, a bigger effect than in a model with two-sided altruism. The welfare gain of eliminating Social Security system under impure altruism is smaller than that in a pure life-cycle model, and bigger than that in a model with two-sided altruism.
Social security; Altruism; Heterogeneous agents; Welfare;
1
2013
37
52
67
C68
D52
E6
H55
http://www.sciencedirect.com/science/article/pii/S0165188912001455
Yang, Fang
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:104-1242012-12-07RePEc:eee:dyncon
article
Aging and pensions in general equilibrium: Labor market imperfections matter
We re-examine the effects of population aging and pension reforms in an OLG model with labor market frictions. The most important feature brought about by labor market frictions is the connection between the interest rate and the unemployment rate. Exogenous shocks (such as aging) leading to lower interest rates also imply lower equilibrium unemployment rates, because lower capital costs stimulate labor demand and induce firms to advertise more vacancies. These effects may be reinforced by increases in the participation rate of older workers, induced by the higher wage rates and the larger probability of finding a job. These results imply that neglecting labor market frictions and employment rate dynamics may seriously bias the evaluation of pension reforms when they have an impact on the equilibrium interest rate.
Overlapping generations; Search unemployment; Labor force participation; Aging; Pensions; Labor market;
1
2013
37
104
124
E24
H55
J26
J64
http://www.sciencedirect.com/science/article/pii/S0165188912001479
de la Croix, David
Pierrard, Olivier
Sneessens, Henri R.
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:150-1672012-10-16RePEc:eee:dyncon
article
Firm-network characteristics and economic robustness to natural disasters
This article proposes a theoretical framework to investigate economic robustness to exogenous shocks such as natural disasters. It is based on a dynamic model that represents a regional economy as a network of production units through the disaggregation of sector-scale input–output tables. Results suggest that disaster-related output losses depend on direct losses heterogeneity and on the economic network structure. Two aggregate indexes – concentration and clustering – appear as important drivers of economic robustness, offering opportunities for robustness-enhancing strategies. Modern industrial organization seems to reduce short-term robustness in a trade-off against higher efficiency in normal times.
Natural disasters; Economic impacts; Economic network;
1
2012
36
150
167
C63
D85
L14
Q54
http://www.sciencedirect.com/science/article/pii/S0165188911001825
Henriet, Fanny
Hallegatte, Stéphane
Tabourier, Lionel
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:1-252012-10-16RePEc:eee:dyncon
article
Varieties of agents in agent-based computational economics: A historical and an interdisciplinary perspective
In this paper, we trace four origins of agent-based computational economics (ACE), namely, the markets origin, the cellular-automata origin, the tournaments origin, and the experiments origin. Along with this trace, we examine how these origins have motivated different concepts and designs of agents in ACE, which starts from the early work on simple programmed agents, randomly behaving agents, zero-intelligence agents, human-written programmed agents, autonomous agents, and empirically calibrated agents, and extends to the newly developing cognitive agents, psychological agents, and culturally sensitive agents. The review also shows that the intellectual ideas underlying these varieties of agents cross several disciplines, which may be considered as a part of a general attempt to study humans (and their behavior) with an integrated interdisciplinary foundation.
Cellular automata; Autonomous agents; Tournaments; Genetic algorithms; Genetic programming; Cognitive capacity;
1
2012
36
1
25
http://www.sciencedirect.com/science/article/pii/S0165188911001692
Chen, Shu-Heng
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:47-622012-10-16RePEc:eee:dyncon
article
Endogenous business cycle propagation and the persistence problem: The role of labor-market frictions
Contrasting sharply with a recent trend in DSGE modeling, we propose a business cycle model where frictions and shocks are chosen with parsimony. The model emphasizes a few labor-market frictions and shocks to monetary policy and technology. The model, estimated from U.S. quarterly postwar data, accounts well for important differences in the serial correlation of the growth rates of aggregate quantities, the size of aggregate fluctuations and key comovements, including the correlation between hours and labor productivity. Despite its simplicity, the model offers an answer to the persistence problem (Chari et al., 2000) that does not rely on multiple frictions and adjustment lags or ad hoc backward-looking components. We conclude modern DSGE models need not embed large batteries of frictions and shocks to account for the salient features of postwar business cycles.
Business cycle propagation; Persistence problem; Sticky wages; Costly labor adjustment;
1
2012
36
47
62
E32
E62
http://www.sciencedirect.com/science/article/pii/S016518891100159X
Ambler, Steve
Guay, Alain
Phaneuf, Louis
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:119-1352012-10-16RePEc:eee:dyncon
article
A quantitative analysis of China's structural transformation
The structural transformation of China – or the reallocation of resources from the agricultural sector to the nonagricultural sector – between 1978 and 2003 was truly remarkable. We develop a two-sector neoclassical growth model to quantitatively assess the driving forces of China's recent structural transformation. In addition to the forces currently emphasized in the literature–sectoral productivity growth—we show that China's transformation was accelerated significantly by the gradual reduction in the relative size of the Chinese government. We find that the reduction in the size of the Chinese government accounted – by itself – for 15% of the reduction in the agricultural share of employment. Two mechanisms explain this: (i) in our model the lower tax rate associated with reduced intervention encouraged the accumulation of physical capital, which is produced in the nonagricultural sector; (ii) lower inefficiencies induced incomes to rise and, given our preferences, resulted in a disproportionate increase in the demand for the nonagricultural good.
Structural transformation; Chinese economy; Neoclassical growth model;
1
2012
36
119
135
E13
O11
P20
http://www.sciencedirect.com/science/article/pii/S0165188911001631
Dekle, Robert
Vandenbroucke, Guillaume
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:100-1182012-10-16RePEc:eee:dyncon
article
Real rigidities, productivity improvements and investment dynamics
The theoretical literature on business cycles predicts a positive investment response to productivity improvements, a prediction we question from theoretical and empirical perspectives. We show that a short-term negative response of investment to a positive technology shock is consistent with a reasonably parameterized new Keynesian dynamic stochastic general equilibrium (DSGE) model in which firm-specific capital introduces an additional real rigidity, and monetary policy is not fully accommodative. Employing Bayesian techniques, we provide evidence that permanent productivity improvements have short-term, contractionary effects on investment. Although this result can be obtained from both firm-specific and rental capital models, only in the case of the former is the average price duration in line with the microeconometric evidence.
Firm-specific capital; NK-DSGE model; Technology shocks; Investment dynamics; Bayesian inference;
1
2012
36
100
118
E32
E22
C11
http://www.sciencedirect.com/science/article/pii/S0165188911001680
Giuli, Francesco
Tancioni, Massimiliano
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:63-842012-10-16RePEc:eee:dyncon
article
Income risk, macroeconomic and demographic change, and economic inequality in Japan
Using an OLG model with heterogeneous households, we investigate the relationship among income risk, macroeconomic and demographic changes, and economic inequality between 1980 and 2000 in Japan. By decomposing the primary factors in earnings and consumption inequality into macroeconomic variables and the demographic variable, we find that our model replicates the evolution of economic inequality in Japan. By performing counterfactual simulations, we demonstrate that two factors—changes in time-varying macroeconomic factors and the unexpected decline in the total factor productivity growth rate—played important roles in the increase in earnings and consumption inequality in the 1990s.
Income risk; Consumption inequality; Population aging;
1
2012
36
63
84
E21
D11
D31
D91
http://www.sciencedirect.com/science/article/pii/S0165188911001412
Yamada, Tomoaki
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:26-462012-10-16RePEc:eee:dyncon
article
Learning in an estimated medium-scale DSGE model
We evaluate the empirical relevance of learning by private agents in an estimated medium-scale DSGE model. We replace the standard rational expectations assumption in the Smets and Wouters (2007) model by a constant-gain learning mechanism. If agents know the correct structure of the model and only learn about the parameters, both expectation mechanisms produce very similar results, and only the transition dynamics that are generated by specific initial beliefs seem to improve the fit. If, instead, agents use only a reduced information set in forming the perceived law of motion, the implied model dynamics change and, depending on the specification of the initial beliefs, the marginal likelihood of the model can improve significantly. These best-fitting models add additional persistence to the dynamics and this reduces the gap between the IRFs of the DSGE model and the more data-driven DSGE-VAR model. However, the learning dynamics do not systematically alter the estimated structural parameters related to the nominal and real frictions in the DSGE model.
Constant-gain adaptive learning; Medium-scale DSGE model; DSGE-VAR;
1
2012
36
26
46
C11
D84
E30
E52
http://www.sciencedirect.com/science/article/pii/S0165188911001217
Slobodyan, Sergey
Wouters, Raf
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:85-992012-10-16RePEc:eee:dyncon
article
Relative risk aversion and the transmission of financial crises
We study how investor behavior affects the transmission of financial crises. If investors exhibit decreasing relative risk aversion, then negative wealth shocks increase the risk premium required to hold risky assets. We integrate this into a second generation model of currency crises which allows for contagion through changes in fundamentals. Investor behavior can be a transmission channel of financial crises, as changes in risk premia increase the coverage ratio and makes the defense of a peg less attractive for the policy maker. The feedback effect of the risk premia on the probability of devaluation also makes multiple equilibria more likely. The possible stabilization effects of capital controls and a Tobin tax on the international transmission of financial crises are also studied.
Financial crises; Contagion; International asset pricing; Relative risk aversion; Wealth effects; Capital controls; Tobin tax;
1
2012
36
85
99
D91
E44
F31
F32
G11
G12
G15
http://www.sciencedirect.com/science/article/pii/S0165188911001679
Boschi, Melisso
Goenka, Aditya
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:136-1492012-10-16RePEc:eee:dyncon
article
A statistical equilibrium model of competitive firms
We find that the empirical density of firm profit rates, measured as returns on assets, is markedly non-Gaussian and reasonably well described by an exponential power (or Subbotin) distribution. We start from a statistical equilibrium model that leads to a stationary Subbotin density in the presence of complex interactions among competitive heterogeneous firms. To investigate the dynamics of firm profitability, we construct a diffusion process that has the Subbotin distribution as its stationary probability density. This leads to a phenomenologically inspired interpretation of variations in the shape parameter of the Subbotin distribution, which essentially measures the competitive pressure in and across industries. Our findings have profound implications both for the previous literature on the ‘persistence of profits’ as well as for understanding competition as a dynamic process. Our main formal finding is that firms' idiosyncratic efforts and the tendency for competition to equalize profit rates are two sides of the same coin, and that a ratio of these two effects ultimately determines the dispersion of the equilibrium distribution.
Statistical equilibrium; Diffusion process; Stochastic differential equation; Maximum entropy principle; Profit rate; Return on assets; Subbotin distribution; Exponential power distribution; Laplace distribution;
1
2012
36
136
149
C16
L10
D21
E10
http://www.sciencedirect.com/science/article/pii/S0165188911001424
Alfarano, Simone
Milaković, Mishael
Irle, Albrecht
Kauschke, Jonas
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1048-10612010-06-29RePEc:eee:dyncon
article
Sustained development of a society with a renewable resource
A maximin program is applied to a policy of sustaining a simple society whose population is dependent on a resource subject to logistic growth. Regular and non-regular paths are characterized. There are continua of both regular and non-regular solutions, the type depending on the initial conditions. A non-regular path involves an intermediate part in which the sustainment constraint is not effective. All solutions are time consistent and Pareto optimal. Because a problem may not be regular, it is not valid to assume that sustainment implies constant utility.
Sustainability Intergenerational equity Maximin Regular path Population
6
2010
34
6
1048
1061
http://www.sciencedirect.com/science/article/B6V85-4Y95TWS-5/2/ccae18e440d88ac70e48e3870a9d9a93
Cairns, Robert D.
Tian, Huilan
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1214-12322010-06-29RePEc:eee:dyncon
article
Technology shocks and aggregate fluctuations in an estimated hybrid RBC model
This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of neutral and investment-specific technology shocks in explaining aggregate fluctuations. To achieve this, we estimate the model's posterior density using Bayesian methods. Within this framework we first extend (Ireland, 2001b) and (Ireland, 2004a) hybrid estimation approach to allow for a vector autoregressive moving average (VARMA) process to describe the movements and co-movements of the model's errors not explained by the basic RBC model. Our main findings for the model with neutral technical change are: (i) the VARMA specification of the errors significantly improves the hybrid model's fit to the historical data relative to the VAR and AR alternatives; and (ii) despite setting the RBC model a more difficult task under the VARMA specification, neutral technology shocks are still capable of explaining a significant share of the observed variation in output and its components over shorter- and longer-forecast horizons as well as hours at shorter horizons. When the hybrid model is extended to incorporate investment shocks, we find that: (iii) the VAR specification is preferred to the alternatives; and (iv) the model's ability to explain fluctuations improves considerably.
Real business cycle Bayesian estimation Technology shocks Measurement errors
7
2010
34
7
1214
1232
http://www.sciencedirect.com/science/article/B6V85-4YB78SF-1/2/264a470bcdf2ab7a9f61ba0ec06574f3
Malley, Jim
Woitek, Ulrich
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1325-13422010-06-29RePEc:eee:dyncon
article
Country portfolio dynamics
This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. The method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed-form solutions for the dynamics of equilibrium portfolios.
Country portfolios Solution methods
7
2010
34
7
1325
1342
http://www.sciencedirect.com/science/article/B6V85-4YP0MSS-1/2/20f5f083e7a3e499a7ef1ffb12d8811e
Devereux, Michael B.
Sutherland, Alan
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1456-14702010-06-29RePEc:eee:dyncon
article
A game options approach to the investment problem with convertible debt financing
We consider a firm that operates a single plant and has an expansion option to invest in a new plant with convertible debt financing. This conversion feature introduces another complication not only because of the added conversion timing problem (by the bond holder) but also because the equity holder needs to take future conversion into account when evaluating her expansion/financing decision. We have two main objectives here. We use game options techniques to analyze optimal strategies involved in this convertible debt financed expansion problem. The first goal is to provide a comprehensive framework and procedure for solving the problem in a mathematically tractable way. Secondly, we illustrate our solution method through a concrete example with economic analysis. This includes a comparison with straight bond financing and comparative statics with respect to price volatility and conversion ratio. In this regard, we attempt to clarify how the conversion feature affects the equity holder's investment decisions. Throughout the paper, we study expansion options by viewing a firm's existing operation, bankruptcy threat, conversion decisions and financing decisions all together.
Convertible bond Investment decision Optimal stopping Game options
8
2010
34
8
1456
1470
http://www.sciencedirect.com/science/article/B6V85-4YS4W6D-1/2/2549d11447e81adf9b05c5cb96214f1a
Egami, Masahiko
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1392-14022010-06-29RePEc:eee:dyncon
article
A dynamic model of shirking and unemployment: Private saving, public debt, and optimal taxation
This paper introduces private saving and public debt into the shirking-unemployment model of Shapiro and Stiglitz (1984), while relaxing their exclusive focus on steady states. After generalizing their no-shirking constraint to accommodate asset accumulation, and demonstrating that the resulting economy's equilibrium is saddle-path stable, we use our dynamic model to obtain significant departures from the Shapiro-Stiglitz prescriptions for optimal policy. Most notably, wage income should be taxed (not subsidized) in the long run if the labor market is sufficiently distorted. Furthermore, interest income should be (exhaustively) taxed only during an initial interval of time, as in Chamley's (1986) full-employment model.
Shirking Unemployment Saving Public debt Optimal taxation
8
2010
34
8
1392
1402
http://www.sciencedirect.com/science/article/B6V85-4YP8THN-1/2/958128a27e018e67b60d111392d8392a
Brecher, Richard A.
Chen, Zhiqi
Choudhri, Ehsan U.
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1248-12592010-06-29RePEc:eee:dyncon
article
Steady-state invariance in high-order Runge-Kutta discretization of optimal growth models
This work deals with infinite horizon optimal growth models and uses the results in the Mercenier and Michel (1994a) paper as a starting point. Mercenier and Michel (1994a) provide a one-stage Runge-Kutta discretization of the above-mentioned models which preserves the steady state of the theoretical solution. They call this feature the "steady-state invariance property". We generalize the result of their study by considering discrete models arising from the adoption of s-stage Runge-Kutta schemes. We show that the steady-state invariance property requires two different Runge-Kutta schemes for approximating the state variables and the exponential term in the objective function. This kind of discretization is well-known in literature as a partitioned symplectic Runge-Kutta scheme. Its main consequence is that it is possible to rely on the well-stated theory of order for considering more accurate methods which generalize the first order Mercenier and Michel algorithm. Numerical examples show the efficiency and accuracy of the proposed methods up to the fourth order, when applied to test models.
Optimal growth models Steady-state invariance Partitioned symplectic Runge-Kutta methods
7
2010
34
7
1248
1259
http://www.sciencedirect.com/science/article/B6V85-4YMY6WF-1/2/70ba00ce41bc65d0b019c42b817db6cd
Ragni, Stefania
Diele, Fasma
Marangi, Carmela
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1369-13792010-06-29RePEc:eee:dyncon
article
Firm heterogeneity, trade, and wage inequality
This paper considers a world of symmetric countries with two factors of production and two sectors. Outputs of the two sectors are imperfect substitutes and the sectors differ in relative factor intensity. Each sector contains a continuum of heterogeneous firms that produce differentiated goods within their sector. Trade is costly and there are both variable and fixed costs of exporting. The paper shows that under some plausible conditions supported by the data, trade between similar countries can increase the demand for skilled labor, which in turn increases the wage inequality between skilled and unskilled labor. The quantitative analysis suggests that such trade effects have played an important role in the increase in the US skill premium.
Firm heterogeneity Trade Skill premium
8
2010
34
8
1369
1379
http://www.sciencedirect.com/science/article/B6V85-4YMPX35-1/2/ff7bb76fa34cb15cc223b7ccd089efa1
Unel, Bulent
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1062-10762010-06-29RePEc:eee:dyncon
article
Is corporate control effective when managers face investment timing decisions in incomplete markets?
This paper presents a model of investment timing by risk averse managers facing incomplete markets and corporate control. Managers are exposed to idiosyncratic risks due to the dependence of their compensation on investment payoffs which are not spanned by other assets. We show that risk averse managers invest earlier than well-diversified shareholders would prefer, leading to significant agency costs. This effect can be mitigated if the manager is subject to corporate control. Our main finding is that the interaction of idiosyncratic risk and control results in two regimes. When the market is sufficiently close to being complete, control has a strong disciplinary effect and agency costs can be virtually eliminated. However, when idiosyncratic risk is too large, shareholders suffer agency costs and control is ineffective. An implication is that we would expect to see different investment behavior across industries or specific investments as the degree of idiosyncratic risk varied. It would also suggest that both the standard complete-markets real options model and the npv framework can proxy in describing investment timing.
Real options Investment timing Incomplete markets Corporate control
6
2010
34
6
1062
1076
http://www.sciencedirect.com/science/article/B6V85-4YHNYS0-1/2/91bfdbcbfa5719333fb22b35351c0786
Henderson, Vicky
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1153-11702010-06-29RePEc:eee:dyncon
article
Heterogeneous trading strategies with adaptive fuzzy Actor-Critic reinforcement learning: A behavioral approach
The present study addresses the learning mechanism of boundedly rational agents in the dynamic and noisy environment of financial markets. The main objective is the development of a system that "decodes" the knowledge-acquisition strategy and the decision-making process of technical analysts called "chartists". It advances the literature on heterogeneous learning in speculative markets by introducing a trading system wherein market environment and agent beliefs are represented by fuzzy inference rules. The resulting functionality leads to the derivation of the parameters of the fuzzy rules by means of adaptive training. In technical terms, it expands the literature that has utilized Actor-Critic reinforcement learning and fuzzy systems in agent-based applications, by presenting an adaptive fuzzy reinforcement learning approach that provides with accurate and prompt identification of market turning points and thus higher predictability. The purpose of this paper is to illustrate this concretely through a comparative investigation against other well-established models. The results indicate that with the inclusion of transaction costs, the profitability of the novel system in case of NASDAQ Composite, FTSE100 and NIKKEI255 indices is consistently superior to that of a Recurrent Neural Network, a Markov-switching model and a Buy and Hold strategy. Overall, the proposed system via the reinforcement learning mechanism, the fuzzy rule-based state space modeling and the adaptive action selection policy, leads to superior predictions upon the direction-of-change of the market.
Agent-based modeling Technical trading Reinforcement learning Fuzzy inference Bounded rationality
6
2010
34
6
1153
1170
http://www.sciencedirect.com/science/article/B6V85-4YB5M0K-1/2/09f47c920482b94f6031320b5d0c44ea
Bekiros, Stelios D.
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1380-13912010-06-29RePEc:eee:dyncon
article
Self-organized criticality in a dynamic game
We investigate conditions under which self-organized criticality (SOC) arises in a version of a dynamic entry game. In the simplest version of the game, there is a single location--a pool--and one agent is exogenously dropped into the pool every period. Payoffs to entrants are positive as long as the number of agents in the pool is below a critical level. If an agent chooses to exit, he cannot re-enter, resulting in a future payoff of zero. Agents in the pool decide simultaneously each period whether to stay in or not. We characterize the symmetric mixed strategy equilibrium of the resulting dynamic game. We then introduce local interactions between agents that occupy neighboring pools and demonstrate that, under our payoff structure, local interaction effects are necessary and sufficient for SOC and for an associated power law to emerge. Thus, we provide an explicit game-theoretic model of the mechanism through which SOC can arise in a social context with forward looking agents.
Self-organization Criticality Local interaction Power Law Entry Game
8
2010
34
8
1380
1391
http://www.sciencedirect.com/science/article/B6V85-4YVJ3S2-2/2/c1811e24cf56eff7c1980ec1ec19f031
Blume, Andreas
Duffy, John
Temzelides, Ted
oai:RePEc:eee:dyncon:v:32:y:2008:i:12:p:3745-37592010-06-29RePEc:eee:dyncon
article
Endogenous debt constraints in a life-cycle model with an application to social security
This paper develops a simple life-cycle model that embeds a theory of debt restrictions based on the existence of inalienable property rights a la Kehoe and Levine [1993. Debt constrained asset markets. Review of Economic Studies 60(4), 865-888; 2001. Liquidity constrained markets versus debt constrained markets. Econometrica 69(3), 575-598]. In our environment, net debtors have the option of defaulting on unsecured debt at the cost of being subjected to wage garnishment and/or having some or all of their future assets seized by creditors. One advantage of our framework is that it encompasses two standard versions of the life-cycle model: one with perfect capital markets and one with a non-negative net-worth restriction. We study the impact of a payroll financed social security system to illustrate the role of endogenous debt constraints and compare our results to a model with exogenous debt constraints. Whereas the aggregate effects are similar under both types of constraints, the distributional consequences are found to be significantly different across debt regimes.
Life-cycle Debt constraints Social security
12
2008
32
12
3745
3759
http://www.sciencedirect.com/science/article/B6V85-4S80XCN-1/2/62ce7cceab1d98f0c845b1409ba0e4bb
Andolfatto, David
Gervais, Martin
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1471-14912010-06-29RePEc:eee:dyncon
article
Identifying a permanent markup shock and its implications for macroeconomic dynamics
A permanent (price) markup shock is justified using an industry-based model in which an increase in market concentration raises the desired markup. Moreover, evidence in favor of the non-stationarity of the markup is presented, which in turn implies that per capita hours are also non-stationary. Structural vector autoregressions are then constructed that can identify shocks to the markup, technology and the federal funds rate. The results show that (1) inflation responds immediately to shocks to the markup and technology whereas it displays a hump-shaped response to a monetary policy shock, and that (2) per capita hours decline in response to positive shocks to the markup and technology. These empirical findings have important implications for macroeconomic dynamics, including the issues on inflation inertia and the technology-hours debate. The paper also points out that the dynamics of the economy cannot be correctly explained without consideration of the permanent markup shock. Finally, the approach in this paper suggests several ways to identify a wage markup shock using structural vector autoregressions.
Industrial concentration Markup shock Technology shock
8
2010
34
8
1471
1491
http://www.sciencedirect.com/science/article/B6V85-4YVJ3S2-1/2/d24fe373979013dd92a57969a090ae1b
Kim, Bae-Geun
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1140-11522010-06-29RePEc:eee:dyncon
article
On the specification of noise in two agent-based asset pricing models
The paper is concerned with two recent agent-based models of speculative dynamics from the literature, one by Gaunersdorfer and Hommes (2007) and the other by He and Li (2007). At short as well as long lags, both of them display an autocorrelation structure in absolute and squared returns that comes fairly close to that of real data at a daily frequency. The note argues that these long memory effects are to be ascribed to the stochastic specification of the price equation, which despite the wide fluctuations in these models fails to normalize the price shocks. Under an appropriate respecification, the long memory completely disappears. It is subsequently shown that an alternative introduction of randomness, which may be called structural stochastic volatility, can restore the original properties and even improves upon them.
Volatility clustering Autocorrelations of returns Structural stochastic volatility Heterogeneous agents
6
2010
34
6
1140
1152
http://www.sciencedirect.com/science/article/B6V85-4YB5M0K-3/2/91bb419bf62ed264872692b8d67dfb97
Franke, Reiner
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1359-13682010-06-29RePEc:eee:dyncon
article
A model of debit card as a means of payment
This paper provides an explanation for both the rapid growth in the use of a debit card over time and the cross-sectional difference in the use of a debit card using a search-theoretic model. The trade-off between cash and a debit card as means of payment is incorporated such that a buyer incurs disutility cost proportional to the amount of cash holdings, while a seller accepting a debit card bears a fixed record-keeping cost regardless of transaction amount. As record-keeping cost decreases with the development of information technology over time, disutility cost of cash holdings required for pairwise trade eventually exceeds record-keeping cost so that all the agents with different wealth levels choose to use a debit card as a means of payment. Also, disutility cost of cash holdings required for pairwise trade would be higher for the rich than for the poor, implying the cross-sectional feature of payment pattern that the rich use a debit card more frequently than the poor. There are two distinct mechanisms that improve welfare as record-keeping cost decreases: one is to reduce deadweight loss from holding cash and the other is to reduce its distortionary effect on output produced in pairwise trade.
Cash Debit card Record keeping cost Means of payment
8
2010
34
8
1359
1368
http://www.sciencedirect.com/science/article/B6V85-4YM7FD3-1/2/30cda61f92a73158c52ef72d3deec0fa
Kim, Young Sik
Lee, Manjong
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1031-10472010-06-29RePEc:eee:dyncon
article
Smooth-adjustment econometrics and inventory-theoretic money management
A growing number of empirical papers use Miller-Orr (S, s) money management as economic motivation for application of non-linear smooth-adjustment models. This paper shows such models are not implied by the Miller-Orr economy. Instead, the Miller-Orr economy implies non-standard smooth-adjustment, as derived in the neglected (and misinterpreted) work of Milbourne et al. (1983). Remarkably, this function includes a varying weight on the lagged dependent variable, capturing static (not dynamic) effects. Interpretations of these apparent dynamics are presented, some of which may be useful in non-monetary (S, s) contexts. Results imply a new agenda for applied smooth-adjustment modeling of money.
Money Miller-Orr Smooth-adjustment Nonlinear Inventory
6
2010
34
6
1031
1047
http://www.sciencedirect.com/science/article/B6V85-4Y7P6R7-1/2/f0a18bda0709fd9282dcbd6b326ae1b4
Greene, Clinton A.
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1105-11222010-06-29RePEc:eee:dyncon
article
Financial crises and interacting heterogeneous agents
In this paper we examine various types of financial crises and conjecture their underlying mechanisms using a deterministic heterogeneous agent model (HAM). In a market-maker framework, forward-looking investors update their price expectations according to psychological trading windows and cluster themselves strategically to optimize their expected profits. The switches between trading strategies lead to price dynamics in market that subsequently move price up and down, and in the extreme case, cause financial crises. The model suggests that both fundamentalists and chartists could potentially contribute to the financial crises.
Financial crisis Chaos Multi-phase heterogeneous beliefs Discounted expected profits
6
2010
34
6
1105
1122
http://www.sciencedirect.com/science/article/B6V85-4Y95TWS-6/2/d85d88645005ee7abb9013dd2d2ff69d
Huang, Weihong
Zheng, Huanhuan
Chia, Wai-Mun
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1123-11392010-06-29RePEc:eee:dyncon
article
Envelope theorems for locally differentiable open-loop Stackelberg equilibria of finite horizon differential games
Envelope theorems are established for locally differentiable Stackelberg equilibria of a general class of finite horizon differential games with an open-loop information structure. It is shown that the follower's envelope results agree in form with those of any player in an open-loop Nash equilibrium, while those of the leader differ. An unanticipated conclusion is that the costate vector of the leader--but not that of the follower--corresponding to the state vector of the differential game may be legitimately interpreted as the shadow value of the state vector for time-inconsistent open-loop Stackelberg equilibria. Surprisingly, the same cannot be said for time-consistent open-loop Stackelberg equilibria.
Stackelberg duopoly Envelope theorems Differential games Open-loop information structure
6
2010
34
6
1123
1139
http://www.sciencedirect.com/science/article/B6V85-4YB5M0K-2/2/cbf1aec0363125a3e4816ad9cc2ce9b5
Van Gorder, Robert A.
Caputo, Michael R.
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1492-15082010-06-29RePEc:eee:dyncon
article
Dynamic predictor selection in a new Keynesian model with heterogeneous expectations
This paper introduces dynamic predictor selection into a New Keynesian model with heterogeneous expectations and examines its implications for monetary policy. We extend Branch and McGough (2009) by incorporating endogenous time-varying predictor proportions along the lines of Brock and Hommes (1997). We find that periodic orbits and complex dynamics may arise even if the model under rational expectations has a unique stationary solution. The qualitative nature of the non-linear dynamics turns on the interaction between hawkishness of the government's policy and the extrapolative behavior of non-rational agents.
Heterogeneous expectations Complex dynamics Determinacy Monetary policy
8
2010
34
8
1492
1508
http://www.sciencedirect.com/science/article/B6V85-4YRXCXD-1/2/cba958a253aee2258c82d62c48e28d82
Branch, William A.
McGough, Bruce
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1171-11862010-06-29RePEc:eee:dyncon
article
Structural shocks and the comovements between output and interest rates
Stylized facts on U.S. output and interest rates have so far proved hard to match with simple DSGE models. I estimate covariances between output, nominal and real interest rate conditional on structural shocks, since such evidence has largely been lacking in previous discussions of the output-interest rate puzzle. Conditional on shocks to technology and monetary policy, the results square with simple models. Moreover, permanent inflation shocks accounted for the counter-cyclical and inversely leading behavior of the real rate during the Great Inflation (1959-1979). Over the Great Moderation (1982-2006), technology shocks were more dominant and the real rate has been pro-cyclical.
Interest rates Business cycles Bandpass filter Structural VAR News shocks
6
2010
34
6
1171
1186
http://www.sciencedirect.com/science/article/B6V85-4YG1KTC-2/2/05e16263ed0b8f65c2a8ba51e15f3db5
Mertens, Elmar
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1509-15272010-06-29RePEc:eee:dyncon
article
Labor-market volatility in the search-and-matching model: The role of investment-specific technology shocks
Shocks to investment-specific technology have been identified as a main source of U.S. aggregate output volatility. In this paper, we present a model with frictions in the labor market and explore the contribution of these shocks to the volatility of labor market variables, namely, unemployment, vacancies, tightness and the job-finding rate. Thus, our paper contributes to a recent body of literature assessing the ability of the search-and-matching model to account for the large volatility observed in labor market variables. To this aim, we solve a neoclassical economy with search and matching, where neutral and investment-specific technologies are subject to shocks. The three key features of our model economy are: (i) Firms are large, in the sense that they employ many workers. (ii) Adjusting capital and labor is costly. (iii) Wages are the outcome of an intra-firm Nash-bargaining problem between the firm and its workers. In our calibrated economy, we find that shocks to investment-specific technology explain 40% of the observed volatility in U.S. labor productivity. Moreover, these shocks generate relative volatilities in vacancies and the workers' job finding rate which match those observed in U.S. data. Relative volatilities in unemployment and labor market tightness are 55% and 75% of their empirical values, respectively.
Search and matching Labor market fluctuations Investment-specific technology Adjustment costs Factor adjustment dynamics
8
2010
34
8
1509
1527
http://www.sciencedirect.com/science/article/B6V85-4YX7K78-1/2/8b4a36ac008e0596678c2fa0d803be6b
Faccini, Renato
Ortigueira, Salvador
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1305-13242010-06-29RePEc:eee:dyncon
article
Nominal vs real wage rigidities in New Keynesian models with hiring costs: A Bayesian evaluation
The inclusion of labor market frictions in the new Keynesian DSGE model overcomes the main drawbacks of the baseline framework. In this paper we show that this extended model, by assuming real wage rigidities, does not replicate the correct wage dynamics and the negative conditional correlation between technology shocks and employment observed in the data, known as the "productivity-employment puzzle" . We show also that these empirical limitations can be overcome by replacing real wage rigidities with nominal wage rigidities, without sacrificing other appealing features of the model. We adopt a Bayesian perspective to estimate the dynamic properties of the model with real wage rigidities and compare them with those of the model with nominal wage rigidities. We show that the evidence favors this latter construction.
New-Keynesian model Labor market frictions Wage rigidities Technology shocks Bayesian inference
7
2010
34
7
1305
1324
http://www.sciencedirect.com/science/article/B6V85-4YK2F01-1/2/0d63ef072bed282ac27c9f6d24ac2a91
Riggi, Marianna
Tancioni, Massimiliano
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1092-11042010-06-29RePEc:eee:dyncon
article
Patents as collateral
This paper studies how the assignment of patents as collateral determines the savings of firms and magnifies the effect of innovative rents on investment in research and development (R&D). We analyse the behaviour of innovative firms that face random and lumpy investment opportunities in R&D. High growth rates of innovations, possibly higher than the real rate of interest, may be achieved despite financial constraints. There is an optimal level of publicly funded policy by the patent and trademark office that minimizes the legal uncertainty surrounding patents as collateral and maximizes the growth rate of innovations.
Collateral Patents Research and development Credit rationing Growth Innovation
6
2010
34
6
1092
1104
http://www.sciencedirect.com/science/article/B6V85-4YMB60S-1/2/5e7f1397db49cf4c79e4f4e95a58731e
Amable, Bruno
Chatelain, Jean-Bernard
Ralf, Kirsten
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1260-12762010-06-29RePEc:eee:dyncon
article
Discretization of highly persistent correlated AR(1) shocks
The finite state Markov-chain approximation methods developed by Tauchen (1986) and Tauchen and Hussey (1991) are widely used in economics, finance and econometrics to solve functional equations in which state variables follow autoregressive processes. For highly persistent processes, the methods require a large number of discrete values for the state variables to produce close approximations which leads to an undesirable reduction in computational speed, especially in a multivariate case. This paper proposes an alternative method of discretizing multivariate autoregressive processes. This method can be treated as an extension of Rouwenhorst's (1995) method which, according to our finding, outperforms the existing methods in the scalar case for highly persistent processes. The new method works well as an approximation that is much more robust to the number of discrete values for a wide range of the parameter space.
Finite state Markov-chain approximation Discretization of multivariate autoregressive processes Transition matrix Numerical methods Value function iteration
7
2010
34
7
1260
1276
http://www.sciencedirect.com/science/article/B6V85-4YDKJS5-1/2/7ecd9a20d7f3d5a9342f90edf9824787
Galindev, Ragchaasuren
Lkhagvasuren, Damba
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1277-12942010-06-29RePEc:eee:dyncon
article
Optimal monetary rules under persistent shocks
The tug-o-war for supremacy between inflation targeting and monetary targeting is a classic, yet timely topic, in monetary economics. In this paper, we revisit this issue within the context of a pure-exchange, overlapping generations model in which spatial separation and random relocation create an endogenous demand for money. We study AR(1) shocks to both real output and the real interest rate. Irrespective of the nature of the shocks, the optimal inflation target is always positive. Under monetary targeting, shocks to output necessitate negative money growth rates; for shocks to real interest rates, money growth rates may be either positive or negative depending on the elasticity of consumption substitution. Also, for output shocks, monetary targeting welfare-dominates inflation targeting but the gap between the two vanishes as the shock process approaches a random walk. In sharp contrast, for shocks to the real interest rate, we prove that monetary targeting and inflation targeting are welfare-equivalent only in the limit as the shocks become i.i.d. The upshot is that persistence of the underlying fundamental uncertainty matters: depending on the nature of the shock, policy responses need to be either more or less aggressive as persistence increases.
Real shocks Persistence Overlapping generations Random relocation model Monetary targeting Inflation targeting
7
2010
34
7
1277
1294
http://www.sciencedirect.com/science/article/B6V85-4YN5P8R-1/2/3bd99ee6f9303e1a2960a5cb69cbbc7e
Bhattacharya, Joydeep
Singh, Rajesh
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1343-13582010-06-29RePEc:eee:dyncon
article
Macroeconomic models and the yield curve: An assessment of the fit
Many have questioned the empirical relevance of the Calvo-Yun model. This paper adds a term structure to three widely studied macroeconomic models (Calvo-Yun, hybrid and Svensson). We back out from observations on the yield curve the underlying macroeconomic model that most closely matches the level, slope and curvature of the yield curve. With each model we trace the response of the yield curve to macroeconomic shocks. We assess the fit of each model against the observed behaviour of interest rates and find limited support for the Calvo-Yun model in terms of fit with the observed yield curve, we find some support for the hybrid model but the Svensson model performs best.
Macromodels Yield curve Persistence
8
2010
34
8
1343
1358
http://www.sciencedirect.com/science/article/B6V85-4Y95TWS-2/2/1caf4c66e594d1873dee2ffb2b478d93
Chadha, Jagjit S.
Holly, Sean
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1202-12132010-06-29RePEc:eee:dyncon
article
Monthly pass-through ratios
This paper estimates monthly pass-through ratios from import prices to consumer prices in real time. Conventional time series methods impose restrictions to generate exogenous shocks on exchange rates or import prices when estimating pass-through coefficients. Instead, our estimation strategy follows an event-study approach based on monthly releases in import prices. Projections from a dynamic common factor model with daily panels before and after monthly releases of import prices define the innovation for import prices. We apply our identification procedure to Swiss prices and find strong evidence that the median of the monthly pass-through ratio is around 0.3. Tests show that standard assumptions of non-real time data and limited information breath are critical for the pass-through estimates.
Common factors Pass-through Real-time data
7
2010
34
7
1202
1213
http://www.sciencedirect.com/science/article/B6V85-4Y9XKVB-1/2/e7358fe5a0f5f5b1471431f5d9556583
Amstad, Marlene
Fischer, Andreas M.
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1015-10302010-06-29RePEc:eee:dyncon
article
Welfare costs of inflation when interest-bearing deposits are disregarded: A calculation of the bias
Most estimates of the welfare costs of inflation are devised considering only noninterest-bearing assets, ignoring that since the 1980s technological innovations and new regulations have increased the liquidity of interest-bearing deposits. We investigate the resulting bias. Sufficient and necessary conditions on its sign are presented, along with closed-form expressions for its magnitude. Two examples dealing with bidimensional bilogarithmic money demands show that disregarding interest-bearing monies may lead to a non-negligible overestimation of the welfare costs of inflation. An intuitive explanation is that such assets may partially make up for the decreased demand of noninterest-bearing assets due to higher inflation.
Welfare Inflation Money demand Divisia index Interest-bearing monies
6
2010
34
6
1015
1030
http://www.sciencedirect.com/science/article/B6V85-4Y65S8W-2/2/b3a47af22096bb54f0671a1886183af7
Cysne, Rubens Penha
Turchick, David
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1403-14202010-06-29RePEc:eee:dyncon
article
On the theory of sterilized foreign exchange intervention
Standard theory finds that, given uncovered interest parity, sterilized foreign exchange intervention should not affect equilibrium prices and quantities. This paper shows that when, as in the data, taxation is not sufficiently flexible in response to spending shocks, uncovered interest parity is replaced by a monotonically increasing relationship between the stock of domestic currency government debt and domestic interest rates. Sterilized intervention then becomes a second independent monetary policy instrument that affects portfolios, interest rates, exchange rates and consumption. It should be most effective in developing countries, where fiscal spending volatility is large and domestic currency government debt is small.
Uncovered interest parity Imperfect asset substitutability Portfolio balance models Sterilized foreign exchange intervention
8
2010
34
8
1403
1420
http://www.sciencedirect.com/science/article/B6V85-4YWB28P-1/2/6c4fc5a900e6928825713ecc6d86b3c7
Kumhof, Michael
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1442-14552010-06-29RePEc:eee:dyncon
article
On the hidden hazards of adaptive behavior
Adaptive behavior has been observed in almost all aspects of real-world. One of the main advantages of acting adaptively is its stabilizing effect on dynamic equilibrium, associated with which are three favorable features: (a) non-destabilizing characteristics, (b) low-speed effectiveness and (c) the convexity of the stabilization regime in terms of the adaptive parameter. It is shown either in theory or by counter-examples that these advantages may not be preserved if the adaptive mechanism is applied to multi-dimensional processes. The necessary and sufficient conditions for the relevant phenomena are provided for two-dimensional dynamic processes with application to duopolistic dynamics. Our findings not only help to clarify hidden misconceptions and prevent potential abuse of adaptive mechanisms, but also illustrate the possible pitfalls arising from generalizing well-known characteristics of low dimensional and/or homogeneous agent models to high-dimensional and heterogenous agent models.
Adaptive strategy Adaptive learning Adaptive adjustment Stability Adaptive behavior Dynamics Heterogenous agent models
8
2010
34
8
1442
1455
http://www.sciencedirect.com/science/article/B6V85-4YVJ3S2-3/2/304b13a92d8437ef757ec5430fde45e1
Huang, Weihong
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:1001-10182013-04-12RePEc:eee:dyncon
article
Asian and Australian options: A common perspective
We show that Australian options are equivalent to fixed or floating strike Asian options and consequently that by studying Asian options from the Australian perspective and vice versa, much can be gained. One specific application of this “Australian approach” leads to a natural dimension reduction for the pricing PDE of Asian options, with or without stochastic volatility, featuring time independent coefficients. Another application lies in the improvement of Monte Carlo schemes, where the “Australian approach” results in a path-independent method. We also show how the Milevsky and Posner (1998) result on the reciprocal Γ-approximation for Asian options can be quickly obtained by using the connection to Australian options. Further, we present an analytical (exact) pricing formula for Australian options and adapt a result of Carr et al. (2008) to show that the price of an Australian call option is increasing in the volatility and by doing this answering a standing question by Moreno and Navas (2008).
Asset pricing; Derivatives; Asian options; Quanto options; Dollar cost averaging (DCA); Numerical methods;
5
2013
37
1001
1018
G12
G13
C63
http://www.sciencedirect.com/science/article/pii/S0165188913000146
Ewald, Christian-Oliver
Menkens, Olaf
Hung Marten Ting, Sai
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:984-10002013-04-12RePEc:eee:dyncon
article
Optimal tax rules and addictive consumption
This paper studies implementation of the social optimum in a model of addictive consumption. We consider corrective taxes that address inefficiencies due to negative externalities, imperfect competition, and self-control problems. Our setup allows us to evaluate how such taxes are affected by (i) market power and (ii) a requirement for implementation to be time consistent. Together, these features can imply significantly lower taxes. We provide a general characterization of the optimal tax rule and illustrate it with two examples.
Dynamic externalities; Internalities; Addiction; Optimal taxation; Time consistent implementation;
5
2013
37
984
1000
H55
D72
D91
E62
http://www.sciencedirect.com/science/article/pii/S0165188913000171
Bossi, Luca
Calcott, Paul
Petkov, Vladimir
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:1019-10392013-04-12RePEc:eee:dyncon
article
A constructive geometrical approach to the uniqueness of Markov stationary equilibrium in stochastic games of intergenerational altruism
We provide sufficient conditions for existence and uniqueness of a monotone, Lipschitz continuous Markov stationary Nash equilibrium (MSNE) and characterize its associated Stationary Markov equilibrium in a class of intergenerational paternalistic altruism models with stochastic production. Our methods are constructive, and emphasize both order-theoretic and geometrical properties of nonlinear fixed point operators, and relate our results to the construction of globally stable numerical schemes that construct approximate Markov equilibrium in our models. Our results provide a new catalog of tools for the rigorous analysis of MSNE on minimal state spaces for OLG economies with stochastic production and limited commitment.
Stochastic games; Constructive methods; Intergenerational altruism;
5
2013
37
1019
1039
C62
C73
D91
http://www.sciencedirect.com/science/article/pii/S0165188913000134
Balbus, Łukasz
Reffett, Kevin
Woźny, Łukasz
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:964-9832013-04-12RePEc:eee:dyncon
article
Optimal lending contracts with long run borrowing constraints
This paper discusses two variations to the optimal lending contract under asymmetric information studied in Clementi and Hopenhayn (2006). One variation assumes that the entrepreneur is less patient than the bank, and the other assumes the bank has limited commitment. The qualitative properties of the two modified contracts are very similar. In particular, both variations lead to borrowing constraints that are always binding such that the firm is financially constrained throughout its life cycle and subject to a positive probability of being liquidated eventually.
Optimal lending contract; Borrowing constraints; Asymmetric information; Limited commitment; Impatient entrepreneur;
5
2013
37
964
983
G3
L2
D21
http://www.sciencedirect.com/science/article/pii/S0165188913000110
Li, Shuyun May
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:951-9632013-04-12RePEc:eee:dyncon
article
Progressive taxation and macroeconomic (In) stability with productive government spending
This paper systematically examines the interrelations between a progressive income tax schedule and macroeconomic (in)stability in an otherwise standard one-sector real business model with productive government spending. We analytically show that the economy exhibits indeterminacy and sunspots if and only if the equilibrium after-tax wage-hours locus is positively sloped and steeper than the household's labor supply curve. Unlike in the framework with useless public expenditures, a less progressive tax policy may operate like an automatic stabilizer that mitigates belief-driven cyclical fluctuations. Moreover, our quantitative analysis shows that this result is able to provide a theoretically plausible explanation for the discernible reduction in US output volatility after the Tax Reform Act of 1986 was implemented.
Progressive income taxation; Equilibrium (in)determinacy; Productive government spending; Business cycles;
5
2013
37
951
963
E32
E62
http://www.sciencedirect.com/science/article/pii/S0165188913000122
Chen, Shu-Hua
Guo, Jang-Ting
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:1040-10652013-04-12RePEc:eee:dyncon
article
Price dynamics in a market with heterogeneous investment horizons and boundedly rational traders
This paper studies the effects of multiple investment horizons and investors' bounded rationality on the price dynamics. We consider a market with one risky asset with agents maximizing expected utility of wealth over discrete investment periods. Investors' demand for the risky asset may depend on the historical returns, so that our model encompasses a wide range of behaviorist patterns. Stochastic properties of the returns process are established analytically and illustrated by simulation. The links between dynamic patterns in returns and different types of investment behavior are explored in the heterogeneous agents' framework. We find that conditional volatility of returns cannot be constant in many generic situations, especially if agents with different investment horizons operate on the market. In the latter case, the return process can display conditional heteroscedasticity, even if all investors are so-called “fundamentalists” and their demand for the risky asset is subject to exogenous iid shocks. We show that the heterogeneity of investment horizons can contribute to the explanation of different stylized patterns in stock returns, in particular, mean-reversion and volatility clustering.
Asset pricing; Heterogeneous agents; Multiple investment scales; Volatility clustering;
5
2013
37
1040
1065
G12
G11
D84
http://www.sciencedirect.com/science/article/pii/S0165188913000195
Chauveau, Th.
Subbotin, A.
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:1066-10962013-04-12RePEc:eee:dyncon
article
Time consistent vs. time inconsistent dynamic asset allocation: Some utility cost calculations for mean variance preferences
We solve for the time consistent dynamic asset allocation of an investor with a mean variance objective function in a multiple assets affine setting. We use as a benchmark the pre-commitment strategy widely used in the literature and assess the potential welfare gains from pre-commitment by comparing the time consistent strategy to the pre-commitment, time inconsistent, strategy. The gains from pre-commitment are simply considerable since, in some cases, at the 5 years horizon the yearly certainty equivalent of the pre-commitment strategy is 48% compared with 9% for the time consistent strategy. However, these welfare gains result from huge and unrealistic positions in the risky assets; in some cases, the pre-commitment strategy is more than 60 times the time consistent strategy. We thus looked for alternative time inconsistent strategies that improve relative to the time consistent strategy while still involving reasonable risky asset positions. To identify these strategies, we explore an original aspect of the time consistent mean variance strategy: the presence of intertemporal hedging in such a strategy reflects welfare degradation. Therefore, a natural candidate is the time consistent strategy without the intertemporal hedging component. The second component of the time consistent strategy is the traditional myopic component discounted. We show that this component could be seen as a standard myopic strategy which is marked to market and the discount factor acts as a tailing factor. This marked to market myopic (MMM) strategy is shown to yield reasonable risky assets positions and substantial welfare gains at long horizons relative to the time consistent strategy. We also show that it dominates the standard myopic strategy as well as the equally weighted strategy.
Mean-variance preferences; Dynamic asset allocation; Intertemporal hedging; Predictability; Value and growth investment;
5
2013
37
1066
1096
D11
D12
G11
http://www.sciencedirect.com/science/article/pii/S0165188913000158
Lioui, Abraham
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:911-9282013-04-12RePEc:eee:dyncon
article
Targets for global climate policy: An overview
A survey of the economic impact of climate change and the marginal damage costs shows that carbon dioxide emissions are a negative externality. The estimated Pigou tax and its growth rate are too low to justify the climate policy targets set by political leaders. A lower discount rate or greater concern for the global distribution of income would justify more stringent climate policy, but would imply an overhaul of other public policies. Catastrophic risk justifies more stringent climate policy, but only to a limited extent.
Climate change; Climate policy; First-best;
5
2013
37
911
928
Q54
http://www.sciencedirect.com/science/article/pii/S0165188913000092
Tol, Richard S.J.
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:929-9502013-04-12RePEc:eee:dyncon
article
The role of non-convex costs in firms' investment and financial dynamics
This paper shows that non-convex costs of financial adjustment are quantitatively relevant for explaining firm dynamics. First, empirically, financial activity is lumpy, more than investment activity. Second, non-convex costs are necessary, in the context of a dynamic investment and financing model, to rationalize this lumpiness. Two versions of the model, with and without non-convex costs, are compared. Only the non-convex costs version replicates the dynamics in the data, generating financial lumpiness higher than investment lumpiness. Other predictions of the model with respect to investment and finance are discussed.
Financial frictions; External financing costs; Investment; Dynamic trade-off model; Financial lumpiness;
5
2013
37
929
950
E22
E42
E44
G31
G32
G33
http://www.sciencedirect.com/science/article/pii/S0165188913000109
Bazdresch, Santiago
oai:RePEc:eee:dyncon:v:20:y:1996:i:1-3:p:415-4312012-12-25RePEc:eee:dyncon
article
On the local stability of the stationary solution to variational problems
1-3
1996
20
415
431
http://www.sciencedirect.com/science/article/B6V85-3VWPNPX-Y/2/bf2fee9b26382762e0cf22593cc856df
Rodriguez, Alvaro
oai:RePEc:eee:dyncon:v:21:y:1997:i:4-5:p:873-8942012-12-25RePEc:eee:dyncon
article
Central bank independence and public debt policy
4-5
1997
21
5
873
894
http://www.sciencedirect.com/science/article/B6V85-3SWY0XD-9/2/37905ed0d3bafbdf647c76f885a1a442
Beetsma, Roel M. W. J.
Bovenberg, A. Lans
oai:RePEc:eee:dyncon:v:36:y:2012:i:8:p:1284-13022012-12-25RePEc:eee:dyncon
article
Estimation of an agent-based model of investor sentiment formation in financial markets
We use weekly survey data on short-term and medium-term sentiment of German investors to estimate the parameters of a stochastic model of opinion formation governed by social interactions. The bivariate nature of our data set also allows us to explore the interaction between the two hypothesized opinion formation processes, while consideration of the simultaneous weekly changes of the stock index DAX enables us to study the influence of sentiment on returns. Technically, we extend the maximum likelihood framework for parameter estimation in agent-based models introduced by Lux (2009a) by generalizing it to bivariate and tri-variate settings. As it turns out, our results are consistent with strong social interaction in short-run sentiment. While one observes abrupt changes of mood in short-run sentiment, medium-term sentiment is a more slowly moving process in which the influence of social interaction seems to be less pronounced. The tri-variate model entails a significant effect from short-run sentiment on prices in-sample, but its out-of-sample predictive performance does not beat the random walk benchmark.
Opinion formation; Social interaction; Investor sentiment;
8
2012
36
1284
1302
G12
G17
http://www.sciencedirect.com/science/article/pii/S016518891200084X
Lux, Thomas
oai:RePEc:eee:dyncon:v:20:y:1996:i:1-3:p:445-4702012-12-25RePEc:eee:dyncon
article
Composition of R&D and technological cycles
1-3
1996
20
445
470
http://www.sciencedirect.com/science/article/B6V85-3VWPNPX-11/2/a626a73495dda1d223102fec5ae1a6d3
Bhattacharjya, Ashoke S.
oai:RePEc:eee:dyncon:v:25:y:2001:i:11:p:1751-17732012-12-25RePEc:eee:dyncon
article
Equilibrium with new investment opportunities
11
2001
25
11
1751
1773
http://www.sciencedirect.com/science/article/B6V85-43DKSHS-3/2/70724903202cd18c86d41f6be55374db
Wang, Tan
oai:RePEc:eee:dyncon:v:14:y:1990:i:3-4:p:741-7622012-12-25RePEc:eee:dyncon
article
The solution of the infinite horizon tracking problem for discrete time systems possessing an exogenous component
3-4
1990
14
10
741
762
http://www.sciencedirect.com/science/article/B6V85-45MFRX7-1D/2/0c6ea8dc71b4361116e8132ff335fe5e
Engwerda, Jacob Chr.
oai:RePEc:eee:dyncon:v:10:y:1986:i:1-2:p:291-2952012-12-25RePEc:eee:dyncon
article
Decomposition of the international consequences of policies into world and difference effects Application to the fair multi-country model
1-2
1986
10
6
291
295
http://www.sciencedirect.com/science/article/B6V85-4D8W2RC-1K/2/91418d21dbcecdca4440924a91b91327
Laffargue, Jean-Pierre
oai:RePEc:eee:dyncon:v:27:y:2003:i:11-12:p:2007-20342012-12-25RePEc:eee:dyncon
article
Information technologies, embodiment and growth
11-12
2003
27
9
2007
2034
http://www.sciencedirect.com/science/article/B6V85-470M5XH-2/2/8b60e209ebbb50ae047598dba4a4d971
Boucekkine, Raouf
de la Croix, David
oai:RePEc:eee:dyncon:v:22:y:1998:i:7:p:1027-10512012-12-25RePEc:eee:dyncon
article
Dynamic portfolio choice and asset pricing with differential information
7
1998
22
5
1027
1051
http://www.sciencedirect.com/science/article/B6V85-3V5MB4X-3/2/9659351c945f39f839016d86cffc2acc
Zhou, Chunsheng
oai:RePEc:eee:dyncon:v:31:y:2007:i:2:p:493-5132012-12-25RePEc:eee:dyncon
article
A theory of optimal deadlines
2
2007
31
2
493
513
http://www.sciencedirect.com/science/article/B6V85-4JGJJ0B-3/2/95e2cd242edb8c52344df04b731790c1
Toxvaerd, Flavio
oai:RePEc:eee:dyncon:v:31:y:2007:i:8:p:2802-28262012-12-25RePEc:eee:dyncon
article
Capital and macroeconomic instability in a discrete-time model with forward-looking interest rate rules
8
2007
31
8
2802
2826
http://www.sciencedirect.com/science/article/B6V85-4MD461D-1/2/cb5f8d2f8f519d0fd095993e25c39d83
Huang, Kevin X.D.
Meng, Qinglai
oai:RePEc:eee:dyncon:v:20:y:1996:i:6-7:p:1263-12882012-12-25RePEc:eee:dyncon
article
Are taxes too low?
6-7
1996
20
1263
1288
http://www.sciencedirect.com/science/article/B6V85-3VW1T3H-G/2/e9fe5868715f237d885b1c1f65a36409
Manasse, Paolo
oai:RePEc:eee:dyncon:v:31:y:2007:i:2:p:361-3972012-12-25RePEc:eee:dyncon
article
A conditional extreme value volatility estimator based on high-frequency returns
2
2007
31
2
361
397
http://www.sciencedirect.com/science/article/B6V85-4JFGF55-2/2/12b73961beec2b3c6eeab29af013d30e
Bali, Turan G.
Weinbaum, David
oai:RePEc:eee:dyncon:v:22:y:1997:i:1:p:123-1402012-12-25RePEc:eee:dyncon
article
Capacity utilization and market power
1
1997
22
11
123
140
http://www.sciencedirect.com/science/article/B6V85-3SX6H28-7/2/d3e132922f7cc3cb8592adf88bf57f72
Fagnart, Jean-Francois
Licandro, Omar
Sneessens, Henri R.
oai:RePEc:eee:dyncon:v:26:y:2002:i:7-8:p:1217-12412012-12-25RePEc:eee:dyncon
article
A comparative study of portfolio insurance
7-8
2002
26
7
1217
1241
http://www.sciencedirect.com/science/article/B6V85-459HNNF-8/2/770576076a5e0b64baf6b9e4a4890278
Basak, Suleyman
oai:RePEc:eee:dyncon:v:5:y:1983:i:1:p:173-1852012-12-25RePEc:eee:dyncon
article
Optimal currency diversification for a class of risk-averse international investors
1
1983
5
2
173
185
http://www.sciencedirect.com/science/article/B6V85-4C47HD0-B/2/7303f7c04772c56f5e148938dbb44cb7
de Macedo, Jorge Braga
oai:RePEc:eee:dyncon:v:1:y:1979:i:1:p:101-1092012-12-25RePEc:eee:dyncon
article
The report of the committee on policy optimisation-- UK
1
1979
1
2
101
109
http://www.sciencedirect.com/science/article/B6V85-4DVNG1X-6/2/d7469c1885b4a9de0d06445128c813b7
Johansen, Leif
oai:RePEc:eee:dyncon:v:29:y:2005:i:4:p:595-6002012-12-25RePEc:eee:dyncon
article
Bounded rationality, heterogeneity and market dynamics
4
2005
29
4
595
600
http://www.sciencedirect.com/science/article/B6V85-4CSYP36-2/2/8e7ca0511c60c5a58178513baedd4872
Kirman, Alan
Tuinstra, Jan
oai:RePEc:eee:dyncon:v:31:y:2007:i:12:p:3965-39852012-12-25RePEc:eee:dyncon
article
Optimal pest control in agriculture
12
2007
31
12
3965
3985
http://www.sciencedirect.com/science/article/B6V85-4NBY8JT-1/2/b1c2707b975e4f6e875521132cb444ea
Christiaans, Thomas
Eichner, Thomas
Pethig, Rudiger
oai:RePEc:eee:dyncon:v:19:y:1995:i:8:p:1511-15282012-12-25RePEc:eee:dyncon
article
Social insurance and taxation under sequential majority voting and utilitarian regimes
8
1995
19
11
1511
1528
http://www.sciencedirect.com/science/article/B6V85-3YB56J6-B/2/9e622eced73aab44e956d4d92bf73a01
Rao Aiyagari, S.
Peled, Dan
oai:RePEc:eee:dyncon:v:14:y:1990:i:3-4:p:553-5692012-12-25RePEc:eee:dyncon
article
When does coordination pay?
3-4
1990
14
10
553
569
http://www.sciencedirect.com/science/article/B6V85-45MFRX7-14/2/ecf93775230273d90ce0267c6f448f9e
Miller, Marcus
Salmon, Mark
oai:RePEc:eee:dyncon:v:1:y:1979:i:3:p:271-2822012-12-25RePEc:eee:dyncon
article
Economic policymaking in the United States: New procedures under Humphrey-Hawkins
3
1979
1
271
282
http://www.sciencedirect.com/science/article/B6V85-4DJ3F4H-3/2/e99d5b60baec025dacaae5827d4bba26
Roberts, Steven M.
oai:RePEc:eee:dyncon:v:11:y:1987:i:4:p:499-5112012-12-25RePEc:eee:dyncon
article
Joint production of substitutable, exhaustible resources, or: Is flaring gas rational?
4
1987
11
12
499
511
http://www.sciencedirect.com/science/article/B6V85-4GP1TWJ-3/2/10dc7ccc646c82402a3ffe0ba2882780
Wirl, Franz
oai:RePEc:eee:dyncon:v:10:y:1986:i:1-2:p:67-712012-12-25RePEc:eee:dyncon
article
Limit pricing in a mature market A dynamic game approach
1-2
1986
10
6
67
71
http://www.sciencedirect.com/science/article/B6V85-4D8W2RC-F/2/308a3dd4f903fc285e2c8c2e543ef943
Shupp, Franklin R.
oai:RePEc:eee:dyncon:v:11:y:1987:i:1:p:93-1162012-12-25RePEc:eee:dyncon
article
Stationary uncertainty frontiers in macroeconometric models and existence and uniqueness of solutions to matrix Riccati equations
1
1987
11
3
93
116
http://www.sciencedirect.com/science/article/B6V85-4C7WMJR-5/2/1c2c4b467f1c82096e3df007e0c560b5
Le Van, Cuong
oai:RePEc:eee:dyncon:v:21:y:1997:i:1:p:115-1432012-12-25RePEc:eee:dyncon
article
Equilibrium dynamics in two-sector models of endogenous growth
1
1997
21
1
115
143
http://www.sciencedirect.com/science/article/B6V85-3T7HKH4-4/2/a7a2c4495d5d5f45ecdeabf3878a4b45
Ladron-de-Guevara, Antonio
Ortigueira, Salvador
Santos, Manuel S.
oai:RePEc:eee:dyncon:v:28:y:2004:i:8:p:1635-16602012-12-25RePEc:eee:dyncon
article
Solving for optimal simple rules in rational expectations models
8
2004
28
6
1635
1660
http://www.sciencedirect.com/science/article/B6V85-48WJSH4-2/2/4da237d79ad0791aeec7a571f01e5678
Dennis, Richard
oai:RePEc:eee:dyncon:v:30:y:2006:i:9-10:p:1729-17532012-12-25RePEc:eee:dyncon
article
A dynamic analysis of moving average rules
9-10
2006
30
1729
1753
http://www.sciencedirect.com/science/article/B6V85-4K07FJ5-1/2/85078ada312b573dbba261f9b2178a05
Chiarella, Carl
He, Xue-Zhong
Hommes, Cars
oai:RePEc:eee:dyncon:v:30:y:2006:i:2:p:293-3222012-12-25RePEc:eee:dyncon
article
The effectiveness of Keynes-Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach
2
2006
30
2
293
322
http://www.sciencedirect.com/science/article/B6V85-4G1R3JK-1/2/45f75b308a3a9155408314c00f13cdf3
Westerhoff, Frank H.
Dieci, Roberto
oai:RePEc:eee:dyncon:v:22:y:1998:i:10:p:1575-16032012-12-25RePEc:eee:dyncon
article
Sustained endogenous growth with decreasing returns and heterogeneous capital
10
1998
22
8
1575
1603
http://www.sciencedirect.com/science/article/B6V85-3VW2X45-3/2/ce51435c0c786e477ee9bfc1f61759e0
Kaganovich, Michael
oai:RePEc:eee:dyncon:v:28:y:2004:i:5:p:859-8602012-12-25RePEc:eee:dyncon
article
Financial decision models in a dynamical setting
5
2004
28
2
859
860
http://www.sciencedirect.com/science/article/B6V85-49SFH39-1/2/435f8ec4fd4512b0eac7d40d836d4334
Mitra, Gautam
Zenios, Stavros
oai:RePEc:eee:dyncon:v:20:y:1996:i:6-7:p:1237-12612012-12-25RePEc:eee:dyncon
article
From decay to growth: A demographic transition to economic growth
6-7
1996
20
1237
1261
http://www.sciencedirect.com/science/article/B6V85-3VW1T3H-F/2/726d4c712c1d2241755c685f56a68e6d
Tamura, Robert
oai:RePEc:eee:dyncon:v:11:y:1987:i:3:p:313-3292012-12-25RePEc:eee:dyncon
article
Behavior of the firm in a market for heterogeneous labor
3
1987
11
9
313
329
http://www.sciencedirect.com/science/article/B6V85-4GP1TWK-3/2/f1e60144b4cc5529c63b7fc27f917ac4
Vroman, Susan B.
oai:RePEc:eee:dyncon:v:15:y:1991:i:1:p:197-2132012-12-25RePEc:eee:dyncon
article
Temporary stabilization policy : The case of flexible prices and exchange rates
1
1991
15
197
213
http://www.sciencedirect.com/science/article/B6V85-45N4YNB-C/2/cd74fc68a7