2015-11-28T20:08:59Z
http://oai.repec.openlib.org/oai.php
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:18-362014-02-25RePEc:eee:dyncon
article
Partial information about contagion risk, self-exciting processes and portfolio optimization
This paper compares two classes of models that allow for additional channels of correlation between asset returns: regime switching models with jumps and models with contagious jumps. Both classes of models involve a hidden Markov chain that captures good and bad economic states. The distinctive feature of a model with contagious jumps is that large negative returns and unobservable transitions of the economy into a bad state can occur simultaneously. We show that in this framework the filtered loss intensities have dynamics similar to self-exciting processes. Besides, we study the impact of unobservable contagious jumps on optimal portfolio strategies and filtering.
Asset allocation; Contagion; Nonlinear filtering; Hidden state; Self-exciting processes;
C
2014
39
18
36
G01
G11
http://www.sciencedirect.com/science/article/pii/S0165188913002017
Branger, Nicole
Kraft, Holger
Meinerding, Christoph
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:293-3162014-02-25RePEc:eee:dyncon
article
Time-consistent investment policies in Markovian markets: A case of mean–variance analysis
The optimal investment policy for a standard multi-period mean–variance model is not time-consistent because the variance operator is not separable in the sense of the dynamic programming principle. With a nested conditional expectation mapping, we develop an investment model with time consistency in Markovian markets. Furthermore, we examine the differences of the investment policies with a riskless asset from those without a riskless asset. Analytical solutions for time-consistent optimal investment policies and the resulting mean–variance efficient frontier are obtained. Finally, using numerical examples, we show that the optimal investment policy derived from our model is more efficient than that of the standard mean–variance model in which the trade-off is determined between the mean and variance of the terminal wealth.
Dynamic time consistency; Mean–variance analysis; Markovian markets; Optimal investment policy; Lagrange multiplier method;
C
2014
40
293
316
C44
C52
C61
E22
G11
http://www.sciencedirect.com/science/article/pii/S0165188914000220
Chen, Zhiping
Li, Gang
Zhao, Yonggan
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:62-782014-02-25RePEc:eee:dyncon
article
On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century and beyond
The main objective of this paper is to propose a novel setup that allows estimating separately the welfare costs of the uncertainty stemming from business-cycle fluctuations and from economic-growth variation, when the two types of shocks associated with them (respectively, transitory and permanent shocks) hit consumption simultaneously. Separating these welfare costs requires dealing with degenerate bivariate distributions. Levi's Continuity Theorem and the Disintegration Theorem allow us to adequately define the one-dimensional limiting marginal distributions. Under Normality, we show that the parameters of the original marginal distributions are not affected, providing the means for calculating separately the welfare costs of business-cycle fluctuations and of economic-growth variation.
Business cycles fluctuations; Economic-growth variation; Welfare costs; Beveridge–Nelson decomposition; Unobserved-component model;
C
2014
39
62
78
E32
C32
C53
http://www.sciencedirect.com/science/article/pii/S0165188913002236
Guillén, Osmani Teixeira de Carvalho
Issler, João Victor
Franco-Neto, Afonso Arinos de Mello
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:98-1122014-02-25RePEc:eee:dyncon
article
Credit risk and asymmetric information: A simplified approach
We present a simple model for risky, corporate debt. Debtholders and equityholders have incomplete information about the financial state of the debt issuing company. Information is incomplete because it is delayed for all agents, and it is asymmetrically distributed between debtholders and equityholders. We solve for the equityholders' optimal default policy and for the credit spreads required by debtholders. Delayed information accelerates the equityholders' optimal decision to default. Interestingly, this effect is small, implying only a small impact on credit spreads. Asymmetric information, however, has a major impact on credit spreads. Our model predicts high credit spreads for short-term debt, as observed empirically in credit markets.
Default policy; Credit spreads; Incomplete information;
C
2014
39
98
112
G12
G33
http://www.sciencedirect.com/science/article/pii/S0165188913002212
Lindset, Snorre
Lund, Arne-Christian
Persson, Svein-Arne
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:67-832014-02-25RePEc:eee:dyncon
article
On the role of policy interventions in structural change and economic development: The case of postwar Japan
In this paper, we study the structural change occurring in Japan's post-World War II era of rapid economic growth. We use a two-sector neoclassical growth model with government policies to analyze the evolution of the Japanese economy in this period and to assess the role of such policies. Our model is able to replicate the empirical behavior of the main macroeconomic variables. Three findings emerge from our analysis. First, neither price and investment subsidies to the agricultural sector, nor industrial policy plays a crucial role in the rapid postwar growth. Second, had there existed a labor migration barrier, the negative long-run level effect on output would have been substantial. Finally, TFP in non-agricultural sector is mostly responsible for the rapid growth of Japan in the post-war period.
Two-sector growth model; Structural change; Government policies;
C
2014
40
67
83
E1
O1
O41
http://www.sciencedirect.com/science/article/pii/S0165188913002455
Esteban-Pretel, Julen
Sawada, Yasuyuki
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:95-1022014-02-25RePEc:eee:dyncon
article
Optimal Diamond–Dybvig mechanism in large economies with aggregate uncertainty
This paper characterizes the direct mechanism which implements the constrained optimal outcome in a version of Diamond and Dybvig (1983) with aggregate uncertainty and a continuum of agents. Using this result, numerical examples where the best direct mechanism has a bank-run-equilibrium are easily obtained.
Diamond–Dybvig model; Bank-run; Deposit contracts;
C
2014
40
95
102
D82
E58
G21
http://www.sciencedirect.com/science/article/pii/S0165188913002479
Sultanum, Bruno
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:165-1772014-02-25RePEc:eee:dyncon
article
Steady-state properties in a class of dynamic models
We characterize the location, stability and approach-time of optimal steady states in single-state, infinite-horizon, autonomous models by means of a simple function of the state variable, defined in terms of the model's primitives. The method does not require the solution of the underlying dynamic optimization problem. Its application is illustrated in the context of a generic class of resource management problems.
Infinite horizon; Autonomous problems; Optimal policy; Steady-state; Approach time;
C
2014
39
165
177
C61
Q20
Q30
http://www.sciencedirect.com/science/article/pii/S0165188913002248
Tsur, Yacov
Zemel, Amos
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:140-1642014-02-25RePEc:eee:dyncon
article
Do firms share the same functional form of their growth rate distribution? A statistical test
We propose a hypothesis testing procedure to investigate whether the same growth rate distribution is shared by all the firms in a balanced panel or, more generally, whether they share the same functional form for this distribution, without necessarily sharing the same parameters. We apply the test to panels of US and European Union publicly quoted manufacturing firms, both at the sectoral and at the subsectoral NAICS level. We consider the following null hypotheses about the growth rate distribution of the individual firms: (i) an unknown shape common to all firms, with all the firms sharing also the same parameters, or with the firm variance related to its firm size through a scaling relationship, and (ii) several functional shapes described by the Subbotin family of distributions. Our empirical results indicate that firms do not have a common shape of the growth rate distribution at the sectorial NAICS level, whereas firms may typically be described by the same shape of the distribution at the subsectorial level, even if the specific shape may not be the same for different subsectors.
Growth rate distribution of individual firm; Heterogeneous firms; EDF tests;
C
2014
39
140
164
C12
C15
D22
http://www.sciencedirect.com/science/article/pii/S016518891300225X
Lunardi, José T.
Miccichè, Salvatore
Lillo, Fabrizio
Mantegna, Rosario N.
Gallegati, Mauro
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:113-1262014-02-25RePEc:eee:dyncon
article
Anticipation, learning and welfare: the case of distortionary taxation
We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We extend the existing framework by introducing distortionary taxes as well as elastic labor supply, which makes agents’ decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behavior that can be interpreted as self-fulfilling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of fiscal reforms.
Fiscal policy; Adaptive learning; Oscillations; Welfare;
C
2014
39
113
126
E32
E62
D84
http://www.sciencedirect.com/science/article/pii/S0165188913002364
Gasteiger, Emanuel
Zhang, Shoujian
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:46-662014-02-25RePEc:eee:dyncon
article
Stock prices and monetary policy shocks: A general equilibrium approach
Empirical literature documents that unexpected changes in the nominal interest rates have a significant effect on real stock prices: a 100-basis point increase in the nominal interest rate is associated with an immediate decrease in broad real stock indices that may range from 2.2 to 9%, followed by a gradual decay as real stock prices revert towards their long-run expected value. We assess the ability of a general equilibrium New Keynesian asset-pricing model to account for these facts. We consider a production economy with elastic labor supply, staggered price and wage setting, as well as time-varying risk aversion through habit formation. We find that the model predicts a stock market response to policy shocks that matches empirical estimates, both qualitatively and quantitatively. Our findings are robust to a range of variations and parametrizations of the model.
Monetary policy; Asset prices; New Keynesian general equilibrium model;
C
2014
40
46
66
E31
E52
G12
http://www.sciencedirect.com/science/article/pii/S0165188913002418
Challe, Edouard
Giannitsarou, Chryssi
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:208-2262014-02-25RePEc:eee:dyncon
article
Equilibrium Heterogeneous-Agent models as measurement tools: Some Monte Carlo evidence
This paper discusses a series of Monte Carlo experiments designed to evaluate the empirical properties of Heterogeneous-Agent macroeconomic models in the presence of sampling variability. The calibration procedure leads to the welfare analysis being conducted with the wrong parameters. The ability of the calibrated model to correctly predict the long-run welfare changes induced by a set of policy experiments is assessed. The results show that, for the policy reforms with sizable welfare effects (i.e., more than 0.2%), the model always predicts the right sign of the welfare effects. However, the welfare effects can be evaluated with the wrong sign, when they are small and when the sample size is fairly limited. Quantitatively, the maximum errors made in evaluating a policy change are very small for some reforms (in the order of 0.02 percentage points), but bigger for others (in the order of 0.6 percentage points). Finally, having access to better data, in terms of larger samples, does lead to substantial increases in the precision of the welfare effects estimates, though the rate of convergence can be slow.
Monte Carlo; Heterogeneous agents; Incomplete markets; Ex-ante policy evaluation; Welfare;
C
2014
39
208
226
C15
C54
C68
D52
http://www.sciencedirect.com/science/article/pii/S016518891300239X
Cozzi, Marco
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:79-972014-02-25RePEc:eee:dyncon
article
Biased Bayesian learning with an application to the risk-free rate puzzle
Based on the axiomatic framework of Choquet decision theory, we develop a closed-form model of Bayesian learning with ambiguous beliefs about the mean of a normal distribution. In contrast to rational models of Bayesian learning the resulting Choquet Bayesian estimator results in a long-run bias that reflects the agent's ambiguity attitudes. By calibrating the standard equilibrium conditions of the consumption based asset pricing model we illustrate that our approach contributes towards a resolution of the risk-free rate puzzle. For a plausible parameterization we obtain a risk-free rate in the range of 3.5–5%. This is 1–2.5% closer to the empirical risk-free rate than according calibrations of the rational expectations model.
Ambiguity; Non-additive probability measures; Bayesian learning; Truncated normal distribution; Risk-free rate puzzle;
C
2014
39
79
97
D83
E44
G12
http://www.sciencedirect.com/science/article/pii/S0165188913002224
Ludwig, Alexander
Zimper, Alexander
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:179-1942014-02-25RePEc:eee:dyncon
article
Do option-like incentives induce overvaluation? Evidence from experimental asset markets
One potential reason for bubbles evolving prior to the financial crisis was excessive risk taking stemming from option-like incentive schemes in financial institutions. By running laboratory asset markets, we investigate the impact of option-like incentives on price formation and trading behavior. The main results are that (i) we observe significantly higher market prices with option-like incentives than linear incentives. (ii) We further find that option-like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives. (iii) We finally show that trading at inflated prices is rational for subjects with option-like incentives since it increases their expected payout.
Mispricing; Incentives; Market efficiency; Experimental finance;
C
2014
40
179
194
C92
D84
G10
http://www.sciencedirect.com/science/article/pii/S0165188914000116
Holmen, Martin
Kirchler, Michael
Kleinlercher, Daniel
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:1-242014-02-25RePEc:eee:dyncon
article
Solving DSGE portfolio choice models with dispersed private information
Noisy rational expectations models, in which agents have dispersed private information and extract information from an endogenous asset price, are widely used in finance. However, these linear partial equilibrium models do not fit well in modern macroeconomics that is based on non-linear dynamic general equilibrium models. We develop a method for solving a DSGE model with portfolio choice and dispersed private information. We combine and extend existing local approximation methods applied to public information DSGE settings with methods for solving noisy rational expectations models in finance with dispersed private information.
Local approximation method; Dispersed information; Private information; Noisy rational expectations model; Dynamic general equilibrium model;
C
2014
40
1
24
C60
F30
F41
G11
http://www.sciencedirect.com/science/article/pii/S0165188914000256
Tille, Cédric
van Wincoop, Eric
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:1-172014-02-25RePEc:eee:dyncon
article
The cyclicality of job-to-job transitions and its implications for aggregate productivity
This paper analyzes the job-to-job transitions of workers in the United States. First, I propose a new method of correcting the time-aggregation bias. The bias correction does not significantly alter the cyclical properties of the job-to-job transition rates. The bias-corrected series from 1996 to 2011 reveals a procyclical pattern of job-to-job transitions and a large decline since the beginning of the 2000s. Second, I construct a model of on-the-job search and explore the implications of this phenomenon. The calibrated model quantifies the effect of the decline in the reallocation of workers through job-to-job transitions on total factor productivity (TFP). From 2009 to 2011, the model accounts for about 0.4–0.5% annual decline in TFP.
Job-to-job transition; Time-aggregation bias; On-the-job search;
C
2014
39
1
17
E24
E32
J62
http://www.sciencedirect.com/science/article/pii/S0165188913002406
Mukoyama, Toshihiko
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:334-3542014-02-25RePEc:eee:dyncon
article
Public infrastructure investment, output dynamics, and balanced budget fiscal rules
We study the dynamic macroeconomic effects of public infrastructure investment under a balanced budget fiscal rule, using an overlapping generations model of a small open economy. The government finances public investment by employing distortionary labor taxes. The balanced budget rule implies a negative short-run output multiplier that exceeds (in absolute terms) the positive long-run output multiplier. Larger public capital spillovers sharpen the intertemporal output tradeoff. In contrast to conventional results regarding public investment shocks, we obtain dampened cyclical responses for plausible parameter values. The cyclical dynamics arise from the interaction between the labor tax rate, the tax base, and the intergenerational spillover effects. We show that financing scenarios involving public debt creation can substantially reduce the short-run output contraction and the transitional macroeconomic fluctuations induced by public investment.
Public infrastructure investment; Distortionary taxation; Balanced budget fiscal rules;
C
2014
40
334
354
E62
F41
H54
http://www.sciencedirect.com/science/article/pii/S0165188914000293
Bom, Pedro R.D.
Ligthart, Jenny E.
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:266-2782014-02-25RePEc:eee:dyncon
article
Patterns of technology, industry concentration, and productivity growth without scale effects
This paper investigates the relationship between geographic patterns of industry and economic growth in a two-country model of trade with no scale effect, where productivity growth is generated by firm investment in process innovation. We find that dispersed equilibria with industry located in both countries produce higher growth rates than concentrated equilibria with all industry located in one country. The highest growth rate arises for equal industry shares and no productivity gap, implying that industry concentration has a negative effect on overall growth. Convergence towards a dispersed equilibrium is contingent on transport costs and knowledge dispersion.
Industry concentration; Industry share; Productivity gap; Productivity growth; Scale effect;
C
2014
40
266
278
F43
O30
O40
R12
http://www.sciencedirect.com/science/article/pii/S0165188914000190
Davis, Colin
Hashimoto, Ken-ichi
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:103-1152014-02-25RePEc:eee:dyncon
article
More neighbors, more efficiency
This paper considers a finite population of agents located within an arbitrary fixed network. Every agent plays a coordination game with his neighbors. If one neighbor's payoff from a specific interaction exceeds his average payoff per interaction, the neighbor is perceived as better performing. Over time agents imitate the strategies of their better performing neighbors; occasionally they make mistakes. Sufficient conditions for emergence of Pareto efficient and risk dominant conventions are provided. The paper also illustrates the main results through relevant examples.
Local interaction; Coordination game; Imitation; Contagion;
C
2014
40
103
115
C72
D83
http://www.sciencedirect.com/science/article/pii/S0165188914000025
Cui, Zhiwei
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:25-452014-02-25RePEc:eee:dyncon
article
Effective sub-simulation-free upper bounds for the Monte Carlo pricing of callable derivatives and various improvements to existing methodologies
We present a new non-nested approach for computing additive upper bounds for callable derivatives using Monte Carlo simulation. It relies on the regression of Greeks computed using adjoint methods. We also show that it is possible to early terminate paths once points of optimal exercise have been reached. A natural control variate for the multiplicative upper bound is introduced which renders it competitive to the additive one. In addition, a new bi-iterative family of upper bounds is introduced which takes a stopping time, an upper bound, and a martingale as inputs.
G10; G12; G13; LIBOR market model; Bermudan options; Callability; Monte Carlo; Early exercise; Upper bounds;
C
2014
40
25
45
http://www.sciencedirect.com/science/article/pii/S0165188913002376
Joshi, Mark
Tang, Robert
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:127-1392014-02-25RePEc:eee:dyncon
article
Capital, credit constraints and the comovement between consumer durables and nondurables
Evidence indicates that consumer durables are more flexibly priced than nondurable goods and services. In otherwise standard two-sector neoclassical sticky-price models with flexible durable prices, following monetary tightening, nondurables decrease but consumer durables increase. Friction in lending between households can resolve the comovement problem if durable prices are sticky. However, if durable prices are flexible, friction in lending fails to generate joint decline. This paper resolves the co-movement problem by adding capital into a model with flexible durable prices and friction in lending. When capital is needed in production, monetary tightening reduces the relative price of durables which induces investment and decreases firms' real profits in the short run. Due to fewer profits remitted from firms, savers have a lower disposable income and cannot increase expenditures on consumer durables as much as otherwise. As a consequence, aggregate consumer durables decrease and there is a joint decline of nondurables and consumer durables.
Credit constraints; Capital; Consumer durables; Nondurables; Sticky price; Comovement;
C
2014
39
127
139
E21
E52
G10
http://www.sciencedirect.com/science/article/pii/S0165188913002200
Chen, Been-Lon
Liao, Shian-Yu
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:178-2072014-02-25RePEc:eee:dyncon
article
Robust tracking error portfolio selection with worst-case downside risk measures
This paper proposes downside risk measure models in portfolio selection that captures uncertainties both in distribution and in parameters. The worst-case distribution with given information on the mean value and the covariance matrix is used, together with ellipsoidal and polytopic uncertainty sets, to build-up this type of downside risk model. As an application of the models, the tracking error portfolio selection problem is considered. By lifting the vector variables to positive semidefinite matrix variables, we obtain semidefinite programming formulations of the robust tracking portfolio models. Numerical results are presented in tracking SSE50 of the Shanghai Stock Exchange. Compared with the tracking error variance portfolio model and the equally weighted strategy, the proposed models are more stable, have better accumulated wealth and have much better Sharpe ratio in the investment period for the majority of observed instances.
Downside risk measure; Robust tracking error portfolio; Semidefinite programming; Sharpe ratio;
C
2014
39
178
207
C61
G11
http://www.sciencedirect.com/science/article/pii/S0165188913002352
Ling, Aifan
Sun, Jie
Yang, Xiaoguang
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:213-2412014-02-25RePEc:eee:dyncon
article
Valuation of stock loans with jump risk
A stock loan is a special loan with stocks as collateral, which offers the borrowers the right to redeem the stocks on or before the maturity (Xia and Zhou, 2007; Dai and Xu, 2011). We investigate pricing problems of both infinite- and finite-maturity stock loans under a hyper-exponential jump diffusion model. In the infinite-maturity case, we derive closed-form formulas for stock loan prices and deltas by solving the related optimal stopping problem explicitly. Moreover, we obtain a sufficient and necessary condition under which the optimal stopping time is finite with probability one. In the finite-maturity case, we provide analytical approximations to both stock loan prices and deltas by solving an ordinary integro-differential equation as well as a complicated non-linear system. Numerical experiments demonstrate that the approximation methods for both prices and deltas are accurate, fast, and easy to implement.
Stock loans; Derivatives pricing; Jump diffusion; Stopping time;
C
2014
40
213
241
G13
http://www.sciencedirect.com/science/article/pii/S016518891400013X
Cai, Ning
Sun, Lihua
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:134-1532014-02-25RePEc:eee:dyncon
article
Optimal adaptation strategies to face shocks on groundwater resources
We consider an exogenous and reversible shock to a groundwater resource, namely a decrease in the recharge rate of the aquifer. We compare optimal extraction paths and the social costs of optimal adaptation in two cases: under certainty, i.e. when the date of occurrence of the shock is known, and under uncertainty, when the date of occurrence of the shock is a random variable. We show that an increase in uncertainty leads to a decrease in precautionary behavior in the short run and to an increase in precautionary behavior in the long run. We apply our model to the particular case of the Western la Mancha aquifer in Spain. We show that, in this context, it is advantageous for the water agency to acquire information on the date of the shock, especially for high-intensity and intermediate-risk events.
Groundwater resource; Optimal behavior; Exogenous shock; Uncertainty;
C
2014
40
134
153
C61
Q25
http://www.sciencedirect.com/science/article/pii/S0165188914000141
de Frutos Cachorro, Julia
Erdlenbruch, Katrin
Tidball, Mabel
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:227-2362014-02-25RePEc:eee:dyncon
article
Bounded interest rate feedback rules in continuous-time
This paper analyzes the dynamic consequences of interest rate feedback rules in a flexible-price model where money enters the utility function. Two alternative rules are considered based on past or predicted inflation rates. The main feature is to consider inflation rates that are selected over a bounded time horizon. We prove that if the Central Bank's forecast horizon is not too long, an active and forward-looking monetary policy is not destabilizing: the equilibrium trajectory is unique and monotonic. This is an advantage with respect to active and backward-looking policies that are shown to lead to a unique but fluctuating dynamic.
Interest rate rules; Indeterminacy; Functionnal equations;
C
2014
39
227
236
E31
E43
E52
http://www.sciencedirect.com/science/article/pii/S0165188913002388
d'Albis, Hippolyte
Augeraud-Véron, Emmanuelle
Hupkes, Hermen Jan
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:273-2862014-02-25RePEc:eee:dyncon
article
Capital maintenance and depreciation over the business cycle
This paper develops and estimates a stochastic general equilibrium model with capital maintenance, which affects endogenously the depreciation rate of capital. The estimate of maintenance series is found to track survey-based measures for Canada quite closely and to generate the procyclical pattern of maintenance observed in the data. We use our model estimates to infer the time profile of equipment capital depreciation in Canadian and US manufacturing. The depreciation rate is estimated to be volatile and highly procyclical in both countries.
Real business cycle; Endogenous capital depreciation; Maintenance;
C
2014
39
273
286
E22
E32
E37
http://www.sciencedirect.com/science/article/pii/S0165188913002443
Albonico, Alice
Kalyvitis, Sarantis
Pappa, Evi
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:317-3332014-02-25RePEc:eee:dyncon
article
Adaptive learning and distributional dynamics in an incomplete markets model
Recent research shows that several DSGE models provide a closer fit to the data under adaptive learning. This paper extends this research by introducing adaptive learning in the model of Krusell and Smith (1998) with uninsurable idiosyncratic risks and aggregate uncertainty. A first contribution of this paper establishes that the equilibrium of this framework is stable under least-squares learning. The second contribution consists of showing that bounded rationality enhances the ability of this model to match the distribution of income in the US. Learning increases significantly the Gini coefficients because of the opposite effects on consumption of the capital-rich and of the capital-poor agent. The third contribution is an empirical exercise that shows that learning can account for increases in the income Gini coefficient of up to 25% in a period of 28 years. Overall, these findings suggest that adaptive learning has important distributional repercussions in this class of models.
Adaptive learning; Incomplete markets; Wealth and income distribution;
C
2014
40
317
333
E00
E02
D31
D83
http://www.sciencedirect.com/science/article/pii/S0165188914000165
Giusto, Andrea
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1031-10472014-03-11RePEc: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/pii/S0165-1889(10)00007-2
Greene, Clinton A.
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1015-10302014-03-11RePEc: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
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1030
http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00004-7
Cysne, Rubens Penha
Turchick, David
oai:RePEc:eee:dyncon:v:32:y:2008:i:12:p:3745-37592014-03-11RePEc: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
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2008
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3759
http://www.sciencedirect.com/science/article/pii/S0165-1889(08)00056-0
Andolfatto, David
Gervais, Martin
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1325-13422014-03-11RePEc: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
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1325
1342
http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00066-7
Devereux, Michael B.
Sutherland, Alan
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1471-14912014-03-11RePEc: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/pii/S0165-1889(10)00083-7
Kim, Bae-Geun
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1123-11392014-03-11RePEc: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/pii/S0165-1889(10)00017-5
Van Gorder, Robert A.
Caputo, Michael R.
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1343-13582014-03-11RePEc: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
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1343
1358
http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00009-6
Chadha, Jagjit S.
Holly, Sean
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1171-11862014-03-11RePEc: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
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1171
1186
http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00037-0
Mertens, Elmar
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1214-12322014-03-11RePEc: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/pii/S0165-1889(10)00018-7
Malley, Jim
Woitek, Ulrich
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1392-14022014-03-11RePEc: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
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1392
1402
http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00067-9
Brecher, Richard A.
Chen, Zhiqi
Choudhri, Ehsan U.
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1248-12592014-03-11RePEc: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
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1248
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00063-1
Ragni, Stefania
Diele, Fasma
Marangi, Carmela
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1442-14552014-03-11RePEc: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
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1442
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00084-9
Huang, Weihong
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1456-14702014-03-11RePEc: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
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1456
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00071-0
Egami, Masahiko
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1202-12132014-03-11RePEc: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
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2010
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1202
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00015-1
Amstad, Marlene
Fischer, Andreas M.
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1153-11702014-03-11RePEc: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
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00016-3
Bekiros, Stelios D.
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1092-11042014-03-11RePEc: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
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2010
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00052-7
Amable, Bruno
Chatelain, Jean-Bernard
Ralf, Kirsten
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1140-11522014-03-11RePEc: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/pii/S0165-1889(10)00030-8
Franke, Reiner
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1509-15272014-03-11RePEc: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
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1509
1527
http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00089-8
Faccini, Renato
Ortigueira, Salvador
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1369-13792014-03-11RePEc: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
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2010
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1369
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00062-X
Unel, Bulent
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1403-14202014-03-11RePEc: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
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1403
1420
http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00085-0
Kumhof, Michael
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1048-10612014-03-11RePEc: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
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2010
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00013-8
Cairns, Robert D.
Tian, Huilan
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1380-13912014-03-11RePEc: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
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00082-5
Blume, Andreas
Duffy, John
Temzelides, Ted
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1492-15082014-03-11RePEc: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
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2010
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00070-9
Branch, William A.
McGough, Bruce
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1277-12942014-03-11RePEc: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
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2010
34
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1294
http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00064-3
Bhattacharya, Joydeep
Singh, Rajesh
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1359-13682014-03-11RePEc: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
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2010
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00051-5
Kim, Young Sik
Lee, Manjong
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1105-11222014-03-11RePEc: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
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1105
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http://www.sciencedirect.com/science/article/pii/S0165-1889(10)00014-X
Huang, Weihong
Zheng, Huanhuan
Chia, Wai-Mun
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1062-10762014-03-11RePEc: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/pii/S0165-1889(10)00048-5
Henderson, Vicky
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1260-12762014-03-11RePEc: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/pii/S0165-1889(10)00035-7
Galindev, Ragchaasuren
Lkhagvasuren, Damba
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1305-13242014-03-11RePEc: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/pii/S0165-1889(10)00049-7
Riggi, Marianna
Tancioni, Massimiliano
oai:RePEc:eee:dyncon:v:37:y:2013:i:11:p:2270-22862013-11-01RePEc:eee:dyncon
article
The New Keynesian Phillips curve with myopic agents
Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged inflation and a weight less than one on expected inflation. We argue that myopic price setting of some agents explains the low weight on expected inflation. The lagged term can be explained by trend extrapolation if information about the future is costly. In a laboratory experiment we implement the Calvo (1983) microfoundations of the Phillips curve. Our hypotheses are supported by the experimental data. About half of the subjects set optimal Calvo prices while about a third is myopic.
Hybrid Phillips curve; Experimental economics; Myopia; Behavioral macroeconomics;
11
2013
37
2270
2286
C91
D92
E52
http://www.sciencedirect.com/science/article/pii/S0165188913001292
Orland, Andreas
Roos, Michael W.M.
oai:RePEc:eee:dyncon:v:37:y:2013:i:11:p:2168-21792013-11-01RePEc:eee:dyncon
article
A family production overlapping generations economy
This paper provides a theoretical analysis of an overlapping generations economy in which production decisions and input–output allocations are all carried out at the family level. I consider a single class of output allocation schemes and various degrees of knowledge about the production technology. Under complete knowledge, I show that a family organizational structure in which everyone receives his marginal contribution to output, invests less in physical capital than under a perfectly competitive equilibrium environment. Under incomplete knowledge, I analyze and compare how beliefs about the input–output relationship affect the physical capital accumulation dynamics and the long-run standards of living.
Overlapping generations; Family production; Expectation function;
11
2013
37
2168
2179
C62
D84
D91
http://www.sciencedirect.com/science/article/pii/S0165188913001152
Cellarier, Laurent L.
oai:RePEc:eee:dyncon:v:37:y:2013:i:11:p:2217-22402013-11-01RePEc:eee:dyncon
article
Asset allocation over the life cycle: How much do taxes matter?
We study the welfare effect of tax-optimizing portfolio decisions in a life cycle model with unspanned labor income and realization-based capital gain taxation. For realistic parameterizations of our model, certainty equivalent welfare gains from fully tax-optimized portfolio decisions are less than 2% of present financial wealth and lifetime income compared to a heuristic portfolio policy ignoring the taxation of profits (capital gains, interest and dividend payments). Compared to a heuristic portfolio policy that only ignores the realization-based feature of capital gain taxation and instead assumes mark-to-market taxation, these gains are less than 0.5%. That is, our work provides a justification for ignoring taxes in life cycle portfolio choice problems – a wide-spread assumption in that literature. However, if capital gains are forgiven at death (as in the U.S.), investors with strong bequest motives face substantial welfare costs when not tax-optimizing their portfolio decisions towards the end of the life cycle.
Portfolio choice; Life cycle asset allocation; Taxation; Unspanned labor income;
11
2013
37
2217
2240
G11
H24
http://www.sciencedirect.com/science/article/pii/S0165188913001188
Fischer, Marcel
Kraft, Holger
Munk, Claus
oai:RePEc:eee:dyncon:v:37:y:2013:i:11:p:2307-23212013-11-01RePEc:eee:dyncon
article
Pushing the limit? Fiscal policy in the European Monetary Union
Governments are confronted with the growing realization that they face fiscal limits on the size of debt and deficits relative to GDP. These fiscal limits invalidate Bohn's criterion for fiscal sustainability, which allows explosive debt relative to GDP, eventually violating any fiscal limit. We derive restrictions on a fiscal rule, necessary for the government to eliminate explosive behavior. These restrictions require that the response of the primary surplus to debt be relatively strong, and that the primary surplus be cointegrated with both debt and output. We test these empirical implications for a panel of eleven EMU countries, and find that they are satisfied, implying that fiscal policy does not create explosive behavior.
European Monetary Union; Fiscal policy; Fiscal limits; Panel cointegration; Error correction;
11
2013
37
2307
2321
C32
C33
E42
E62
F33
http://www.sciencedirect.com/science/article/pii/S0165188913001358
Daniel, Betty C.
Shiamptanis, Christos
oai:RePEc:eee:dyncon:v:37:y:2013:i:11:p:2322-23352013-11-01RePEc:eee:dyncon
article
A polyhedral approximation approach to concave numerical dynamic programming
This paper introduces a numerical method for solving concave continuous state dynamic programming problems which is based on a pair of polyhedral approximations of concave functions. The method is globally convergent and produces computable upper and lower bounds on the value function which can in theory be made arbitrarily tight. This is true regardless of the pattern of binding constraints, the smoothness of model primitives, and the dimensionality and rectangularity of the state space. We illustrate the method's performance using an optimal firm management problem subject to credit constraints and partial investment irreversibilities.
Numerical methods; Dynamic programming;
11
2013
37
2322
2335
C61
C63
http://www.sciencedirect.com/science/article/pii/S0165188913001334
Fukushima, Kenichi
Waki, Yuichiro
oai:RePEc:eee:dyncon:v:37:y:2013:i:11:p:2351-23702013-11-01RePEc:eee:dyncon
article
The bull and bear market model of Huang and Day: Some extensions and new results
We develop a financial market model with interacting chartists and fundamentalists that embeds the famous bull and bear market model of Huang and Day as a special case. Their model is given by a one-dimensional continuous piecewise-linear map. Our model, on the other hand, is more flexible and is represented by a one-dimensional discontinuous piecewise-linear map. Nevertheless, we are able to provide a more or less complete analytical treatment of the model dynamics by characterizing its possible outcomes in parameter space. In addition, we show that quite different scenarios can trigger real-world phenomena such as bull and bear market dynamics and excess volatility.
Heterogeneous interacting agents; Bull and bear market dynamics; Piecewise-linear maps; Border collision bifurcations;
11
2013
37
2351
2370
C02
D84
G12
G14
http://www.sciencedirect.com/science/article/pii/S0165188913001371
Tramontana, Fabio
Westerhoff, Frank
Gardini, Laura
oai:RePEc:eee:dyncon:v:37:y:2013:i:11:p:2157-21672013-11-01RePEc:eee:dyncon
article
Optimal dynamic tax evasion
We study optimal dynamic tax evasion in the framework proposed by Lin and Yang (2001) and Dzhumashev and Gahramanov (2011) with some modifications: a more flexible utility function, a more realistic audit process, and a penalty function which can be defined both on evaded income and evaded taxes. In the former case the elasticity between tax rate and tax evasion is positive, unless the subsistence consumption level is higher than a given threshold. In the latter case the relationship is usually negative , but the value of elasticity depends on the form of absolute risk aversion. In particular we show that for increasing relative risk aversion, for a tax rate higher than 50%, the elasticity may even become positive. US data are consistent with IRRA preferences.
Optimal dynamic tax evasion; Tax rates;
11
2013
37
2157
2167
G11
H26
H42
http://www.sciencedirect.com/science/article/pii/S0165188913001395
Levaggi, Rosella
Menoncin, Francesco
oai:RePEc:eee:dyncon:v:37:y:2013:i:11:p:2180-21942013-11-01RePEc:eee:dyncon
article
Dynamic pricing for subscription services
This paper investigates the use of pricing schemes in subscription services that consist of various combinations of activation, subscription, and cancellation fees. When customers exclusively consider what is directly perceivable, the activation fee starts low and increases as the network grows (penetration strategy), whereas the cancellation fee starts high and decreases as the network grows (skimming strategy). The activation and cancellation fees take various other forms otherwise. The subscription fee remains low at the early stages and increases only when a reasonable number of subscribers is secured. Finally, the authors discuss the theoretical and managerial implications of their findings.
Subscription service; Activation fee; Cancellation fee; Subscription fee; Optimal control;
11
2013
37
2180
2194
http://www.sciencedirect.com/science/article/pii/S0165188913000961
Fruchter, Gila E.
Sigué, Simon P.
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2397-24162014-11-19RePEc:eee:dyncon
article
Lending constraints, real estate prices and business cycles in emerging economies
We investigate a small open economy with constraints in both the domestic and the international credit market. The informational opaqueness of the domestic market hinders foreign lenders' activity, so that entrepreneurs face looser borrowing constraints vis-à-vis domestic financiers. However, limited capitalization constrains domestic lenders. Calibrating the model to data from Argentina, we find that the interaction between lending and borrowing constraints is a channel through which real interest rate shocks generate fluctuations in output, real estate prices and consumption. External financial liberalization increases volatility and affects welfare more than domestic liberalization but also mitigates the destabilizing impact of domestic deregulation.
Lending constraints; Real estate prices; Business fluctuations;
12
2013
37
2397
2416
http://www.sciencedirect.com/science/article/pii/S0165188913001656
Minetti, Raoul
Peng, Tao
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:152-1672014-11-19RePEc:eee:dyncon
article
Does the labor-income process contain a unit root? Evidence from individual-specific time series
Calibrations of models related to life-cycle behavior of consumption and saving often invoke the important assumption of a unit root in individuals׳ labor-income process. We for the first time test this assumption using methods for univariate time series. Based on longitudinal register data from 1968 to 2005, we first estimate an autoregressive model for each individual using a method for approximately median-unbiased estimation. We then exploit the resulting distribution of the individual-specific estimates to draw inference about the presence of a unit root. Results indicate that earnings for the representative worker are governed by a process where shocks to earnings have moderate persistence and are both economically and statistically significantly different from having permanent effects. These results question the heavy use of unit-root processes for earnings.
Income risk; Earnings dynamics; Median-unbiased estimation;
C
2014
47
152
167
C22
C23
J31
http://www.sciencedirect.com/science/article/pii/S0165188914001754
Gustavsson, Magnus
Österholm, Pär
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:1001-10182014-11-19RePEc: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:34:y:2010:i:4:p:798-8152014-11-19RePEc: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/pii/S0165-1889(09)00216-4
Mariani, Fabio
Pérez-Barahona, Agustín
Raffin, Natacha
oai:RePEc:eee:dyncon:v:44:y:2014:i:c:p:235-2502014-11-19RePEc:eee:dyncon
article
On-the-job search and cyclical unemployment: Crowding out vs. vacancy effects
Incorporating on-the-job search (OTJS) into a real business cycle model has been shown to increase the cyclical volatility of unemployment. Using a particularly simple model of OTJS, we show that the increased search of employed workers during expansions induces firms to open more vacancies, but also crowds out unemployed workers in the job search, resulting in an ambiguous overall effect on unemployment volatility. We show analytically and numerically that the difference between the employer׳s share of the match surplus with an employed versus an unemployed job seeker determines the degree to which OTJS increases unemployment volatility. We use this result to re-consider some related papers of OTJS and explain the amplification of volatility they obtain. Finally, we show that a plausible calibration of the OTJS model allows us to reproduce most significant features of the US labor data.
On-the-job search; Cyclical properties;
C
2014
44
235
250
E24
E32
J64
http://www.sciencedirect.com/science/article/pii/S0165188914001109
Martin, Daniel
Pierrard, Olivier
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:210-2302014-11-19RePEc: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:11:p:2195-22162014-11-19RePEc:eee:dyncon
article
Measuring and predicting heterogeneous recessions
This paper examines the usefulness of a more refined business cycle classification for monthly industrial production (IP), beyond the usual distinction between expansions and contractions. Univariate Markov-switching models show that a three regime model is more appropriate than a model with only two regimes. Interestingly, the third regime captures ‘severe recessions’, contrasting the conventional view that the additional third regime represents a ‘recovery’ phase. This is confirmed by means of Markov-switching vector autoregressive models that allow for phase shifts between the cyclical regimes of IP and the Conference Board's Leading Economic Index (LEI). The timing of the severe recession regime mostly corresponds with periods of substantial financial market distress and severe credit squeezes, providing empirical evidence for the ‘financial accelerator’ theory.
Business cycle; Phase shifts; Regime-switching models; Bayesian analysis; Financial accelerator;
11
2013
37
2195
2216
C11
C32
C51
C52
http://www.sciencedirect.com/science/article/pii/S016518891300136X
Çakmaklı, Cem
Paap, Richard
van Dijk, Dick
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:258-2652014-11-19RePEc: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/pii/S0165-1889(09)00163-8
Jørgensen, Steffen
oai:RePEc:eee:dyncon:v:33:y:2009:i:11:p:1880-18962014-11-19RePEc: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/pii/S0165-1889(09)00112-2
Llosa, Luis-Gonzalo
Tuesta, Vicente
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:150-1672014-11-19RePEc: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:37:y:2013:i:7:p:1248-12632014-11-19RePEc:eee:dyncon
article
Optimal oil production and the world supply of oil
We study the optimal oil extraction strategy and the value of an oil field using a multiple real option approach. The numerical method is flexible enough to solve a model with several state variables, to discuss the effect of risk aversion, and to take into account uncertainty in the size of reserves. Optimal extraction in the baseline model is found to be volatile. If the oil producer is risk averse, production is more stable, but spare capacity is much higher than what is typically observed. We show that decisions are very sensitive to expectations on the equilibrium oil price using a mean reverting model of the oil price where the equilibrium price is also a random variable. Oil production was cut during the 2008–2009 crisis, and we find that the cut in production was larger for OPEC members, for countries facing a lower discount rate, and for countries whose governments' finances are less dependent on oil revenues. However, the net present value of a country's oil reserves would be increased significantly (by 100%, in the most extreme case) if production was cut completely when prices fall below the country's threshold price. If several producers were to adopt such strategies, world oil prices would be higher but more stable.
Oil production; Real options; Capacity expansion; Equilibrium price of oil; OPEC;
7
2013
37
1248
1263
C61
Q30
Q43
http://www.sciencedirect.com/science/article/pii/S0165188913000389
Aleksandrov, Nikolay
Espinoza, Raphael
Gyurkó, Lajos
oai:RePEc:eee:dyncon:v:45:y:2014:i:c:p:289-3142014-11-19RePEc:eee:dyncon
article
Model uncertainty and intertemporal tax smoothing
In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB improves the model׳s predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending, (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government budget deficits in the U.S. economy. Finally, we show that RB can also improve the model׳s predictions in the presence of multiple shocks.
Robustness; Model uncertainty; Taxation smoothing;
C
2014
45
289
314
D83
E6
H3
H6
http://www.sciencedirect.com/science/article/pii/S0165188914001420
Luo, Yulei
Nie, Jun
Young, Eric R.
oai:RePEc:eee:dyncon:v:43:y:2014:i:c:p:31-572014-11-19RePEc:eee:dyncon
article
The credit crunch and fall in employment during the Great Recession
We study how a bank credit crunch—a dramatic worsening of firm and consumer access to bank credit, such as the one observed over the Great Recession—translates into job losses in U.S. manufacturing industries. To identify the impact of the recent credit crunch, we rely on differences in the degree of dependence on external finance and of tangibility of assets across manufacturing industries and in the sensitivity of these industries׳ output to changes in the supply of consumer credit. We find that, for employment, household access to bank loans matters more than firm access to bank loans. In addition, we show that, over the recent financial crisis, tightening access to commercial and industrial loans and, in particular, consumer installment loans may have contributed significantly to the drop in employment in the manufacturing sector.
Bank credit; Credit crunch; Job losses; Great Recession; Senior Loan Officer Opinion Survey;
C
2014
43
31
57
G21
G28
G30
J20
L25
http://www.sciencedirect.com/science/article/pii/S0165188914000815
Haltenhof, Samuel
Jung Lee, Seung
Stebunovs, Viktors
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:94-1142014-11-19RePEc:eee:dyncon
article
Learning and time-varying macroeconomic volatility
This paper presents a DSGE model in which agents׳ learning about the economy can endogenously generate time-varying macroeconomic volatility. Economic agents use simple models to form expectations and need to learn the relevant parameters. Their gain coefficient is endogenous and is adjusted according to past forecast errors.
Adaptive learning; Constant gain; Monetary policy; Macroeconomic volatility; Inflation dynamics;
C
2014
47
94
114
C11
D84
E30
E52
E58
E66
http://www.sciencedirect.com/science/article/pii/S0165188914001808
Milani, Fabio
oai:RePEc:eee:dyncon:v:45:y:2014:i:c:p:66-792014-11-19RePEc:eee:dyncon
article
No-Arbitrage ROM simulation
Ledermann et al. (2011) propose random orthogonal matrix (ROM) simulation for generating multivariate samples matching means and covariances exactly. Its computational efficiency compared to standard Monte Carlo methods makes it an interesting alternative. In this paper we enhance this method׳s attractiveness by focusing on applications in finance. Many financial applications require simulated asset returns to be free of arbitrage opportunities. We analytically derive no-arbitrage bounds for expected excess returns to be used in the context of ROM simulation, and we establish the theoretical relation between the number of states (i.e., the sample size) and the size of (no-)arbitrage regions. Based on these results, we present a No-Arbitrage ROM simulation algorithm, which generates arbitrage-free random samples by purposefully rotating a simplex. Hence, the proposed algorithm completely avoids any need for checking samples for arbitrage. Compared to the alternative of (potentially frequent) re-sampling followed by arbitrage checks, it is considerably more efficient. As a by-product, we provide interesting geometrical insights into affine transformations associated with the No-Arbitrage ROM simulation algorithm.
Financial scenario generation; ROM simulation; No-arbitrage bounds; Simplex; Rotation matrix;
C
2014
45
66
79
C63
G11
G12
http://www.sciencedirect.com/science/article/pii/S0165188914001250
Geyer, Alois
Hanke, Michael
Weissensteiner, Alex
oai:RePEc:eee:dyncon:v:35:y:2011:i:5:p:813-8132014-11-19RePEc: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/pii/S0165-1889(11)00010-8
Aliaga-Díaz, Roger
Olivero, María Pía
oai:RePEc:eee:dyncon:v:27:y:2003:i:11:p:2195-22062014-11-19RePEc:eee:dyncon
article
Competitive dynamics of web sites
We present a dynamical model of web site growth in order to explore the effects of competition among web sites and to determine how they affect the nature of markets. We show that under general conditions, as the competition between sites increases, the model exhibits a sudden transition from a regime in which many sites thrive simultaneously, to a “winner-take-all market” in which a few sites grab almost all the users, while most other sites go nearly extinct. This is in agreement with recent measurements on the nature of electronic markets.
Winner-take-all; Competition; Dynamics; Equilibrium;
11
2003
27
2195
2206
D59
L11
http://www.sciencedirect.com/science/article/pii/S0165188902001215
Maurer, Sebastian M.
Huberman, Bernardo A.
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:545-5642014-11-19RePEc: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/pii/S0165-1889(10)00252-6
Cwik, Tobias
Müller, Gernot J.
Wolters, Maik H.
oai:RePEc:eee:dyncon:v:33:y:2009:i:8:p:1604-16162014-11-19RePEc: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/pii/S0165-1889(09)00047-5
Dennis, Richard
Leitemo, Kai
Söderström, Ulf
oai:RePEc:eee:dyncon:v:34:y:2010:i:6:p:1077-10912014-11-19RePEc: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/pii/S0165-1889(10)00012-6
Kitti, Mitri
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:616-6222014-11-19RePEc: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/pii/S0165-1889(10)00233-2
Wälde, Klaus
oai:RePEc:eee:dyncon:v:35:y:2011:i:11:p:1852-18672014-11-19RePEc: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:37:y:2013:i:7:p:1231-12472014-11-19RePEc:eee:dyncon
article
Second-order approximation of dynamic models with time-varying risk
This paper provides first and second-order approximation methods for the solution of non-linear dynamic stochastic models in which the exogenous state variables follow conditionally linear stochastic processes displaying time-varying risk. The first-order approximation is consistent with a conditionally linear model in which risk is still time-varying but has no distinct role – separated from the primitive stochastic disturbances – in influencing the endogenous variables. The second-order approximation of the solution, instead, is sufficient to get this role. Moreover, risk premia, evaluated using only a first-order approximation of the solution, will be also time varying.
Solution method; Uncertainty shocks; Risk;
7
2013
37
1231
1247
C63
E37
http://www.sciencedirect.com/science/article/pii/S0165188913000626
Benigno, Gianluca
Benigno, Pierpaolo
Nisticò, Salvatore
oai:RePEc:eee:dyncon:v:43:y:2014:i:c:p:12-302014-11-19RePEc:eee:dyncon
article
In search for yield? Survey-based evidence on bank risk taking
Monetary policy can have an impact on economic and financial stability through the risk taking of banks. Falling interest rates might induce investment into risky activities. This paper provides evidence on the link between monetary policy and bank risk taking. We use a factor-augmented vector autoregressive model (FAVAR) for the US for the period 1997–2008. Besides standard macroeconomic indicators, we include factors summarizing information provided in the Federal Reserve’s Survey of Terms of Business Lending (STBL). These data provide information on banks׳ new loans as well as interest rates for different loan risk categories and different banking groups. We identify a risk-taking channel of monetary policy by distinguishing responses to monetary policy shocks across different types of banks and different loan risk categories. Following an expansionary monetary policy shock, small domestic banks increase their exposure to risk. Large domestic banks do not change their risk exposure. Foreign banks take on more risk only in the mid-2000s, when interest rates were ‘too low for too long’.
FAVAR; Bank risk taking; Macro-finance linkages; Monetary policy;
C
2014
43
12
30
E44
G21
http://www.sciencedirect.com/science/article/pii/S0165188914000281
Buch, Claudia M.
Eickmeier, Sandra
Prieto, Esteban
oai:RePEc:eee:dyncon:v:32:y:2008:i:6:p:1830-18562014-11-19RePEc: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/pii/S0165-1889(07)00166-2
Bernard, A.
Haurie, A.
Vielle, M.
Viguier, L.
oai:RePEc:eee:dyncon:v:46:y:2014:i:c:p:271-3052014-11-19RePEc:eee:dyncon
article
Optimal monetary policy rules, financial amplification, and uncertain business cycles
This paper studies optimal monetary policy in the presence of ‘uncertainty’, time-variation in cross-sectional dispersion of firms׳ productive performance. Using a model with financial market imperfections, the results suggest that (i) optimal policy is to dampen the strength of financial amplification by responding to uncertainty (at the expense of creating mild degree of fluctuations in inflation). (ii) Higher uncertainty makes the welfare-maximizing planner more willing to relax financial constraints. (iii) Credit spreads are a good proxy for uncertainty. Hence, a non-negligible response to credit spreads – together with a strong anti-inflationary policy stance – achieves the highest aggregate welfare possible.
Optimal monetary policy; Financial amplification; Uncertainty shocks;
C
2014
46
271
305
http://www.sciencedirect.com/science/article/pii/S0165188914001468
Fendoğlu, Salih
oai:RePEc:eee:dyncon:v:33:y:2009:i:5:p:1159-11692014-11-19RePEc: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/pii/S0165-1889(09)00035-9
Assenza, Tiziana
Berardi, Michele
oai:RePEc:eee:dyncon:v:45:y:2014:i:c:p:366-3882014-11-19RePEc:eee:dyncon
article
Solvability of perturbation solutions in DSGE models
We prove that the undetermined Taylor series coefficients of local approximations to the policy function of arbitrary order in a wide class of discrete time dynamic stochastic general equilibrium (DSGE) models are solvable by standard DSGE perturbation methods under regularity and saddle point stability assumptions on first order approximations. Extending the approach to nonstationary models, we provide necessary and sufficient conditions for solvability, as well as an example in the neoclassical growth model where solvability fails. Finally, we eliminate the assumption of solvability needed for the local existence theorem of perturbation solutions, complete the proof that the policy function is invariant to first order changes in risk, and attribute the loss of numerical accuracy in progressively higher order terms to the compounding of errors from the first order transition matrix.
Perturbation; DSGE; Nonlinear; Sylvester equations; Solvability; Bézout׳s theorem;
C
2014
45
366
388
C61
C63
E17
http://www.sciencedirect.com/science/article/pii/S0165188914001432
Lan, Hong
Meyer-Gohde, Alexander
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1393-14042014-11-19RePEc: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:33:y:2009:i:9:p:1699-17182014-11-19RePEc: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/pii/S0165-1889(09)00065-7
Benchekroun, Hassan
Martín-Herrán, Guiomar
Taboubi, Sihem
oai:RePEc:eee:dyncon:v:33:y:2009:i:1:p:250-2652014-11-19RePEc: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/pii/S0165-1889(08)00100-0
Tramontana, Fabio
Gardini, Laura
Puu, Tönu
oai:RePEc:eee:dyncon:v:43:y:2014:i:c:p:146-1742014-11-19RePEc:eee:dyncon
article
Should monetary policy lean against the wind?
The global financial crisis has reaffirmed the importance of financial factors for macroeconomic fluctuations. Recent work has shown how the conventional pre-crisis prescription that monetary policy should pay no attention to financial variables over and above their effects on inflation may no longer be valid in models that consider frictions in financial intermediation (Cúrdia and Woodford, 2009). This paper analyzes whether Taylor rules augmented with asset prices and credit can improve upon a standard rule both in terms of macroeconomic stabilization and of agents׳ welfare in a DSGE with both a firms׳ balance-sheet channel and a bank-lending channel and in which the spread between lending and policy rates endogenously depends on banks׳ leverage. The main result is that, even in a model in which financial stability does not represent a distinctive policy objective, leaning-against-the-wind policies are desirable in the case of supply side shocks, while strict inflation targeting and a standard rule are less effective. The gains are amplified if the economy is characterized by high private sector indebtedness. Robustness shows that the interaction between financial frictions and debt-deflation effects is potentially very powerful.
DSGE; Monetary policy; Asset prices; Credit channel; Taylor rule; Leaning-against-the-wind;
C
2014
43
146
174
E30
E44
E50
http://www.sciencedirect.com/science/article/pii/S016518891400027X
Gambacorta, Leonardo
Signoretti, Federico M.
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:312-3282014-11-19RePEc: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:34:y:2010:i:4:p:710-7242014-11-19RePEc: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/pii/S0165-1889(09)00201-2
Frey, Rüdiger
Backhaus, Jochen
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:1000-10142014-11-19RePEc: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/pii/S0165-1889(07)00118-2
Ruiz-Tamarit, José Ramón
oai:RePEc:eee:dyncon:v:36:y:2012:i:6:p:862-8752014-11-19RePEc: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:35:y:2011:i:7:p:1032-10442014-11-19RePEc: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:34:y:2010:i:10:p:2038-20552014-11-19RePEc: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/pii/S0165-1889(10)00093-X
Díaz, Roger Aliaga
Olivero, María Pía
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:296-3112014-11-19RePEc: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:39:y:2014:i:c:p:237-2542014-11-19RePEc:eee:dyncon
article
Optimal consumption under uncertainty, liquidity constraints, and bounded rationality
I study how boundedly rational agents can learn a "good" solution to an infinite horizon optimal consumption problem under uncertainty and liquidity constraints. Using an empirically plausible theory of learning I propose a class of adaptive learning algorithms that agents might use to choose a consumption rule. I show that the algorithm always has a globally asymptotically stable consumption rule, which is optimal. Additionally, I present extensions of the model to finite horizon settings, where agents have finite lives and life-cycle income patterns. This provides a simple and parsimonious model of consumption for large agent based models.
C
2014
39
237
254
C6
D8
D9
E21
http://www.sciencedirect.com/science/article/pii/S0165188913002431
Ozak, Omer
oai:RePEc:eee:dyncon:v:37:y:2013:i:8:p:1479-14992014-11-19RePEc:eee:dyncon
article
The real consequences of financial stress
We introduce a dynamic banking-macro model, which abstains from conventional mean-reversion assumptions and in which—similar to Brunnermeier and Sannikov (2010)—adverse asset-price movements and their impact on risk premia and credit spreads can induce instabilities in the banking sector. To assess such phenomena empirically, we employ a multi-regime vector autoregression (MRVAR) approach rather than conventional linear vector autoregressions. We conduct bivariate empirical analyses, using country-specific financial-stress indices and industrial production, for the U.S., the UK and the four large euro-area countries. Our MRVAR-based impulse-response studies demonstrate that, compared to a linear specification, response profiles are dependent on the current state of the economy as well as the sign and size of shocks. Previous multi-regime-based studies, focusing solely on the regime-dependence of responses, conclude that, during a high-stress period, stress-increasing shocks have more dramatic consequences for economic activity than during low stress. Conducting size-dependent response analysis, we find that this holds only for small shocks and reverses when shocks become sufficiently large to induce immediate regime switches. Our findings also suggest that, in states of high financial stress, large negative shocks to financial-stress have sizeable positive effects on real activity and support the idea of “unconventional” monetary policy measures in cases of extreme financial stress.
Banking-sector instability; Monetary policy; Nonlinear VAR; Regime dependence;
8
2013
37
1479
1499
E2
E6
C13
http://www.sciencedirect.com/science/article/pii/S0165188913000912
Mittnik, Stefan
Semmler, Willi
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:577-5842014-11-19RePEc: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/pii/S0165-1889(09)00198-5
Nishimura, Kazuo
Stachurski, John
oai:RePEc:eee:dyncon:v:33:y:2009:i:9:p:1648-16612014-11-19RePEc: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/pii/S0165-1889(09)00052-9
Böhringer, Christoph
Rutherford, Thomos F.
oai:RePEc:eee:dyncon:v:34:y:2010:i:9:p:1700-17312014-11-19RePEc: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/pii/S0165-1889(10)00158-2
Castelnuovo, Efrem
Nisticò, Salvatore
oai:RePEc:eee:dyncon:v:43:y:2014:i:c:p:175-1982014-11-19RePEc:eee:dyncon
article
Bank capital and the macroeconomy: Policy considerations
We develop a macroeconomic model in which the balance sheet condition of financial institutions plays an important role in the determination of asset prices and economic activity. The financial intermediaries in our model are required to make investment commitments before a complete resolution of idiosyncratic funding risk that can be addressed only by costly refinancing, forcing them to behave in a risk-averse manner. The model shows that the balance sheet condition of intermediaries can drive asset values away from their fundamentals, causing aggregate investment and output to respond to shocks to intermediaries. We use this model to evaluate several public policies designed to address balance sheet problems at financial institutions. With regard to short-run policies, we find that capital injections conditioned upon voluntary recapitalization can be a more effective tool than asset purchases. With regard to long-run policies, we demonstrate that higher capital requirements can have sizable short-run effects on economic activity, and that a long transition period helps avoid undesirable side effects. Finally, we show that the marginal effects of policies can be larger during “crises” because of the nonlinear interactions between some financial frictions and policy actions.
Financial intermediation; Crisis policies;
C
2014
43
175
198
E44
E58
http://www.sciencedirect.com/science/article/pii/S0165188914000384
Kiley, Michael T.
Sim, Jae W.
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:123-1512014-11-19RePEc:eee:dyncon
article
Measuring the effects of fiscal policy
Measuring the effects of discretionary fiscal policy is both difficult and controversial, as some explicit or implicit identifying assumptions need to be made to isolate exogenous and unanticipated changes in taxes and government spending. Studies based on structural vector autoregressions typically achieve identification by restricting the contemporaneous interaction of fiscal and non-fiscal variables in a rather arbitrary way. In this paper, we relax those restrictions and identify fiscal policy shocks by exploiting the conditional heteroscedasticity of the structural disturbances. We use this methodology to evaluate the macroeconomic effects of fiscal policy shocks in the U.S. before and after 1979. Our results show substantive differences in the economy׳s response to government spending and tax shocks across the two periods. Importantly, we find that increases in public spending are, in general, more effective than tax cuts in stimulating economic activity. A key contribution of this study is to provide a formal test of the identifying restrictions commonly used in the literature.
Fiscal policy; Government spending; Taxes; Primary deficit; Structural vector auto-regression; Identification;
C
2014
47
123
151
C32
E62
H20
H50
H60
http://www.sciencedirect.com/science/article/pii/S0165188914001936
Bouakez, Hafedh
Chihi, Foued
Normandin, Michel
oai:RePEc:eee:dyncon:v:35:y:2011:i:11:p:1898-19152014-11-19RePEc: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:33:y:2009:i:3:p:583-5962014-11-19RePEc: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/pii/S0165-1889(08)00148-6
Jørgensen, Steffen
Kort, Peter M.
Zaccour, Georges
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:231-2502014-11-19RePEc: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:47:y:2014:i:c:p:300-3162014-11-19RePEc:eee:dyncon
article
Social security and retirement across the OECD
Employment to population ratios differ markedly across Organization for Economic Cooperation and Development (OECD) countries, especially for people aged over 55 years. In addition, social security features differ markedly across the OECD, particularly with respect to features such as generosity, entitlement ages, and implicit taxes on social security benefits. This study postulates that differences in social security features explain many differences in employment to population ratios at older ages. This conjecture is assessed quantitatively with a life cycle general equilibrium model of retirement. At ages 60–64 years, the correlation between the simulations of this study׳s model and observed data is 0.67. Generosity and implicit taxes are key features to explain the cross-country variation, whereas entitlement age is not.
Social security; Retirement; Idiosyncratic labor income risk;
C
2014
47
300
316
E24
H53
J14
J26
http://www.sciencedirect.com/science/article/pii/S0165188914001778
Alonso-Ortiz, Jorge
oai:RePEc:eee:dyncon:v:33:y:2009:i:3:p:676-6912014-11-19RePEc: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/pii/S0165-1889(08)00162-0
Bayraktar, Erhan
Milevsky, Moshe A.
David Promislow, S.
Young, Virginia R.
oai:RePEc:eee:dyncon:v:36:y:2012:i:3:p:433-4542014-11-19RePEc: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:37:y:2013:i:9:p:1889-19102014-11-19RePEc:eee:dyncon
article
Stability of the World Trade Web over time – An extinction analysis
The World Trade Web (WTW) is a weighted network whose nodes correspond to countries while edge weights reflecting the value of imports and/or exports between countries. In this paper we introduce to this macroeconomic system the notion of extinction analysis, a technique often used in the analysis of ecosystems, for the purpose of investigating the robustness of this network. In particular, we subject the WTW to a principled set of in silico “knockout experiments,” akin to those carried out in the investigation of food webs, but suitably adapted to this macroeconomic network. Informed by results in network theory as well as studies of contagion in economic networks, we seek to understand the role of connectance in the robustness of the system. We interpret increasing connectance as one aspect of a move towards globalization and liberalized trade policy. Broadly, our experiments confirm two conjectures. First, that the WTWs are “robust yet fragile” networks — robust to random failures but fragile under targeted attack. Second, that growing connectance has both positive and negative impacts on robustness. More specifically, we find that increasing connectance corresponds to increasing robustness for small shocks but to decreasing robustness in the face of large, cascading shocks up to the system. This yields evidence in support of the view that globalization, as witnessed by increasing connectance, increases the ability of a system to absorb shock up until a certain size, whereupon the shock overwhelms the system and sparks a broader contagion. We anticipate that experiments and measures like these can play an important role in the evaluation of the stability of economic systems.
World Trade Web; Network; Food web; Robustness; Robust-yet-fragile; Knockout experiments; Simulation; Stability; Import–export;
9
2013
37
1889
1910
C63
F14
http://www.sciencedirect.com/science/article/pii/S0165188913000869
Foti, Nicholas J.
Pauls, Scott
Rockmore, Daniel N.
oai:RePEc:eee:dyncon:v:43:y:2014:i:c:p:130-1452014-11-19RePEc:eee:dyncon
article
Financial innovation and bank behavior: Evidence from credit markets
This paper investigates whether, and through which channel, the active use of credit derivatives changes bank behavior in the credit market, and how this channel was affected by the crisis of 2007–2009. Our principal finding is that banks with larger gross positions in credit derivatives charge significantly lower corporate loan spreads, while banks׳ net positions are not consistently related to loan pricing. We argue that this is consistent with banks passing on risk management benefits to corporate borrowers but not with alternative channels through which credit derivative use may affect loan pricing. We also find that the magnitude of the risk management effect remained unchanged during the crisis period of 2007–2009. In addition, banks with larger gross positions in credit derivatives cut their lending by less than other banks during the crisis and have consistently lower loan charge-offs. In sum, our study is suggestive of significant risk management benefits from financial innovations that persist under adverse conditions – that is, when they matter most.
Financial innovation; Credit derivatives; Syndicated loans; Loan pricing; Financial crisis;
C
2014
43
130
145
G1
G2
http://www.sciencedirect.com/science/article/pii/S0165188914000268
Norden, Lars
Silva Buston, Consuelo
Wagner, Wolf
oai:RePEc:eee:dyncon:v:42:y:2014:i:c:p:69-852014-11-19RePEc:eee:dyncon
article
Repeated moral hazard and recursive Lagrangeans
This paper shows how to solve dynamic agency models by extending recursive Lagrangean techniques à laMarcet and Marimon (2011) to problems with hidden actions. The method has many advantages with respect to the promised utilities approach (Abreu et al., 1990): it is a significant improvement in terms of simplicity, tractability and computational speed. Solutions can be easily computed for hidden actions models with several endogenous state variables and several agents, while the promised utilities approach becomes extremely difficult and computationally intensive even with just one state variable or two agents.
Repeated moral hazard; Recursive Lagrangean; Computational methods; Collocation;
C
2014
42
69
85
C61
C63
D82
http://www.sciencedirect.com/science/article/pii/S0165188914000669
Mele, Antonio
oai:RePEc:eee:dyncon:v:35:y:2011:i:6:p:891-9082014-11-19RePEc: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/pii/S0165-1889(10)00281-2
Boyce, John R.
Nøstbakken, Linda
oai:RePEc:eee:dyncon:v:35:y:2011:i:3:p:386-3932014-11-19RePEc: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/pii/S0165-1889(10)00221-6
Aldrich, Eric M.
Fernández-Villaverde, Jesús
Ronald Gallant, A.
Rubio-Ramírez, Juan F.
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:1-192014-11-19RePEc:eee:dyncon
article
The shadow economy as an equilibrium outcome
We construct a dynamic general equilibrium model of tax evasion where agents choose to report some of their income. Unreported income requires using a payment method that avoids recordkeeping in some markets—cash. Trade using cash to avoid taxes is the ‘shadow economy’ in our model. We then calibrate our model using money, interest rate and GDP data to back out the size of the shadow economy for a sample of countries and compare our measures to traditional reduced form estimates.
Informal sector; Search; Money; Credit;
C
2014
41
1
19
E4
E5
http://www.sciencedirect.com/science/article/pii/S0165188914000517
Gomis-Porqueras, Pedro
Peralta-Alva, Adrian
Waller, Christopher
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:709-7562014-11-19RePEc: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/pii/S0165-1889(07)00090-5
Nyström, Kaj
oai:RePEc:eee:dyncon:v:27:y:2003:i:11:p:1993-20062014-11-19RePEc:eee:dyncon
article
Do adjustment costs explain investment-cash flow insensitivity?
In this paper, I explain two “puzzles” that have been observed in firm level data. First, firms that display a high sensitivity of investment to cash flow (commonly believed to be an indicator of liquidity constraints) usually have large unutilized lines of credit which, presumably, could be used to overcome the shortage of funds. Second, firms that are perceived to be extremely liquidity constrained actually show very little sensitivity of investment to cash flow.
Liquidity constraints; Adjustment costs; Tobin's q;
11
2003
27
1993
2006
E22
G31
http://www.sciencedirect.com/science/article/pii/S0165188902001136
Pratap, Sangeeta
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2562-25812014-11-19RePEc:eee:dyncon
article
Learning cycles in Bertrand competition with differentiated commodities and competing learning rules
This paper stresses the importance of heterogeneity in learning. We consider a Bertrand oligopoly with firms using either least squares learning or gradient learning for determining the price. We demonstrate that convergence properties of the rules are strongly affected by heterogeneity. In particular, gradient learning may become unstable as the number of gradient learners increases. Endogenous choice between the learning rules may induce cyclical switching. Stable gradient learning gives higher average profit than least squares learning, making firms switch to gradient learning. This can destabilize gradient learning which, because of decreasing profits, makes firms switch back to least squares learning.
Bertrand competition; Heterogeneous agents; Least squares learning; Gradient learning; Endogenous switching;
12
2013
37
2562
2581
C63
C72
D43
http://www.sciencedirect.com/science/article/pii/S0165188913001425
Anufriev, Mikhail
Kopányi, Dávid
Tuinstra, Jan
oai:RePEc:eee:dyncon:v:34:y:2010:i:11:p:2358-23742014-11-19RePEc: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/pii/S0165-1889(10)00134-X
Martínez-Jaramillo, Serafín
Pérez, Omar Pérez
Embriz, Fernando Avila
Dey, Fabrizio López Gallo
oai:RePEc:eee:dyncon:v:36:y:2012:i:7:p:1042-10562014-11-19RePEc: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:11:p:2341-23572014-11-19RePEc: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/pii/S0165-1889(10)00133-8
Duellmann, Klaus
Küll, Jonathan
Kunisch, Michael
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:757-7782014-11-19RePEc: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/pii/S0165-1889(07)00091-7
Kumru, Çagri S.
Thanopoulos, Athanasios C.
oai:RePEc:eee:dyncon:v:32:y:2008:i:6:p:1812-18292014-11-19RePEc: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/pii/S0165-1889(07)00165-0
Córdoba, Juan Carlos
Verdier, Geneviève
oai:RePEc:eee:dyncon:v:32:y:2008:i:5:p:1466-14882014-11-19RePEc: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/pii/S0165-1889(07)00144-3
Maria-Dolores, Ramón
Vázquez, Jesús
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:611-6322014-11-19RePEc: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:9:p:1771-17952014-11-19RePEc:eee:dyncon
article
Household debt and labor market fluctuations
The co-movements of labor productivity with output, total hours, vacancies and unemployment have changed since the mid 1980s. This paper offers an explanation for the sharp break in the fluctuations of labor market variables based on endogenous labor supply decisions following the mortgage market deregulation. We set up a search model with efficient bargaining and financial frictions, in which impatient borrowers can take an amount of credit that cannot exceed a proportion of the expected value of their real estate holdings. When borrowers' equity requirements are low, the impact of a positive technology shock on the marginal utility of consumption is strengthened, which in turn results in lower hours per worker and higher wages in the bargaining process. This shift in labor supply discourages firms from opening vacancies, reducing the impact of the shock on employment. We simulate the effects of an increase in both the loan-to-value ratio and the share of borrowers in total population. Our exercise shows that the response of labor market variables might have been substantially affected by the increase in household leverage in the US in the last twenty years.
E24; E32; E44; Business cycle; Labor market; Borrowing restrictions;
9
2013
37
1771
1795
http://www.sciencedirect.com/science/article/pii/S0165188913000663
Andrés, Javier
Boscá, José E.
Ferri, Javier
oai:RePEc:eee:dyncon:v:37:y:2013:i:9:p:1852-18712014-11-19RePEc:eee:dyncon
article
On the informational role of term structure in the US monetary policy rule
This paper uses a structural approach based on the indirect inference principle to estimate a standard version of the new Keynesian monetary (NKM) model augmented with term structure using both revised and real-time data. The estimation results show that the term spread and policy inertia are both important determinants of the US estimated monetary policy rule whereas the persistence of shocks plays a small but significant role when revised and real-time data of output and inflation are both considered. More importantly, the relative importance of term spread and persistent shocks in the policy rule and the shock transmission mechanism drastically change when it is taken into account that real-time data are not well behaved.
NKM model; Term structure; Monetary policy rule; Indirect inference; Real-time and revised data;
9
2013
37
1852
1871
C32
E30
E52
http://www.sciencedirect.com/science/article/pii/S0165188913000705
Vázquez, Jesús
María-Dolores, Ramón
Londoño, Juan-Miguel
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:136-1492014-11-19RePEc: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:37:y:2013:i:8:p:1626-16402014-11-19RePEc:eee:dyncon
article
Leveraged network-based financial accelerator
In this paper we build on the network-based financial accelerator model of Delli Gatti et al. (2010), modelling the firms' financial structure following the “dynamic trade-off theory”, instead of the “packing order theory”. Moreover, we allow for multiperiodal debt structure and consider multiple bank-firm links based on a myopic preferred-partner choice. In case of default, we also consider the loss given default rate (LGDR). We find many results: (i) if leverage increases, the economy is riskier; (ii) a higher leverage pro-cyclicality has a destabilizing effect; (iii) a pro-cyclical leverage weakens the monetary policy effect; (iv) a central bank that wants to increase the interest rate should previously check if the banking system is well capitalized; (v) an increase of the reserve coefficient has an impact similar to that produced by raising the policy rate, but for the enlargement of bank reserves that improves the resilience of the banking system to shocks.
Leverage; Dynamic trade-off theory; Network; Bankruptcy cascades; Monetary policy; Macroprudential regulation;
8
2013
37
1626
1640
C63
E32
E52
G01
http://www.sciencedirect.com/science/article/pii/S0165188913000419
Riccetti, Luca
Russo, Alberto
Gallegati, Mauro
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:858-8742014-11-19RePEc: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/pii/S0165-1889(10)00002-3
Boug, Pål
Cappelen, Adne
Swensen, Anders Rygh
oai:RePEc:eee:dyncon:v:36:y:2012:i:10:p:1520-15332014-11-19RePEc:eee:dyncon
article
Do institutional changes affect business cycles? Evidence from Europe
We study the effects that the Maastricht Treaty, the creation of the ECB, and the Euro changeover had on the dynamics of European business cycles using a panel VAR and data from 10 European countries—seven from the Euro area and three outside of it. There are changes in the features of European business cycles and in the transmission of shocks. They precede the three events of interest and are more linked to a general process of European convergence and synchronization.
Business cycles; European Monetary Union; Panel VAR; Structural changes;
10
2012
36
1520
1533
C15
C33
E32
E42
http://www.sciencedirect.com/science/article/pii/S0165188912000942
Canova, Fabio
Ciccarelli, Matteo
Ortega, Eva
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:32-512014-11-19RePEc: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:36:y:2012:i:8:p:1248-12662014-11-19RePEc:eee:dyncon
article
The impact of a financial transaction tax on stylized facts of price returns—Evidence from the lab
As the introduction of financial transaction taxes is increasingly discussed by political leaders we explore possible consequences such taxes could have on markets. Here we examine how “stylized facts”, namely fat tails and volatility clustering, are affected by different tax regimes in laboratory experiments. We find that leptokurtosis of price returns is highest and clustered volatility is weakest in unilaterally taxed markets (where tax havens exist). Instead, tails are slimmest and volatility clustering is strongest in tax havens. When an encompassing financial transaction tax is levied, stylized facts hardly change compared to a scenario with no tax on all markets.
Financial transaction tax; Stylized facts; Fat tails; Volatility clustering; Experiment;
8
2012
36
1248
1266
C91
E62
F31
http://www.sciencedirect.com/science/article/pii/S0165188912000838
Huber, Jürgen
Kleinlercher, Daniel
Kirchler, Michael
oai:RePEc:eee:dyncon:v:46:y:2014:i:c:p:1-292014-11-19RePEc:eee:dyncon
article
A dynamic autoregressive expectile for time-invariant portfolio protection strategies
“Constant proportion portfolio insurance” is a popular technique among portfolio insurance strategies: the risky part of a portfolio is reallocated with respect to market conditions, via a fixed parameter (the multiple), guaranteeing a predetermined floor. We propose here to use a conditional time-varying multiple as an alternative. We provide the main properties of the conditional multiples for some mainstream cases, including discrete-time rebalancing and an underlying risk asset driven by the Lévy process, while evaluating conditional and unconditional gap risks. Finally, we evaluate the use of a dynamic autoregressive expectile model for estimating the conditional multiple in such a context.
CPPI; Expected shortfall; Expectile; Quantile regression; Dynamic quantile model;
C
2014
46
1
29
G11
C6
G24
L10
http://www.sciencedirect.com/science/article/pii/S0165188914001134
Hamidi, Benjamin
Maillet, Bertrand
Prigent, Jean-Luc
oai:RePEc:eee:dyncon:v:35:y:2011:i:11:p:1880-18972014-11-19RePEc: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:37:y:2013:i:7:p:1264-12832014-11-19RePEc:eee:dyncon
article
The fiscal multiplier and spillover in a global liquidity trap
We consider the fiscal multiplier and spillover—the extent to which one country's government expenditure increases production at home and also in another foreign country, when the two countries are caught simultaneously in a liquidity trap. Using a standard new open economy macroeconomics (NOEM) model, we show that the fiscal multiplier and spillover are contrary to textbook economics. For the country where government expenditure takes place, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one, and positive if it is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is critical in understanding the effects of fiscal policy in open economies. These results remain unchanged even if we incorporate incomplete markets or endogenous capital into the model, but local currency pricing yields positive fiscal spillover irrespective of the size of the intertemporal elasticity of substitution.
Zero lower bound; Two-country model; Fiscal policy; Beggar-thy-neighbor;
7
2013
37
1264
1283
E52
E62
E63
F41
http://www.sciencedirect.com/science/article/pii/S0165188913000377
Fujiwara, Ippei
Ueda, Kozo
oai:RePEc:eee:dyncon:v:36:y:2012:i:1:p:119-1352014-11-19RePEc: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:47:y:2014:i:c:p:317-3372014-11-19RePEc:eee:dyncon
article
Sufficiency of an outside bank and a default penalty to support the value of fiat money: Experimental evidence
We present a model in which an outside bank and a default penalty support the value of fiat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money and use of the bank rate to influence inflation or deflation, although other institutions could provide alternatives.
Experimental gaming; Bank; Fiat money; Outside bank; General equilibrium;
C
2014
47
317
337
C73
C91
http://www.sciencedirect.com/science/article/pii/S0165188914001080
Huber, Jürgen
Shubik, Martin
Sunder, Shyam
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:20-382014-11-19RePEc:eee:dyncon
article
Monetary policy, bank leverage, and financial stability
This paper shows that with limited liability banks lever up excessively to finance new loans. Lower monetary policy rates can worsen or reduce these incentives depending on the size of the shock when equity financing is ruled out. When this constrained is relaxed but the bank faces costly dividend adjustment, lower monetary policy rates always worsen risk-taking incentives and the effect is persistent. The reason is that costly dividend adjustment lowers the opportunity cost of lending. In this model, capital requirements are closer to the source of the distortion and thus work better than loan-to-value caps in reducing excessive risk taking.
Financial stability; Bank leverage; Risk-taking; Monetary policy; Macroprudential regulation;
C
2014
47
20
38
C61
E32
E44
http://www.sciencedirect.com/science/article/pii/S0165188914001730
Valencia, Fabián
oai:RePEc:eee:dyncon:v:32:y:2008:i:10:p:3218-32522014-11-19RePEc:eee:dyncon
article
Robust monetary policy in a small open economy
10
2008
32
10
3218
3252
http://www.sciencedirect.com/science/article/pii/S0165-1889(08)00016-X
Leitemo, Kai
Söderström, Ulf
oai:RePEc:eee:dyncon:v:37:y:2013:i:5:p:1019-10392014-11-19RePEc: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:44:y:2014:i:c:p:251-2692014-11-19RePEc:eee:dyncon
article
Instability and concentration in the distribution of wealth
We consider a setup in which infinitely lived households face idiosyncratic investment risk and show that in this case the equilibrium distribution of wealth becomes increasingly right-skewed over time until wealth concentrates entirely at the top. The households in our setup are identical in terms of their patience and their abilities, and we assume that there are no redistributive mechanisms—neither explicit in the form of government tax or fiscal policies, nor implicit in the form of limited intergenerational transfers. Our results demonstrate that the presence of such redistributive mechanisms alone ensures the stability of the distribution of wealth over time.
Wealth distribution; Inequality; Incomplete markets;
C
2014
44
251
269
E21
E24
http://www.sciencedirect.com/science/article/pii/S0165188914001092
Fernholz, Ricardo
Fernholz, Robert
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:186-2102014-11-19RePEc:eee:dyncon
article
Systemic risk in banking networks: Advantages of “tiered” banking systems
This paper studies the risk and potential impact of system-wide defaults in a tiered banking network, where a small group of head institutions has many credit linkages with other banks, while the majority of banks have only a few links. A network is random and displays a given distribution of the number of banks׳ linkages, known as degree. We model tiering by a negative correlation between degrees of neighboring banks and by a scale-free degree distribution. The main findings of the paper highlight the advantages of tiering. Both the risk of systemic crisis and the potential scope of the crisis are lower in systems with negative correlation of bank degrees than in other types of systems. Similarly, in scale-free networks, the resilience of the system to shocks is increasing with the level of tiering.
Banking crisis; Contagion; Default; Random network; Disassortative network; Scale-free distribution;
C
2014
47
186
210
C63
D85
G01
G21
http://www.sciencedirect.com/science/article/pii/S0165188914001961
Teteryatnikova, Mariya
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:84-942014-11-19RePEc:eee:dyncon
article
Model-free CPPI
We consider Constant Proportion Portfolio Insurance (CPPI) and its dynamic extension, which may be called Dynamic Proportion Portfolio Insurance (DPPI). It is shown that these investment strategies work within the setting of Föllmer's pathwise Itô calculus, which makes no probabilistic assumptions whatsoever. This shows, on one hand, that CPPI and DPPI are completely independent of any choice of a particular model for the dynamics of asset prices. They even make sense beyond the class of semimartingale sample paths and can be successfully defined for models admitting arbitrage, including some models based on fractional Brownian motion. On the other hand, the result can be seen as a case study for the general issue of robustness in the face of model uncertainty in finance.
CPPI; DPPI; Model uncertainty; Knightian uncertainty; Föllmer's pathwise Itô calculus; Robustness; Pathwise trading strategies;
C
2014
40
84
94
C61
G11
G12
http://www.sciencedirect.com/science/article/pii/S0165188913002467
Schied, Alexander
oai:RePEc:eee:dyncon:v:42:y:2014:i:c:p:122-1422014-11-19RePEc:eee:dyncon
article
Misallocation, informality, and human capital: Understanding the role of institutions
The aim of this paper is to quantify the role of formal-sector institutions in shaping the demand for human capital and the level of informality. We propose a firm dynamics model where firms face capital market imperfections and costs of operating in the formal sector. Formal firms have a larger set of production opportunities and the ability to employ skilled workers, but informal firms can avoid the costs of formalization. These firm-level distortions give rise to endogenous formal and informal sectors and, more importantly, affect the demand for skilled workers. The model predicts that countries with a low degree of debt enforcement and high costs of formalization are characterized by relatively lower stocks of skilled workers, larger informal sectors, low allocative efficiency, and measured TFP. Moreover, we find that the interaction between entry costs and financial frictions (as opposed to the sum of their individual effects) is the main driver of these differences. This complementarity effect derives from the introduction of skilled workers, which prevents firms from substituting labor for capital and in turn moves them closer to the financial constraint.
Financial structure; Informal sector; Productivity; Policy distortions; Human capital;
C
2014
42
122
142
D24
E26
J24
L11
O16
O17
http://www.sciencedirect.com/science/article/pii/S0165188914000682
D׳Erasmo, Pablo N.
Moscoso Boedo, Hernan J.
Şenkal, Aslı
oai:RePEc:eee:dyncon:v:36:y:2012:i:9:p:1349-13632014-11-19RePEc:eee:dyncon
article
Nonlinear expectations in speculative markets – Evidence from the ECB survey of professional forecasters
Chartist and fundamentalist models have proven to be capable of replicating stylized facts on speculative markets. In general, this is achieved by specifying nonlinear interactions of otherwise linear asset price expectations of the respective trader groups. This paper investigates whether or not regressive and extrapolative expectations themselves exhibit significant nonlinear dynamics. The empirical results are based on a new data set from the European Central Bank Survey of Professional Forecasters on oil price expectations. In particular, we find that forecasters form destabilizing expectations in the neighborhood of the fundamental value, whereas expectations tend to be stabilizing in the presence of substantial oil price misalignment.
Agent based models; Nonlinear expectations; Survey data;
9
2012
36
1349
1363
F31
D84
C33
http://www.sciencedirect.com/science/article/pii/S0165188912000644
Reitz, Stefan
Rülke, Jan-Christoph
Stadtmann, Georg
oai:RePEc:eee:dyncon:v:37:y:2013:i:6:p:1213-12292014-11-19RePEc:eee:dyncon
article
On the role of heuristics—Experimental evidence on inflation dynamics
We run an experiment where groups of six subjects must set prices in a non-stationary macroeconomic environment, where prices are complements. The exogenous variable, a business indicator, is common knowledge and prices are flexible, disregarding sticky prices or sticky information. In a first treatment subjects insignificantly corrected for past errors, which implies that history plays a role for determining current prices. By reporting the business indicator in a simpler form the second treatment tacitly offered a heuristic for setting prices. This option was widely taken, bringing about an excess response to the business indicator and a significant deviation from equilibrium even in the long run. In a third treatment with staggered pricing we observe that subjects look only one round into the future but not further ahead, contrary to theoretical predictions. Our findings suggest that monetary transmission may be impaired due to what we label sticky reasoning, the failure or unwillingness to iteratively delete dominated strategies.
Inflation persistence; Staggered prices; Sticky reasoning; New Keynesian Phillips curve;
6
2013
37
1213
1229
E31
C92
http://www.sciencedirect.com/science/article/pii/S0165188913000407
Lambsdorff, Johann Graf
Schubert, Manuel
Giamattei, Marcus
oai:RePEc:eee:dyncon:v:37:y:2013:i:2:p:422-4452014-11-19RePEc:eee:dyncon
article
Fiscal consolidation in a currency union: Spending cuts vs. tax hikes
This paper uses a two country DSGE model to examine the effects of tax-based vs. expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-term, though is more costly in the longer-run. Second, a large expenditure-based consolidation may be counterproductive in the near-term if the zero lower bound is binding, reflecting that output losses rise at the margin. Third, a “mixed strategy” that combines a sharp but temporary rise in taxes with gradual spending cuts may be desirable in minimizing the output costs of fiscal consolidation.
Monetary policy; Fiscal policy; Liquidity trap; Zero bound constraint; Open economy macroeconomics; DSGE model;
2
2013
37
422
445
E32
F41
http://www.sciencedirect.com/science/article/pii/S0165188912001960
Erceg, Christopher J.
Lindé, Jesper
oai:RePEc:eee:dyncon:v:36:y:2012:i:6:p:891-9132014-11-19RePEc: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:33:y:2009:i:6:p:1332-13442014-11-19RePEc: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/pii/S0165-1889(09)00015-3
Lanne, Markku
Luoma, Arto
Luoto, Jani
oai:RePEc:eee:dyncon:v:36:y:2012:i:8:p:1077-10872014-11-19RePEc:eee:dyncon
article
Financial markets are markets in stories: Some possible advantages of using interviews to supplement existing economic data sources
Fifty-two research interviews were conducted with money managers controlling over $500 billion. This paper presents detailed material from one interview to argue interviews usefully describe their shared reality and provide information about the conditions of action facing financial decision-makers with implications for aggregate behaviour. Their shared reality was dominated by “radical” uncertainty and information ambiguity which severely limited the scope for “fully rational” decision-making. How they managed to commit to decisions was by creating narratives. The study suggests it may be useful to reconsider prejudices against the usefulness of talking to individual economic agents about what they actually do.
Financial markets; Interviews; Economic methodology; Narrative; Uncertainty;
8
2012
36
1077
1087
B4
G1
http://www.sciencedirect.com/science/article/pii/S0165188912000851
Tuckett, David
oai:RePEc:eee:dyncon:v:43:y:2014:i:c:p:58-772014-11-19RePEc:eee:dyncon
article
Verifying the state of financing constraints: Evidence from U.S. business credit contracts
Many policymakers are concerned that tight financing constraints for small businesses are stalling the recovery from the Great Recession. This paper empirically assesses two agency problems that induce such financing constraints—one resulting in a “firm balance sheet channel” and one resulting in a “bank balance sheet channel”. Evaluating specific models of these two agency problems against a comprehensive data set of U.S. small business credit contracts, I find strong support for the firm balance sheet channel but only weak support for the bank balance sheet channel. A complementary regression analysis confirms this result. Hence, policies seeking to improve firms’ balance sheets may be desirable to support small business lending in the recovery from the Great Recession.
Firm balance sheet channel; Bank balance sheet channel; Small business lending;
C
2014
43
58
77
E44
E50
G20
http://www.sciencedirect.com/science/article/pii/S0165188914000657
Meisenzahl, Ralf R.
oai:RePEc:eee:dyncon:v:32:y:2008:i:8:p:2543-25832014-11-19RePEc: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/pii/S0165-1889(07)00205-9
Coenen, Günter
McAdam, Peter
Straub, Roland
oai:RePEc:eee:dyncon:v:44:y:2014:i:c:p:196-2172014-11-19RePEc:eee:dyncon
article
What inventories tell us about aggregate fluctuations—A tractable approach to (S,s) policies
We estimate a DSGE model with (S,s) inventory policies. We find that (i) taking inventories into account can significantly improve the empirical fit of DSGE models in matching the standard business-cycle moments (in addition to explaining inventory fluctuations); (ii) (S,s) inventory policies can significantly amplify aggregate output fluctuations, in contrast to the findings of the recent general-equilibrium inventory literature; and (iii) aggregate demand shocks become more important than technology shocks in explaining the business cycle once inventories are incorporated into the model. An independent contribution of our paper is that we develop a solution method for analytically solving (S,s) inventory policies in general equilibrium models with heterogeneous firms and a large aggregate state space, and we illustrate how standard log-linearization methods can be used to solve various versions of our inventory model, generate impulse response functions, and estimate the model׳s deep structural parameters.
(S,s) inventories policy; State-dependent decisions; Heterogeneous-agent models; Perturbation methods;
C
2014
44
196
217
E13
E22
E32
http://www.sciencedirect.com/science/article/pii/S0165188914001110
Wang, Pengfei
Wen, Yi
Xu, Zhiwei
oai:RePEc:eee:dyncon:v:44:y:2014:i:c:p:218-2342014-11-19RePEc:eee:dyncon
article
Imperfect credibility and robust monetary policy
This paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model. Taking the Smets–Wouters model as the central bank׳s approximating model, the paper׳s main findings are as follows. First, a central bank׳s credibility can have large consequences for how policy responds to shocks. Second, central banks that have low credibility can benefit from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time-consistent. Third, even relatively small departures from perfect credibility can produce important declines in policy performance. Fourth, the risk premium shock represents an important potential source of model misspecification. Finally, as a technical contribution, the paper develops a numerical procedure to solve the decision-problem facing an imperfectly credible policymaker that seeks robustness.
Imperfect credibility; Robust policymaking; Time-consistency;
C
2014
44
218
234
E58
E61
C63
http://www.sciencedirect.com/science/article/pii/S0165188914001122
Dennis, Richard
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2913-29272014-11-19RePEc:eee:dyncon
article
World, country, and sector factors in international business cycles
Do sector-specific factors common to all countries play an important role in explaining business cycle co-movement? We address this question by analyzing international co-movements of value added (VA) growth in a multi-sector dynamic factor model. The model contains a world factor, country-specific factors, sector-specific factors, and idiosyncratic components. We estimate the model using Bayesian methods for 30 disaggregated sectors in the G7 economies for the 1974–2004 period. Our findings show that, although there is a substantial role for sector-specific factors, fluctuations are dominated by country-factors. The world factor appears to play a minimal role because, when using aggregate data, the world factor captures both the factor common to all countries and industries and the factor common to the same industry across countries. We then examine how these factors evolved as globalization deepened over the past two decades. Our results suggest that business cycles at a disaggregate level have not become more synchronized internationally. This is mainly driven by a substantial fall in the volatility of world shocks during the globalization period, rather than a lower sensitivity of sectoral growth to world factors. Our results also reveal that world factors appear to be more important for industries with a higher level of international vertical integration.
Dynamic factors; Disaggregated business cycles; International co-movement;
12
2013
37
2913
2927
E32
F44
http://www.sciencedirect.com/science/article/pii/S0165188913001905
Karadimitropoulou, Aikaterini
León-Ledesma, Miguel
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1700-17172014-11-19RePEc: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:37:y:2013:i:2:p:387-4032014-11-19RePEc:eee:dyncon
article
Fiscal policy, banks and the financial crisis
This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macroeconomics literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.
Financial crisis; Bank rescue measures; Fiscal policy;
2
2013
37
387
403
E62
E32
G21
H63
F41
http://www.sciencedirect.com/science/article/pii/S0165188912001911
Kollmann, Robert
Ratto, Marco
Roeger, Werner
in′t Veld, Jan
oai:RePEc:eee:dyncon:v:35:y:2011:i:11:p:1831-18512014-11-19RePEc: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:12:p:2064-20772014-11-19RePEc: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:11:p:1688-16992014-11-19RePEc: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:12:p:2833-28612014-11-19RePEc:eee:dyncon
article
Dynamic contracting under imperfect public information and asymmetric beliefs
We develop a dynamic principal–agent model to show how imperfect public information and asymmetric beliefs about payoff-relevant parameters, agency conflicts, and the agent's implicit incentives to influence the principal's posterior beliefs through his unobservable actions interact to affect optimal dynamic contracts. We make a methodological contribution to the literature by solving the continuous-time contracting problem using a discrete-time approximation approach. We obtain a simple characterization of optimal renegotiation-proof contracts in terms of the solution to a nonlinear ordinary differential equation (ODE). We then exploit the properties of the ODE to derive a number of novel implications for the dynamics of long-term contracts that alter the intuition gleaned from the previous literature. Optimism has a first-order impact on incentives, investment and output that could reconcile the “private equity” puzzle. Consistent with empirical evidence, the interaction between asymmetric beliefs, risk-sharing and adverse selection costs could cause the time-paths of the agent's incentive intensities to be increasing or decreasing. Our results also suggest that the incorporation of imperfect public information and asymmetric beliefs could potentially reconcile empirical evidence of an ambiguous relation between risk and incentives, and a non-monotonic relation between firm value and incentives. Permanent and transitory components of risk have differing effects on incentives, which suggest that empirical investigations of the link between risk and incentives should appropriately account for different components of risk.
Dynamic principal–agent models; Imperfect public information; Asymmetric beliefs; Hidden actions; Hidden states;
12
2013
37
2833
2861
D86
D83
D82
D92
http://www.sciencedirect.com/science/article/pii/S0165188913001693
Giat, Yahel
Subramanian, Ajay
oai:RePEc:eee:dyncon:v:34:y:2010:i:12:p:2533-25462014-11-19RePEc: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/pii/S0165-1889(10)00163-6
Shackleton, Mark B.
Sødal, Sigbjørn
oai:RePEc:eee:dyncon:v:45:y:2014:i:c:p:146-1642014-11-19RePEc:eee:dyncon
article
Quantitative easing and the loan to collateral value ratio
We study optimal monetary policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio.
Optimal monetary policy; Zero lower bound; Quantitative easing; Money multiplier; Loan to value ratio; House prices;
C
2014
45
146
164
E44
E51
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188914001213
Damjanovic, Tatiana
Girdėnas, Šarūnas
oai:RePEc:eee:dyncon:v:45:y:2014:i:c:p:111-1252014-11-19RePEc:eee:dyncon
article
Financial intermediation in an overlapping generations model with transaction costs
We analyze an overlapping generations economy where agents interact to share liquidity risk. We show that a pure exchange economy has excessive trade in equilibrium because agents interact to rebalance their portfolios. Intergenerational financial intermediaries reduce the number of interactions because agents only transact when they face liquidity needs. In the absence of asset risk, intermediaries match redemptions with deposits and dividends, and never sell assets. If the economy is subject to transaction costs, the intermediated economy can sustain higher stationary investment and welfare. We also find that dead weight transaction costs can increase welfare because it protects banks from interbank arbitrage and dampens the inherent cyclicality of market economies.
Financial intermediation; Overlapping generations; Transaction costs;
C
2014
45
111
125
D91
G21
E43
http://www.sciencedirect.com/science/article/pii/S0165188914001201
Hasman, Augusto
Samartín, Margarita
van Bommel, Jos
oai:RePEc:eee:dyncon:v:37:y:2013:i:8:p:1403-14332014-11-19RePEc:eee:dyncon
article
Modeling diverse expectations in an aggregated New Keynesian Model
We explore a New Keynesian Model with diverse beliefs and study the aggregation problems in the log-linearized economy. We show the solution of these problems depend upon the belief structure. Agents' beliefs are described by individual state variables and satisfy three Rationality Axioms, leading to the emergence of an aggregate state variable named “mean market state of belief.” In equilibrium, endogenous variables are functions of mean market belief and this state variable is the tool used to solve the aggregation problems.
New Keynesian Model; Heterogenous beliefs; Market state of belief; Bayesian learning; Updating beliefs; Rational beliefs; Monetary policy rule;
8
2013
37
1403
1433
C53
D8
D84
E27
E42
E52
G12
G14
http://www.sciencedirect.com/science/article/pii/S0165188913000390
Kurz, Mordecai
Piccillo, Giulia
Wu, Howei
oai:RePEc:eee:dyncon:v:37:y:2013:i:3:p:483-4992014-11-19RePEc: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:40:y:2014:i:c:p:195-2122014-11-19RePEc:eee:dyncon
article
The optimal management of renewable resources under the risk of potential regime shift
Complex dynamic systems can undergo changes in feedbacks between system components causing a rapid and persistent shift in system behavior (“regime shifts”), and potentially reduce welfare from declining provision of important ecosystem services. In this paper, we provide an analytical condition that determinfilefs whether the threat of a potential regime shift causes management to be more aggressive or more precautionary. In numerical simulations we find that aggressive management can occur for reasonable parameter values, which is counter prior results that the potential for harmful regime shift always leads to precautionary management.
Optimal management; Uncertainty; Growth; Renewable resources; Regime shift;
C
2014
40
195
212
O44
Q01
Q20
Q57
http://www.sciencedirect.com/science/article/pii/S0165188914000153
Ren, Bijie
Polasky, Stephen
oai:RePEc:eee:dyncon:v:33:y:2009:i:12:p:1981-19902014-11-19RePEc: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/pii/S0165-1889(09)00126-2
Schipper, Burkhard C.
oai:RePEc:eee:dyncon:v:44:y:2014:i:c:p:147-1682014-11-19RePEc:eee:dyncon
article
Experimental evidence on inflation expectation formation
Using laboratory experiments within a New Keynesian sticky price framework, we study the process of inflation expectation formation. We focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics. Using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40% of subjects. More than 20% of subjects are also best described by adaptive learning models, where they behave like econometricians and update their model estimates every period. However, rather than using a single forecasting model, switching between models describes their behavior better. Switching is more likely to occur when experimental economy is in a recession.
Laboratory experiments; Inflation expectations; New Keynesian model; Adaptive learning;
C
2014
44
147
168
C91
C92
E37
E52
http://www.sciencedirect.com/science/article/pii/S0165188914001079
Pfajfar, Damjan
Žakelj, Blaž
oai:RePEc:eee:dyncon:v:27:y:2003:i:11:p:1961-19912014-11-19RePEc:eee:dyncon
article
A computational general equilibrium model with vintage capital
This paper presents a vintage capital model assuming putty–clay investment and perfect foresight. The model is written in discrete time and is simulated by using a second order relaxation algorithm. By computing the eigenvalues of the dynamic system, we have checked the conditions of existence and uniqueness of a solution (Blanchard and Kahn's conditions) and identified the echo effect that characterizes vintage capital models and the related dynamics of creation and destruction. By calibrating the model on French data, it has been proved useful to explain the medium-term movements in the distribution of income in France during the last three decades.
Vintage capital models; Replacement echoes; Dynamic model solving; Medium-term dynamics;
11
2003
27
1961
1991
C68
C63
E22
http://www.sciencedirect.com/science/article/pii/S0165188902001124
Cadiou, Loı̈c
Dées, Stéphane
Laffargue, Jean-Pierre
oai:RePEc:eee:dyncon:v:33:y:2009:i:3:p:758-7762014-11-19RePEc: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/pii/S0165-1889(08)00167-X
Andrés, Javier
David López-Salido, J.
Nelson, Edward
oai:RePEc:eee:dyncon:v:37:y:2013:i:4:p:756-7732014-11-19RePEc: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:33:y:2009:i:6:p:1217-12352014-11-19RePEc: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/pii/S0165-1889(08)00213-3
Gomis-Porqueras, Pere
Haro, Àlex
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:279-2922014-11-19RePEc:eee:dyncon
article
Consumer misperceptions, uncertain fundamentals, and the business cycle
This paper estimates the importance of shocks to consumer misperceptions “noise shocks” for U.S. business cycle fluctuations. I embed imperfect information as in Lorenzoni (2009) into a Smets and Wouters (2007)-type DSGE model. Agents only observe aggregate productivity and a signal about the permanent component contaminated with noise. Based on this information agents form beliefs about the temporary and the permanent component of productivity. Shocks to the signal (noise shocks) trigger aggregate fluctuations unrelated to changes in productivity. Bayesian estimation shows that noise shocks explain up to 14 percent of output and up to 25 percent of consumption fluctuations. Nominal rigidities and the specification of the monetary policy rule are crucial for the importance of noise shocks. These features help to resolve conflicting results in the previous literature.
Imperfect information; Noise shocks; Aggregate fluctuations; Bayesian estimation; Bayesian model comparison;
C
2014
40
279
292
D83
E32
http://www.sciencedirect.com/science/article/pii/S0165188914000177
Hürtgen, Patrick
oai:RePEc:eee:dyncon:v:46:y:2014:i:c:p:91-1132014-11-19RePEc:eee:dyncon
article
Leave and let leave: A sufficient condition to explain the evolutionary emergence of cooperation
The option to leave your current partner in response to his behavior, also known as conditional dissociation, is a mechanism that has been shown to promote the emergence and stability of cooperation in many social interactions. This mechanism, nevertheless, has always been studied in combination with other factors that are known to support cooperation by themselves. In this paper, we isolate the effect of conditional dissociation on the evolution of cooperation and show that this mechanism is enough to sustain a significant level of cooperation if the expected lifetime of individuals is sufficiently long.
Option to leave; Conditional dissociation; Prisoner׳s dilemma; Positive assortment; Exit option;
C
2014
46
91
113
C73
http://www.sciencedirect.com/science/article/pii/S0165188914001456
Izquierdo, Luis R.
Izquierdo, Segismundo S.
Vega-Redondo, Fernando
oai:RePEc:eee:dyncon:v:44:y:2014:i:c:p:29-532014-11-19RePEc:eee:dyncon
article
An optimal stochastic control framework for determining the cost of hedging of variable annuities
An implicit partial differential equation (PDE) method is used to determine the cost of hedging for a Guaranteed Lifelong Withdrawal Benefit (GLWB) variable annuity contract. In the basic setting, the underlying risky asset is assumed to evolve according to geometric Brownian motion, but this is generalised to the case of a Markov regime switching process. A similarity transformation is used to reduce a pricing problem with K regimes to the solution of K coupled one dimensional PDEs, resulting in a considerable gain in computational efficiency. The methodology developed is flexible in the sense that it can calculate the cost of hedging for a variety of different withdrawal strategies by investors. Cases considered here include both optimal withdrawal strategies (i.e. strategies which generate the highest possible cost of hedging for the insurer) and sub-optimal withdrawal strategies in which the policy holder׳s decisions depend on the moneyness of the embedded options. Numerical results are presented which demonstrate the sensitivity of the cost of hedging (given the withdrawal specification) to various economic and contractual assumptions.
Optimal control; GLWB pricing; PDE approach; Regime switching; No-arbitrage; Withdrawal strategies;
C
2014
44
29
53
G22
http://www.sciencedirect.com/science/article/pii/S0165188914000864
Forsyth, Peter
Vetzal, Kenneth
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:132-1572014-11-19RePEc: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/pii/S0165-1889(09)00149-3
Li, Minqiang
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:978-9992014-11-19RePEc: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/pii/S0165-1889(07)00108-X
von Hagen, Jürgen
Zhang, Haiping
oai:RePEc:eee:dyncon:v:40:y:2014:i:c:p:242-2652014-11-19RePEc:eee:dyncon
article
An empirical study of the Mexican banking system’s network and its implications for systemic risk
With the aim to measure and monitor systemic risk, we present some topological metrics for the interbank exposures and the payments system networks. The evolution of such networks is analyzed, we draw important conclusions from the systemic risk's perspective and propose a measure of interconnectedness. Additionally, we suggest non-topological measures to describe individual behavior of banks in both networks. The main findings of this paper are: the structures of the payments and exposures networks are different (in terms of connectivity); the topology of the exposures network changed after the collapse of Lehman Brothers, whereas the structure of the payments network does not; the proposed measure of interconnectedness can be used to determine the importance of a bank in terms of connectivity. Finally, we found that interconnectedness of a bank is not necessarily related with its assets size but it is linked to the contagion it might cause.
Systemic risk; Financial networks; Payment systems; Interbank market;
C
2014
40
242
265
C01
C02
C44
C63
G21
http://www.sciencedirect.com/science/article/pii/S0165188914000189
Martinez-Jaramillo, Serafin
Alexandrova-Kabadjova, Biliana
Bravo-Benitez, Bernardo
Solórzano-Margain, Juan Pablo
oai:RePEc:eee:dyncon:v:36:y:2012:i:2:p:255-2652014-11-19RePEc: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:36:y:2012:i:8:p:1229-12472014-11-19RePEc:eee:dyncon
article
Testing conditional asymmetry: A residual-based approach
We propose three residual-based tests for conditional asymmetry. The distribution is assumed to fall into the class of skewed distributions of Fernández and Steel (1998). In this class, asymmetry is measured by the ratio between the probabilities of being larger and smaller than the mode. Estimation is performed under the null hypothesis of constant asymmetry of the innovations and, in a second step, tests for conditional asymmetry are performed on generalized residuals through parametric and nonparametric methods. We derive the asymptotic distribution of the tests that incorporates the uncertainty of the estimated parameters. A Monte Carlo study shows that neglecting this uncertainty severely biases the tests. An empirical application on a basket of daily returns reveals that financial data often present dynamics in the conditional skewness.
Conditional asymmetry; Residuals; Wald; Runs;
8
2012
36
1229
1247
C32
G14
E44
http://www.sciencedirect.com/science/article/pii/S0165188912000814
Lambert, Philippe
Laurent, Sébastien
Veredas, David
oai:RePEc:eee:dyncon:v:36:y:2012:i:10:p:1534-15502014-11-19RePEc:eee:dyncon
article
Cyclical dynamics of industrial production and employment: Markov chain-based estimates and tests
The purpose of this paper is to understand differences in cyclical phenomena across a broad range of developed and emerging countries based on the behavior of two key economic times series—industrial production and employment. The paper characterizes the series in question as a recurring Markov chain. Univariate processes are estimated for each series individually, and a composite indicator is constructed by using information on both series. Based on tests of equality of the estimated Markov chains across countries as well as the expected times to switch between different states, we find evidence that (i) the developed and emerging economies are “de-coupled” from each other in terms of their cyclical dynamics, and (ii) the behavior of industrial production and employment growth are “de-coupled” for the emerging economies. Our results suggest new directions for the analysis of emerging economy cyclical fluctuations.
Markov chain; Tests of time homogeneity and time dependence; Composite indicator;
10
2012
36
1534
1550
C14
E32
http://www.sciencedirect.com/science/article/pii/S0165188912000917
Altug, Sumru
Tan, Barış
Gencer, Gözde
oai:RePEc:eee:dyncon:v:32:y:2008:i:10:p:3253-32742014-11-19RePEc:eee:dyncon
article
Asset pricing with loss aversion
10
2008
32
10
3253
3274
http://www.sciencedirect.com/science/article/pii/S0165-1889(08)00017-1
Grüne, Lars
Semmler, Willi
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2483-24992014-11-19RePEc:eee:dyncon
article
Evolution of repeated prisoner's dilemma play under logit dynamics
In an evolutionary set-up, we append an ecology of iterated prisoner's dilemma (IPD) game strategies, consisting of unconditional cooperators (AllC), unconditional defectors (AllD) and reactive players (TFT) with two repeated strategies that have received less attention in the evolutionary IPD game literature: the error-proof, “generous” tit-for-tat (GTFT) which, with a certain probability, re-establishes cooperation after a (possibly by mistake) defection of the opponent and the penitent, “stimulus–response” (WSLS) strategy that resets cooperation after the opponent punished for defection. An abundance of rock–paper–scissors like patterns is discovered in the 3×3 ecologies comprising Pavlovian and “generous” players. Interestingly, the evolutionary success of Pavlov seems to depend on the absence of unconditional cooperators in the ecologies investigated.
Prisoner's dilemma; Repeated games; Evolution; Pavlov;
12
2013
37
2483
2499
C72
C73
D43
http://www.sciencedirect.com/science/article/pii/S0165188913001449
Ochea, Marius-Ionut
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:345-3642014-11-19RePEc: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:8:p:1659-16822014-11-19RePEc:eee:dyncon
article
E Pluribus Unum: Macroeconomic modelling for multi-agent economies
From the macroeconomist's viewpoint, agent based modelling has an obvious drawback: it makes impossible to think in aggregate terms. The modeller, in fact, can reconstruct aggregate variables only “from the bottom up” by summing the levels of a myriad of individual variables. We propose a modelling strategy which reduces the dimensionality of an agent based framework by replacing the actual distribution with the first and higher moments of the distribution itself. We put this strategy at work in a Macroeconomic and Agent Based Model (M&ABM) of the financial accelerator in which firms' heterogeneous degrees of financial robustness affect investment in a Greenwald-Stiglitz setting.
Financial fragility; Heterogeneity; Stochastic aggregation; Business fluctuations;
8
2013
37
1659
1682
E32
E43
E44
E52
http://www.sciencedirect.com/science/article/pii/S0165188913000870
Assenza, Tiziana
Delli Gatti, Domenico
oai:RePEc:eee:dyncon:v:37:y:2013:i:2:p:446-4652014-11-19RePEc:eee:dyncon
article
Exchange rate regimes and fiscal multipliers
Does the fiscal multiplier depend on the exchange rate regime? To address this question, we first estimate a panel vector autoregression (VAR) model on time-series data for OECD countries. We identify the effects of unanticipated government spending shocks in countries with fixed and floating exchange rates, while controlling for anticipated changes in government spending. In a second step, we interpret the evidence through the lens of a New Keynesian small open economy model. We find that government spending multipliers are considerably larger under fixed exchange rate regimes and that the New Keynesian model provides a satisfactory account of the evidence.
Fiscal policy; Exchange rate regime; Fiscal multiplier; Monetary policy; Panel VAR; New Keynesian model;
2
2013
37
446
465
E62
F41
http://www.sciencedirect.com/science/article/pii/S0165188912001984
Born, Benjamin
Juessen, Falko
Müller, Gernot J.
oai:RePEc:eee:dyncon:v:27:y:2003:i:11:p:2059-20942014-11-19RePEc:eee:dyncon
article
Monetary policy rules for an open economy
The popular Taylor rule is meant to inform monetary policy in economies that are closed. Its main open-economy alternative, i.e., Ball's (In: J.B. Taylor (Ed.), Monetary Policy Rules, University of Chicago Press, Chicago) rule based on a Monetary Conditions Index, cannot offer guidance for the day-to-day conduct of monetary policy because it may perform poorly in the face of specific exchange rate shocks. In this paper we examine the performance of various monetary policy rules suitable for small open economies vis-à-vis existing rules. This entails comparing the asymptotic properties of a two-sector open-economy dynamic stochastic general equilibrium model calibrated on UK data under different rules. We find that an inflation-forecast-based rule is a good rule in this respect, one that also proves robust to different shocks. Adding a separate response to the level of the real exchange rate improves stabilisation only marginally.
Monetary policy; Simple feedback rules; Open economy macroeconomics;
11
2003
27
2059
2094
E52
E58
F41
http://www.sciencedirect.com/science/article/pii/S0165188902001161
Batini, Nicoletta
Harrison, Richard
Millard, Stephen P.
oai:RePEc:eee:dyncon:v:32:y:2008:i:7:p:2370-23962014-11-19RePEc: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/pii/S0165-1889(08)00036-5
Grammig, Joachim
Kehrle, Kerstin
oai:RePEc:eee:dyncon:v:42:y:2014:i:c:p:50-682014-11-19RePEc:eee:dyncon
article
Structural evolution of the postwar U.S. economy
We consider a time-varying parameter vector autoregressive model with stochastic volatility and mixture innovations to study the empirical relevance of the Lucas critique for the postwar U.S. economy. The model allows blocks of parameters to change at endogenously estimated points of time. Contrary to the Lucas critique, there are large changes at certain points of time in the parameters associated with monetary policy that do not correspond to changes in “reduced-form” parameters for inflation or the unemployment rate. However, the structure of the U.S. economy has evolved considerably over the postwar period, with an apparent reduction in the late 1980s in the impact of monetary policy shocks on inflation, though not on the unemployment rate. Related, we find changes in the Phillips curve tradeoff between inflation and cyclical unemployment (measured as the deviation from the time-varying steady-state unemployment rate implied by the model) in the 1970s and especially since the mid-1990s.
Time-varying parameters; Mixture innovations; Lucas critique; Great Moderation; Natural rate of unemployment; Phillips curve;
C
2014
42
50
68
C11
E24
E32
http://www.sciencedirect.com/science/article/pii/S016518891400061X
Liu, Yuelin
Morley, James
oai:RePEc:eee:dyncon:v:37:y:2013:i:9:p:1814-18322014-11-19RePEc:eee:dyncon
article
Heterogeneous response of disaggregate inflation to monetary policy regime change: The role of price stickiness
This paper explores how a monetary regime change affects headline inflation via differential effects on various sectors in the economy. Using disaggregated CPI data for Canada, we find that the response to the adoption of inflation targeting (IT) was quite heterogeneous across sectors. While sticky-price sectors experienced a notable change in inflation dynamics following IT adoption, little structural change was observed in flexible price sectors. Our analysis based on a common factor model suggests that the structural changes in the sticky price sectors are driven by a decline in their responses to common aggregate shocks, including a monetary shock.
Price stickiness; Sectoral inflation dynamics; Monetary policy regime; Inflation targeting (IT); Common factor model;
9
2013
37
1814
1832
E31
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188913000699
Choi, Chi-Young
O'Sullivan, Róisín
oai:RePEc:eee:dyncon:v:36:y:2012:i:9:p:1364-13712014-11-19RePEc:eee:dyncon
article
Destabilizing optimal policies in the business cycle
It is often believed that governments should either abstain from leading activist policies, or if they lead such policies, that these policies should somehow be “stabilizing”, in the sense of reducing the volatilities of some endogenous variables. We construct a model with explicit foundations where the optimal policies are activist, and they make both employment and output more volatile than in the no intervention case.
Destabilizing optimal policies; Business cycles; Monetary policy;
9
2012
36
1364
1371
E32
E52
http://www.sciencedirect.com/science/article/pii/S0165188912001091
Bénassy, Jean-Pascal
oai:RePEc:eee:dyncon:v:37:y:2013:i:9:p:1911-19282014-11-19RePEc:eee:dyncon
article
Long-run risk and hidden growth persistence
An extensive literature has analyzed the implications of hidden shifts in the dividend growth rate. However, corresponding research on learning about growth persistence is completely lacking. Hidden persistence is a novel way to introduce long-run risk into standard business-cycle models of asset prices because it tightly intertwines the cyclical and long-run frequencies. Hidden persistence magnifies endogenous changes in the forecast variance of the long-run dividend growth rate despite homoscedastic consumption innovations. Not only does changing forecast variance make discrimination between protracted spells of anemic growth and brief business recessions difficult, it also endogenously induces additional variation in asset price discounts due to the preference for early uncertainty resolution.
Long-run risk; Learning; Hidden persistence; Forecast error variance; Endogenous economic uncertainty; Peso problem; Timing premium;
9
2013
37
1911
1928
E13
E21
E27
E32
E37
E44
G12
G14
http://www.sciencedirect.com/science/article/pii/S0165188913000821
Pakoš, Michal
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2862-28812014-11-19RePEc:eee:dyncon
article
Monetary policy transmission in a model with animal spirits and house price booms and busts
Can monetary policy trigger pronounced boom-bust cycles in house prices and create persistent business cycles? We address this question by building heuristics into an otherwise standard DSGE model. As a result, monetary policy sets off waves of optimism and pessimism (“animal spirits”) that drive house prices, that, in turn, have strong repercussions on the business cycle. We compare our findings to a standard model with rational expectations by means of impulse responses. We suggest that a standard Taylor rule is not well-suited to maintain macroeconomic stability. Instead, an augmented rule that incorporates house prices is shown to be superior.
Monetary policy; Animal spirits; Housing markets;
12
2013
37
2862
2881
E32
E52
D83
http://www.sciencedirect.com/science/article/pii/S016518891300170X
Bofinger, Peter
Debes, Sebastian
Gareis, Johannes
Mayer, Eric
oai:RePEc:eee:dyncon:v:33:y:2009:i:6:p:1296-13132014-11-19RePEc: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/pii/S0165-1889(09)00005-0
Marzo, Massimiliano
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:130-1532014-11-19RePEc:eee:dyncon
article
Best response dynamics with level-n expectations in two-stage games
This paper analyzes behavior in repeatedly played two-stage games, where players choose actions in both stages according to best replies using level-n expectations about the opponent׳s actions in both stages. Level-n expectations are recursively defined in a way that a player holding level-n expectations correctly predicts the action of an opponent holding level-(n−1) expectations. A general conceptual framework to study such dynamics for two-stage games is developed and it is shown that, contrary to results for single-stage games, the fixed points of the dynamics depend on the level of the expectations. In particular, for level-0 expectation, fixed points correspond to a Nash equilibrium of a simultaneous move version of the game, whereas (under certain conditions) fixed points converge towards the subgame perfect equilibrium of the two-stage game if the level of expectations goes to infinity. The approach is illustrated using a two-stage duopoly game, where firms in the first stage invest in activities reducing their marginal costs and in the second stage engage in Cournot competition. Conditions for local stability of the fixed points are derived for different levels of expectations and it is shown that level-2 expectations are sufficient to move the fixed-point of the dynamics to a close neighborhood of the subgame perfect equilibrium. Furthermore, it is demonstrated that although firms benefit from unilateral increases in the level of expectations, an increase of n by all firms reduces all profits.
Expectation formation; Multi-stage games; Best response dynamics;
C
2014
41
130
153
C72
C73
D83
L13
http://www.sciencedirect.com/science/article/pii/S016518891400030X
Dawid, Herbert
Heitmann, Dennis
oai:RePEc:eee:dyncon:v:42:y:2014:i:c:p:13-322014-11-19RePEc:eee:dyncon
article
Quadratic hedging schemes for non-Gaussian GARCH models
We propose different schemes for option hedging when asset returns are modeled using a general class of GARCH models. More specifically, we implement local risk minimization and a minimum variance hedge approximation based on an extended Girsanov principle that generalizes Duan׳s (1995) delta hedge. Since the minimal martingale measure fails to produce a probability measure in this setting, we construct local risk minimization hedging strategies with respect to a pricing kernel. These approaches are investigated in the context of non-Gaussian driven models. Furthermore, we analyze these methods for non-Gaussian GARCH diffusion limit processes and link them to the corresponding discrete time counterparts. A detailed numerical analysis based on S&P 500 European call options is provided to assess the empirical performance of the proposed schemes. We also test the sensitivity of the hedging strategies with respect to the risk neutral measure used by recomputing some of our results with an exponential affine pricing kernel.
GARCH models; Local risk minimization; Martingale measure; Bivariate diffusion limit; Minimum variance hedge;
C
2014
42
13
32
C02
C58
G13
G17
http://www.sciencedirect.com/science/article/pii/S0165188914000608
Badescu, Alexandru
Elliott, Robert J.
Ortega, Juan-Pablo
oai:RePEc:eee:dyncon:v:32:y:2008:i:5:p:1399-14312014-11-19RePEc: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/pii/S0165-1889(07)00132-7
Turnovsky, Stephen J.
Garcia-Peñalosa, Cecilia
oai:RePEc:eee:dyncon:v:37:y:2013:i:2:p:367-3862014-11-19RePEc:eee:dyncon
article
Gauging the effects of fiscal stimulus packages in the euro area
We seek to quantify the impact on euro area GDP of the European Economic Recovery Plan (EERP) enacted in response to the financial crisis of 2008–2009. To do so, we estimate an extended version of the ECB's New Area-Wide Model with a richly specified fiscal sector. The estimation results point to the existence of important complementarities between private and government consumption and, to a lesser extent, between private and public capital. We first examine the implied present-value multipliers for seven distinct fiscal instruments and show that the estimated complementarities result in fiscal multipliers larger than one for government consumption and investment. We highlight the importance of monetary accommodation for these findings. We then show that the EERP, if implemented as initially enacted, had a sizeable, although short-lived impact on euro area GDP. Since the EERP comprised both revenue and expenditure-based fiscal stimulus measures, the total multiplier is below unity.
Fiscal policy; Fiscal multiplier; European Economic Recovery Plan; DSGE modelling; Bayesian inference; Euro area;
2
2013
37
367
386
C11
E32
E62
http://www.sciencedirect.com/science/article/pii/S016518891200190X
Coenen, Günter
Straub, Roland
Trabandt, Mathias
oai:RePEc:eee:dyncon:v:32:y:2008:i:9:p:2826-28532014-11-19RePEc: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/pii/S0165-1889(07)00234-5
Hromcová, Jana
oai:RePEc:eee:dyncon:v:36:y:2012:i:11:p:1729-17592014-11-19RePEc: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:27:y:2003:i:11:p:2219-22422014-11-19RePEc:eee:dyncon
article
Numerical issues in threshold autoregressive modeling of time series
This paper analyses the contribution of various numerical approaches to making the estimation of threshold autoregressive time series more efficient. It relies on the computational advantages of QR factorizations and proposes Givens transformations to update these factors for sequential LS problems. By showing that the residual sum of squares is a continuous rational function over threshold intervals it develops a new fitting method based on rational interpolation and the standard necessary optimality condition. Taking as benchmark a simple grid search, the paper illustrates via Monte Carlo simulations the efficiency gains of the proposed tools.
Band-TAR; QR factorization; Givens rotations; Rational interpolation;
11
2003
27
2219
2242
C63
C51
C61
http://www.sciencedirect.com/science/article/pii/S0165188902001239
Coakley, Jerry
Fuertes, Ana-Marı́a
Pérez, Marı́a-Teresa
oai:RePEc:eee:dyncon:v:45:y:2014:i:c:p:262-2882014-11-19RePEc:eee:dyncon
article
Speculative behavior and the dynamics of interacting stock markets
We develop a simple agent-based financial market model in which heterogeneous speculators apply technical and fundamental analysis to trade in two different stock markets. Speculators׳ strategy/market selections are repeated at each time step and depend on predisposition effects, herding behavior and market circumstances. Simulations reveal that our model is able to explain a number of nontrivial statistical properties of and between international stock markets, including bubbles and crashes, fat-tailed return distributions, volatility clustering, persistent trading volume, coevolving stock prices and cross-correlated volatilities. Against this background, our model may be deemed to have been validated.
Stock markets; Comovements; Cross-correlations; Technical and fundamental analysis; Agent-based modeling; Simulation analysis;
C
2014
45
262
288
C63
D84
G12
http://www.sciencedirect.com/science/article/pii/S0165188914001171
Schmitt, Noemi
Westerhoff, Frank
oai:RePEc:eee:dyncon:v:37:y:2013:i:8:p:1581-15972014-11-19RePEc:eee:dyncon
article
Within and between systemic country risk. Theory and evidence from the sovereign crisis in Europe
We propose a hierarchical Marshall–Olkin model of countrywide systemic risk. At the lower level, we model the systemic risk of a crisis within the banking system (that we call “within” systemic risk) and at the higher level we model the probability of a joint default of the banking system and the public sector (that we call “between” systemic risk). We apply the model to four countries of Northern Europe and four of Southern Europe. In Northern Europe, Germany ranks third for soundness of the banking system but first for country safety. The opposite findings are obtained for Netherlands. In Southern Europe, the Italian banking system ranks first for soundness, quite above Spain, while Italy is aligned with Spain for countrywide risk. Differences in default time correlations between the banking and the public sectors explain these findings.
Marshall–Olkin distribution; Copula functions; Systemic risk; Financial crisis; Country risk; Sovereign default;
8
2013
37
1581
1597
G21
H63
http://www.sciencedirect.com/science/article/pii/S0165188913000365
Baglioni, Angelo
Cherubini, Umberto
oai:RePEc:eee:dyncon:v:37:y:2013:i:11:p:2336-23502014-11-19RePEc:eee:dyncon
article
A microfoundation for normalized CES production functions with factor-augmenting technical change
Based on a tractable “endogeneous technology choice” framework, we provide a microfoundation for aggregate normalized constant elasticity of substitution (CES) production functions with non-neutral, factor-augmenting technical change. In this framework, firms are allowed to choose unit productivities of capital and labor optimally from a technology menu constructed under the assumption that unit factor productivities (UFPs) are independently Weibull-distributed. The Weibull distribution itself is also microfounded here: based on extreme value theory, it is found to be an accurate and robust approximation of the true UFP distribution if technologies consist of a large number of complementary components.
CES production function; Weibull distribution; Optimal technology choice; Direction of technical change; Directed R&D;
11
2013
37
2336
2350
E23
E25
O47
http://www.sciencedirect.com/science/article/pii/S0165188913001383
Growiec, Jakub
oai:RePEc:eee:dyncon:v:46:y:2014:i:c:p:237-2512014-11-19RePEc:eee:dyncon
article
Does risk sharing increase with risk aversion and risk when commitment is limited?
I consider a risk-sharing game with limited commitment, and study how the discount factor above which perfect risk sharing is self-enforcing in the long run depends on agents׳ risk aversion and the riskiness of their endowment. When agents face no aggregate risk, a mean-preserving spread may destroy the sustainability of perfect risk sharing if each agent׳s endowment may take more than three values. With aggregate risk the same can happen with only two possible endowment realizations. With respect to risk aversion the intuitive comparative statics result holds without aggregate risk, but it holds only under strong assumptions in the presence of aggregate risk. In simple settings with two endowment values I also show that the threshold discount factor co-moves with popular measures of risk sharing.
Risk sharing; Limited commitment; Dynamic contracts; Comparative statics;
C
2014
46
237
251
C73
D10
D86
http://www.sciencedirect.com/science/article/pii/S0165188914001511
Laczó, Sarolta
oai:RePEc:eee:dyncon:v:33:y:2009:i:3:p:666-6752014-11-19RePEc: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/pii/S0165-1889(08)00153-X
Marín-Solano, Jesús
Navas, Jorge
oai:RePEc:eee:dyncon:v:34:y:2010:i:8:p:1421-14412014-11-19RePEc: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/pii/S0165-1889(10)00069-2
Kovác, Eugen
Vinogradov, Viatcheslav
Zigic, Kresimir
oai:RePEc:eee:dyncon:v:35:y:2011:i:8:p:1172-11912014-11-19RePEc: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:37:y:2013:i:5:p:1040-10652014-11-19RePEc: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:34:y:2010:i:4:p:765-7792014-11-19RePEc: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/pii/S0165-1889(09)00214-0
Benk, Szilárd
Gillman, Max
Kejak, Michal
oai:RePEc:eee:dyncon:v:45:y:2014:i:c:p:220-2382014-11-19RePEc:eee:dyncon
article
Liquidity traps and expectation dynamics: Fiscal stimulus or fiscal austerity?
We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. The intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus, or in some cases a policy of fiscal austerity, will insulate the economy from deflation traps if the policy is appropriately tailored in magnitude and duration. A fiscal stimulus “switching rule,” which automatically kicks in without discretionary fine-tuning, can be equally effective.
Adaptive learning; Monetary policy; Fiscal policy; Zero interest rate lower bound;
C
2014
45
220
238
E63
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188914001377
Benhabib, Jess
Evans, George W.
Honkapohja, Seppo
oai:RePEc:eee:dyncon:v:33:y:2009:i:1:p:221-2362014-11-19RePEc: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/pii/S0165-1889(08)00098-5
Mukoyama, Toshihiko
Sahin, Aysegül
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:121-1312014-11-19RePEc: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/pii/S0165-1889(09)00148-1
Lanne, Markku
Lütkepohl, Helmut
Maciejowska, Katarzyna
oai:RePEc:eee:dyncon:v:36:y:2012:i:10:p:1600-16252014-11-19RePEc:eee:dyncon
article
Management compensation and market timing under portfolio constraints
This paper shows that portfolio constraints have important implications for management compensation and performance evaluation. In particular, in the presence of portfolio constraints, allowing for benchmarking can be beneficial. Benchmark design arises as an alternative effort inducement mechanism vis-a-vis relaxing portfolio constraints. Numerically, we solve jointly for the manager's linear incentive fee and the optimal benchmark. The size of the incentive fee and the risk adjustment in the benchmark composition are increasing in the investor's risk tolerance and the manager's ability to acquire and process private information.
Market timing; Incentive fee; Benchmarking; Portfolio constraints;
10
2012
36
1600
1625
D81
D82
J33
http://www.sciencedirect.com/science/article/pii/S0165188912001133
Agarwal, Vikas
Gómez, Juan-Pedro
Priestley, Richard
oai:RePEc:eee:dyncon:v:39:y:2014:i:c:p:37-612014-11-19RePEc:eee:dyncon
article
Adaptive consumption behavior
In this paper we propose and study a theory of adaptive consumption behavior under income uncertainty and liquidity constraints. We assume that consumption is governed by a linear function of wealth, whose coefficients are revised each period by a procedure that places few informational or computational demands on the consumer. We show that under a variety of settings the procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function.
Learning; Consumption function; Liquidity constraint; Dynamic programming;
C
2014
39
37
61
C63
E21
http://www.sciencedirect.com/science/article/pii/S0165188913002182
Howitt, Peter
Özak, Ömer
oai:RePEc:eee:dyncon:v:35:y:2011:i:12:p:2213-22272014-11-19RePEc: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:35:y:2011:i:6:p:859-8752014-11-19RePEc: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/pii/S0165-1889(10)00247-2
Galbiati, Marco
Soramäki, Kimmo
oai:RePEc:eee:dyncon:v:37:y:2013:i:11:p:2287-23062014-11-19RePEc:eee:dyncon
article
Non-smooth dynamics and multiple equilibria in a Cournot–Ramsey model with endogenous markups
We consider a Ramsey model with a continuum of Cournotian industries where free entry generates an endogenous markup. The model produces two different regimes, monopolistic and Cournotian monopolistic competition, resulting in non-smooth dynamics. We analyze the global dynamics of the model, demonstrating it may exhibit heteroclinic orbits connecting multiple equilibria. Small transitory changes in parameters can lead to large permanent effects and there can be a poverty trap separating a low-capital and high-markup equilibrium from a high-capital low-markup equilibrium. We apply results from the mathematics of non-smooth dynamic systems, which provide a more general framework for understanding regime switching.
Endogenous markups; Regime switch; Discontinuity-induced bifurcations;
11
2013
37
2287
2306
C62
D43
E32
http://www.sciencedirect.com/science/article/pii/S0165188913001206
Brito, Paulo B.
Costa, Luís F.
Dixon, Huw
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:211-2242014-11-19RePEc:eee:dyncon
article
Industrialization and environmental externalities in a Solow-type model
In this paper we examine the role played by environmental externalities in shaping the dynamics of an economy with two sectors (a farming sector and an industrial one), free inter-sectoral labor mobility and heterogeneous agents (workers/farmers and industrial entrepreneurs). We find that, in the presence of the environmental pressure of the economic activity of the industrial sector, the stability properties of the equilibria and their features in terms of environmental preservation, welfare outcomes and sectoral allocation of labor are sensitive to the level of carrying capacity. We show that an endogenous process of industrialization associated with a reduction in farmers/workers׳ welfare can emerge.
Environmental negative externalities; Industrialization; Economic growth with heterogeneous agents;
C
2014
47
211
224
D62
O11
O13
O15
O41
Q20
http://www.sciencedirect.com/science/article/pii/S0165188914001985
Antoci, Angelo
Russu, Paolo
Sordi, Serena
Ticci, Elisa
oai:RePEc:eee:dyncon:v:36:y:2012:i:7:p:1057-10742014-11-19RePEc: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:40:y:2014:i:c:p:355-3732014-11-19RePEc:eee:dyncon
article
Adaptive learning, endogenous uncertainty, and asymmetric dynamics
I present a simple model where forecasting confidence affects aggregate demand. It is shown that this model has similar stability properties, under statistical and evolutionary learning, as a model without a confidence affect. From this setup, I introduce “Expectational Business Cycles” where output fluctuates due to learning, heterogeneous forecasting models and random changes in the efficient forecasting model. Agents use one of two forecasting models to forecast future variables while heterogeneity is dictated via an evolutionary process. Increased uncertainty, due to a shock to the structure of the economy, may result in a sudden decrease in output. As agents learn the equilibrium, output slowly increases to its equilibrium value. Expectational business cycles tend to arrive faster, last longer and are more severe as agents possess less information.
Adaptive learning; Aggregate fluctuations; Heterogeneous expectations; Imitation dynamics; Multiple equilibria; Rational expectations; Uncertainty;
C
2014
40
355
373
C62
D84
E37
http://www.sciencedirect.com/science/article/pii/S0165188914000311
Guse, Eran A.
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1931-19492014-11-19RePEc: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:1:p:63-842014-11-19RePEc: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:37:y:2013:i:7:p:1284-12992014-11-19RePEc:eee:dyncon
article
Stochastic Stackelberg equilibria with applications to time-dependent newsvendor models
In this paper, we prove a maximum principle for general stochastic differential Stackelberg games, and apply the theory to continuous time newsvendor problems. In the newsvendor problem, a manufacturer sells goods to a retailer, and the objective of both parties is to maximize expected profits under a random demand rate. Our demand rate is an Itô–Lévy process, and to increase realism information is delayed, e.g., due to production time. A special feature of our time-continuous model is that it allows for a price-dependent demand, thereby opening for strategies where pricing is used to manipulate the demand.
Stochastic differential games; Delayed information; Itô–Lévy processes; Stackelberg equilibria; Newsvendor models; Optimal control of forward-backward stochastic differential equations;
7
2013
37
1284
1299
C44
C61
C73
D81
http://www.sciencedirect.com/science/article/pii/S0165188913000432
Øksendal, Bernt
Sandal, Leif
Ubøe, Jan
oai:RePEc:eee:dyncon:v:35:y:2011:i:1:p:97-1142014-11-19RePEc: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/pii/S0165-1889(10)00170-3
Carmona, Julio
León, Angel
Vaello-Sebastià, Antoni
oai:RePEc:eee:dyncon:v:37:y:2013:i:8:p:1567-15802014-11-19RePEc:eee:dyncon
article
An assessment of the Stability and Growth Pact reform in a small-scale macro-framework
This paper contributes to the debate on EMU fiscal governance. We simulate a small-scale macroeconomic model with forward-looking agents, augmented with a public finance block. We account for positive (output stabilization) and negative (via risk premia) effects of debt and deficit. We compare the working of the “fiscal compact” with the Maastricht 3% deficit limit (status quo), and a public investment rule. We evaluate their performance in terms of output and inflation during fiscal consolidation, and following demand and supply shocks at the steady state. All rules guarantee long run sustainability. The investment rule robustly displays the lowest output loss, followed by the status quo. The “fiscal compact” rule appears to be the most recessionary and deflationary.
Fiscal rules; Golden rule; Fiscal consolidation; EMU economic governance; Fiscal compact;
8
2013
37
1567
1580
C63
E62
E63
H61
http://www.sciencedirect.com/science/article/pii/S0165188913000936
Creel, Jérôme
Hubert, Paul
Saraceno, Francesco
oai:RePEc:eee:dyncon:v:37:y:2013:i:1:p:251-2642014-11-19RePEc: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:35:y:2011:i:3:p:282-2942014-11-19RePEc: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/pii/S0165-1889(10)00236-8
Canzoneri, Matthew
Cumby, Robert
Diba, Behzad
López-Salido, David
oai:RePEc:eee:dyncon:v:32:y:2008:i:4:p:1312-13312014-11-19RePEc: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/pii/S0165-1889(07)00128-5
Kossioris, G.
Plexousakis, M.
Xepapadeas, A.
de Zeeuw, A.
Mäler, K.-G.
oai:RePEc:eee:dyncon:v:32:y:2008:i:3:p:956-9772014-11-19RePEc: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/pii/S0165-1889(07)00107-8
Flåm, S.D.
Godal, O.
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:38-492014-11-19RePEc:eee:dyncon
article
Validating an agent-based model of the Zipf׳s Law: A discrete Markov-chain approach
This study discusses the validation of an agent-based model of emergent city systems with heterogeneous agents. To this end, it proposes a simplified version of the original agent-based model and subjects it to mathematical analysis. The proposed model is transformed into an analytically tractable discrete Markov model, and its city size distribution is examined. Its discrete nature allows the Markov model to be used to validate the algorithms of computational agent-based models. We show that the Markov chains lead to a power-law distribution when the ranges of migration options are randomly distributed across the agent population. We also identify sufficient conditions under which the Markov chains produce the Zipf׳s Law, which has never been done within a discrete framework. The conditions under which our simplified model yields the Zipf׳s Law are in agreement with, and thus validate, the configurations of the original heterogeneous agent-based model.
Discrete Markov model; Agent-based models; Zipf׳s Law;
C
2014
41
38
49
C61
C65
R12
http://www.sciencedirect.com/science/article/pii/S0165188914000360
Gaujal, Bruno
Gulyas, Laszlo
Mansury, Yuri
Thierry, Eric
oai:RePEc:eee:dyncon:v:33:y:2009:i:1:p:183-2032014-11-19RePEc: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/pii/S0165-1889(08)00089-4
Furth, Dave
oai:RePEc:eee:dyncon:v:34:y:2010:i:7:p:1295-13042014-11-19RePEc: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/pii/S0165-1889(10)00036-9
Jääskelä, Jarkko P.
Kulish, Mariano
oai:RePEc:eee:dyncon:v:36:y:2012:i:10:p:1585-15992014-11-19RePEc:eee:dyncon
article
Leverage management in a bull–bear switching market
Should an investor unwind his portfolio in the face of changing economic conditions? We study an investor's optimal trading strategy with finite horizon and transaction costs in an economy that switches stochastically between two market conditions. We fully characterize the investor's time dependent investment strategy in a “bull” market and a “bear” market. We show that when the market switches from the “bull” market to the “bear” market, complete deleveraging, reducing the degree of leverage, or keeping leverage unchanged may all be optimal strategies, subject to underlying market conditions. We further show that the investor may optimally keep leverage unchanged in the “bear” market, particularly so for illiquid asset. On the other hand, a lower borrowing cost in the “bear” market would prevent sell offs.
Leverage; Portfolio selection; Bull–bear switching market; Transaction costs;
10
2012
36
1585
1599
D11
D91
G11
C61
http://www.sciencedirect.com/science/article/pii/S0165188912000930
Dai, Min
Wang, Hefei
Yang, Zhou
oai:RePEc:eee:dyncon:v:42:y:2014:i:c:p:33-492014-11-19RePEc:eee:dyncon
article
Monetary policy trade-offs in an estimated open-economy DSGE model
This paper studies the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank׳s estimated dynamic stochastic general equilibrium (DSGE) model of a small open economy. Our main finding is that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible.
Optimal monetary policy; Instrument rules; Open-economy DSGE models; Output gap; Potential output;
C
2014
42
33
49
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188914000578
Adolfson, Malin
Laséen, Stefan
Lindé, Jesper
Svensson, Lars E.O.
oai:RePEc:eee:dyncon:v:36:y:2012:i:4:p:629-6412014-11-19RePEc: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:32:y:2008:i:12:p:3978-40152014-11-19RePEc: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/pii/S0165-1889(08)00077-8
Hautsch, Nikolaus
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2371-23962014-11-19RePEc:eee:dyncon
article
Energy balance climate models and general equilibrium optimal mitigation policies
In a general equilibrium model of the world economy, we develop a two-dimensional energy balance climate model featuring heat diffusion and anthropogenic forcing driven by global fossil fuel use across the sphere of the Earth. This introduces an endogenous location dependent temperature function, driving spatial characteristics, in terms of location dependent damages resulting from local temperature anomalies into the standard climate-economy framework. We solve the social planner's problem and characterize the competitive equilibrium for two polar cases differentiated by the degree of market integration. We define optimal taxes on fossil fuel use and how they may implement the planning solution. Our results suggest that if the implementation of international transfers across latitudes is not possible then optimal taxes are in general spatially non-homogeneous and may be lower at poorer latitudes. The degree of spatial differentiation of optimal taxes depends on heat transportation. By employing the properties of the spatial model, we show by numerical simulations how the impact of thermal transport across latitudes on welfare can be studied.
Optimal carbon taxes; General equilibrium; Energy balance climate model;
12
2013
37
2371
2396
Q54
Q32
H23
H21
http://www.sciencedirect.com/science/article/pii/S0165188913001966
Brock, William A.
Engström, Gustav
Grass, Dieter
Xepapadeas, Anastasios
oai:RePEc:eee:dyncon:v:36:y:2012:i:12:p:1950-19702014-11-19RePEc: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:37:y:2013:i:12:p:2602-26222013-12-03RePEc:eee:dyncon
article
Numerical solution of dynamic equilibrium models under Poisson uncertainty
We propose a simple and powerful numerical algorithm to compute the transition process in continuous-time dynamic equilibrium models with rare events. In this paper we transform the dynamic system of stochastic differential equations into a system of functional differential equations of the retarded type. We apply the Waveform Relaxation algorithm, i.e., we provide a guess of the policy function and solve the resulting system of (deterministic) ordinary differential equations by standard techniques. For parametric restrictions, analytical solutions to the stochastic growth model and a novel solution to Lucas' endogenous growth model under Poisson uncertainty are used to compute the exact numerical error. We show how (potential) catastrophic events such as rare natural disasters substantially affect the economic decisions of households.
Continuous-time DSGE; Poisson uncertainty; Waveform Relaxation;
12
2013
37
2602
2622
C61
E21
O41
http://www.sciencedirect.com/science/article/pii/S0165188913001498
Posch, Olaf
Trimborn, Timo
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:3034-30432013-12-03RePEc:eee:dyncon
article
The Taylor principle in a medium-scale macroeconomic model
We consider a medium-scale New-Keynesian model which combines features that have been shown to explain fairly well postwar U.S. business cycles. Our main result demonstrates that the determinacy properties of forward-looking interest rate rules resemble, at least qualitatively, the corresponding outcomes under current-looking rules. We explain how and why the empiri-cally relevant features of our model generate this novel result.
Nominal rigidities; Real rigidities; Monetary policy;
12
2013
37
3034
3043
E22
E31
http://www.sciencedirect.com/science/article/pii/S0165188913001917
Sveen, Tommy
Weinke, Lutz
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2582-26012013-12-03RePEc:eee:dyncon
article
Fiscal news and macroeconomic volatility
This paper analyzes the contribution of anticipated capital and labor tax shocks to business cycle volatility in an estimated New Keynesian business cycle model. While fiscal policy accounts for about 15% of output variance at business cycle frequencies, this mostly derives from anticipated government spending shocks. Tax shocks, both anticipated and unanticipated, contribute little to the fluctuations of real variables. However, anticipated capital tax shocks do explain a sizable part of inflation fluctuations, accounting for up to 12% of its variance. In line with earlier studies, news shocks in total account for about 50% of output variance. Further decomposing this news effect, we find permanent total factor productivity news shocks to be most important. When looking at the federal level instead of total government, the importance of anticipated tax and spending shocks significantly increases, suggesting that fiscal policy at the subnational level typically counteracts the effects of federal fiscal policy shocks.
Anticipated tax shocks; Sources of aggregate fluctuations; Bayesian estimation;
12
2013
37
2582
2601
E32
E62
C11
http://www.sciencedirect.com/science/article/pii/S0165188913001437
Born, Benjamin
Peter, Alexandra
Pfeifer, Johannes
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2500-25242013-12-03RePEc:eee:dyncon
article
On the long-run relationship between inflation and output in a spatial overlapping generations model
The paper builds a model that features spatial differentiation of markets, and then uses it to study, first, the relationship between inflation and the steady-state level of output, and second, the relationship between inflation and the steady-state distribution of output across the economy. A steady-state of the model entails a stationary distribution of money across the locations of the economy. With all else held fixed, a change in the rate of money-growth induces a change in the distribution of money, which leads to a change in labour supply and production throughout the economy. Thus the distribution of money provides a channel through which a change in monetary policy affects real economic activity.
Spatial overlapping generations model; Underlying graph; Distribution channel;
12
2013
37
2500
2524
E40
E44
http://www.sciencedirect.com/science/article/pii/S0165188913001413
Anthonisen, Niels
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2417-24452013-12-03RePEc:eee:dyncon
article
Option pricing with discrete time jump processes
In this paper we propose new option pricing models based on class of models with jumps contained in the Lévy-type based models (NIG-Lévy, Schoutens, 2003, Merton-jump, Merton, 1976 and Duan based model, Duan et al., 2007). By combining these different classes of models with several volatility dynamics of the GARCH type, we aim at taking into account the dynamics of financial returns in a realistic way. The associated risk neutral dynamics of the time series models is obtained through two different specifications for the pricing kernel: we provide a characterization of the change in the probability measure using the Esscher transform and the Minimal Entropy Martingale Measure. We finally assess empirically the performance of this modelling approach, using a dataset of European options based on the S&P 500 and on the CAC 40 indices. Our results show that models involving jumps and a time varying volatility provide realistic pricing and hedging results for options with different kinds of time to maturities and moneyness. These results are supportive of the idea that a realistic time series model can provide realistic option prices making the approach developed here interesting to price options when option markets are illiquid or when such markets simply do not exist.
Option pricing; Time Jump processes; Exponential affine stochastic discount factor; Minimal Entropy Martingale Measure; S&P 500; CAC 40;
12
2013
37
2417
2445
G12
G13
G22
http://www.sciencedirect.com/science/article/pii/S0165188913001516
Guégan, Dominique
Ielpo, Florian
Lalaharison, Hanjarivo
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:3044-30582013-12-03RePEc:eee:dyncon
article
Organizational dynamics and aggregate fluctuations: The role of financial relationships
This paper constructs an estimated dynamic stochastic general equilibrium model to study the role of labor reallocation between production and organizational tasks within a firm in movements in measured TFP in Japan. Allocating more labor to organizational tasks strengthens the financial relationship with financial intermediaries and helps firms to mitigate a widening in credit spread during financial difficulties. However, doing so reduces the labor allocated to production tasks and hence the measured TFP. Our quantitative analysis indicates that labor reallocation contributes to the observed procyclicality in measured TFP. We also find that this mechanism amplifies and propagates the effects of exogenous shocks on aggregate activity.
Labor reallocation; Financial relationship; Organizational capital; TFP; Aggregate fluctuations;
12
2013
37
3044
3058
E13
E32
http://www.sciencedirect.com/science/article/pii/S0165188913001681
Otsu, Keisuke
Saito, Masashi
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2963-29782013-12-03RePEc:eee:dyncon
article
On firm-level, industry-level, and aggregate employment fluctuations
Employment fluctuations are examined, at different levels of aggregation, in a model with firm-specific hiring decisions due to search frictions and sticky pricing. The results indicate that firm-level employment dispersion rises with higher price stickiness and higher demand elasticity, whereas it falls with more convexity of search costs and with a higher labor supply elasticity. Industry-level employment is more volatile and less procyclical than aggregate employment, and a larger industry size reduces volatility and raises co-movement with output. The calibrated model is able to match the volatility, autocorrelation and cyclical correlation of US industry-level employment when incorporating firm-specific technology shocks.
Employment fluctuations; Search frictions; Sticky prices; Firm-specific shocks;
12
2013
37
2963
2978
E3
J2
J3
J4
http://www.sciencedirect.com/science/article/pii/S0165188913001851
Casares, Miguel
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2928-29422013-12-03RePEc:eee:dyncon
article
Structural estimation of stock market participation costs
This paper develops and estimates a dynamic model of stock market participation, where consumers' decisions regarding stock market participation are influenced by participation costs. The practical significance of the participation costs is considered as being a channel through which financial education programs can affect consumers' investment decisions. Using household data from the Panel Study of Income Dynamics, I estimate the magnitude of the participation cost, allowing for individual heterogeneity in it. The results show the average stock market participation cost is about 4–6% of labor income; however, it varies substantially over consumers' life. The model successfully predicts the level of the observed participation rate and the increasing pattern of stock market participation over the consumers' life cycle.
Household Finance; Stock Market Participation; Investor Heterogeneity; Dynamic Discrete Choice Models;
12
2013
37
2928
2942
D91
D14
G11
http://www.sciencedirect.com/science/article/pii/S0165188913001875
Khorunzhina, Natalia
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2547-25612013-12-03RePEc:eee:dyncon
article
Long-term interest rates, risk premia and unconventional monetary policy
We study two kinds of unconventional monetary policies: announcements about the future path of the short-term rate and long-term nominal interest rates as operating instruments of monetary policy. We do so in a model where the risk premium on long-term debt is, in part, endogenously determined. We find that both policies are consistent with unique equilibria, that, at the zero lower bound, announcements about the future path of the short-term rate can lower long-term interest rates through their impact both on expectations and on the risk premium and that long-term interest rate rules perform as well as, and at times better than, conventional Taylor rules. With simulations, we show that long-term interest rate rules generate sensible dynamics both when in operation and when expected to be applied.
Unconventional monetary policy; Taylor rule; Risk premia; Term structure;
12
2013
37
2547
2561
E43
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188913001528
Jones, Callum
Kulish, Mariano
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2695-27092013-12-03RePEc:eee:dyncon
article
Distressed exchange, bargaining power, and prior capital structure
Financially troubled companies often make Distressed Exchange (DE) offers to its creditors, to postpone costly bankruptcy reorganization. We derive the optimal terms and timing of a DE offer consisting of debt reduction and an equity stake in the restructured firm. The DE terms and timing are affected by shareholder bargaining power, with greater shareholder bargaining power resulting in earlier DE offer, smaller debt reduction and smaller equity stake. The impact of shareholder bargaining power is greater when bankruptcy cost is larger and tax rate is higher. We also show that renegotiability of debt increases ex-ante firm value and results in a higher optimal leverage ratio. Both firm value and optimal leverage ratio are decreasing functions of shareholder bargaining power.
Renegotiable debt; Bargaining power; Distressed exchange; Reorganization;
12
2013
37
2695
2709
G31
G32
http://www.sciencedirect.com/science/article/pii/S0165188913001504
Sarkar, Sudipto
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2979-29972013-12-03RePEc:eee:dyncon
article
Optimal regime switching and threshold effects
We consider a general control problem with two types of optimal regime switch. The first one concerns technological and/or institutional regimes indexed by a finite number of discrete parameter values, and the second features regimes relying on given threshold values for given state variables. We propose a general optimal control framework allowing to derive the first-order optimality conditions and in particular to characterize the geometry of the shadow prices at optimal switching times (if any). We apply this new optimal control material to address the problem of the optimal management of natural resources under ecological irreversibility, and with the possibility to switch to a backstop technology.
Multi-stage optimal control; Threshold effects; Irreversibility; Non-renewable resources; Backstop technology;
12
2013
37
2979
2997
Q30
Q53
C61
O33
http://www.sciencedirect.com/science/article/pii/S016518891300184X
Boucekkine, R.
Pommeret, A.
Prieur, F.
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2679-26942013-12-03RePEc:eee:dyncon
article
Fiscal policy in good and bad times
In this paper we analyze whether the effect of fiscal policy differs across the business cycle. To tackle this question, we use a regime-switching error-correction framework, where nonlinearities are only modeled in the short-run and have no impact on the long-run equilibrium. Regime specific shocks to government revenue and government purchases are identified using sign restrictions. Linear combinations of the impulse responses of these basic shocks are used to construct a deficit-spending shock and a deficit-financed tax-cut shock. We find that active spending policies have a stronger impact in recession, with multipliers exceeding unity, and should be preferred to deficit-financed tax-cuts.
Fiscal policy; Nonlinearity; Threshold vector error-correction;
12
2013
37
2679
2694
E30
E32
E62
http://www.sciencedirect.com/science/article/pii/S0165188913001899
Candelon, Bertrand
Lieb, Lenard
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2710-27282013-12-03RePEc:eee:dyncon
article
Design limits and dynamic policy analysis
This paper characterizes the frequency domain properties of feedback control rules in linear systems in order to better understand how different policies affect outcomes frequency by frequency. We are especially concerned in understanding how reductions of variance at some frequencies induce increases in variance at others. Tradeoffs of this type are known in the control literature as design limits. Design limits are important in understanding the full range of effects of macroeconomic stabilization policies. We extend existing results to account for discrete time bivariate systems with rational expectations. Application is made to the evaluation of monetary policy rules.
Design limits; Stabilization policy; Frequency domain; Monetary policy rules;
12
2013
37
2710
2728
C52
E6
http://www.sciencedirect.com/science/article/pii/S0165188913001668
Brock, William A.
Durlauf, Steven N.
Rondina, Giacomo
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2771-27952013-12-03RePEc:eee:dyncon
article
The Taylor principle fights back, Part I
New Keynesian models with limited asset market participation assert that under plausible conditions higher real interest rates increase aggregate demand, the Taylor principle leads to indeterminacy, and passive policy ensures a unique equilibrium. These striking results stem from the assumption that the real wage is highly flexible. Relaxing this assumption slightly brings back the normal world where higher real interest rates reduce aggregate demand and where the Taylor principle is effectively necessary and sufficient for a unique, stable equilibrium.
Inflation; Taylor principle; Indeterminacy; Limited asset market participation;
12
2013
37
2771
2795
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188913001711
Buffie, Edward F.
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2882-29122013-12-03RePEc:eee:dyncon
article
Costly external finance and labor market dynamics
We study the role of agency frictions and costly external finance in cyclical labor market dynamics, with a focus on how credit-market frictions may amplify aggregate TFP shocks. The main result is that aggregate TFP shocks lead to large fluctuations of labor market quantities if the model is calibrated to the empirically observed countercyclicality of the finance premium. A financial accelerator mechanism thus amplifies labor market fluctuations by rendering rigidity in real wage dynamics. In contrast, if the finance premium is procyclical, which the model can be parameterized to accommodate, amplification is absent, and labor-market fluctuations display the Shimer (2005) puzzle.
Credit frictions; Financial accelerator; Risk shocks; Labor search and matching; Volatility puzzle; Business cycle modeling;
12
2013
37
2882
2912
E32
E44
J63
J64
http://www.sciencedirect.com/science/article/pii/S0165188913001802
Chugh, Sanjay K.
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2668-26782013-12-03RePEc:eee:dyncon
article
Demand for cash with intra-period endogenous consumption
We extend the literature on the demand for money by relaxing the assumption of a constant rate of consumption. Although total consumption is still fixed over the period, agents can choose more than one rate of consumption and cash depletion in the period to minimize the cost of money management. Consistent with empirical evidence, we find that agents do not smooth intra-period consumption. Instead, their rate of consumption will be positively related to their cash position. This positive correlation depends on the volatility of the consumption process.
Money demand; Drift control; Consumption smoothing;
12
2013
37
2668
2678
E41
http://www.sciencedirect.com/science/article/pii/S0165188913001450
Bar-Ilan, Avner
Marion, Nancy
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2446-24652013-12-03RePEc:eee:dyncon
article
Experimental evidence of bank runs as pure coordination failures
We investigate how coordination requirement, measured by the coordination parameter, affects the occurrence of miscoordination-based bank runs in controlled laboratory environments. We identify an indeterminacy region of the coordination parameter such that games with the parameter within the region have varying coordination outcomes and exhibit persistent path dependence. Experimental economies with the parameter above (below) the region stay close or converge to the run (non-run) equilibrium. Switches between the two equilibria occur even with fixed economic fundamentals. The experimental results are well accounted for by a version of the evolutionary algorithm that uses experimentation rates estimated from the experimental data.
Bank runs; Experimental studies; Evolutionary algorithm; Coordination games;
12
2013
37
2446
2465
D83
G20
http://www.sciencedirect.com/science/article/pii/S0165188913001486
Arifovic, Jasmina
Hua Jiang, Janet
Xu, Yiping
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2643-26672013-12-03RePEc:eee:dyncon
article
Solving DSGE models with a nonlinear moving average
We propose a nonlinear infinite moving average as an alternative to the standard state space policy function for solving nonlinear DSGE models. Perturbation of the nonlinear moving average policy function provides a direct mapping from a history of innovations to endogenous variables, decomposes the contributions from individual orders of uncertainty and nonlinearity, and enables familiar impulse response analysis in nonlinear settings. When the linear approximation is saddle stable and free of unit roots, higher order terms are likewise saddle stable and first order corrections for uncertainty are zero. We derive the third order approximation explicitly, examine the accuracy of the method using Euler equation tests, and compare with state space approximations.
Perturbation; Nonlinear impulse response; DSGE; Solution methods; Volterra series;
12
2013
37
2643
2667
C61
C63
E17
http://www.sciencedirect.com/science/article/pii/S0165188913001462
Lan, Hong
Meyer-Gohde, Alexander
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:2998-30112013-12-03RePEc:eee:dyncon
article
Revisiting the effect of household size on consumption over the life-cycle
Although the link between household size and consumption has strong empirical support, there is no consistent way in which demographics are dealt with in standard life-cycle models. We study the relationship between the predictions of the Single Agent model (the standard in the literature) versus a simple model extension (the Demographics model) where deterministic changes in household size and composition affect optimal consumption decisions. We show theoretically that the Demographics model is conceptually preferable to the Single Agent model as it captures economic mechanisms ignored by the latter. However, our quantitative analysis demonstrates that differences in predictions for consumption are negligible across models, when using standard calibration strategies. This suggests that it is largely irrelevant which model specification is used.
Consumption; Life-cycle models;
12
2013
37
2998
3011
D12
D91
E21
J10
http://www.sciencedirect.com/science/article/pii/S0165188913001826
Bick, Alexander
Choi, Sekyu
oai:RePEc:eee:dyncon:v:37:y:2013:i:12:p:3012-30332013-12-03RePEc:eee:dyncon
article
Skill-biased technological change and homeownership
In the United States, the residential housing market went through important changes over the period from the 1970s to the mid-1990s. Although the aggregate homeownership rate was relatively stable during that period, the distribution of homeownership rates by age changed in remarkable ways. While younger households saw substantial declines in homeownership rates, the opposite happened for older households. In this paper, we argue that the skill-biased technological change (SBTC) that began during the 1970s has been an important factor behind the observed change in the distribution of homeownership rates by age. We build a life cycle model in which skills are accumulated on-the-job through experience: learning by doing. Early in life, households have lower levels of skills and therefore lower earnings. SBTC increases the returns to skill, widening the wage gap between young and old ages. As a consequence, it takes more time for young households to become homeowners given frictions in financial markets (e.g. downpayment requirements) and housing markets (e.g. large and indivisible houses), in line with consumption smoothing behavior. On the other hand, older households that could not afford a house before may now become homeowners, given higher returns to skill. Our analysis confirms this conjecture, namely, that SBTC shifts the distribution of homeownership from the young to the old.
Homeownership; Incomplete markets; Skill-biased technological change;
12
2013
37
3012
3033
E2
http://www.sciencedirect.com/science/article/pii/S0165188913001838
Anagnostopoulos, Alexis
Atesagaoglu, Orhan Erem
Carceles-Poveda, Eva
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:209-2342014-01-10RePEc:eee:dyncon
article
Evaluating monetary policy under preferences with zero wealth effect: A Bayesian approach
Both real and monetary macro models have parallely exploited the potential for various preferences in accounting for empirical facts. This paper brings the two literatures together by estimating time non-separable preferences with habit formation in consumption that nests several commonly used preferences. In the absence of wealth effects and external habits, these preferences fail to generate observed inflation inertia and output persistence after a monetary policy shock. Furthermore, the data strongly rejects these preferences in favor of preferences with external habits. An alternative solution is to include habit adjusted intermediate wealth effect preferences which are able to simultaneously generate sluggish responses of the variables to a monetary policy shock and fit the data better.
Preferences; Wealth effect; Habit; Monetary policy; Inflation; Output;
C
2014
38
209
234
E21
E31
E32
E52
http://www.sciencedirect.com/science/article/pii/S0165188913001991
Dey, Jaya
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:125-1412014-01-10RePEc:eee:dyncon
article
Extracting market information from equity options with exponential Lévy processes
Lévy processes have been successfully applied in the modeling of financial assets. Useful information such as implied volatility, skewness, and risk-preferences can be derived from market option prices. In this paper, we advocate using Esscher conjugate Lévy processes to estimate risk-neutral and empirical densities. More specifically, we employ the exponential Meixner and NIG processes to calculate in closed form the pricing kernel in the equity market and then study the evolution of equity market behavior between 2002 and 2010. Our empirical analysis using S&P 500 options shows that the risk preferences of equity investors were signalling an anomaly in the market well before the subprime prime mortgage crisis (August 2007) and the crisis of confidence that followed, anticipating the downfall in equity markets in 2008, but then returning to normal levels in 2009.
Risk-neutral density; Exponential Lévy processes; Pricing kernel; Relative risk-aversion coefficient;
C
2014
38
125
141
C15
C52
C54
G15
http://www.sciencedirect.com/science/article/pii/S0165188913001978
Fabozzi, Frank J.
Leccadito, Arturo
Tunaru, Radu S.
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:72-862014-01-10RePEc:eee:dyncon
article
The evolution of free trade networks
This paper considers the evolutionary dynamics of a free trade agreement (FTA) network formation game among N countries. We first explore the static model introduced by Goyal and Joshi (2006) and precisely characterize the set of pairwise stable FTA networks. Then, we develop a dynamic model under random perturbations and identify long-run outcomes to remove prediction uncertainty inherited from static analysis. The results show that both partial free trade and global free trade will result when there are only three countries. However, when more countries are involved, only the complete FTA network emerges.
Free trade agreements; Global free trade; Network formation game; Stochastic stability analysis;
C
2014
38
72
86
C73
F15
http://www.sciencedirect.com/science/article/pii/S0165188913001929
Zhang, Jin
Cui, Zhiwei
Zu, Lei
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:161-1832014-01-10RePEc:eee:dyncon
article
Escape dynamics: A continuous-time approximation
We extend a continuous-time approximation approach to the analysis of escape dynamics in economic models with constant gain adaptive learning. This approach is based on the application of the results of continuous-time version of large deviations theory to the linear diffusion approximation of the original discrete-time dynamics under learning. We characterize escape dynamics by analytically deriving the most probable escape point and mean escape time. The approximation is tested on the Phelps problem of a government controlling inflation while adaptively learning a misspecified Phillips curve, studied previously by Sargent (1999) and Cho et al. (2002) (henceforth, CWS), among others. We compare our results with simulations extended to very low values of the constant gain and show that, for the lowest gains, our approach approximates simulations relatively well. We express reservations regarding the applicability of any approach based on large deviations theory to characterizing escape dynamics for economically plausible values of constant gain in the model of CWS when escapes are not rare. We show that for these values of the gain it is possible to derive first passage times for learning dynamics reduced to one dimension without resort to large deviations theory. This procedure delivers mean escape time results that fit the simulations closely. We explain inapplicability of large deviations theory by insufficient averaging near the point of self-confirming equilibrium for relatively large gains which makes escapes relatively frequent, suggest the changes which might help approaches based on the theory to work better in this gain interval, and describe a simple heuristic method for determining the range of constant gain values for which large deviations theory could be applicable.
Constant gain adaptive learning; Escape dynamics; Recursive least squares; Large deviations theory;
C
2014
38
161
183
C62
C65
D83
E10
E17
http://www.sciencedirect.com/science/article/pii/S0165188913002029
Kolyuzhnov, Dmitri
Bogomolova, Anna
Slobodyan, Sergey
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:17-362014-01-10RePEc:eee:dyncon
article
Volatility and welfare
This paper explores the relationship between volatility and welfare. Even though households prefer smooth streams of consumption and leisure, welfare can be increasing in the volatility of an exogenous driving force if factor supply is sufficiently elastic. We provide some analytical results for a model without capital, and do some quantitative exercises in a model with capital and a variety of shocks. Welfare is greater in high shock volatility regimes under plausible parameter values. Augmenting the model with features that increase the elasticity of factor supply extends the range of parameters over which higher volatility results in greater welfare.
Volatility; Welfare cost of business cycles;
C
2014
38
17
36
E32
E37
http://www.sciencedirect.com/science/article/pii/S0165188913001887
Lester, Robert
Pries, Michael
Sims, Eric
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:1-162014-01-10RePEc:eee:dyncon
article
The (Un-) importance of Chapter 7 wealth exemption levels
This paper examines the effects of the Chapter 7 wealth exemption level on welfare, bankruptcy filings, debt, and on asset holdings. I build a heterogeneous agent life cycle model which features uninsurable income and expense shocks. Moreover, households can borrow and save simultaneously. When a borrower defaults on her debt by filing for Chapter 7 bankruptcy, she can keep her assets up to the wealth exemption level. Wealth exemption levels are important for two reasons. First, they explain the extensive and intensive margin of the credit card debt puzzle. Around thirty percent of borrowers, both in the model and in the data, who borrow at high interest rates simultaneously save at low interest rates. However, these borrowers borrow and save only relatively small amounts, a few thousand U.S. Dollars. Second, ignoring the exemption level biases results because it overstates the costs of defaulting. The welfare gains from Chapter 7 compared to the European system, where debt is not discharged, are twice as high when exemption levels are positive compared to when they are ignored. At the same time, wealth exemption levels are unimportant in the sense that they have an impact only at low exemption levels. The effects of increases in the exemption level fade out very quickly. There is no strong positive relationship between exemption levels, which vary across U.S. states, and default rates in the model. This is in contrast to the previous literature, but consistent with the data. The reason is that those borrowers who might default do not own much wealth. Therefore, only very few households are affected by increases in the exemption level.
Personal bankruptcy law; Wealth exemption level; Asset portfolios; Credit card debt puzzle;
C
2014
38
1
16
E21
D31
K35
http://www.sciencedirect.com/science/article/pii/S0165188913002030
Mankart, Jochen
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:250-2652014-01-10RePEc:eee:dyncon
article
Myopic governments and welfare-enhancing debt limits
This paper studies welfare effects of a soft borrowing constraint on sovereign debt. The constraint is modeled as a proportional fine per unit of debt in excess of a specified reference value, resembling features of the Stability and Growth Pact. Sovereign debt is the result of myopic fiscal policy. It reduces welfare in the absence of lump-sum taxes. The paper shows that the borrowing constraint enhances welfare by reducing long run debt. In an economy calibrated to a generic OECD country, the maximum attainable welfare gain of debt consolidation, which is induced by imposing the optimally parameterized constraint, amounts to 0.5% in terms of consumption. The short run welfare costs of the constraint, which arise from restricting the use of debt to smooth taxes, are quantitatively negligible.
Myopic governments; Debt bias; Fiscal constraints; Stability and Growth Pact; Social welfare;
C
2014
38
250
265
E6
H3
http://www.sciencedirect.com/science/article/pii/S016518891300211X
Rieth, Malte
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:235-2492014-01-10RePEc:eee:dyncon
article
Endogenous specialization of heterogeneous innovative activities of firms under the technological spillovers
This paper proposes a reduced form model of dynamic duopoly in the context of heterogeneous innovations framework. Two agents invest into expansion of variety of available products and into the improvement of quality of existing products simultaneously. Every newly introduced product has its own dimension of quality-improving innovations and there is a continuum of possible new products. In the area of quality innovations the costless imitation effect is modelled while in the area of variety expanding innovations agents are cooperating with each other. As a result the specialization of innovative activity is observed. This specialization arises from strategic interactions of agents in both fields of innovative activity and is endogenously defined from the dynamics of the model.
Innovations; Dynamics; Multiproduct; Technology spillovers; Distributed control; Differential games;
C
2014
38
235
249
C02
L0
O31
http://www.sciencedirect.com/science/article/pii/S016518891300198X
Bondarev, Anton
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:37-642014-01-10RePEc:eee:dyncon
article
The short and long-run impact of globalization if firms differ in factor input ratios
Empirical evidence has shown that exporters are more capital intensive than non-exporters. Based on this evidence, I construct a two-factor general equilibrium model with firm heterogeneity in factor intensities, monopolistic competition, scale economies and international trade. This setting can explain several empirical regularities on international trade, factor market competition, factor relocations and factor returns: (i) exporters are more capital intensive than non-exporters, regardless of a country's relative factor endowments; (ii) finite supply of capital limits a country's export activities; (iii) trade liberalization increases the relative return to capital; (iv) new profit opportunities in export markets change the distribution of firms towards the more capital intensive ones. Finally, I extend the setting to endogenous capital accumulation and show that trade liberalization induces economic growth and, in the long-run, benefits all factors in real terms.
International trade; Economic growth; Firm heterogeneity in factor input ratios; Factor market competition; Income distribution;
C
2014
38
37
64
F12
L11
O41
D33
http://www.sciencedirect.com/science/article/pii/S0165188913001930
Emami Namini, Julian
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:105-1242014-01-10RePEc:eee:dyncon
article
Age-dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners
A defined contribution pension plan allows consumption to be redistributed from the plan member's working life to retirement in a manner that is consistent with the member's personal preferences. The plan's optimal funding and investment strategies therefore depend on the desired profile of consumption over the lifetime of the member. We investigate these strategies under the assumption that the member is a rational life cycle financial planner and has an Epstein–Zin utility function, which allows a separation between risk aversion and the elasticity of intertemporal substitution. We also take into account the member's human capital during the accumulation phase of the plan and we allow the annuitisation decision to be endogenously determined during the decumulation phase.
Defined contribution pension plan; Funding strategy; Investment strategy; Epstein–Zin utility; Stochastic lifestyling; Phased annuitisation; Dynamic programming;
C
2014
38
105
124
G11
G23
http://www.sciencedirect.com/science/article/pii/S0165188913002169
Blake, David
Wright, Douglas
Zhang, Yumeng
oai:RePEc:eee:dyncon:v:38:y:2014:i:c:p:142-1602014-01-10RePEc:eee:dyncon
article
Computing equilibria in dynamic models with occasionally binding constraints
We propose a method to compute equilibria in dynamic models with several continuous state variables and occasionally binding constraints. These constraints induce non-differentiabilities in policy functions. We develop an interpolation technique that addresses this problem directly: It locates the non-differentiabilities and adds interpolation nodes there. To handle this flexible grid, it uses Delaunay interpolation, a simplicial interpolation technique. Hence, we call this method Adaptive Simplicial Interpolation (ASI). We embed ASI into a time iteration algorithm to compute recursive equilibria in an infinite horizon endowment economy where heterogeneous agents trade in a bond and a stock subject to various trading constraints. We show that this method computes equilibria accurately and outperforms other grid schemes by far.
Adaptive grid; Delaunay interpolation; Non-differentiabilities; Occasionally binding constraints; Simplicial interpolation;
C
2014
38
142
160
C63
C68
E21
G11
http://www.sciencedirect.com/science/article/pii/S0165188913001954
Brumm, Johannes
Grill, Michael
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:205-2262015-08-05RePEc:eee:dyncon
article
Multipliers of unexpected increases in defense spending: An empirical investigation
We show that unexpected increases in defense spending increase total factor productivity (TFP) and output and decrease investment in US quarterly data. Yet, the output multiplier is zero when the TFP response is shut down. We examine various explanations for this phenomenon and find that the rise in TFP is due to the presence of measurement error in quarterly data. Using artificial data generated from an RBC model with measurement error, we demonstrate the suitability of our identification approach for recovering the true output multiplier in the presence of measurement error.
Defense spending; Unanticipated defense shocks; Total factor productivity;
C
2015
57
205
226
E32
E62
http://www.sciencedirect.com/science/article/pii/S016518891500113X
Ben Zeev, Nadav
Pappa, Evi
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:1-232015-08-05RePEc:eee:dyncon
article
The implications of a graying Japan for government policy
Japan is in the midst of a demographic transition that is both rapid and large by international standards. As recently as 1990 Japan had the youngest population among the Group of 6 large, developed countries. However, the combined effects of aging of the baby-boomer generation and low fertility rates have produced very rapid aging. Japan now finds itself with the oldest population among the Group of 6 and its population will continue to age at a rapid pace in future years. Aging is already placing a burden on government finances and Japan׳s ability to confront the negative fiscal implications of future aging is constrained by its very high debt–GDP ratio. We find that Japan faces a severe fiscal crisis if remedial action is not undertaken soon and analyze alternative strategies for correcting Japan׳s fiscal imbalances.
Fiscal policy; Demographics; Aging; Japan;
C
2015
57
1
23
E62
H51
H55
H63
http://www.sciencedirect.com/science/article/pii/S0165188915000780
Braun, R. Anton
Joines, Douglas H.
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:227-2492015-08-05RePEc:eee:dyncon
article
Riskiness, endogenous productivity dispersion and business cycles
In the data, cross-sectional productivity dispersion is countercyclical at both the plant level and the firm level, see e.g. Bloom (2009). I incorporate a firm׳s choice of risk level into a model of firm dynamics with real business cycle features to explain this empirical finding both qualitatively and quantitatively. In the model, in every period, each firm chooses the investment amount and the risk level associated with a production project every period. All projects available to each firm have the same expected flow return, determined by the aggregate and idiosyncratic shocks to the firm׳s productivity, and differ from one another only in their risk. The endogenous option of exiting the market and the limited funding for new investment jointly play an important role in motivating firms׳ risk-taking behavior. The model predicts that, in each period, relatively small firms are more likely to take risk and hence exhibit a higher exit rate, and that the cross-sectional productivity dispersion, measured as the standard deviation of the realized individual component of productivity, is larger in recessions.
Countercyclical productivity dispersion; Business cycles; Firm dynamics;
C
2015
57
227
249
E32
L11
L25
http://www.sciencedirect.com/science/article/pii/S0165188915000950
Tian, Can
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:65-762015-08-05RePEc:eee:dyncon
article
Vertical governance change and product differentiation under decreasing component costs
In deciding on whether and when to outsource component production, firms should consider the trade-off between total production costs and the ability to horizontally differentiate products. We study the outsourcing decision in a duopoly under decreasing but uncertain market rates for components, given that outsourcing increases the substitutability of the final products. We find that there is at least one firm that eventually outsources component production because it cannot differentiate its product enough by in-house production to justify the (eventually) higher costs. The follower outsources at a lower market rate or may even remain vertically integrated. The follower thus incurs the (eventually) much higher in-house component costs longer, while the low substitutability is enjoyed by both firms. Under endogenous roles, firms thus engage in a preemption game to be the first to outsource. We also find that firms generally outsource at lower market rates if uncertainty is higher, but seek to preempt at remarkably higher market rates if substitutability remains low.
C
2015
57
65
76
C73
D23
D81
L14
http://www.sciencedirect.com/science/article/pii/S0165188915000901
Vermeulen, B.
Huisman, K.J.M.
Kok, A.G. de
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:182-2042015-08-05RePEc:eee:dyncon
article
Nonlinear adventures at the zero lower bound
In this paper, we argue for the importance of explicitly considering nonlinearities in analyzing the behavior of the New Keynesian model with a zero lower bound (ZLB) of the nominal interest rate. To show this, we report how the decision rules and the equilibrium dynamics of the model are substantially affected by the nonlinear features brought about by the ZLB. We also illustrate a tension between the length of a spell at the ZLB and the drop in consumption there.
Zero lower bound; New Keynesian models; Nonlinear solution methods;
C
2015
57
182
204
E30
E50
E60
http://www.sciencedirect.com/science/article/pii/S0165188915000949
Fernández-Villaverde, Jesús
Gordon, Grey
Guerrón-Quintana, Pablo
Rubio-Ramírez, Juan F.
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:145-1622015-08-05RePEc:eee:dyncon
article
The impact of reduced pre-trade transparency regimes on market quality
This paper studies the effects of pre-trade quote transparency on spread, price discovery and liquidity in an artificial limit order market with heterogeneous trading rules. Our agent-based numerical experiments suggest that full quote transparency incurs substantial transaction costs to traders and dampens trading activity in an order-driven market. Our finding reveals that exogenous restriction of displayed depth, up to several best quotes, does not benefit market performance. On the contrary, endogenous restriction of displayed quote depth, by means of iceberg orders, improves market quality in multiple dimensions: it reduces average transaction costs, maintains higher liquidity and moderate volatility, balances the limit order book, and enhances price discovery.
Agent based models; Market transparency; Iceberg orders; Liquidity; Bid-ask spread;
C
2015
57
145
162
D4
D8
G1
http://www.sciencedirect.com/science/article/pii/S0165188915000913
Kovaleva, Polina
Iori, Giulia
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:132-1442015-08-05RePEc:eee:dyncon
article
Measuring the welfare costs of inflation in a life-cycle model
In a neoclassical growth model with life-cycle households in which money is held to satisfy a cash-in-advance constraint, the optimal steady state inflation rate is absurdly high: in excess of 20%. Lump-sum, age-independent money injections twist and flatten the lifetime profile of utility, making this profile look more like the one that would be chosen by a planner. The cost of monetary finance of lump-sum payments is the distortion introduced to the labor-leisure choice.
Monetary policy; Inflation; Welfare costs; Life-cycle model;
C
2015
57
132
144
E52
E31
E32
D58
D91
http://www.sciencedirect.com/science/article/pii/S0165188915001098
Gomme, Paul
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:112-1302015-08-05RePEc:eee:dyncon
article
Borrowing constraints, collateral fluctuations, and the labor market
This paper studies the effects of changes in collateral requirements on the cyclical properties of unemployment and job creation. I develop a general equilibrium model in which labor market frictions prevent the costless adjustment of employment. Financial frictions arise from an imperfect enforcement contract. An environment in which borrowing limits are linked to the firm׳s physical capital stock can quantitatively account for the sluggish response of labor market variables to productivity shocks. I find that fluctuations in those variables are mainly driven by changes in financial conditions. The model can explain 75% of the variation in job creation observed in the data, and it can also account for the persistent reduction in both output and leverage that follows a contraction in credit availability.
Financial frictions; Unemployment; Labor markets; Search and matching; Financial shocks;
C
2015
57
112
130
E24
E27
E32
E44
J63
J64
http://www.sciencedirect.com/science/article/pii/S016518891500086X
Garín, Julio
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:163-1812015-08-05RePEc:eee:dyncon
article
Dynamic pricing and advertising of perishable products with inventory holding costs
We examine a special class of dynamic pricing and advertising models for the sale of perishable goods, including marginal unit costs and inventory holding costs. The time horizon is assumed to be finite and we allow several model parameters to be dependent on time. For the stochastic version of the model, we derive closed-form expressions of the value function as well as of the optimal pricing and advertising policy in feedback form. Moreover, we show that for small unit shares, the model converges to a deterministic version of the problem, whose explicit solution is characterized by an overage and an underage case. We quantify the close relationship between the open-loop solution of the deterministic model and the expected evolution of optimally controlled stochastic sales processes. For both models, we derive sensitivity results. We find that in the case of positive holding costs, on average, optimal prices increase in time and advertising rates decrease. Furthermore, we analytically verify the excellent quality of optimal feedback policies of deterministic models applied in stochastic models.
Dynamic pricing and advertising; Optimal stochastic and deterministic control; Inventory holding costs; Finite horizon; Feedback heuristics;
C
2015
57
163
181
C61
D42
M37
http://www.sciencedirect.com/science/article/pii/S0165188915000974
Schlosser, Rainer
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:54-642015-08-05RePEc:eee:dyncon
article
Structural change accounting with labor market distortions
This paper quantifies the relative importance of sectoral productivity and labor market distortions for structural change in the U.S., India, Mexico and Brazil between 1960 and 2005. I use census data to compute human capital by sector and infer labor market distortions as sectoral gaps in wage per unit of human capital. I incorporate these distortions into a model of structural change, and calibrate the model to reproduce the time paths of sectoral shares of labor and value added for each country. Counterfactuals reveal that (1) TFP growth in agriculture drives most of the decline in its share of labor; (2) the role of labor market distortions is limited.
Structural change; Productivity; Distortions;
C
2015
57
54
64
O11
O41
J31
http://www.sciencedirect.com/science/article/pii/S0165188915000792
Cai, Wenbiao
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:77-952015-08-05RePEc:eee:dyncon
article
On the stability of Calvo-style price-setting behavior
An increasing literature has been concerned that the dynamics of the economy keeps switching and that, in particular, it is important to allow time variation in the degree of Calvo stickiness. We investigate this with a Markov-switching Dynamic Stochastic General Equilibrium model and show that there is little gain when allowing for such time variation. As a result we recommend to use a constant Calvo stickiness parameter, even when allowing for regime shifts elsewhere.
Markov-switching; Policy-invariant; Nominal rigidities; Monetary policy; Bayesian method; DSGE models;
C
2015
57
77
95
C11
C51
E31
E32
E42
http://www.sciencedirect.com/science/article/pii/S0165188915000755
Lhuissier, Stéphane
Zabelina, Margarita
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:96-1112015-08-05RePEc:eee:dyncon
article
A New Keynesian model with staggered price and wage setting under learning
This paper provides a study of the implications for economic dynamics when the central bank sets its nominal interest rate target in response to variations in wage inflation. I provide results on the existence, uniqueness, and stability under learning of rational expectations equilibrium for alternative specifications of the manner in which monetary policy responds to economic shocks when nominal rigidities are present. Monopolistically competitive producers set prices via staggered price contracts, and households set nominal wages in the same fashion. In this setting, the conditions for determinacy and learnability of rational expectations equilibrium differ from a model where only prices are sticky. I find that when the central bank responds to wage and price inflation and to the output gap, a Taylor principle for wage and price inflation arises that is related to stability under learning dynamics. In other words, a moderate reaction of the interest rate to wage inflation helps to avoid instability under learning and indeterminacy.
Learning; Monetary policy; Nominal wage and price rigidity; Expectational stability;
C
2015
57
96
111
E52
E31
E43
E58
http://www.sciencedirect.com/science/article/pii/S0165188915000937
Best, Gabriela
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:250-2662015-08-05RePEc:eee:dyncon
article
A model for irreversible investment with construction and revenue uncertainty
This paper presents a model of investment in projects that are characterized by uncertainty over both the construction costs and revenues. Both processes are modeled as spectrally negative Lévy jump-diffusions. The optimal stopping problem that determines the value of the project is solved under fairly general assumptions. It is found that the current value of the benefit-to-cost ratio (BCR) decreases in the frequency of negative shocks to the construction process. This implies that the cost overruns that can be expected if one ignores such shocks are increasing in their frequency. Based on calibrated data, the model is applied to the proposed construction of high-speed rail in the UK and it is found that its economic case cannot currently be made and is unlikely to be met at any time in the next decade. In addition it is found that ignoring construction uncertainty leads to a substantial probability of an erroneous decision being taken.
Investment under uncertainty; Railway investment; Optimal stopping;
C
2015
57
250
266
D81
G31
http://www.sciencedirect.com/science/article/pii/S0165188915001086
Thijssen, Jacco J.J.
oai:RePEc:eee:dyncon:v:57:y:2015:i:c:p:24-532015-08-05RePEc:eee:dyncon
article
Animal spirits as an engine of boom-busts and throttle of productivity growth
The news-shock literature interprets empirical news-shock identifications as signals about future productivity. Under this view, changes in productivity cause changes in expectations. I investigate an alternative interpretation whereby changes in expectations cause changes in productivity. I present a model where firms adopt the technology of a deterministic frontier, and where self-fulfilling expectational-shocks unleash a frenzy of adoption through which firms increase productivity. Consistent with the news evidence, stock prices and aggregate activity boom, yet TFP increases with a lag. Simulations using i.i.d. expectational-shocks yield moments consistent with the data, and qualitatively capture both high-frequency boom-busts and lower-frequency fluctuations. Finally, estimating a Beaudry–Portier style VECM on the simulated model output to identify a “news shock” recovers impulse response functions largely consistent with the Beaudry and Portier (2006) results.
Expectations-driven business cycle; Technological adoption; Sunspot; Multiple equilibria; News shock; Intangible capital;
C
2015
57
24
53
C68
E00
E2
E3
O3
O4
http://www.sciencedirect.com/science/article/pii/S0165188915000743
Gunn, Christopher M.
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: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: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: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: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: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: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: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:47:y:2014:i:c:p:239-2622014-10-24RePEc:eee:dyncon
article
Volatility swaps and volatility options on discretely sampled realized variance
Volatility swaps and volatility options are financial products written on discretely sampled realized variance. Actively traded in over-the-counter markets, these products are often priced by continuously sampled approximations to simplify the computations. This paper presents an analytical approach to efficiently and accurately price discretely sampled volatility derivatives, under a general stochastic volatility model. We first obtain an accurate approximation for the characteristic function of the discretely sampled realized variance. This characteristic function is then applied to price discrete volatility derivatives through either semi-analytical pricing formulae (up to an inverse Fourier transform) or an efficient Fourier-cosine series method. Numerical experiments show that our approximation is more accurate in comparison to the approximations in the literature. We remark that although discretely sampled variance swaps and options are usually more expensive than their continuously sampled counterparts, discretely sampled volatility swaps are more prone to be cheaper than the continuously sampled counterparts. An analysis is then provided to explain why this is the case in general for realistic contract specifications and reasonable model parameters.
Realized variance; Variance swaps; Volatility swaps; Variance options; Stochastic volatility; Fourier-cosine series;
C
2014
47
239
262
G13
C3
http://www.sciencedirect.com/science/article/pii/S0165188914002036
Lian, Guanghua
Chiarella, Carl
Kalev, Petko S.
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:282-2992014-10-24RePEc:eee:dyncon
article
Dealing with a liquidity trap when government debt matters: Optimal time-consistent monetary and fiscal policy
How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. While the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap.
Monetary policy; Fiscal policy; Deficit spending; Discretion; Zero nominal interest rate bound;
C
2014
47
282
299
E31
E52
E62
E63
D11
http://www.sciencedirect.com/science/article/pii/S0165188914002073
Burgert, Matthias
Schmidt, Sebastian
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:1-192014-10-24RePEc:eee:dyncon
article
Distortions in the neoclassical growth model: A cross-country analysis
This paper investigates the properties of distortions that manifest themselves as wedges in the equilibrium conditions of the neoclassical growth model across a sample of 22 OECD countries for the 1970–2011 period. The quantitative relevance of each wedge and its robustness in generating fluctuations in macroeconomic aggregates is assessed. The efficiency wedge proves to be determinant in enabling models to replicate movements in output and investment, while the labor wedge is important to predict fluctuations in hours worked. Modeling distortions to the savings decision holds little quantitative or qualitative relevance. Also, investment seems to be the hardest aggregate to replicate, as prediction errors concerning output and hours worked are typically one order of magnitude smaller. These conclusions are statistically significant across the countries in the sample and are not limited to output drops. Finally, the geographical distance between countries and their degree of openness to trade are shown to contain information with regard to the wedges, stressing the importance of international mechanisms of transmission between distortions to the equilibrium conditions of the neoclassical growth model.
Business cycle accounting; Frictions; Economic fluctuations;
C
2014
47
1
19
E27
E30
E32
E37
http://www.sciencedirect.com/science/article/pii/S0165188914001766
Brinca, Pedro
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:39-532014-10-24RePEc:eee:dyncon
article
Productivity insurance: The role of unemployment benefits in a multi-sector model
We construct a multi-sector search and matching model where the unemployed receives idiosyncratic productivity shocks that make working in certain sectors more productive than in the others. Agents must decide which sector to search in and face moving costs when leaving their current sector for another. In this environment, unemployment is associated with an additional risk: low future wages if mobility costs preclude search in the appropriate sector. This introduces a new role for unemployment benefits – productivity insurance while unemployed. For plausible parameterizations unemployment benefits increase per-worker productivity. In addition, the welfare-maximizing benefit level decreases as moving costs increase.
Unemployment insurance; Search; Mobility; Productivity; Multi-sector model; Sectoral mismatch;
C
2014
47
39
53
J62
J63
J64
J65
http://www.sciencedirect.com/science/article/pii/S016518891400178X
Fuller, David L.
Kudlyak, Marianna
Lkhagvasuren, Damba
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:115-1222014-10-24RePEc:eee:dyncon
article
Feedback equilibria in a dynamic renewable resource oligopoly: Pre-emption, voracity and exhaustion
We revisit a recent literature on productive asset exploitation describing a differential oligopoly game of resource extraction under static, linear feedback and nonlinear feedback strategies, where we explicitly allow for the possibility of resource exhaustion. We show that (i) feedback rules entail resource exhaustion for a finite number of firms; and (ii) feedback strategies are more aggressive than static ones as long as the resource stock is large enough, in accordance with the acquired view based on the traditional pre-emption argument associated with feedback information.
Dynamic oligopoly; Renewable resources; Feedback strategies;
C
2014
47
115
122
C73
L13
Q2
http://www.sciencedirect.com/science/article/pii/S0165188914001997
Lambertini, Luca
Mantovani, Andrea
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:54-712014-10-24RePEc:eee:dyncon
article
R&D and aggregate fluctuations
Empirical observations raise interesting questions regarding the sources of the excessive volatility in the R&D sector as well as the nature of the relation between the sector and aggregate fluctuations. Using US data for the period 1959–2007, we identify sectoral technology and capital investment-specific shocks by employing a Vector Autoregression. The identifying assumptions are motivated by a two-sector dynamic general equilibrium model. Controlling for real and nominal factors, we find that capital investment-specific shocks explain 70 percent of fluctuations of R&D investment, while R&D technology shocks explain 30 percent of the variation of aggregate output, net of R&D investment. Technology shocks jointly explain almost all the variation of output in the R&D sector and 78 percent of the variation of output in the rest of the economy. They also constitute the main factor of the procyclicality of R&D investment.
Cycles; Technology shocks; Investment-specific shocks; R&D; VAR;
C
2014
47
54
71
C13
C32
C68
E32
O3
http://www.sciencedirect.com/science/article/pii/S0165188914001699
Artuç, Erhan
Pourpourides, Panayiotis M.
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:263-2812014-10-24RePEc:eee:dyncon
article
Corporate credit risk prediction under stochastic volatility and jumps
This paper examines the impact of allowing for stochastic volatility and jumps (SVJ) in a structural model on corporate credit risk prediction. The results from a simulation study verify the better performance of the SVJ model compared with the commonly used Merton model, and three sources are provided to explain the superiority. The empirical analysis on two real samples further ascertains the importance of recognizing the stochastic volatility and jumps by showing that the SVJ model decreases bias in spread prediction from the Merton model, and better explains the time variation in actual CDS spreads. The improvements are found particularly apparent in small firms or when the market is turbulent such as the recent financial crisis.
Credit risk; CDS spread; Merton model; Stochastic volatility; Jumps;
C
2014
47
263
281
C22
G13
http://www.sciencedirect.com/science/article/pii/S016518891400195X
Bu, Di
Liao, Yin
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:225-2382014-10-24RePEc:eee:dyncon
article
Network structure, games, and agent dynamics
Consider a group of agents embedded in a network, repeatedly playing a game with their neighbors. Each agent acts locally but through the links of the network local decisions percolate to the entire population. Past research shows that such a system converges either to an absorbing state (a fixed distribution of actions that once attained does not change) or to an absorbing set (a set of action distributions that may cycle in finite populations or behave chaotically in unbounded populations). In many network games, however, it is uncertain which situation emerges. In this paper I identify two fundamental network characteristics, boundary consistency and neighborhood overlap, that determine the outcome of all symmetric, binary-choice, network games. In quasi-consistent networks these games converge to an absorbing state regardless of the initial distribution of actions, and the degree to which neighborhoods overlap impacts the number and composition of those absorbing states.
Games; Networks; Local interaction; Network structure; Agent dynamics;
C
2014
47
225
238
D85
C70
D23
http://www.sciencedirect.com/science/article/pii/S0165188914001973
Wilhite, Allen
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:72-932014-10-24RePEc:eee:dyncon
article
Trade-offs in means tested pension design
The means-testing of age pension programs allows governments to control the receipt of pension benefits (extensive margin) and the benefit level (intensive margin). We investigate how the presence of the extensive margin influences the trade-off between protecting the poorer elderly and the economic costs of distorting incentives to work and save of young individuals. The means-test effect via the extensive margin improves the insurance aspect but introduces opposing impacts on incentives that potentially have ambiguous welfare outcomes. We characterize combinations of the maximum pension benefit and taper rate that balance the negative incentive effects and positive insurance effects.
Means-tested pension; Social security; Optimal policy; Overlapping generations; Dynamic general equilibrium;
C
2014
47
72
93
D9
E2
E6
H3
H5
J1
http://www.sciencedirect.com/science/article/pii/S0165188914001687
Tran, Chung
Woodland, Alan
oai:RePEc:eee:dyncon:v:47:y:2014:i:c:p:168-1852014-10-24RePEc:eee:dyncon
article
The threat of counterfeiting in competitive search equilibrium
This paper studies counterfeiting of bank notes in a monetary model under competitive search. The application of the refinement scheme proposed by Guerrieri et al. (2010) shows that there is no equilibrium with counterfeiting. However, due to the entry margin, counterfeiting poses a threat to the existence of a monetary equilibrium: there is no monetary equilibrium if the cost of producing counterfeits is low enough. Moreover, the threat of counterfeiting can generate an endogenous resalability constraint. An extension of the model is provided which allows the threat of counterfeiting to materialize, in that some buyers cannot observe the offers, and therefore search randomly. Counterfeit notes are produced by those buyers who randomly search.
Counterfeiting; Competitive search; Partially directed search;
C
2014
47
168
185
D82
D83
E42
http://www.sciencedirect.com/science/article/pii/S0165188914001791
Shao, Enchuan
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:81-1002015-09-03RePEc:eee:dyncon
article
Optimal order display in limit order markets with liquidity competition
Order display is associated with benefits and costs. Benefits arise from increased execution-priority, while costs are due to adverse market impact. We analyze a structural model of optimal order placement that captures trade-off between the costs and benefits of order display. For a benchmark model of pure liquidity competition, we give a closed-form solution for optimal display sizes. We show that competition in liquidity supply incentivizes the use of hidden orders to prevent losses due to over-bidding. Thus, because aggressive liquidity competition is more prevalent in liquid stocks, our model predicts that the proportion of hidden liquidity is higher in liquid markets. Our theoretical considerations ares supported by an empirical analysis using high-frequency order-message data from NASDAQ. We find that there are no benefits in hiding orders in il-liquid stocks, whereas the performance gains can be significant in liquid stocks.
Hidden liquidity; Liquidity competition; Limit order book; Market impact; Order flow dynamics; High-frequency trading;
C
2015
58
81
100
C51
C60
D01
D4
G1
http://www.sciencedirect.com/science/article/pii/S0165188915000779
Cebiroğlu, Gökhan
Horst, Ulrich
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:265-2732015-09-03RePEc:eee:dyncon
article
A comparison of programming languages in macroeconomics
We solve the stochastic neoclassical growth model, the workhorse of modern macroeconomics, using C++14, Fortran 2008, Java, Julia, Python, Matlab, Mathematica, and R. We implement the same algorithm, value function iteration, in each of the languages. We report the execution times of the codes in a Mac and in a Windows computer and briefly comment on the strengths and weaknesses of each language.
Dynamic equilibrium economies; Computational methods; Programming languages;
C
2015
58
265
273
C63
C68
E37
http://www.sciencedirect.com/science/article/pii/S0165188915000883
Aruoba, S. Borağan
Fernández-Villaverde, Jesús
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:58-802015-09-03RePEc:eee:dyncon
article
Risky bank lending and countercyclical capital buffers
We study the properties of a monetary economy with an essential role for risky bank lending. Banks issue deposits and lend to entrepreneurs. Because banks׳ lending rate cannot be made contingent on aggregate shocks, and because banks face capital adequacy regulations, they require a capital buffer against loan losses. Capital adequacy regulations are modeled on the Basel-III rules, including a minimum capital adequacy ratio, an endogenous capital conservation buffer, and a countercyclical capital buffer. We find that a countercyclical capital buffer leads to a significant increase in welfare. It also reduces the need for countercyclical adjustments in policy interest rates.
Bank lending; Lending risk; Financial accelerator; Monetary policy; Macroprudential policy; Bank capital adequacy;
C
2015
58
58
80
E44
E52
G21
http://www.sciencedirect.com/science/article/pii/S0165188915001141
Benes, Jaromir
Kumhof, Michael
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:152-1662015-09-03RePEc:eee:dyncon
article
Systemic risk mitigation in financial networks
We propose a multi-period clearing framework, where the level of systemic risk is mitigated through the provision of liquidity assistance. The interbank liability network evolves stochastically over time, and assets of defaulted banks are sold to qualified banks within the network through a first-price sealed-bid auction. We find that policies targeting systemically important banks are more effective in core-periphery network structures, whereas those maximizing the total liquidity in the system are preferred in random network configurations. We assess sensitivity of systemic risk to variations in interbank liabilities as well as to their correlation structure.
Systemic risk; Financial networks; Default contagion; Mitigation policies; Lender of last resort; E32; D85; L14; L22;
C
2015
58
152
166
http://www.sciencedirect.com/science/article/pii/S0165188915001177
Capponi, Agostino
Chen, Peng-Chu
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:167-1852015-09-03RePEc:eee:dyncon
article
Labor supply and the optimality of Social Security
Traditional economic theory predicts that an unfunded public pension system can be justified on the basis of its ability to provide intergenerational transfers, and also for its ability to provide partial insurance against mortality and labor income risks. In this paper, I demonstrate that the quantitative importance of these traditional roles depends on how the pension system distorts households' labor supply decisions. Using a general-equilibrium life-cycle consumption model calibrated to the U.S. economy, I show that these distortions can be large enough to erase much of the traditional welfare gains from Social Security. I also find that this fact is robust within the range of labor supply elasticities usually encountered in the macroeconomic literature.
Labor supply; Social Security; Mortality risk; Labor productivity risk; Insurance; Labor supply elasticity;
C
2015
58
167
185
E21
H55
J22
http://www.sciencedirect.com/science/article/pii/S0165188915001207
Bagchi, Shantanu
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:125-1512015-09-03RePEc:eee:dyncon
article
Cross-sectional asset pricing with heterogeneous preferences and beliefs
This paper provides the theoretical foundation for studying the cross-section of stock returns in a Lucas economy populated by investors with heterogeneous preferences and beliefs. The equilibrium quantities are either derived explicitly or characterized in terms of conditional expectations well-suited for Monte-Carlo simulations. The main advantage of the simulation approach lies in its straightforward extension to many assets, which makes it possible to analyze equilibrium in economies with many fundamental assets. A numerical example shows that the model is able to generate a low level of the risk-free rate with non-negligible volatility as well as reasonable equity premia and return volatilities when sufficiently many fundamental assets are present.
Asset pricing; Heterogeneous preferences; Heterogeneous beliefs; Cross-section;
C
2015
58
125
151
G12
D51
D58
C68
http://www.sciencedirect.com/science/article/pii/S0165188915001128
Hansen, Simon Lysbjerg
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:101-1242015-09-03RePEc:eee:dyncon
article
Optimal fiscal policy under learning
This paper characterizes optimal fiscal policy when agents learn about future taxation. A benevolent and fully rational government chooses taxes on labor income and state-contingent bonds to finance public spending, considering that private agents form their expectations through a learning algorithm. Facing a trade-off between distortionary taxes and distorted expectations, the Ramsey planner chooses the policy that minimizes the total cost of distortions. The analysis produces two main results. First, the government will use fiscal variables to manipulate expectations, reducing taxes and issuing debt at times of pessimism and doing the opposite at times of optimism. This speeds up learning. Second, the expectation-dependent fiscal plan is also history-dependent, and it prescribes taxes that are not as smooth and more persistent than under rational expectations. These findings are robust to alternative learning algorithms.
Optimal fiscal policy; Adaptive learning;
C
2015
58
101
124
E62
H63
D83
http://www.sciencedirect.com/science/article/pii/S0165188915000871
Caprioli, Francesco
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:218-2342015-09-03RePEc:eee:dyncon
article
Precautionary price stickiness
This paper proposes a model in which retail prices are sticky even though firms can always change their prices at zero cost. Instead of imposing a “menu cost”, we assume that more precise decisions are more costly. In equilibrium, firms optimally make some errors in price-setting, thus economizing on managerial time. Both the time cost of choice, and the resulting risk of errors, give firms an incentive to leave their prices unchanged until they perceive a sufficiently costly deviation from the optimal price. We show that this error-prone “control cost” framework helps explain many puzzling observations from microdata. However, on the macroeconomic side, pricing errors do little to explain the real effects of monetary shocks.
State-dependent pricing; (S,s) adjustment; Logit equilibrium; Control costs; Near-rational behavior;
C
2015
58
218
234
E31
D81
C72
http://www.sciencedirect.com/science/article/pii/S0165188915001219
Costain, James
Nakov, Anton
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:34-572015-09-03RePEc:eee:dyncon
article
Electricity derivatives pricing with forward-looking information
In order to increase overall transparency on key operational information, power transmission system operators publish an increasing amount of fundamental data, including forecasts of electricity demand and available capacity. We employ a fundamental model for electricity prices which lends itself well to integrating such forecasts, while retaining ease of implementation and tractability to allow for analytic derivatives pricing formulae. In an extensive futures pricing study, the pricing performance of our model is shown to further improve based on the inclusion of electricity demand and capacity forecasts, thus confirming the general importance of forward-looking information for electricity derivatives pricing. However, we also find that the usefulness of integrating forecast data into the pricing approach is primarily limited to those periods during which electricity prices are highly sensitive to demand or available capacity, whereas the impact is less visible when fuel prices are the primary underlying driver to prices instead.
Electricity futures; Fundamental model; Derivatives pricing; Forward-looking information; Enlargement of filtrations;
C
2015
58
34
57
G12
G13
Q4
Q41
http://www.sciencedirect.com/science/article/pii/S0165188915000962
Füss, Roland
Mahringer, Steffen
Prokopczuk, Marcel
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:19-332015-09-03RePEc:eee:dyncon
article
Learning and coordination with dispersed information
We analyse adaptive learning in a model of incomplete and dispersed information, with externalities and strategic interactions. We build on the framework proposed by Angeletos and Pavan (2007a) and extend it to a dynamic multi-period setting where agents need to learn to coordinate. We derive conditions under which adaptive learning obtains in such setting and show that, when actions are strategic substitutes, the information structure affects the speed of convergence: while more precise private information is beneficial, better public information has negative effects. We also show that adaptive learning dynamics converge to the Bayesian Nash equilibrium, which means that agents can learn to act strategically by relying only on observable (exogenous) information.
Learning; Heterogeneity; Dispersed information; Interaction; Coordination;
C
2015
58
19
33
C62
C73
D83
http://www.sciencedirect.com/science/article/pii/S0165188915000998
Berardi, Michele
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:235-2492015-09-03RePEc:eee:dyncon
article
What factors drive the price–rent ratio for the housing market? A modified present-value analysis
We consider which factors determined the price–rent ratio for the housing market in 18 U.S. metropolitan statistical areas (MSAs) and at the national level over the period of 1975–2014. Based on a present-value framework, our proposed empirical model separates the price–rent ratio for a given market into unobserved components related to the expected real rent growth and the expected housing return, but is modified from standard present-value analysis by also including a residual component that captures non-stationary deviations of the price–rent ratio from its present-value level. Estimates for the modified present-value model suggest that the present-value residual (PVR) component is always important and sometimes very large at the national and MSA levels, especially for MSAs that have experienced frequent booms and busts in the housing market. In further analysis, we find that house prices in MSAs that have larger PVR components are more sensitive to mortgage rate changes. These are also the MSAs with less elastic housing supply. Also, comparing our results with a recent statistical test for periodically-collapsing bubbles, we find that MSAs with large estimated PVR components are the same MSAs that test positively for explosive sub-periods in their price–rent ratios, especially during the 2005–2007 subsample. Our approach allows us to estimate the correlation between shocks to expected rent growth, the expected housing return, and the PVR component. We find that the expected housing return and movements in the PVR component are highly positively correlated implying an impact of the expected housing return on house prices that is amplified from what a standard present-value model would imply. Our results also show that most of the variation in the present-value component of the price–rent ratio arises due to the variation in the expected housing return.
Price–rent ratio; Unobserved component model; Present-value model;
C
2015
58
235
249
E31
G12
R31
http://www.sciencedirect.com/science/article/pii/S0165188915001153
Kishor, N. Kundan
Morley, James
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:250-2642015-09-03RePEc:eee:dyncon
article
Superhedging under ratio constraint
We consider superhedging of contingent claims under ratio constraint. It has been widely recognized that the minimum cost of superhedging a contingent claim with certain portfolio constraints is equal to the price of a claim with appropriately modified payoff but without constraints. In terms of the backward stochastic differential equation (BSDE) and the variational inequality equation approach, we revisit this result and provide two counterexamples.
Superhedging; Ratio constraint; European option; Asian option;
C
2015
58
250
264
C63
G13
http://www.sciencedirect.com/science/article/pii/S0165188915001189
Chen, Yingshan
Dai, Min
Xu, Jing
Xu, Mingyu
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:186-2172015-09-03RePEc:eee:dyncon
article
Unfolded GARCH models
A new GARCH-type model for autoregressive conditional volatility, skewness, and kurtosis is proposed. The approach decomposes returns into their signs and absolute values, and specifies the joint distribution by combining a multiplicative error model for the absolute values, a dynamic binary choice model for the signs, and a copula function for their interaction. The conditional volatility and kurtosis are determined by innovations following a folded (or absolute) Student-t distribution with time-varying degrees of freedom, and separate time variation in conditional return skewness is achieved by allowing the copula parameter to be dynamic. Model estimation is performed with Bayesian methods using an adaptive Markov chain Monte Carlo algorithm. An empirical application to the returns on four major international stock market indices illustrates the statistical and economic significance of the new model for conditional higher moments.
Conditional skewness and kurtosis; Direction-of-change model; Absolute returns; Folded distribution; Copula model; Adaptive MCMC;
C
2015
58
186
217
C11
C22
C58
http://www.sciencedirect.com/science/article/pii/S0165188915001165
Liu, Xiaochun
Luger, Richard
oai:RePEc:eee:dyncon:v:58:y:2015:i:c:p:1-182015-09-03RePEc:eee:dyncon
article
Adaptive learning and monetary exchange
This paper investigates three classic questions in monetary theory: How can an intrinsically worthless asset, such as fiat money, maintain value as a medium of exchange? What are the short-run and long-run effects of a change in the money supply? What is the social cost of inflation? I answer these questions using a microfounded model of monetary exchange that replaces the rational expectations assumption with an adaptive learning rule. First, I show that monetary exchange is a robust arrangement in the sense that agents are able to learn the stationary monetary equilibrium while the non-monetary equilibrium is unstable under learning. Second, an unanticipated monetary injection has real effects in the short-run because learning the value of money takes time. In the long run, agents successfully learn the value of money, hence money is neutral. Third, under a constant money growth policy, an increase in the growth rate of money increases output in the short-run producing a short-run Phillips curve. A ten percent increase in the money growth rate has a social cost of 0.41 percent of output per year. Alternatively, a ten percent decrease in the money growth rate has a social benefit of 0.37 percent of output per year.
Search; Money; Adaptive learning; Expectations; Inflation;
C
2015
58
1
18
E52
E31
E41
D83
D84
http://www.sciencedirect.com/science/article/pii/S0165188915000986
Baranowski, Ryan
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:354-3642013-12-24RePEc: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/pii/S0165-1889(09)00168-7
Berger, Tino
Everaert, Gerdie
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:696-7092013-12-24RePEc: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/pii/S0165-1889(09)00213-9
Daitoh, Ichiroh
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:1003-10132013-12-24RePEc: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/pii/S0165-1889(10)00008-4
Huynh, Kim P.
Petrunia, Robert J.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:281-2952013-12-24RePEc: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/pii/S0165-1889(10)00011-4
Cogan, John F.
Cwik, Tobias
Taylor, John B.
Wieland, Volker
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:388-4032013-12-24RePEc: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/pii/S0165-1889(09)00178-X
Dorofeenko, Victor
Lee, Gabriel S.
Salyer, Kevin D.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:314-3292013-12-24RePEc: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/pii/S0165-1889(09)00166-3
Qi, Ling
Kanaya, Sadao
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:951-9672013-12-24RePEc: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/pii/S0165-1889(10)00006-0
Bruche, Max
Naqvi, Hassan
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:681-6952013-12-24RePEc: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/pii/S0165-1889(09)00202-4
Tramontana, F.
Gardini, L.
Ferri, P.
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:844-8572013-12-24RePEc: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/pii/S0165-1889(09)00218-8
Wang, Wen-Kai
Ewald, Christian-Oliver
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:825-8432013-12-24RePEc: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/pii/S0165-1889(09)00217-6
Kiseleva, Tatiana
Wagener, F.O.O.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:404-4162013-12-24RePEc: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/pii/S0165-1889(09)00180-8
Padula, Mario
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:598-6032013-12-24RePEc: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/pii/S0165-1889(09)00219-X
Fosgerau, Mogens
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:207-2302013-12-24RePEc: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/pii/S0165-1889(09)00160-2
Wang, J.
Forsyth, P.A.
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:636-6562013-12-24RePEc: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/pii/S0165-1889(09)00210-3
Briec, Walter
Kerstens, Kristiaan
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:984-10022013-12-24RePEc: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/pii/S0165-1889(10)00003-5
Meyer-Gohde, Alexander
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:604-6222013-12-24RePEc: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/pii/S0165-1889(09)00215-2
Arcalean, Calin
Schiopu, Ioana
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:743-7642013-12-24RePEc: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/pii/S0165-1889(09)00211-5
Dieci, Roberto
Westerhoff, Frank
oai:RePEc:eee:dyncon:v:34:y:2010:i:5:p:968-9832013-12-24RePEc: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/pii/S0165-1889(10)00005-9
Lechthaler, Wolfgang
Merkl, Christian
Snower, Dennis J.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:365-3872013-12-24RePEc: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/pii/S0165-1889(09)00169-9
Nakajima, Tomoyuki
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:330-3532013-12-24RePEc: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/pii/S0165-1889(09)00167-5
Tang, Jenn-Hong
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:623-6352013-12-24RePEc: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/pii/S0165-1889(09)00199-7
Wong, Tsz-Nga
Yip, Chong K.
oai:RePEc:eee:dyncon:v:34:y:2010:i:4:p:725-7422013-12-24RePEc: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/pii/S0165-1889(09)00208-5
Tsekrekos, Andrianos E.
oai:RePEc:eee:dyncon:v:34:y:2010:i:3:p:296-3132013-12-24RePEc: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/pii/S0165-1889(09)00165-1
Dawid, Herbert
Greiner, Alfred
Zou, Benteng
oai:RePEc:eee:dyncon:v:35:y:2011:i:4:p:413-4292015-05-20RePEc: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/pii/S0165-1889(10)00220-4
Whalley, A. Elizabeth
oai:RePEc:eee:dyncon:v:34:y:2010:i:2:p:246-2572015-05-20RePEc: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/pii/S0165-1889(09)00162-6
Lines, Marji
Westerhoff, Frank
oai:RePEc:eee:dyncon:v:35:y:2011:i:9:p:1489-15012015-05-20RePEc: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:9:p:1502-15132015-05-20RePEc: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:1405-14232015-05-20RePEc: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:9:p:1547-15562015-05-20RePEc: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:1710-17302015-05-20RePEc: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:1451-14732015-05-20RePEc: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:10:p:1671-16952015-05-20RePEc: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:10:p:1789-17992015-05-20RePEc: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:35:y:2011:i:9:p:1557-15762015-05-20RePEc: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:9:p:1387-13922015-05-20RePEc: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:35:y:2011:i:9:p:1474-14882015-05-20RePEc: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:6:p:876-8902015-05-20RePEc: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/pii/S0165-1889(10)00249-6
Chu, Angus C.
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1696-17092015-05-20RePEc: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:1659-16702015-05-20RePEc: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:1514-15302015-05-20RePEc: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:9:p:1577-15852015-05-20RePEc: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:10:p:1626-16512015-05-20RePEc: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:9:p:1605-16132015-05-20RePEc: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:9:p:1586-16042015-05-20RePEc: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:9:p:1424-14342015-05-20RePEc: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:4:p:528-5442015-05-20RePEc: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/pii/S0165-1889(10)00268-X
Krysiak, Frank C.
oai:RePEc:eee:dyncon:v:35:y:2011:i:10:p:1652-16582015-05-20RePEc: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:1800-18162015-05-20RePEc: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:10:p:1731-17432015-05-20RePEc: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:1744-17682015-05-20RePEc: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:1615-16252015-05-20RePEc: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:1435-14502015-05-20RePEc: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:33:y:2009:i:3:p:525-5372015-09-25RePEc:eee:dyncon
article
The impact of heterogeneous trading rules on the limit order book and order flows
In this paper we develop a model of an order-driven market where traders set bids and asks and post market or limit orders according to exogenously fixed rules. Agents are assumed to have three components of the expectation of future asset returns, namely fundamentalist, chartist and noise trader. Furthermore agents differ in the characteristics describing these components, such as time horizon, risk aversion and the weights given to the various components. The model developed here extends a great deal of earlier literature in that the order submissions of agents are determined by utility maximisation, rather than the mechanical unit order size that is commonly assumed. In this way the order flow is better related to the ongoing evolution of the market. For the given market structure we analyze the impact of the three components of the trading strategies on the statistical properties of prices and order flows and observe that it is the chartist strategy that is mainly responsible of the fat tails and clustering in the artificial price data generated by the model. The paper provides further evidence that large price changes are likely to be generated by the presence of large gaps in the book.
Optimal fiscal policy; Adaptive learning;
3
2009
33
525
537
C6
D4
G1
http://www.sciencedirect.com/science/article/pii/S0165188908001437
Chiarella, Carl
Iori, Giulia
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: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: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: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: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:54:y:2015:i:c:p:86-1102015-04-21RePEc:eee:dyncon
article
Complete subset regressions with large-dimensional sets of predictors
We analyze the complete subset regression (CSR) approach of Elliott et al. (2013) in situations with many possible predictor variables. The CSR approach has the computational advantage that it can be applied even when the number of predictors exceeds the sample size. Theoretical results establish that the CSR approach achieves variance reduction and Monte Carlo simulations show that it offers a favorable bias–variance trade-off in the presence of many weak predictor variables. Empirical applications to out-of-sample predictability of U.S. unemployment, GDP growth and inflation show that CSR combinations produce more accurate point forecasts than a dynamic factor approach or univariate regressions that do not exploit the information in the cross-section of predictors.
Complete subset regression; Macroeconomic forecasts; Forecast combination; Factor models;
C
2015
54
86
110
C22
C53
E37
http://www.sciencedirect.com/science/article/pii/S0165188915000524
Elliott, Graham
Gargano, Antonio
Timmermann, Allan
oai:RePEc:eee:dyncon:v:54:y:2015:i:c:p:37-582015-04-21RePEc:eee:dyncon
article
Fiscal cost of demographic transition in Japan
This paper quantifies the fiscal cost of demographic transition that Japan is projected to experience over the next several decades, in a life-cycle model with endogenous saving, consumption, and labor supply in both intensive and extensive margins. Retirement waves of baby-boom generations, combined with a rise in longevity and low fertility rates, raise the old-age dependency ratio to 85% by 2050, the highest among major developed countries, and generate a significant budget imbalance, as the government faces rising costs of public pension and health and long-term care insurance. Preserving the current level of the transfers will require a major increase in taxation. Using consumption taxes to balance the government budget, the tax rate reaches the maximal value of 48% in late 2070s. A pension reform to reduce benefits by 20% results in a peak tax rate of 37%, which can be reduced further to 28% if the retirement age is also gradually raised by 5 years.
Social security reform; Demographic transition; Public pension program; Health insurance; Long-term care insurance; Japanese economy;
C
2015
54
37
58
E2
E6
H3
J1
http://www.sciencedirect.com/science/article/pii/S0165188915000342
Kitao, Sagiri
oai:RePEc:eee:dyncon:v:54:y:2015:i:c:p:17-362015-04-21RePEc:eee:dyncon
article
Solving and estimating indeterminate DSGE models
We propose a method for solving and estimating linear rational expectations models that exhibit indeterminacy and we provide step-by-step guidelines for implementing this method in the Matlab-based packages Dynare and Gensys. Our method redefines a subset of expectational errors as new fundamentals. This redefinition allows us to treat indeterminate models as determinate and to apply standard solution algorithms. We prove that our method is equivalent to the solution method proposed by Lubik and Schorfheide (2003, 2004), and using the New-Keynesian model described in Lubik and Schorfheide (2004), we demonstrate how to apply our theoretical results with a practical exercise.
Indeterminacy; Bayesian methods; Dynare;
C
2015
54
17
36
C19
C51
C63
http://www.sciencedirect.com/science/article/pii/S0165188915000317
Farmer, Roger E.A.
Khramov, Vadim
Nicolò, Giovanni
oai:RePEc:eee:dyncon:v:54:y:2015:i:c:p:74-852015-04-21RePEc:eee:dyncon
article
Convergence of optimal harvesting policies to a normal forest
This paper extends the forestry maximum principle of Heaps (1984) to allow the benefits of harvesting to be the utility of the volume of the wood harvested as in Mitra and Wan (1985, 1986). Unlike those authors, however, time is treated as a continuous rather than as a discrete variable. Existence of an optimal harvesting policy is established. Then necessary conditions are derived for the extended model which are also sufficient. The conditions are used to show that under certain boundedness conditions, sequences of optimal harvesting policies contain subsequences which converge pointwise a.e. and in net present value to an optimal harvesting policy. This result is then used to show that any optimal logging policy must converge in harvesting age to a constant rotation period given by modified Faustmann formula. The associated age class distribution converges to a normal forest.
Optimal harvesting; Multiple age classes; Convergence; Normal forest;
C
2015
54
74
85
Q23
C61
http://www.sciencedirect.com/science/article/pii/S0165188915000354
Heaps, Terry
oai:RePEc:eee:dyncon:v:54:y:2015:i:c:p:59-732015-04-21RePEc:eee:dyncon
article
Insurance and climate-driven extreme events
We investigate how insurance affects agents’ decisions when being faced by endogenous, climate-driven extreme events. This is not only important in order to understand how the possibility of insurance augments mitigation and saving decisions, but it also improves our understanding of how insurance should be provided. Since there are no studies as of now that rely on such an integrated approach, we extend the literature along two lines. Firstly, we develop a neoclassical growth framework with endogenous extreme events and an insurance sector. Secondly, we introduce a simulation method that allows us to explicitly take these extreme events into account and which yields additional numerical insights. In doing so we can fully characterize and quantify the impact of different insurance policies for mitigation and economic growth decisions.
Economic growth; Climate change; Insurance; Integrated assessment; Extreme events; Catastrophes;
C
2015
54
59
73
Q5
O1
http://www.sciencedirect.com/science/article/pii/S0165188915000366
Müller-Fürstenberger, Georg
Schumacher, Ingmar
oai:RePEc:eee:dyncon:v:54:y:2015:i:c:p:1-162015-04-21RePEc:eee:dyncon
article
Abatement, R&D and growth with a pollution ceiling
The consequences of the 2°C climate target and the implicitly imposed ceiling on CO2 have been analyzed in several studies. We use an endogenous growth model with a ceiling and an abatement option to study the effect of the ceiling on the allocation of limited funds for R&D, abatement and capital accumulation. It is found that the advantagenousness of abatement rises with the cost advantage of fossil fuel versus backstop. If the cost advantage is sufficiently large at some point in time it outweighs the costs of abatement and the gains of R&D and capital accumulation. The reallocation of production towards abatement may cause an increase or decrease in long-run consumption. In the latter case, abatement allows an intertemporal consumption trade-off which may even justify the disregard of everlasting growth. In case of stock dependent fossil fuel costs, an abatement induced speed-up of technology development may cause an increase in fossil fuel stock left in situ.
Climate change; Research and development; Abatement; Endogenous growth; Fossil fuel; Renewable resource;
C
2015
54
1
16
O13
O44
Q54
http://www.sciencedirect.com/science/article/pii/S0165188915000330
Kollenbach, Gilbert
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: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: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: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: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: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: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: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: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: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:10:p:1972-19812013-07-30RePEc:eee:dyncon
article
Dynamic pairs trading using the stochastic control approach
We propose a model for analyzing dynamic pairs trading strategies using the stochastic control approach. The model is explored in an optimal portfolio setting, where the portfolio consists of a bank account and two co-integrated stocks and the objective is to maximize for a fixed time horizon, the expected terminal utility of wealth. For the exponential utility function, we reduce the problem to a linear parabolic partial differential equation which can be solved in closed form. In particular, we exhibit the optimal positions in the two stocks.
Optimal stochastic control; Pairs trading; Co-integration; Hamilton Jacobi Bellman equation; Merton problem;
10
2013
37
1972
1981
http://www.sciencedirect.com/science/article/pii/S0165188913001164
Tourin, Agnès
Yan, Raphael
oai:RePEc:eee:dyncon:v:37:y:2013:i:10:p:2062-20822013-07-30RePEc:eee:dyncon
article
Fiscal deficits and current account deficits
Recent fiscal stimulus packages depend for their effectiveness on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, higher fiscal deficits can have problematic implications if they turn out to be permanent. First, if they occur in large countries they significantly raise the world real interest rate. Second, they cause a short run current account deterioration equal to around 50% of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75% for a large economy such as the United States, and almost 100% for a small open economy.
Non-Ricardian households; Government deficits; Government debt; Global current account imbalances;
10
2013
37
2062
2082
E62
F41
F42
H30
H63
http://www.sciencedirect.com/science/article/pii/S0165188913000948
Kumhof, Michael
Laxton, Douglas
oai:RePEc:eee:dyncon:v:37:y:2013:i:10:p:2123-21552013-07-30RePEc:eee:dyncon
article
Fiscal policy, entry and capital accumulation: Hump-shaped responses
In this paper we consider the entry and exit of firms in a Ramsey model with capital and an endogenous labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. The costs of entry (exit) are quadratic in the flow of new firms. The number of firms becomes a second state variable and the entry dynamics gives rise to a richer set of dynamics than in the standard case: in particular, there is likely to be a hump shaped response of output to a fiscal shock with maximum effect after impact and before steady-state is reached. Output and capital per firm are also likely to be hump shaped.
Entry; Ramsey; Fiscal policy; Macroeconomic dynamics;
10
2013
37
2123
2155
E22
D92
E32
D92
http://www.sciencedirect.com/science/article/pii/S0165188913000602
Brito, Paulo
Dixon, Huw
oai:RePEc:eee:dyncon:v:37:y:2013:i:10:p:2104-21222013-07-30RePEc:eee:dyncon
article
The impact of monetary policy on stock market bubbles and trading behavior: Evidence from the lab
We investigate the effect of monetary policy on stock market bubbles and trading behavior in experimental asset markets. We introduce the possibility of investing in interest bearing bonds to the widely used laboratory asset market design of Smith et al. (1988). Treatment groups face a variable interest rate policy which depends on asset prices, while control groups are subjected to a constant interest rate. We observe a strong impact of our interest rate policy on liquidity in the stock market but only a small impact on bubbles. However, we find that announcing the possibility of reserve requirements significantly reduces bubbles.
Experimental economics; Investment behavior; Liquidity; Monetary policy; Asset market bubbles;
10
2013
37
2104
2122
C92
E42
E44
E52
E58
http://www.sciencedirect.com/science/article/pii/S016518891300081X
Fischbacher, Urs
Hens, Thorsten
Zeisberger, Stefan
oai:RePEc:eee:dyncon:v:37:y:2013:i:10:p:2041-20612013-07-30RePEc:eee:dyncon
article
Quality competition with motivated providers and sluggish demand
We study incentives for quality provision in markets where providers are motivated (semi-altruistic); prices are regulated and firms are funded by a combination of block grants and unit prices; competition is based on quality, and demand adjusts sluggishly. Health or education are sectors in which the mentioned features are the rule. We show that the presence of motivated providers makes dynamic competition tougher, resulting in higher steady-state levels of quality in the closed-loop solution than in the benchmark open-loop solution, if the price is sufficiently high. However, this result is reversed if the price is sufficiently low (and below unit costs). Sufficiently low prices also imply that a reduction in demand sluggishness will lead to lower steady-state quality. Prices below unit costs will nevertheless be welfare optimal if the providers are sufficiently motivated.
Quality competition; Differential games; Motivated agents;
10
2013
37
2041
2061
C73
H42
I18
I21
L13
http://www.sciencedirect.com/science/article/pii/S016518891300095X
Siciliani, Luigi
Rune Straume, Odd
Cellini, Roberto
oai:RePEc:eee:dyncon:v:37:y:2013:i:10:p:2023-20402013-07-30RePEc:eee:dyncon
article
Returns to specialization, competition, population, and growth
Using an expanding-variety endogenous growth model with purposive human capital accumulation, this paper provides an alternative explanation of why we may observe an ambiguous correlation between product market competition (PMC) and economic growth, and between population and economic growth rates. Our explanation is based on the notion of ‘returns to specialization’. Under the model's assumptions, PMC and economic growth are ambiguously correlated when returns to specialization are decreasing, whereas population growth and productivity growth are ambiguously correlated when returns to specialization are increasing. From a theoretical point of view, these results are explained by the presence or absence of an ‘increasing production-complexity’ effect associated to the use of a larger number of intermediate-input varieties in the same production process.
Semi-endogenous growth; Population growth; Human capital; R&D; Monopolistic competition; Returns to specialization;
10
2013
37
2023
2040
O41
O31
O33
J24
J10
http://www.sciencedirect.com/science/article/pii/S0165188913000985
Bucci, Alberto
oai:RePEc:eee:dyncon:v:37:y:2013:i:10:p:1947-19712013-07-30RePEc:eee:dyncon
article
Policy change and learning in the RBC model
What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.
Taxation; Government spending; Expectations; Permanent policy changes;
10
2013
37
1947
1971
E62
D84
E21
E43
http://www.sciencedirect.com/science/article/pii/S0165188913001176
Mitra, Kaushik
Evans, George W.
Honkapohja, Seppo
oai:RePEc:eee:dyncon:v:37:y:2013:i:10:p:1982-19942013-07-30RePEc:eee:dyncon
article
The intrinsic comparative dynamics of locally differentiable feedback Nash equilibria of autonomous and exponentially discounted infinite horizon differential games
The comparative dynamics of locally differentiable feedback Nash equilibria are derived for the ubiquitous class of autonomous and exponentially discounted infinite horizon differential games. The resulting refutable implications are intrinsic to the said class of differential games, and thus form their basic, empirically testable, properties. Their relationship with extant results in the optimal control theory and the static game theory is discussed. Separability conditions are identified on the instantaneous payoff and transition functions under which the intrinsic comparative dynamics collapse, in form, to those in optimal control problems. Applications of the results to capital accumulation and sticky-price games are provided.
Comparative dynamics; Differential games; Feedback Nash equilibria;
10
2013
37
1982
1994
C72
C73
L13
http://www.sciencedirect.com/science/article/pii/S0165188913001140
Caputo, Michael R.
Ling, Chen
oai:RePEc:eee:dyncon:v:37:y:2013:i:10:p:1995-20092013-07-30RePEc:eee:dyncon
article
Publish or teach? Analysis of the professor's optimal career path
This paper analyzes how faculty members dynamically allocate their efforts between improving their research and teaching skills, taking into account the organizational structures and incentives implemented by academic institutions. The model builds on the assumption that organizational structures have an impact on the nature of spillover effects between teaching and research competencies. We analyze the dynamic equilibrium under unilateral and bilateral spillovers, using the no-spillover case as a benchmark. The bilateral spillover case is the most appealing as it achieves the highest overall performance; however, the nature of the equilibrium and the career paths can be quite different depending on the parameters of the problem such as the obsolescence of competencies or the strength of the spillover effect. This finding provides interesting insights on what could be the most productive configuration of a higher education institution.
Teaching; Research; Competency spillovers; Effort allocation; Faculty management;
10
2013
37
1995
2009
J22
C61
I23
M52
http://www.sciencedirect.com/science/article/pii/S0165188913001139
El Ouardighi, Fouad
Kogan, Konstantin
Vranceanu, Radu
oai:RePEc:eee:dyncon:v:55:y:2015:i:c:p:148-1752015-06-18RePEc:eee:dyncon
article
Implications of productive government spending for fiscal policy
The standard assumption in macroeconomics that government spending is unproductive can have substantive implications for tax and spending policy. Productive government spending introduces a positive feedback between the tax rate, the productive capacity of the economy, and tax revenue. We allow marginal tax revenue to be optimally allocated between productive subsidies to human capital and utility-enhancing government consumption and calculate Laffer Curves for the US. Productive government spending yields higher revenue-maximizing tax rates, steeper slopes at low tax rates and higher peaks. The differences are particularly pronounced for the labor-tax Laffer curve. The use of tax revenue is an important determinant of the actual revenue that a tax rate increase generates.
Fiscal policy; Laffer curve; Welfare; Human capital;
C
2015
55
148
175
E62
H20
H52
http://www.sciencedirect.com/science/article/pii/S0165188915000706
Daniel, Betty C.
Gao, Si
oai:RePEc:eee:dyncon:v:55:y:2015:i:c:p:89-1122015-06-18RePEc:eee:dyncon
article
Equilibrium transitions from non-renewable energy to renewable energy under capacity constraints
We study the transition between non-renewable and renewable energy sources with adjustment costs over the production capacity of renewable energy. Assuming constant variable marginal costs for both energy sources, convex adjustment costs and a more expensive renewable energy, we show the following. With sufficiently abundant non-renewable energy endowments, the dynamic equilibrium path is composed of a first time phase of only non-renewable energy use followed by a transition phase substituting progressively renewable energy to non-renewable energy before a last time phase of only renewable energy use. The investment into renewable energy may either begin before actual production of renewable energy or be delayed until the energy price achieves a sufficient gap with respect to the renewable energy cost. With an initially abundant non-renewable resource, the features of the transition between non-renewable and renewable energy do not depend upon the initial resource stock.
Energy transition; Non-renewable resource; Renewable energy; Adjustment costs; Capacity constraints;
C
2015
55
89
112
D92
Q30
Q40
Q42
http://www.sciencedirect.com/science/article/pii/S0165188915000585
Amigues, Jean-Pierre
Kama, Alain Ayong Le
Moreaux, Michel
oai:RePEc:eee:dyncon:v:56:y:2015:i:c:p:1-192015-06-18RePEc:eee:dyncon
article
Costly arbitrage through pairs trading
We study the optimal trading policy of an arbitrageur who can exploit temporary mispricing in a market with two convergent assets. We build on the model of Liu and Timmermann (2013) and include transaction costs, which impose additional limits to the implementation of such convergence trade strategy. We show that the presence of transaction costs could reveal an endogenous stop-loss concern in a certain economy, which affects the optimal policy of the arbitrageur in significant ways. Using pairs of dual-listed Chinese stock shares as samples and a pairs trading strategy based on standard deviation of the spread as benchmark, we demonstrate the efficiency of the strategy implied by our model. Several extensions of our model are also discussed.
Pairs trading; Risky arbitrage; Delta-neutral strategies; Transaction costs;
C
2015
56
1
19
C32
G11
G12
http://www.sciencedirect.com/science/article/pii/S016518891500072X
Lei, Yaoting
Xu, Jing
oai:RePEc:eee:dyncon:v:56:y:2015:i:c:p:34-542015-06-18RePEc:eee:dyncon
article
Identification of DSGE models—The effect of higher-order approximation and pruning
This paper shows how to check rank criteria for a local identification of nonlinear DSGE models, given higher-order approximations and pruning. This approach imposes additional restrictions on (higher-order) moments and polyspectra, which can be used to identify parameters that are unidentified in a first-order approximation. The identification procedures are demonstrated by means of the Kim (2003) and the An and Schorfheide (2007) models. Both models are identifiable with a second-order approximation. Furthermore, analytical derivatives of unconditional moments, cumulants and corresponding polyspectra up to fourth order are derived for the pruned state-space.
Identification; Pruning; Higher-order moments; Cumulants; Polyspectra; Analytical derivatives;
C
2015
56
34
54
C10
C51
C52
E1
http://www.sciencedirect.com/science/article/pii/S0165188915000731
Mutschler, Willi
oai:RePEc:eee:dyncon:v:56:y:2015:i:c:p:55-812015-06-18RePEc:eee:dyncon
article
Hiring, firing, and relocation under employment protection
We analyze how hiring and firing costs as well as firing regulatory delays affect firms’ hiring, firing, and relocation policy with a stochastic control model. These frictions are substantial; e.g. the firing delay can be almost a year. In the model hiring and firing costs depend on the firm size and the number of people hired or fired. Based on our simulations, hiring and firing elasticities without relocation are highest with respect to demand and productivity volatility and the hiring and firing variable costs. The elasticity of firing due to relocation is highest with respect to the firm-sized firing cost.
Labor market frictions; Job reallocation; Stochastic control;
C
2015
56
55
81
D21
J23
J63
J68
L51
http://www.sciencedirect.com/science/article/pii/S0165188915000718
Dai, Min
Keppo, Jussi
Maull, Tim
oai:RePEc:eee:dyncon:v:56:y:2015:i:c:p:20-332015-06-18RePEc:eee:dyncon
article
Optimal inflation rates with the trending relative price of investment
I study the effect of the trending relative price of investment on the optimal target rate of inflation in an estimated dynamic general equilibrium model of the U.S. economy. The price of investment has a decreasing trend relative to that of consumption because of investment-specific technological progress. If the prices of investment goods are sticky, a benevolent planner puts weight on stabilizing these prices, which works to raise the optimal target rate of inflation in terms of the price of consumption. The estimated model shows a high degree of price stickiness in an investment sector and the resulting optimal target rate of inflation is significantly positive. This result is robust to an extended model in which the prices of some categories of investment goods are flexible.
Optimal inflation rates; Trend inflation; Sticky prices; Bayesian estimation;
C
2015
56
20
33
E52
E61
http://www.sciencedirect.com/science/article/pii/S016518891500069X
Ikeda, Daisuke
oai:RePEc:eee:dyncon:v:55:y:2015:i:c:p:130-1472015-06-18RePEc:eee:dyncon
article
Shifts in volatility driven by large stock market shocks
This paper presents an extension of the stochastic volatility model which allows for level shifts in volatility of stock market returns, known as structural breaks. These shifts are endogenously driven by large return shocks (innovations), reflecting large pieces of market news. These shocks are identified from the data as being bigger in absolute terms than the values of two threshold parameters of the model: one for the negative shocks and one for the positive shocks. The model can be employed to investigate different sources of stock market volatility shifts driven by market news, without relying on exogenous information. In addition to this, it has a number of interesting features which enable us to study the effects of large return shocks on future levels of market volatility. The above properties of the model are shown based on a study for the US stock market volatility.
Stochastic volatility; Structural breaks;
C
2015
55
130
147
C22
C15
http://www.sciencedirect.com/science/article/pii/S0165188915000548
Dendramis, Yiannis
Kapetanios, George
Tzavalis, Elias
oai:RePEc:eee:dyncon:v:55:y:2015:i:c:p:57-702015-06-18RePEc:eee:dyncon
article
Approximate dynamic programming with post-decision states as a solution method for dynamic economic models
I introduce and evaluate a new stochastic simulation method for dynamic economic models. It is based on recent work in the operations research and engineering literatures (Van Roy et al., 1997; Powell, 2007; Bertsekas, 2011), but also had an early application in economics (Wright and Williams, 1982, 1984). The baseline method involves rewriting the household׳s dynamic program in terms of post-decision states. This makes it possible to choose controls optimally without computing an expectation. I add a subroutine to the original algorithm that updates the values of states not visited frequently on the simulation path; and adopt a stochastic stepsize that efficiently weights information. Finally, I modify the algorithm to exploit GPU computing.
Numerical solutions; Approximations; Heterogeneous agents; Nonlinear numerical solutions; Dynamic programming;
C
2015
55
57
70
C60
C61
C63
D52
http://www.sciencedirect.com/science/article/pii/S0165188915000561
Hull, Isaiah
oai:RePEc:eee:dyncon:v:55:y:2015:i:c:p:1-132015-06-18RePEc:eee:dyncon
article
Super-exponential growth expectations and the global financial crisis
We construct risk-neutral return probability distributions from S&P 500 options data over the decade 2003–2013, separable into pre-crisis, crisis and post-crisis regimes. The pre-crisis period is characterized by increasing realized and, especially, option-implied returns. This translates into transient unsustainable price growth that may be identified as a bubble. Granger tests detect causality running from option-implied returns to Treasury Bill yields in the pre-crisis regime with a lag of a few days, and the other way round during the post-crisis regime with much longer lags (50–200days). This suggests a transition from an abnormal regime preceding the crisis to a “new normal” post-crisis. The difference between realized and option-implied returns remains roughly constant prior to the crisis but diverges in the post-crisis phase, which may be interpreted as an increase of the representative investor׳s risk aversion.
Financial crisis; Returns; Expectations; Options; Risk-neutral densities;
C
2015
55
1
13
D84
G01
G14
http://www.sciencedirect.com/science/article/pii/S0165188915000536
Leiss, Matthias
Nax, Heinrich H.
Sornette, Didier
oai:RePEc:eee:dyncon:v:55:y:2015:i:c:p:71-882015-06-18RePEc:eee:dyncon
article
Firm dynamics and the origins of aggregate fluctuations
What drives aggregate fluctuations? I test the granular hypothesis — according to which the largest firms in the economy drive aggregate dynamics — by estimating a dynamic factor model with firm-level data. The growth rate of a firm׳s sales is decomposed in an unobserved common macroeconomic component and in a residual that I interpret as an idiosyncratic firm-level component. The empirical results show that, after properly controlling for aggregate shocks, idiosyncratic shocks have little role in explaining U.S. business cycle fluctuations.
Business cycles; Firm dynamics; Granular residual; Dynamic factor models;
C
2015
55
71
88
E32
D20
C30
http://www.sciencedirect.com/science/article/pii/S0165188915000573
Stella, Andrea
oai:RePEc:eee:dyncon:v:55:y:2015:i:c:p:14-382015-06-18RePEc:eee:dyncon
article
The zero lower bound, the dual mandate, and unconventional dynamics
This paper examines monetary policy when it is constrained by the zero lower bound (ZLB) on the nominal interest rate. Our analysis uses a nonlinear New Keynesian model with technology and discount factor shocks. Specifically, we investigate why technology shocks may have unconventional effects at the ZLB, what factors affect the likelihood of hitting the ZLB, and the implications of alternative monetary policy rules. We initially focus on a New Keynesian model without capital (Model 1) and then study that model with capital (Model 2). The advantage of including capital is that it introduces another mechanism for intertemporal substitution that strengthens the expectational effects of the ZLB. Four main findings emerge: (1) In Model 1, the choice of output target in the Taylor rule may reverse the effects of technology shocks when the ZLB binds; (2) When the central bank targets steady-state output in Model 2, a positive technology shock at the ZLB leads to more pronounced unconventional dynamics than in Model 1; (3) The presence of capital changes the qualitative effects of demand shocks and alters the impact of a monetary policy rule that emphasizes output stability; and (4) In Model 1, the constrained linear solution is a decent approximation of the nonlinear solution, but meaningful differences exist between the solutions in Model 2.
Monetary policy; Zero lower bound; Nonlinear solution method; Capital;
C
2015
55
14
38
E31
E42
E58
E61
http://www.sciencedirect.com/science/article/pii/S016518891500055X
Gavin, William T.
Keen, Benjamin D.
Richter, Alexander W.
Throckmorton, Nathaniel A.
oai:RePEc:eee:dyncon:v:55:y:2015:i:c:p:39-562015-06-18RePEc:eee:dyncon
article
Cohort and target age effects on subjective survival probabilities: Implications for models of the retirement phase
Subjective survival scaling factors are often estimated from one observation of life expectancy and treated as constant to any target age. Using new survey data on subjective survival probabilities, we estimate a model incorporating cohort- and target age-varying beliefs in scaling factors. Both cohort age and target age matter: respondents are pessimistic about overall life expectancy but optimistic about survival at advanced ages, and older respondents are more optimistic than younger. We propose a new theoretical model incorporating cohort- and target age-varying beliefs and illustrate their effects on the perceived value of annuities and on retirement phase consumption plans.
Subjective life expectancy; Unobservable heterogeneity; Rational expectations; Life cycle model;
C
2015
55
39
56
D14
D84
J11
I10
http://www.sciencedirect.com/science/article/pii/S0165188915000512
Wu, Shang
Stevens, Ralph
Thorp, Susan
oai:RePEc:eee:dyncon:v:55:y:2015:i:c:p:113-1292015-06-18RePEc:eee:dyncon
article
How well does the weighted price contribution measure price discovery?
The weighted price contribution (WPC) is a popular measure for price discovery. This paper examines the theoretical properties and empirical performance of the WPC in sequential markets. The benchmark used to judge the WPC is the information share (IS) measure based on the variation of the efficient price. We derive the asymptotic value of the WPC, which is a complex combination of the unconditional means and variances of the returns of sequential markets, under the assumption of normality. We show that the WPC correctly converges to the IS only when the returns are uncorrelated with zero means. Our theoretical predictions based on normality hold well in simulations and in empirical analyses of the overnight price discovery for the S&P 100 index and its constituent stocks. As the correlation between overnight and daytime returns increases, the WPC deviates from the IS substantially.
Price discovery; Weighted price contribution; Information share; Information flow; Efficient price; Overnight return;
C
2015
55
113
129
G14
G15
C32
http://www.sciencedirect.com/science/article/pii/S0165188915000676
Wang, Jianxin
Yang, Minxian
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: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/pii/S0165-1889(07)00122-4
Chakravorty, Ujjayant
Magné, Bertrand
Moreaux, Michel
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: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/pii/S0165-1889(07)00251-5
Meh, Césaire A.
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/pii/S0165-1889(07)00248-5
Alonso-Carrera, Jaime
Caballé, Jordi
Raurich, Xavier
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/pii/S0165-1889(07)00249-7
Bernard, Carole
Le Courtois, Olivier
Quittard-Pinon, François
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/pii/S0165-1889(10)00130-2
Poilly, Céline
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: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/pii/S0165-1889(11)00004-2
Shaliastovich, Ivan
Tauchen, George
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/pii/S0165-1889(10)00033-3
Boucekkine, Raouf
Krawczyk, Jacek B.
Vallée, Thomas
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/pii/S0165-1889(07)00211-4
Adolfson, Malin
Laséen, Stefan
Lindé, Jesper
Villani, Mattias
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: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/pii/S0165-1889(09)00040-2
Mitraille, Sébastien
Thille, Henry
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/pii/S0165-1889(08)00179-6
Ladley, Dan
Schenk-Hoppé, Klaus Reiner
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/pii/S0165-1889(10)00010-2
Agénor, Pierre-Richard
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/pii/S0165-1889(09)00004-9
Gourio, François
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: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/pii/S0165-1889(08)00076-6
Fontaine, François
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/pii/S0165-1889(07)00117-0
Karamé, Frédéric
Patureau, Lise
Sopraseuth, Thepthida
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/pii/S0165-1889(10)00191-0
Foellmi, Reto
Rosenblatt-Wisch, Rina
Schenk-Hoppé, Klaus Reiner
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: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/pii/S0165-1889(09)00197-3
Meh, Césaire A.
Moran, Kevin
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: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/pii/S0165-1889(10)00232-0
Gautier, Erwan
Le Bihan, Hervé
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: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/pii/S0165-1889(09)00231-0
Palczewski, Jan
Schenk-Hoppé, Klaus Reiner
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:41:y:2014:i:c:p:20-372014-06-06RePEc:eee:dyncon
article
Abatement R&D, market imperfections, and environmental policy in an endogenous growth model
We develop an endogenous growth model featuring environmental externalities, abatement R&D, and market imperfections. We compare the economic performances under three distinct regimes that encompass public abatement, private abatement without tax recycling, and private abatement with tax recycling. It is found that the benefit arising from private abatement will be larger if the degree of the firms’ monopoly power is greater. With a reasonably high degree of monopoly power, a mixed abatement policy by which the government recycles environmental tax revenues to subsidize the private abatement R&D is a plausible way of reaching the highest growth rate and welfare.
Private abatement R&D; Market imperfections; Endogenous growth;
C
2014
41
20
37
H23
O32
Q56
http://www.sciencedirect.com/science/article/pii/S0165188914000566
Chu, Hsun
Lai, Ching-chong
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:173-1872014-06-06RePEc:eee:dyncon
article
Money, random matching and endogenous growth: A quantitative analysis
In this study, we develop a search-and-matching monetary growth model to analyze the effects of inflation on economic growth and social welfare by introducing endogenous economic growth via capital externality into a two-sector search-and-matching model. We find that the channel through which inflation affects economic growth in the search-and-matching model is different from the traditional cash-in-advance model. To facilitate the calibration, we obtain an empirical estimate of the effects of inflation on economic growth using panel regressions. In the simulation analysis, we quantitatively evaluate the welfare effect of inflation in the search-and-matching endogenous growth model and compare it to a search-and-matching exogenous growth model. We find that the welfare effect of inflation is nonlinear in the endogenous growth model whereas it is linear in the exogenous growth model. Furthermore, we find that the welfare cost of inflation under endogenous growth is up to four times as large as the welfare cost of inflation under exogenous growth.
Economic growth; Inflation; Money; Random matching;
C
2014
41
173
187
E41
O41
O42
http://www.sciencedirect.com/science/article/pii/S0165188914000372
Chu, Angus C.
Kan, Kamhon
Lai, Ching-Chong
Liao, Chih-Hsing
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:241-2562014-06-06RePEc:eee:dyncon
article
Trend growth and learning about monetary policy rules
The paper examines the effect of trend productivity growth on the determinacy and learnability of equilibria under alternative monetary policy rules. Under zero trend inflation we show that the economic structure is isomorphic to that of Bullard and Mitra (2002) and show that under a policy rule that responds to current period inflation and output a higher trend growth rate relaxes the conditions for determinacy and learnability. Results are mixed for other policy rules. Under the expectations-based rule, trend growth tightens the conditions for determinacy but it relaxes the conditions for learnability. Under the lagged-data-based rule, trend growth tightens the conditions for determinacy and learnability. Our analysis shows that lower (higher) trend growth has similar effects as higher (lower) trend inflation in the sense of making inflation more (less) forward-looking. Thus, our results complement previous studies on the role of high trend inflation as a cause of macroeconomic volatility in the U.S. in the 1970s, as this period was also characterized by productivity growth slowdown.
Trend growth; Learning; Monetary policy; Determinacy; Expectational stability;
C
2014
41
241
256
E4
E5
http://www.sciencedirect.com/science/article/pii/S0165188914000359
Tesfaselassie, Mewael F.
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:69-922014-06-06RePEc:eee:dyncon
article
Forecasting and decomposition of portfolio credit risk using macroeconomic and frailty factors
This paper presents a dynamic portfolio credit model following the regulatory framework, using macroeconomic and latent risk factors to predict the aggregate loan portfolio loss in a banking system. The latent risk factors have three levels: global across the entire banking system, parent-sectoral for the intermediate loan sectors and sector-specific for the individual loan sectors. The aggregate credit loss distribution of the banking system over a risk horizon is generated by Monte Carlo simulation, and a quantile estimator is used to produce the aggregate risk measure and economic capital. The risk contributions of the individual sectors and risk factors are measured by combining the Hoeffding decomposition with the Euler capital allocation rule. For the U.S. banking system, we find that the real GDP growth rate, the global and sector-wide frailty risk factors and their spillovers significantly affect loan defaults, and the impacts of the frailty factors are not only economy-wide but also sector-specific. We also find that the frailty risk factors make more significant risk contributions to the aggregate portfolio risk than the macroeconomic factors, while the macroeconomic factors help to improve the accuracy and efficiency of the credit risk forecasts.
Risk contribution; Conditional value-at-risk; Euler capital allocation; Hoeffding decomposition; Default probability;
C
2014
41
69
92
C15
C32
C53
E32
G17
http://www.sciencedirect.com/science/article/pii/S0165188914000530
Lee, Yongwoong
Poon, Ser-Huang
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:110-1292014-06-06RePEc:eee:dyncon
article
Optimal interest-rate rules and inflation stabilization versus price-level stabilization
This paper compares the properties of interest-rate rules such as simple Taylor rules and rules that respond to price-level fluctuations (called Wicksellian rules) in a basic forward-looking model. By introducing appropriate history dependence in policy, Wicksellian rules perform better than optimal Taylor rules in terms of welfare, robustness to alternative shock processes, and are less prone to equilibrium indeterminacy. A simple Wicksellian rule augmented with a high degree of interest rate inertia resembles a robustly optimal rule, i.e., a monetary policy rule that implements the optimal plan and that is also completely robust to the specification of exogenous shock processes.
Optimal monetary policy; Taylor rule; Robust policy;
C
2014
41
110
129
E30
E31
http://www.sciencedirect.com/science/article/pii/S0165188914000244
Giannoni, Marc P.
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:50-682014-06-06RePEc:eee:dyncon
article
Heterogeneous beliefs in over-the-counter markets
The behavior and stability of over-the-counter markets is of central concern to regulators. Little is known, however, about how the structure of these markets determine their properties. In this paper we consider an over-the-counter market populated by boundedly rational heterogeneous traders in which the structure is represented by a network. Stability is found to decrease as the market becomes less well connected, however, the configuration of connections has a significant effect. The presence of hubs, such as those found in scale free networks increases stability and decreases volatility whilst small-world short-cut links have the opposite effect. Volatility in the fundamental value increases market volatility, however, volatility in the riskless asset returns has an ambiguous effect.
Over-the-counter; Boundedly rationality; Stability; Network; Heterogeneous agent model;
C
2014
41
50
68
G10
C63
http://www.sciencedirect.com/science/article/pii/S0165188914000542
De Kamps, Marc
Ladley, Daniel
Simaitis, Aistis
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:209-2232014-06-06RePEc:eee:dyncon
article
Living in an imaginary world that looks real
In the paper we show – using standard approaches, general equilibrium modeling and the assumption of complete rationality – that the macroeconomic environment is endogenous and is indeterminate. Specifically, it is argued – without resorting to sunspot type arguments – that microeconomic fundamentals do not suffice to characterize the economy at the macro level. In particular, we show how perceptions of rational agents of the workings of the economy (a) shape the environment, (b) affect the environment sufficiently to ensure that rational economic agents find the observed environment consistent with their beliefs even though it is not. As a by-product, we illustrate that endogenous macro uncertainty can arise as an outcome if rational economic agents whose expectations are anchored on endogenous variables expect them to arise. Finally, we show that systematic errors can persist indefinitely under rationality.
Endogenous environment; Imaginary parameters; Real parameters; Beliefs consistency; Macro-uncertainty; Permanent errors;
C
2014
41
209
223
D83
D84
D91
E32
http://www.sciencedirect.com/science/article/pii/S0165188914000323
Dudek, Maciej K.
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:257-2752014-06-06RePEc:eee:dyncon
article
A new look at variation in employment growth in Canada: The role of industry, provincial, national and external factors
We examine fluctuations in employment growth using Canadian data from 1976 to 2010. We consider a wide range of models and examine the sensitivity of our findings to modelling assumptions. The results from our most preferred model, which we selected using the Bayesian Information Criteria, indicate that most of the variance in employment growth that is not due to the idiosyncratic error comes from domestic sources, with most of this coming from industry and provincial factors. Overall, we find that external and national factors play a much smaller role in employment fluctuations than in earlier research. We provide some possible explanations for these differences and discuss the implications of our findings for public policy and theory.
Employment fluctuations; Dynamic factor model; Disaggregated shocks; Domestic shocks; External shocks;
C
2014
41
257
275
J01
C11
C38
http://www.sciencedirect.com/science/article/pii/S0165188914000505
Campolieti, Michele
Gefang, Deborah
Koop, Gary
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:154-1722014-06-06RePEc:eee:dyncon
article
Understanding the effect of technology shocks in SVARs with long-run restrictions
This paper studies the statistical properties of impulse response functions in structural vector autoregressions (SVARs) with a highly persistent variable as hours worked and long-run identifying restrictions. The highly persistent variable is specified as a nearly stationary persistent process. Such a process appears to be particularly well suited to characterize the dynamics of hours worked because it implies a unit root in a finite sample but is asymptotically stationary and persistent. This is typically the case for per capita hours worked which are included in SVARs. Theoretical results derived from this specification allow us to explain most of the empirical findings from SVARs which include US hours worked.
SVARs; Long-run restrictions; Locally nonstationary process; Technology shocks; Hours worked;
C
2014
41
154
172
C32
E32
http://www.sciencedirect.com/science/article/pii/S0165188914000232
Chaudourne, Jeremy
Fève, Patrick
Guay, Alain
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:93-1092014-06-06RePEc:eee:dyncon
article
Cross-hedging minimum return guarantees: Basis and liquidity risks
We reveal pitfalls in the hedging of insurance contracts with a minimum return guarantee on the underlying investment, e.g. an external mutual fund. We analyze basis risk entailed by hedging the guarantee with a dynamic portfolio of proxy assets for the funds. We also take account of liquidity risk which arises since the insurer may need to advance funds for performing the hedge. Based on a least-squares Monte Carlo simulation, we study the economic implications of basis and liquidity risks. We demonstrate that both risks may be surprisingly high and show how the design of the contract and the hedging strategy may help to alleviate them.
Basis risk; Least-squares Monte Carlo; Liquidity risk; Periodic premia; Variable annuities;
C
2014
41
93
109
G12
G13
http://www.sciencedirect.com/science/article/pii/S0165188914000554
Ankirchner, Stefan
Schneider, Judith C.
Schweizer, Nikolaus
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:188-2082014-06-06RePEc:eee:dyncon
article
Optimism, pessimism and financial bubbles
This paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank-dependent expected utility. This RDU assumption can be viewed as a transformation of probabilities depending on the pessimism/optimism of the agent. The results show that pessimism favors the existence of deterministic bubbles, when optimism may promote the existence of stochastic bubbles. Moreover, under pessimism, the RDU assumption may generate multiple bubbly equilibria. The RDU assumption also leads to new conditions ensuring the (absence of) Pareto-optimality of the competitive equilibrium without bubbles. These conditions still govern the existence of bubbles.
Rational bubbles; RDU preferences;
C
2014
41
188
208
D81
D9
G1
O41
http://www.sciencedirect.com/science/article/pii/S0165188914000335
Wigniolle, B.
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:224-2402014-06-06RePEc:eee:dyncon
article
Wars and capital destruction
In this paper, we propose a theoretical framework to investigate the impact of conflicts and wars on key macroeconomic aggregates and welfare. Using a panel data with 9 countries from 1870 onwards, we first show that the consumption-to-output ratio is minimal during WWII for participants. While this can be explained by an increase in public spending in the USA, this cannot be the case in other countries that participated in WWII, as they experience a large fall in output during wartime. To account for this, we build a variation of a Real Business Cycle model first proposed by Hercowitz and Sampson (1991). We extend the initial model to account for specific shocks that destroy private and public capital stocks – as conflicts do – by assuming an (exogenously) time-varying parameter in the law of capital accumulation. In addition, the model imbeds generalized TFP shocks capturing standard technological factors as well as the potential effects of war on the labor force. The model is estimated and used (i) to assess the importance of capital shocks during war episodes, and (ii) to quantify the welfare effects of conflicts. We show that capital shocks are crucial to account for the macroeconomic dynamics of countries that have experienced large war-related destruction, and that the welfare losses from fluctuations can be quite large when considering data samples that include major war episodes.
War; Military conflicts; Capital shocks; Real business cycle model; Random coefficient autoregressive model;
C
2014
41
224
240
E13
E32
H56
http://www.sciencedirect.com/science/article/pii/S0165188914000347
Auray, Stéphane
Eyquem, Aurélien
Jouneau-Sion, Frédéric
oai:RePEc:eee:dyncon:v:41:y:2014:i:c:p:276-2902014-06-06RePEc:eee:dyncon
article
Executive compensation and earnings management under moral hazard
This paper analyzes executive compensation in a setting where managers may take a costly action to manipulate corporate performance, and whether managers do so is stochastic. We show that an increase in the possibility of manipulation actually calls for executive pay to be more responsive to reported performance. In addition, regulatory reforms that increase the cost involved in manipulation may lead to reduced pay-for-performance sensitivities. The time-series and cross-sectional variations of executive compensation lend support to our model.
Earnings management; Executive compensation; Optimal contract; Corporate governance;
C
2014
41
276
290
D82
D86
G38
J31
http://www.sciencedirect.com/science/article/pii/S0165188914000499
Sun, Bo
oai:RePEc:eee:dyncon:v:42:y:2014:i:c:p:86-1042014-05-30RePEc:eee:dyncon
article
Consuming durable goods when stock markets jump: A strategic asset allocation approach
In this paper we show the impact of considering jumps in the return process of risky assets when deciding how to invest and consume throughout time. Agents derive their utilities from consumption over time. We consider an agent that invests in the financial market and in durable and perishable consumption goods. Assuming that there are costs for transacting the durable good, we show that an agent who does not consider the possibility of jumps will make suboptimal decisions, not only regarding the fraction of wealth invested in the stock market, but also with respect to the timing for trading on the durable good. Furthermore we also show that jumps cause a non-obvious asymmetric impact on the thresholds that lead the consumer to trade the durable good, even when the jump distribution is symmetric.
Strategic asset allocation; Optimal investment; Jumps; Financial markets; Durable consumption goods; Perishable consumption goods;
C
2014
42
86
104
G11
http://www.sciencedirect.com/science/article/pii/S016518891400058X
Amaro de Matos, João
Silva, Nuno
oai:RePEc:eee:dyncon:v:42:y:2014:i:c:p:175-1872014-05-30RePEc:eee:dyncon
article
Trend inflation, sticky prices, and expectational stability
Micro evidence indicates that each period a fraction of prices is kept unchanged under a positive trend inflation rate. In a sticky price model based on this evidence, recent research shows that high trend inflation is a serious cause for indeterminacy of rational expectations equilibrium under the Taylor rule. This paper examines implications of trend inflation for expectational stability of the equilibrium. An empirically plausible calibration of the model demonstrates that a fundamental rational expectations equilibrium is likely to be expectationally stable even in cases of indeterminacy induced by high trend inflation.
Trend inflation; Sticky price; Indeterminacy; Expectational stability; Least-squares learnability;
C
2014
42
175
187
E31
E52
http://www.sciencedirect.com/science/article/pii/S0165188914000827
Kurozumi, Takushi
oai:RePEc:eee:dyncon:v:42:y:2014:i:c:p:105-1202014-05-30RePEc:eee:dyncon
article
Optimal harvesting of a spatial renewable resource
In this paper we investigate the optimal harvesting of a renewable natural resource. While in most standard approaches the resource is located at a single point, we allow the resource to be distributed spatially. Consequently, an agent who exploits the resource has to travel from one location to another. For a fixed planning horizon, we investigate the speed and the path of harvesting chosen by the agent. We show that the agent adjusts this speed so as to visit each location only once, even in the absence of travelling cost. Since the agent does not return to any location for a second harvest, it is optimal to fully deplete the resource upon arrival. A similar type of bang–bang solution results when we drop the assumption of a constant harvesting rate: allowing for a variable harvesting rate, the agent chooses to fully exploit the resource either in the last or in the first travelling period. A society interested in conserving some of the resource thus has to take measures to limit the exploitative behaviour of the agent.
Optimal harvesting; Spatial renewable resource; Continuous time; Market failure; Bang–bang solution;
C
2014
42
105
120
Q20
Q28
D21
C61
http://www.sciencedirect.com/science/article/pii/S0165188914000670
Behringer, Stefan
Upmann, Thorsten
oai:RePEc:eee:dyncon:v:33:y:2009:i:4:p:777-7972014-05-30RePEc: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/pii/S0165-1889(08)00168-1
Glomm, Gerhard
Jung, Juergen
Tran, Chung
oai:RePEc:eee:dyncon:v:43:y:2014:i:c:p:199-2172014-05-30RePEc:eee:dyncon
article
Unconventional government debt purchases as a supplement to conventional monetary policy
In response to the Great Financial Crisis, the Federal Reserve, the Bank of England and many other central banks have adopted unconventional monetary policy instruments. We investigate if one of these, purchases of long-term government debt, could be a valuable addition to conventional short-term interest rate policy even if the main policy rate is not constrained by the zero lower bound. To do so, we add a stylised financial sector and central bank asset purchases to an otherwise standard New Keynesian DSGE model. Asset quantities matter for interest rates through a preferred habitat channel. If conventional and unconventional monetary policy instruments are coordinated appropriately then the central bank is better able to stabilise both output and inflation.
Quantitative easing; Large-scale asset purchases; Preferred habitat; Optimal monetary policy;
C
2014
43
199
217
E40
E43
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188914000803
Ellison, Martin
Tischbirek, Andreas
oai:RePEc:eee:dyncon:v:43:y:2014:i:c:p:107-1292014-05-30RePEc:eee:dyncon
article
The effectiveness of non-standard monetary policy in addressing liquidity risk during the financial crisis: The experiences of the Federal Reserve and the European Central Bank
A number of studies sought to measure the effects of non-standard policy on bank funding markets. This paper carries those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending. By separately modeling loan supply and demand, we determine how non-standard central bank measures affected bank lending by reducing stress in bank funding markets. Our results suggest that non-standard policy measures lowered bank funding volatility in the US and the Euro Area. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustained lending activity.
Bank lending; Non-standard policy; Bank funding volatility;
C
2014
43
107
129
E58
G32
G21
http://www.sciencedirect.com/science/article/pii/S0165188914000645
Carpenter, Seth
Demiralp, Selva
Eisenschmidt, Jens
oai:RePEc:eee:dyncon:v:42:y:2014:i:c:p:1-122014-05-30RePEc:eee:dyncon
article
An escape time interpretation of robust control
This paper studies the problem of an agent who wants to prevent the state from exceeding a critical threshold. Even though the agent is presumed to know the model, the optimal policy is computed by solving a conventional robust control problem. That is, robustness is induced here by objectives rather than uncertainty, and so is an example of the duality between risk-sensitivity and robustness. However, here the agent only incurs costs upon escape to a critical region, not during ‘normal times’. We argue that this is often a more realistic model of macroeconomic policymaking.
Robust control; Large deviations;
C
2014
42
1
12
C61
D81
http://www.sciencedirect.com/science/article/pii/S0165188914000591
Cho, In-Koo
Kasa, Kenneth
oai:RePEc:eee:dyncon:v:43:y:2014:i:c:p:241-2682014-05-30RePEc:eee:dyncon
article
Endogenous risk in a DSGE model with capital-constrained financial intermediaries
This paper proposes a perturbation-based approach to implement the idea of endogenous financial risk in a standard DSGE macro-model. Recent papers, such as Mendoza (2010), Brunnermeier and Sannikov (2012) and He and Krishnamurthy (2012), that have stimulated the research field on endogenous risk in a macroeconomic context, are based on sophisticated solution methods that are not easily applicable in larger models. We propose an approximation method that allows us to capture some of the basic insights of this literature in a standard macro-model. We are able to identify an important risk-channel that derives from the risk aversion of constrained intermediaries and that contributes significantly to the overall financial and macroeconomic volatility.
Endogenous financial risk; DSGE models; Non-linear dynamics;
C
2014
43
241
268
E3
E44
G12
http://www.sciencedirect.com/science/article/pii/S0165188914000633
Dewachter, Hans
Wouters, Raf
oai:RePEc:eee:dyncon:v:42:y:2014:i:c:p:143-1742014-05-30RePEc:eee:dyncon
article
Spatial externalities and agglomeration in a competitive industry
We introduce spatial spillovers as an externality in the production function of competitive firms operating within a finite spatial domain under adjustment costs. Spillovers may attenuate with distance and the overall externality could contain positive and negative components with the overall effect being positive. We show that when the spatial externality is not internalized by firms, spatial agglomerations may emerge endogenously in a competitive equilibrium. The result does not require increasing returns at the private or the social level, increasing marginal productivity of private capital with respect to the externality, or location advantages. In fact agglomerations may emerge with decreasing returns to scale, declining marginal productivity of private capital with respect to the externality, and no location advantage. The result depends on the interactions between the structures of production technology and spatial effects as shown in the paper. No agglomerations emerge at the social optimum when spillovers are internalized and diminishing returns both from the private and the social point of view prevail. Numerical experiments with Cobb–Douglas and CES technologies and an isoelastic demand confirm our theoretical predictions.
Competitive equilibrium; Social optimum; Spatial externality; Endogenous agglomerations;
C
2014
42
143
174
D21
R3
C61
http://www.sciencedirect.com/science/article/pii/S0165188914000785
Brock, William A.
Xepapadeas, Anastasios
Yannacopoulos, Athanasios N.
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:151-1532015-01-10RePEc:eee:dyncon
article
Policy rules in practice
Over the past twenty years, monetary policy rules have played an increasingly central role in disucssions of monetary policy strategy and tactics at the Federal Reserve. This represented a sea change in thinking about monetary policy in terms of a systematic startagey rather than a sequence of policy decisions.
E52; Monetary policy; Taylor rule;
C
2014
49
151
153
http://www.sciencedirect.com/science/article/pii/S0165188914002425
Williams, John C.
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:35-482015-01-10RePEc:eee:dyncon
article
The impact of monetary policy in the midst of big shocks
This paper studies the impact of Federal Reserve policies that created the largest deviations from price stability during the Fed׳s first 100 years: the post-World War I deflation, the deflation of the Great Depression, the inflation of World War II, and the Great Inflation of the 1970s. In terms of their macroeconomic impacts, I find that deflation was uniquely depressing in the 1930s because of cartel policies that prevented nominal prices and wages from adjusting to clear markets, and not because deflation is generically depressing. I find that the biggest impact of monetary policy during World War II was in debasing debt through inflation. I find that the main drivers of the 1970s economy were long-run changes in productivity and the labor market, and that there may have been little that the Fed could have done at this time to expand employment and output. More broadly, I find that macroeconomic performance would have been better over the Fed׳s first century had the Fed followed a monetary policy to deliver stable prices.
Inflation; Federal reserve; Great depression; Deflation;
C
2014
49
35
48
E3
E4
E5
N2
http://www.sciencedirect.com/science/article/pii/S016518891400219X
Ohanian, Lee E.
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:135-1382015-01-10RePEc:eee:dyncon
article
Fed Credit Policy: What is a Lender of Last Resort?
Discussions of the Fed׳s financial crisis lending – and its role as “Lender of Last Resort” more generally – often overlook the distinction between monetary policy and credit policy. Central bank actions constitute monetary policy if they alter the quantity of the bank׳s monetary liabilities, but constitute credit policy if they alter the composition of the bank׳s portfolio without affecting the outstanding amount of monetary liabilities. In the 19th century, Henry Thornton and Walter Bagehot advocated Lender of Last Resort policies as a means of expanding the money supply when the demand for money surged in a crisis. In contrast, the Fed׳s recent crisis lending for the most part left its outstanding monetary liabilities unaffected, and thus represented credit policy, not Lender of Last Resort activity. Credit allocation in a crisis is potentially costly because it affects market participants׳ beliefs about the likelihood of future central bank rescues, which in turn reduces their incentive to protect themselves against financial distress and thus exacerbates financial instability. Credible limits on credit policy thus are critical to central banks׳ core policy mission. One path to establishing such limits is to create “living wills” that detail how to resolve large, complex financial firms without government support.
E; Fed; Central bank; Federal Reserve; Too big to fail; Economy; Resolution;
C
2014
49
135
138
http://www.sciencedirect.com/science/article/pii/S0165188914002413
Lacker, Jeffrey M.
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:52-692015-01-10RePEc:eee:dyncon
article
The design and communication of systematic monetary policy strategies
The efficacy of central bank communications is inextricably linked to the characteristics of the monetary policy framework. Therefore, this paper presents a set of fundamental principles regarding the joint design of monetary policy strategy and communications. The practical implications of these principles are illustrated by considering a number of significant policy challenges faced by central banks in the advanced economies.
Central Bank independence; Inflation targeting; Simple monetary policy rules;
C
2014
49
52
69
E24
E32
E52
E58
J21
http://www.sciencedirect.com/science/article/pii/S0165188914002164
Levin, Andrew T.
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:74-1082015-01-10RePEc:eee:dyncon
article
Monetary policy with interest on reserves
I analyze monetary policy with interest on reserves and a large balance sheet. I show that conventional theories do not determine inflation in this regime, so I base the analysis on the fiscal theory of the price level. I find that monetary policy can peg the nominal rate, and determine expected inflation. With sticky prices, monetary policy can also affect real interest rates and output, though higher interest rates raise output and then inflation. The conventional sign requires a coordinated fiscal–monetary policy contraction. I show how conventional new-Keynesian models also imply strong monetary–fiscal policy coordination to obtain the usual signs. I address theoretical controversies. A concluding section places our current regime in a broader historical context, and opines on how optimal fiscal and monetary policy will evolve in the new regime.
Monetary policy; Interest on reserves; Balance sheet; Fiscal theory;
C
2014
49
74
108
E52
E58
E63
http://www.sciencedirect.com/science/article/pii/S0165188914002152
Cochrane, John H.
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:112-1202015-01-10RePEc:eee:dyncon
article
Lessons from a century of FED policy: Why monetary and credit policies need rules and boundaries
Wide operational and financial independence given to monetary and credit policies subjects the Federal Reserve to incentives detrimental for macroeconomic and financial stability. The absence of a monetary policy rule created go-stop incentives that produced inefficient volatility of both inflation and unemployment during the Great Inflation. Fed credit policy has undergone massive “mission creep” since the Fed was established. Being debt-financed fiscal policy, Fed credit policy beyond ordinary temporary lending to solvent depositories creates friction with the fiscal authorities and jeopardizes the Fed׳s independence. An ambiguous boundary of expansive Fed credit policy creates expectations of Fed accommodation in financial crisis—that blunts the incentive of private entities to take protective measures beforehand (to shrink counter-party risk and reliance on short-term finance, and build up equity capital) and blunts the incentive of the fiscal authorities to prepare procedures in advance to act systematically in times of credit turmoil. These points are illustrated with reference to the 2007–09 financial crisis. Part of the problem is that the independent Fed does not have the same incentive as the 19th century Bank of England to follow Bagehot׳s Rule. The paper concludes with a set of principles to preserve a workable, sustainable division of responsibilities between the independent central bank and the fiscal authorities.
Bagehot׳s last resort lending rule; Central Bank independence and fiscal policy; Federal Reserve credit policy; Federal Reserve history; Financial crisis of 2007–09; Great Inflation;
C
2014
49
112
120
E31
E32
E44
E52
E58
E63
http://www.sciencedirect.com/science/article/pii/S0165188914002176
Goodfriend, Marvin
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:156-1592015-01-10RePEc:eee:dyncon
article
Central bank rules in historical perspective
This article explains that, while Walter Bagehot׳s Lombard Street had a rule about the central bank׳s role as a lender of last resort, it was not a precursor of the rules-based approach to monetary policy. Monetary policy rules came into fashion in the 1980s and 1990s when it became clear from the 1970s just how dangerous discretion could be. Under different historical circumstances before that and in more recent times, it was rules that seemed much inferior to discretion.
Monetary policy rules; Central bank balance sheet; Lender of last resort; Fed-Treasury Accord;
C
2014
49
156
159
http://www.sciencedirect.com/science/article/pii/S0165188914002231
Ferguson, Niall
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:154-1552015-01-10RePEc:eee:dyncon
article
Methodology of economic history as an approach to assessing monetary policy
Contribution to the panel session at the Hoover Institution conference on “Frameworks for Monetary Policy for the Next Century,” May 30, 2014.
Monetary policy; Central banking; Economic History;
C
2014
49
154
155
http://www.sciencedirect.com/science/article/pii/S0165188914002139
Eichengreen, Barry
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:142-1432015-01-10RePEc:eee:dyncon
article
The importance of rules-based monetary policy in practice
This paper draws on several actual policy experiences of the author to demonstrate why it is important to have a rules-based monetary policy. These experiences show that policy rules provide a needed “steady as you go” strategy and serve as an insurance against excessive intervention. They also show why in practice one must consider rules-based policy in the broader policy context in which the Federal Reserve operates.
Monetary policy; Taylor rule; Bailout; Wage and price controls;
C
2014
49
142
143
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188914002243
Shultz, George P.
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:144-1462015-01-10RePEc:eee:dyncon
article
Monetary rules: Theory and practice
President Charles Plosser discusses his views on the benefits of a systematic and rule-like approach to monetary policy.
Taylor rules; Forward guidance; Transparency;
C
2014
49
144
146
E52
E58
http://www.sciencedirect.com/science/article/pii/S0165188914002401
Plosser, Charles I.
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:139-1412015-01-10RePEc:eee:dyncon
article
Supervisory frameworks and monetary policy
One issue that the crisis has pushed to the forefront is the relationship between macroeconomics and finance, and how we think about the footings of financial stability. My comments this evening will focus briefly on this intersection of monetary policy and supervisory and regulatory issues. I am convinced that promoting financial stability requires a comprehensive approach that uses both macroprudential tools and the examination of individual firms, relying on the judgment of experienced examiners. In addition, I am skeptical of a clean “separation principle” that places financial stability squarely in the purview of the supervisors. Instead, I think monetary policymakers also need to maintain a careful eye on the financial system and how interest rate policy affects incentives for financial markets and institutions.
C
2014
49
139
141
http://www.sciencedirect.com/science/article/pii/S0165188914002577
George, Esther L.
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:109-1112015-01-10RePEc:eee:dyncon
article
Interest on reserves, policy rules and quantitative easing
Hundred percent reserve transaction banking system is proposed with tax-free interest on demand deposits and interest bearing reserves. To eliminate shadow banking arrangements, a 100% tax on net interest income is proposed for limited liability businesses. All financing of businesses would be mutual as currently most is. With this arrangement there would be no bank runs associated giving rise to a financial crisis.
100% Reserve banking; Transaction banks; Monetary policy rules;
C
2014
49
109
111
E52
E58
E61
http://www.sciencedirect.com/science/article/pii/S0165188914002255
Prescott, Edward C.
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:4-172015-01-10RePEc:eee:dyncon
article
Deviations from rules-based policy and their effects
Rules-based monetary policy evaluation has long been central to macroeconomics. Using the original Taylor rule, a modified Taylor rule with a higher output gap coefficient, and an estimated Taylor rule, we define rules-based and discretionary eras by smaller and larger policy rule deviations, the absolute value of the difference between the actual federal funds rate and the federal funds rate prescribed by the three rules. We use tests for multiple structural changes to identify the eras so that knowledge of subsequent economic outcomes cannot influence the choice of the dates. With the original Taylor rule, monetary policy in the U.S. is characterized by a rules-based era until 1974, a discretionary era from 1974 to 1985, a rules-based era from 1985 to 2000, and a discretionary era from 2001 to 2013. With the modified Taylor rule, the rules-based era extends further into the 1970s and there is an additional rules-based period starting in 2006. We calculate various loss functions and find that economic performance is uniformly better during rules-based eras than during discretionary eras, and that the original Taylor rule provides the largest loss during discretionary periods relative to loss during rules-based periods.
Monetary policy; Taylor rules; Rules versus discretion; Tests for structural change;
C
2014
49
4
17
E52
E60
http://www.sciencedirect.com/science/article/pii/S0165188914002565
Nikolsko-Rzhevskyy, Alex
Papell, David H.
Prodan, Ruxandra
oai:RePEc:eee:dyncon:v:49:y:2014:i:c:p:160-1632015-01-10