1,721,043 research outputs found
Solution of continuous-time dynamic models with inequality constraints
No full textI propose a simple method to compute the transition process in continuous-time dynamic equilibrium models with occasionally binding inequality constraints. By augmenting the dynamic system with an auxiliary variable standard algorithms are able to solve the extended dynamic system taking the inequality into account. The procedure can handle any sequence of regimes with binding and non-binding constraints and determines the exact pattern of regimes endogenously. (C) 2013 Elsevier B.V. All rights reserved
The Spending Multiplier in the Medium Run
No full textMost of the discussion about fiscal stimulus focuses on the multiplier of government spending on impact. In this paper we shift the focus to the multiplier at the end, i.e., to the period in which a deficit spending program terminates. We show that recent time-series analyses and neoclassical as well new Keynesian business cycle models predict that the multiplier turns negative before spending expires. This means that aggregate output at the time of expiry of fiscal stimulus is lower than it could be without deficit spending. Here, we show why this phenomenon is a general outcome of mainstream business cycle theory and explain the underlying mechanism. Using phase diagram analysis, we prove that the aggregate capital stock at the time of expiry of fiscal stimulus is lower than it would be without a deficit spending program. This fact explains why aggregate output is below its laissez faire level as well
A NOTE ON VARIABLE CAPITAL UTILIZATION IN GROWTH AND BUSINESS CYCLE THEORY
No full textIt was always considered to be a major achievement of modern business cycle economics that it was solidly grounded in neoclassical growth theory. Preserving this joint foundation, however, imposes a discipline on the specification of models with variable capital utilization. In this note we show that conventional specifications of the depreciation cost of capital utilization and the labor supply elasticity, introduced into business cycle theory to generate a satisfactory amplification of shocks, entail counterfactual growth dynamics: the positive association between capital stock and GDP along the growth path turns negative. Across economies with access to the same technology, the economy with the lowest capital stock per capita is predicted to produce the highest output per capita. We compute lower and upper bounds for the involved elasticities between which these counterfactual dynamics are avoided
Numerical solution of dynamic equilibrium models under Poisson uncertainty
No full textWe 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. (C) 2013 Elsevier B.V. All rights reserved
Quantifying Optimal Growth Policy
No full textWe determine the optimal growth policy within a comprehensive endogenous growth model. The model accounts for important elements of the tax transfer system and for transitional dynamics. It captures the three main growth engines based on standard ingredients in order to understand the quantitative policy and welfare implications of the existing theory. Our calibrated model indicates that the current policy leads to severe underinvestment in both R&D and physical capital, implying that both R&D and capital investment subsidies should be increased substantially. We argue that previous research has overlooked a strong evidence for the welfare significance of the quest for the optimal growth policy by failing to calibrate the distortionary tax system
Natural Disasters and Macroeconomic Performance
Full text linkRecent empirical research has shown that output and GDP per capita in the after-math of natural disasters are not necessarily lower than before the event. In many cases,both are not significantly affected and, surprisingly, sometimes they are found to respondpositively to natural disasters. Here, we propose a novel economic theory that explains theseobservations. Specifically, we show that GDP is driven above its pre-shock level when naturaldisasters destroy predominantly durable consumption goods (cars, furniture, etc.). Disastersdestroying mainly productive capital, in contrast, are predicted to reduce GDP. Insignificantresponses of GDP can be expected when disasters destroy both, durable goods and productivecapital. We extend the model by a residential housing sector and show that disasters may alsohave an insignificant impact on GDP when they destroy residential houses and durable goods.We show that disasters, irrespective of whether their impact on GDP is positive, negative, orinsignificant, entail considerable losses of aggregate welfare
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