PrefaceGiven the huge number of responses and comments to the first edition of our book, we felt obliged to come up with the second edition within such a short period of time. Stochastic Dynamic General Equilibrium modeling is certainly among the most rapidly changing fields in economics and we try to cover the most recent developments.In this edition, we reorganize and extend the presentation of solution methods in the former Chapters 1 through 4 and add major new material. Different from the first edition Chapter 1 serves as introduction, but does not present any solution techniques. It covers deterministic and stochastic representative agent models, elaborates on their calibration and evaluation, and ends with a characterization of the solution methods presented in Chapters 2 through 6. Chapter 2 now includes a section on the secondorder approximation of policy functions, the extended deterministic path algorithm in Chapter 3 is applied to an open economy model with a unit root, and we consider various techniques to speed up value function iteration in Chapter 4. In the second part of the book on heterogenous agent economies we split the former Chapter 7 on overlapping generations (OLG) models. The solution of OLG models with perfect foresight is now covered in Chapter 9, where we also consider different ways to compute the transitional dynamics of these models. A new application deals with a model of the demographic transition. OLG models with aggregate and individual uncertainty are solved in Chapter 10.Computer Code. As one of our main ambition, we keep the essential feature of this book to make all our programs that we used for the computations available on our website www.wiwi.uni-VIII Preface augsburg.de/vwl/maussner/. Therefore, the reader does not need to download any program code from other websites in order to replicate any of our findings, for example, on the statistics and characteristics of business cycle models or the dynamics of the distribution function in heterogeneous-agent economies. In the email correspondence with our readers this very feature of our book has often been pointed out as a crucial one by the graduate students in order to get started with his or her own research. If you are endowed with the programs for all the basic models of the business cycle, growth, and the distribution that we cover in this book, it is easy to start modifying them and work on your own projects.Numerical methods are introduced one after the other and every new method is illustrated with the help of an example. This book and its accompanying web page is particularly designed for those students with little or no prior computing experience. We start from the scratch and deliberately concentrate on models that are formulated in discrete time so that we are able to bypass the technical complexities that arise when stochastic elements are introduced into continuous time optimizing models. The computer code is available either in Gauss or Fortran or both. The former computer language is almost identical to Matla...
Abstract:We review the labor market implications of recent real business cycle and New Keynesian models that successfully replicate the empirical equity premium. We document the fact that all models reviewed in this paper that do not feature either sticky wages or immobile labor between two production sectors as in Boldrin, Christiano, and Fisher (2001) imply a negative correlation of working hours and output that is not observed empirically. Within the class of Neo-Keynesian models, sticky prices alone are demonstrated to be less successful than rigid nominal wages with respect to the modeling of the labor market stylized facts. In addition, monetary shocks in these models are required to be much more volatile than productivity shocks to match statistics from both the asset and labor market. * We would like to thank two anonymous referees for their comments. All remaining errors are ours.
We compare the numerical methods that are most widely applied in the computation of the standard business cycle model with flexible labor. The numerical techniques imply economically insignificant differences with regard to business cycle summary statistics. Furthermore, these results are robust with regard to the choice of the functional form of the utility function and the model's parameterization. In addition, the extended path approach, albeit time-consuming, and the Galerkin projection are found to be the most accurate methods, given that we have not used function approximations beyond the second degree.
Inflation is often associated with a loss for the poor in the medium and long term. We study the short-run redistributive effects of unanticipated inflation in a dynamic optimizing sticky price model of the business cycle. Agents are heterogeneous with regard to their age and their productivity. We emphasize three channels of the effect of inflation on income distribution: (1) factor prices, (2) "bracket creep," and (3) sticky pensions. Unanticipated inflation that is caused by monetary expansion is found to reduce income inequality. In particular, an increase of the money growth rate by one standard deviation results in a 1% drop of the Gini coefficient of disposable income if extra tax revenues are transferred lump-sum to the households.
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