Dynamic General Equilibrium Modeling

Abstract

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...

Wealth Inequality and the Optimal Level of Government Debt

“…The downside of this greater precision of the wealth distribution is however that the computation of the stationary wealth distribution is more time consuming (see for example Heer and Maussner (2009) as a reference on different methods for computing the stationary wealth distribution and their performance in terms of precision and computing time). Therefore finding the 'optimal' path of transition which involves iterating over the whole path of interest rates, wage rates and tax rates is a difficult task.…”

Demographic change and the labour share of income

“…Other parameter values are taken from the literature. The coefficient on capital Į = 0.5 is taken from de la Croix and Michel (2002), the coefficient of relative risk aversion ș = 2 from Heer and Maussner (2005) and the total factor productivity A = 100 from Fanti and Gori (2007). The private subjective discount rate ȕ = 1/(1+ȡ) in OLG models ranges from 0.3 (de la Croix and Michel 2002) to 0.75 (Ambler, 2000).…”

The Welfare Effects of Pension Reforms in an Aging Economy

“…Maußner [5]; Muto et al [6]; Rausch and Rutherford [7]) to study the complex issues involved in the aging economy.…”