This paper builds a dynamicgeneralequilibrium model that emphasizes banks’ comparative advantage in monitoring …nancial distress in order to explain …rms’ choice between bank loans and market debt. Banks can deal with …nancial distress more cheaply than bond holders, but this requires a higher initial expenditure proportional to the loan size. In contrast, bond issues may involve a small …xed cost. Entrepreneurs’ choice of bank or bond …nancing depends on their net worth. The steady state of the model can explain why smaller …rms tend to use more bank …nancing and why bank …nancing is more prevalent in Europe than in the US. We …nd that a higher …xed cost of issuing market debt is a key factor in replicating the higher use of bank …nancing relative to market debt in Europe. Finally, we …nd that for plausible calibrations one can predict aggregate quantities just as well using a model with only one type of loan with costs of …nancial distress that are an average of the costs for bank loans and market debt.
Abstract—The equilibrium analyses under the classical growth framework mainly concern production processes so far and the utility-maximization of consumers is not considered sufficiently. Treating a consumer as a producer of labor or land-use right etc. with a utility parameter, this paper presents equilibrium formulas taking account of the utility-maximization of consumers, which may facilitate the analysis of dynamicgeneralequilibrium involving both profit-maximizing firms and utility-maximizing consumers under the classical growth framework. For concreteness, some numerical examples with Cobb-Douglas production and utility functions are utilized to illustrate the method of the equilibrium analysis involving utility-maximizing consumers.
This paper focuses on the likely consequences of the reunification of the two Koreas. We are interested in several questions. There is little doubt that North Korea will benefit from almost any change in economic policy. We examine the effects of various kinds of reform on the North Korean economy. These range from internal reforms that encourage the establishment of markets to complete economic integration with the South. While happenings in the North are of vital importance to the lives of millions, the questions facing the South are more subtle, and hence have less obvious answers. Will the South benefit on net from reunification? Who will gain and who will be harmed? South Korea is already an open economy. How large can the benefits of preferential trade with an economy as backward as the North be? How much will South Korean wages and standards of living be lowered due to competition from workers in the North? We attempt to address these questions using a calibrated dynamicgeneralequilibrium model of the North and South Korean economies.
While these ideas have been tested in a number of empirical studies, they are struggling to find their way into generalequilibrium modelling, which has led to a good deal of criticism. As Ghiglino (2002) pointed out, endogenous growth theory has had some success in explaining the observed data related to the process of economic growth, but the results of the models are typically very sensitive to their microeconomic structure. Therefore, valuable insights can be gained by integrating endogenous growth theory into the framework of generalequilibrium theory. The motivation behind our work is to construct and develop a dynamicgeneralequilibrium model with endogenous growth, driven by investment in education and R&D, which will enable us to analyze the impact of these determinants on economic growth in the context of complex mutual activity of economic agents that is taking place in their socio-economic environment. Our contribution to the existing model literature is a focus on a small open economy case of Slovenia, where a large part of the technological change comes from abroad. In this article, we focus on integrating education and human capital as major endogenous growth elements into an inter-temporal generalequilibrium framework for Slovenia.
The paper documents a dynamicgeneralequilibrium model for Colombia based on national accounts from 1999. The paper is part of a project in- tended to develop a capacity for the the design, specification, and application of computable models within the Colombian Ministry of Finance and Depart- ment of National Planning. Our analytical framework includes both forward- looking expectations and Harris-Todaro labor markets. In the present paper we compare numerical results from the dynamic model with simpler static and steady-state formulations to highlight the importance of transitional effects in evaluating tax policy reform. Our applications include measurement of the marginal cost of funds from different tax bases and the evaluation of discrete changes in tariff structure. The structure of the labor and intermediate credit markets have important implications for the ranking alternative tax reform proposals.
While these ideas have been tested in a number of empirical studies, they are struggling to find their way into generalequilibrium modelling, which has led to a good deal of criticism. As Ghiglino (2002) pointed out, endogenous growth theory has had some success in explaining the observed data related to the process of economic growth, but the results of the models are typically very sensitive to their microeconomic structure. Therefore, valuable insights can be gained by integrating endogenous growth theory into the framework of generalequilibrium theory. The motivation behind our work is to construct and develop a dynamicgeneralequilibrium model with endogenous growth, driven by investment in education and R&D, which will enable us to analyze the impact of these determinants on economic growth in the context of complex mutual activity of economic agents that is taking place in their socio-economic environment. Our contribution to the existing model literature is a focus on a small open economy case of Slovenia, where a large part of the technological change comes from abroad. In this article, we focus on integrating R&D as a major endogenous growth element into an inter-temporal generalequilibrium framework for Slovenia.
RCK model relaxes the Solow model’s assumption that the saving rate is ex- ogenous and fixed. RCK model is setup in dynamicgeneralequilibrium (DGE) framework and thus has micro foundation. Saving rate is endogenously derived in this model. One shortage is that capital stock in steady state is less than golden rule level and capital stock satisfying golden rule is unstable in this model. The other is that assumption of living forever does not conform to the reality and there are no old people also called retired people in this model   .
China’s dramatic economic growth during the past three decades is characterised by rapid industrialisation that was fuelled by a large pool of rural surplus labour in the agricultural sector. The large scale movement of labour from the agricultural to the industrial and services sectors witness in recent years raises pertinent questions about its sustainability: is there still a pool of surplus labourers in rural China? If there is, how large is that pool and how long can it last? These questions are hotly debated in China. The present study contributes to that discussion by providing a quantitative framework to estimate the size of the surplus labour under various scenarios. Applying a dynamicgeneralequilibrium model of the Chinese economy, we present our estimates of the size of the rural labour surplus from 1997-2005 and forecast its size from 2006-2015. Two scenarios are presented in this paper, one is business-as-usual; the other with accelerated improvement of labour productivity in China’s agricultural sector.
This paper constructs a multi-sector dynamicgeneralequilibrium model for a trading economy. We incorporate three major factors of production: capital, skilled labor & unskilled labor. We solve and calibrate the model using data from Japan and Korea. We then consider changes to immigration policy in both countries. We are able to examine the effects on output, consumption, wages, and utility. We do this for both the new steady state and for the time-path leading to that steady state. In addition, we are able, if we so wish, to impose a series of unrelated macroeconomic shock to the model. This has the advantage of allowing us to calculate confidence bands around our policy impulse response functions.
This paper proposes a methodology for measuring the size and properties of the shadow econ- omy based on a dynamic deterministic generalequilibrium model. While other authors have used DGE models as well, nearly all of them disregard the trend component found in most eco- nomic time series. In our methodology, we exploit the dynamics of observed trends to account for both the size and the cyclicality of the shadow economy, as they impose a set of equilibrium restrictions over the growth rates of the model variables (including shadow sector output). Ignor- ing these restrictions—or imposing ad-hoc growth rates to quantify the dynamics of the shadow economy—may produce biased results. 1
We propose a methodology for measuring the size and properties of the shadow economy. We use a two-sector dynamic deterministic generalequilibrium model with four different trends: hours worked, investment-specific productivity, formal productivity, and shadow productivity. We find that the shadow productivity trend is endogenous, in the sense that it is an exact function of model parameters and the other three trends. We also document that, in order to be consistent with observed (real-world) trend growths, the shadow sector needs to exhibit increasing returns to scale, which is contrary to the standard procedure of imposing decreasing returns to this sector. We apply our methodology to a set of seven Latin American and Asian countries and document several empirical regularities that emerge from our analysis, the most important one being that the volatility of shadow sector output is considerably larger than the one in formal sector output.
Using a dynamic CGE model this paper explores the effects of reform of the household registration (hukou) system in China on economic growth and rural – urban income equality over the period 2010 to 2020. It addresses the specific questions whether reform of the household registration system together with the removal of other institutional barriers to rural labour mobility can accelerate rural labour mobility, and whether the enhanced labour mobility can improve the efficiency of the allocation of labour with the result of increasing labour productivity and reducing rural-urban income inequality.
The one-child population policy implemented since the late of 1970s in China has decelerated the growth of China’s working age population since the 1990s. This growth is 0.9 in 2008 and it will decline to 0.5 in 2010 and from 2015, it will turn sharply negative, resulting declining labour force in China. What is the effect of the decline of the growth of working age population on China’s economic growth? We conducted a counterfactual simulation by assuming that the growth rate of working age population will keep at its 2008 level throughout the simulation period (2008- 2020) and all other exogenous variables are the same as the baseline scenario. We found that if the growth rate of working age population does not decline then the average annual growth rate of real GDP from 2008 to 2020 will be 7.87 percent (refer to Table A1). This implies that the declined growth rate of working age population as a result of sustained low fertility since the late of 1980s will reduce the average annual growth rate of real GDP by 0.31 percentage points from 2008 to 2020 (the annual growth rate of real GDP with the declining growth of labour supply is 7.56 percent). What is the suitable policy to mitigate this negative effect of declining growth of labour supply? This paper sheds lights on the view that a more efficient allocation of labour between sectors is likely to counter balance the negative effect of declining labour force. Using a dynamic CGE model of China, we analyse the effects of removing labour market distortions that hinder the movement of labour from agricultural to manufacturing and services sectors over the period 2008 to 2020 in the context of declining growth of labour supply in China.
From Figure 2, let us we concentrate on 𝑋 𝑙 𝑐 and 𝑋 ℎ 𝑐 . It is not difficult to prove that after a finite time, inheritance of all individual come within the interval [𝑋 𝑙 𝑐 , 𝑋 ℎ 𝑐 ] , provided probability values remain strictly positive and non-unitary (the next sub-section shows that in the long-run equilibrium also it actually takes non-unitary value). Note that, in figure 2 all lines cut the 45° line from below. Hence, if the model was a deterministic one then 𝑥 or 𝑋 ℎ 𝑐 would be a long run stable equilibrium. That is, the process might end up at 𝑥 or 𝑋 ℎ 𝑐 after infinite time interval. Because of the stochastic nature of the model under discussion, no 𝑋 𝑡+2 can remain infinitely on the same inheritance path on which 𝑋 𝑡 lies. There is always a positive probability of switching the path. Therefore, given a 𝑋 𝑡 either below 𝑋 𝑙 𝑐 𝑜𝑟 above 𝑋 ℎ 𝑐 , this dynamic process brings 𝑋 𝑡+𝑛 within the stated interval after some arbitrary n (finite) periods. Once all 𝑋 𝑡 s come within the interval [𝑋 𝑙 𝑐 , 𝑋 ℎ 𝑐 ] , it is impossible to get out of that interval; although population will never converge at a point (or on some points). For certain parametric restriction simulation result (shown in section
This paper quantitatively studies the welfare implications of bank capital requirements in a dynamicgeneralequilibrium banking model. In the proposed model, because of government bailouts, banks have incentives to risk-shift, leading to inefficient lending to risky-low- productivity firms. Bank capital requirements reduce risk-shifting incentives and improve welfare. The calibrated version of the model suggests that an 8% minimum Tier 1 capital requirement brings about a significant welfare improvement of 1.1% of lifetime consumption. This capital requirement is 2 percentage points higher than the level under Basel III and current U.S. regulation. Moreover, from a social perspective, the bank cost of equity in this model is not expensive. Welfare gains remain sizable even at a 25 percent minimum capital requirement. Overall, my results highlight the need to re-examine current bank capital regulations.
The most important feature of the Solow model, is that it is a simple and abstract representation of complex economy. The Solow growth model is to simple and too abstract. Solow growth model do justice in growth of macroeconomic equilibrium and it consider various sectors such as households and individuals with different capital abilities incomes, and roles in society, various fields, and mix social interactions. The Solow model cuts through these complications by constructing simple are good economy will small reference to personal decisions. Therefore the Solow model should be through of as a initial point and a springboard for riche models. Economic growth and development are dynamic process and thus necessitate dynamic models regarding its simplicity the Solow Growth Model is dynamicgeneralequilibrium model. The Solow model has many important key features of dynamicgeneralequilibrium models emphasized.
The common practice of solving a dynamicgeneralequilibrium model of a(n) (often competitive) market economy by solving an associated programming problem, that is, an optimisation problem, is evidence of the fatal confusion in the minds of much of the economics profession between shadow prices and market prices and between transversality conditions that are an integral part of the solution to an optimisation problem and the long-term expectations that characterise the behaviour of decentralised asset markets. The efficient markets hypothesis assumes that there is a friendly auctioneer at the end of time - a God-like father figure - who makes sure that nothing untoward happens with long-term price expectations or (in a complete markets model) with the present discounted value of terminal asset stocks or financial wealth.
generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components.