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7 - Default and Aggregate Fluctuations in Storage Economies
- Edited by Timothy J. Kehoe, University of Minnesota, T. N. Srinivasan, Yale University, Connecticut, John Whalley, University of Western Ontario
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- Book:
- Frontiers in Applied General Equilibrium Modeling
- Published online:
- 14 January 2010
- Print publication:
- 17 January 2005, pp 127-150
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Summary
ABSTRACT: In this paper we extend the work of Chatterjee, Corbae, Nakajima, and Ríios-Rull (unpublished manuscript, University of Pennsylvania, 2002) to include aggregate real shocks to economic activity. The model, which includes agents that borrow and lend and a competitive credit industry, and which has endogenous default and credit limits, allows us to explore the extent to which aggregate events are amplified or smoothed via the mechanism of household bankruptcy filings. In the model agents are subject to shocks to earnings opportunities, to preferences, and to their asset position and borrow and lend to smooth consumption. On occasion, the realization of the shocks is bad enough so that agents take advantage of the opportunities provided by the U.S. Bankruptcy Code and file for bankruptcy, which wipes out their debt at the expense both of being banned from borrowing for a certain amount of time and of incurring transaction costs. The incentives to default are time-varying and depend on the individual state and general economic conditions. The model is quantitative in the sense that its fundamental parameters are estimated using U.S. data, and the model can replicate the aggregate conditions of the U.S. economy. Especially, the model accounts for the very high number of bankruptcies in the past few years. We report statistics produced by experiments with model economies with various aggregate shocks. Based on these experiments, we analyze the reaction of households to various aggregate real shocks and the interaction between households and the credit industry, and we discuss the aggregate implications of these actions and the direction in which the model might be further extended.
6 - Consumption Smoothing and Extended Families
- Edited by Mathias Dewatripont, Université Libre de Bruxelles, Lars Peter Hansen, University of Chicago, Stephen J. Turnovsky, University of Washington
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- Book:
- Advances in Economics and Econometrics
- Published online:
- 06 January 2010
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- 20 January 2003, pp 209-242
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INTRODUCTION
Agricultural economies are characterized by substantial fluctuations in individual income. Someof these fluctuations affect all members of the society, whereas others are individual specific. Income fluctuations do not have to translate into consumption fluctuations (that people abhor given convex preferences). However, all too often, income fluctuations induce (perhaps mitigated) consumption fluctuations. Moreover, there is evidence that idiosyncratic risk is not fully insured even within relatively small and closed groups. Udry (1994), for instance, discussing his evidence from rural Nigeria, states that “it is possible to reject the hypothesis that a fully Pareto-efficient risk-pooling allocation of village resources is achieved through these loans. The mutual insurance network available through these loans to households in rural northern Nigeria is important, but it is in complete” (p. 523).
We think of agricultural societies (villages and islands) as both having undeveloped financial markets and being small enough so that anonymity does not exist within the village. At the same time, however, information about idiosyncratic shocks could be difficult to convey to the outside world. In other words, these societies might have limited enforcement capability. The lack of developed financial markets prevents the members of these societies from borrowing and lending and from insuring both among themselves and with the outside world. The fact that, within the economy (or smaller subsets of agents), information problems are negligible, while enforceability problems might be serious, suggests the modeling framework to use when thinking of what type of institutions may develop to substitute for the missing markets. In short, the only type of arrangement that may be possible is self-enforcing contracts, that is, contracts that are sustained by the mutual interest of the parties of maintaining the relationship.
14 - Simulation-based estimation of a non-linear, latent factor aggregate production function
- Edited by Roberto Mariano, University of Pennsylvania, Til Schuermann, AT&T Bell Laboratories, New Jersey, Melvyn J. Weeks, University of Cambridge
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- Book:
- Simulation-based Inference in Econometrics
- Published online:
- 04 August 2010
- Print publication:
- 20 July 2000, pp 359-399
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Introduction
The purpose of this chapter is to explore in detail a number of econometric issues associated with the specification and estimation of a non-linear, latent variable aggregate production function developed in Krusell, Ohanian, Rios-Rull, and Violante (1995) (hereafter KORV). In particular, we discuss how different simulation-based methods can be used to address a number of difficult problems associated with our particular model, and evaluate the relative performance of these methods. Since some of these issues have not been analyzed in much detail using simulation-based methods, the findings reported here may be of use to other researchers working in similar environments.
In our earlier paper, we developed an aggregate production function that differs substantially from the standard production function used in macro-economic analysis. The development of our alternative model was motivated by a key fact of the US economy. In the last 30 years, a substantial difference has emerged in the growth rates of wages for workers with different educational levels. John, Murphy, and Pierce (1993) report that the median wage earner among college graduates experienced a 15 percent increase in inflation-adjusted wages between 1964 and 1988, while the median wage earner among high school graduates experienced a 5 percent decline in real wages over the same period. The widening gap in the relative wage of skilled or unskilled labor is commonly referred to as the “wage premium” or “skill premium.”