Ronald Wendner

A Calibration Procedure of Dynamic CGE Models for Non-Steady State Situations Using GEMPACK

This paper is concerned with the development of a calibration procedure for dynamic CGE models for non-steady state situations. While the literature on calibration of dynamic models mainly concentrates on the process of calibration in the context of a steady state, this essay centers upon the calibration procedure for the case that the models state variables are not initially at their steady state values. Though this is the more realistic interpretation of a base years data set it raises a number of additional difficulties including intertemporal feedback and the requirement that the basic data are consistent with the intertemporal equations of the model. These difficulties are discussed and a procedure is presented which can cope with them. Finally, the procedure is applied to an overlapping generations growth model with foresight and the steps involved in calibration are illustrated in detail.

Do habits raise consumption growth

The paper shows that two of the most common specifications of habits - the multiplicative specification and the subtractive specification - may easily come to opposite conclusions regarding household behavior. In response to an increase in the strength of habits, young households increase the rate of consumption growth in the case of subtractive habits, while they lower the rate of consumption growth in the case of the multiplicative specification of habit formation. This result reflects the fact that, contrary to what is suggested by the literature so far, there exists no generally accepted definition of habits in terms of what habits imply for household behavior.

Ramsey, Pigou, heterogenous agents, and non-atmospheric consumption externalities

This paper analyzes the effects of non-atmospheric consumption externalities on optimal commodity taxation and on the social cost and optimal levels of public good provision. A negative consumption externality, by lowering the social cost of public good provision, may require the second-best level of public good provision to exceed the first-best level. If those households who are most important for building up the consumption reference level respond the least to commodity taxation, heterogeneity may imply an equity-efficiency tradeoff. This tradeoff is present only if the consumption externality is of the non-atmospheric type.

The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning

The standard neoclassical growth model with Cobb-Douglas production predicts a monotonically declining saving rate, when reasonably calibrated. Ample empirical evidence, however, shows that the transition paths of most countries’ saving rates exhibit a statistically significant hump-shaped pattern. Prior literature shows that CES production may imply a hump-shaped pattern of the saving rate (Gomez, 2008). However, the implied magnitude of the hump falls short of what is seen in empirical data. We introduce two non-standard features of preferences into a neoclassical growth model with CES production: hyperbolic discounting and short planning horizons. We show that, in contrast to the commonly accepted argument, in general (except for the special case of logarithmic utility) a model with hyperbolic discounting is not observationally equivalent to one with exponential discounting. We also show that our framework implies a hump-shaped saving rate dynamics that is consistent with empirical evidence. Hyperbolic discounting turns out to be a major factor explaining the magnitude of the hump of the saving rate path. Numerical simulations employing a generalized class of hyperbolic discount functions, which we term regular discount functions, support the results.

INTRODUCTION TO MACROECONOMIC DYNAMICS SPECIAL ISSUE: PUBLIC POLICY, EXTERNALITIES, AND ECONOMIC GROWTH

Externalities are a fundamental aspect of any modern interdependent economy. The fact that agents interact with one another makes it inevitable that their decisions will influence one another directly, in addition to any indirect impact that may occur through the market place. Ever since the earliest stages of the discipline, externalities have been of prime concern to economists, who have long argued that they provide an important motive for (economic) decision making. To cite one prominent example, in The Theory of Moral Sentiments, Adam Smith notes that “Though it is in order to supply the necessities and conveniences of the body that the advantages of external fortune are originally recommended to us, yet we cannot live long in the world without perceiving that the respect of our equals, our credit and rank in the society we live in, depend very much upon the degree in which we possess, or are supposed to possess those advantages. The desire of becoming the proper objects of this respect . . . is perhaps the strongest of all our desires†[Smith (1759, pp. 348–349)]. In modern terminology, Adam Smith is referring to a consumption externality.

Ramsey, Pigou, and a Consumption Externality

This paper analyzes the effects of consumption externalities on optimal taxation and on the social cost and optimal levels of public good provision. If public and private goods are Hicksian complements and no lump sum taxes are available, the second-best level of public good provision can exceed the first-best level. In contrast to economies without externalities, this result even holds for Cobb-Douglas economies with homogeneous agents. Heterogeneity of agents raises the second-best commodity tax rate due to equity considerations, but lowers the tax rate due to the concern for externality-correction.

Finite Horizon, Externalities, and Growth

This paper investigates the impact of externalities on economic growth in an AK model. In contrast to the existing literature, the paper considers finitely-lived agents along the continuous time, overlapping generations literature. A series of new results, not holding for infinitely-lived agent economies, emerge. Consumption externalities generally introduce a distortion (inefficiency), even when labor supply is exogenous and there is no concurrent production externality. A negative consumption externality implies overconsumption, and growth is lower than optimal. Transition paths are considered. The model employed encompasses the infinitely-lived agent economy as a special case, thus helps understanding the differences in results between finite-horizon overlapping-generations and infinitely-lived agents economies.

Do positional preferences for wealth and consumption cause inter-temporal distortions?

This paper derives necessary and sufficient conditions under which positional preferences do not induce inter-temporal distortions. When labor supply is exogenous, positional preferences for consumption have been shown to be non-distortionary for a class of models. However, it has not been explored whether the same holds when households also exhibit positional preferences for wealth. The analysis identifies a restricted homogeneity-property which, when not satisfied, induces positional preferences to be distortionary, despite inelastic labor supply. Without positional preferences for wealth, a constant marginal rate of substitution-property is necessary and sufficient for a consumption positionality to be non-distortionary. Once a household also has positional preferences for wealth in addition, the consumption positionality almost always becomes distortionary, as the implied effects of the positional concerns induce opposing effects on a households saving behavior. Under a constant marginal rates of substitution-property, these opposing effects exactly offset each other.

Positional Preferences, Endogenous Growth, and Optimal Income- and Consumption Taxation

This paper analyzes the impact of positional preferences, exhibiting conspicuous consumption and conspicuous wealth, on optimal consumption- and income taxes, for an endogenous growth model with public capital. Positional preferences raise the endogenous growth rate if the elasticity of intertemporal substitution is larger than one. Even if labor supply is exogenous, the consumption externalities introduce distortions so long as preferences are wealth-dependent, and with or without the presence of conspicuous wealth. Consequently, optimal consumption- and income taxes differ from zero. Numerical simulations present the effects of fiscal policy on the balanced growth path and transitional dynamics.

Saving Rate Dynamics in the Neoclassical Growth Model - Hyperbolic Discounting and Observational Equivalence

The standard neoclassical growth model with Cobb-Douglas production predicts a monotonically declining saving rate, when reasonably calibrated. Ample empirical evidence, however, shows that the transition path of a country’s saving rate exhibits a rising or non-monotonic pattern. In important cases, hyperbolic discounting, which is empirically strongly supported, implies transitional dynamics of the saving rate that accords well with empirical evidence. This holds true even in a growth model with Cobb-Douglas production technology. We also identify the cases where hyperbolic discounting is observationally equivalent to exponential discounting. In those cases, hyperbolic discounting does not affect the saving rate dynamics. Numerical simulations employing a generalized class of hyperbolic discounting functions that we term regular discounting functions support the results.