# Journal of Economic Dynamics and Control

Published by Elsevier

Online ISSN: 0165-1889

Published by Elsevier

Online ISSN: 0165-1889

Publications

Article

Numerous optimal control models analyzed in economics are formulated as discounted infinite time horizon problems, where the defining functions are nonlinear as well in the states as in the controls. As a consequence solutions can often only be found numerically. Moreover, the long run optimal solutions are mostly limit sets like equilibria or limit cycles. Using these specific solutions a BVP approach together with a continuation technique is used to calculate the parameter dependent dynamic structure of the optimal vector field. We use a one dimensional optimal control model of a fishery to exemplify the numerical techniques. But these methods are applicable to a much wider class of optimal control problems with a moderate number of state and control variables.

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Article

"This paper extends the Cass-Koopmans optimal growth model to allow for endogenous fertility choice. It is shown that if agents choose their fertility rate, then the net rate of return on capital (marginal product of capital minus the population growth rate) may not be monotonically decreasing in capital. In this case, multiple steady states and growth paths may emerge, which can explain the persistent differentials in income between poor and rich countries, as well as the existence of development miracles and disasters. The paper provides also empirical evidence which supports the existence of multiple convergence groups and is consistent with the theoretical model."

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Article

"The standard neoclassical model cannot explain persistent migration flows and lack of cross-country convergence when capital and labor are mobile. Here we present a model where both phenomena may take place.... Our model is based on the Arrow-Romer approach to endogenous growth theory. We single out the importance of a (however weak) scale effect from the size of the workforce.... The main conclusion of this simple model is that lack of convergence, or even divergence, among countries is possible, even with perfect capital mobility and labor mobility."

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Article

The author presents "a dynamic version of the Harris-Todaro migration model where a finite population of infinitely-lived Bayesian agents choose consumption and migration decision rules as a function of their histories. The agents do not know the production functions in the two sectors and learn about them through wage draws that they receive from the stochastic production functions. The government knows the true production functions but is uninformed about the agents' beliefs, and the actual wage draws they observe. The government maximizes its welfare function using wage subsidies in the two sectors, and a migration tax. We solve the agents' dynamics programming problem, and then use the solution to solve the government's dynamic programming problem. We study the effects of government policies on the population distribution, and illustrate the model by numerically solving a particular parametric example."

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Article

As the introduction of financial transaction taxes is increasingly discussed by political leaders we explore possible consequences such taxes could have on markets. Here we examine how "stylized facts", namely fat tails and volatility clustering, are affected by different tax regimes in laboratory experiments. We find that leptokurtosis of price returns is highest and clustered volatility is weakest in unilaterally taxed markets (where tax havens exist). Instead, tails are slimmest and volatility clustering is strongest in tax havens. When an encompassing financial transaction tax is levied, stylized facts hardly change compared to a scenario with no tax on all markets.

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Article

"This paper develops a search-theoretic framework for analyzing migration decisions of workers who can only observe the quality of a location by migrating to the location after accepting a job there. After learning the location quality, the worker can stay at the current job, search locally at the same location, or search for a job at another location (leading to repeat migration). This paper develops the properties of optimal search, migration, and repeat migration decisions, and finds how revealed location quality influences the tradeoffs between local search and repeat migration. The effects of search costs and better job opportunities on the reservation levels of wages and revealed quality levels are also determined."

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Article

Governments have long worried about their role in promoting technological innovation. Historically, both the generation of general purpose knowledge and project- or industry-specific research have been supported. The purpose of this paper is to study the optimal government policy regarding general and specific R&D and its relationship to economic growth. We develop an endogenous growth model where we distinguish between these two types of R&D activities. General R&D is an activity completely separated from the production process. Specific R&D on the other hand is closely linked to production activities. We find that a uniform subsidy to both types of R&D will not always be appropriate and that the correct subsidy mix will increase the growth rate.

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Article

When modelling government-private sector relations in economics as a Stackelberg game, the optimization problems of both players are strongly coupled. If the government and the private sector have similar or contradictory points of view on some issues, this will lead to a proportionality relation between some of the weighting matrices in the players' cost functions. In this case an appropriate change of variables leads to a new Stackelberg game where coupling appears only in terminal conditions.

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Article

Danish mortgage loans have several features that make them interesting: Short-term revolving adjustable-rate mortgages are available, as well as fixed-rate, 10-, 20- or 30-year annuities that contain embedded options (call and delivery options). The decisions faced by a mortgagor are therefore non-trivial, both in terms of deciding on an initial mortgage, and in terms of managing (rebalancing) it optimally.We propose a two-factor, arbitrage-free interest-rate model, calibrated to observable security prices, and implement on top of it a multi-stage, stochastic optimization program with the purpose of optimally composing and managing a typical mortgage loan. We model accurately both fixed and proportional transaction costs as well as tax effects. Risk attitudes are addressed through utility functions and through worst-case (min–max) optimization. The model is solved in up to 9 stages, having 19,683 scenarios. Numerical results, which were obtained using standard soft- and hardware, indicate that the primary determinant in choosing between adjustable-rate and fixed-rate loans is the short–long interest rate differential (i.e., term structure steepness), but volatility also matters. Refinancing activity is influenced by volatility and, of course, transaction costs.

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Article

During the first half of the 20th century the length of the workweek in the U.S. declined, and its distribution across wage deciles narrowed. The hypothesis is twofold. First, technological progress, through the rise in wages and the decreasing cost of recreation, made it possible for the average U.S. worker to afford more time off from work. Second, changes in the wage distribution explain the changes in the distribution of hours. A general equilibrium model is built to explore whether such mechanisms can quantitatively account for the observations. The model is calibrated to the U.S. economy in 1900. It predicts 82% of the observed decline in hours, and most of the contraction in their dispersion. The decline in the price of leisure goods accounts for 7% of the total decline in hours.

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Article

The paper shows that US GDP velocity of M1 money has exhibited long cycles around a 1.25% per year upward trend, during the 1919-2004 period. It explains the velocity cycles through shocks constructed from a DSGE model and annual time series data (Ingram et al., 1994). Model velocity is stable along the balanced growth path, which features endogenous growth and decentralized banking that produces exchange credit. Positive shocks to credit productivity and money supply increase velocity, as money demand falls, while a positive goods productivity shock raises temporary output and velocity. The paper explains such velocity volatility at both business cycle and long run frequencies. With filtered velocity turning negative, starting during the 1930s and the 1987 crashes, and again around 2003, results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times.

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Article

The primary aim of the paper is to place current methodological discussions in macroeconometric modeling contrasting the ‘theory first’ versus the ‘data first’ perspectives in the context of a broader methodological framework with a view to constructively appraise them. In particular, the paper focuses on Colander’s argument in his paper “Economists, Incentives, Judgement, and the European CVAR Approach to Macroeconometrics” contrasting two different perspectives in Europe and the US that are currently dominating empirical macroeconometric modeling and delves deeper into their methodological/philosophical underpinnings. It is argued that the key to establishing a constructive dialogue between them is provided by a better understanding of the role of data in modern statistical inference, and how that relates to the centuries old issue of the realisticness of economic theories.

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Article

This paper reexamines Goodwin's business cycle model with nonlinear acceleration principle that gives rise to cyclic oscillations when its stationary state is locally unstable. Fixed time delay in the investment is replaced by continuously distributed time delay. It is first demonstrated that the latter has stronger stabilizing effect than the former and, second, that multiple limit cycles may coexist when the stationary state is locally stable.

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Article

We study the exploration and development of oil and gas fields in the U.S. over the period 1955–2002. We make four contributions to explain the economic evolution of the oil and gas industry during this period. First, we derive a testable model of the dynamics of competitive oil and gas field exploration and development. Second, we show how to empirically distinguish Hotelling scarcity effects from effects due to technological change. Third, we test these hypotheses using statewide panel data of exploration and development drilling. We find that the time paths of exploration, development and total wells drilled are dominated by Hotelling scarcity effects. Finally, we offer an explanation for why fixed costs from exploration can make the contracting equilibrium in the mineral rights market efficient.

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Article

This paper contributes empirically to our understanding of informed traders. It analyzes traders' characteristics in a foreign exchange electronic limit order market via anonymous trader identities. We use six indicators of informed trading in a cross-sectional multivariate approach to identify traders with high price impact. More information is conveyed by those traders' trades which--simultaneously--use medium-sized orders (practice stealth trading), have large trading volume, are located in a financial center, trade early in the trading session, at times of wide spreads and when the order book is thin.

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Article

We build an investment model based on Stochastic Programming. In the model we buy at the ask price and sell at the bid price. We apply the model to a case where we can invest in a Swedish stock index, call options on the index and the risk-free asset. By reoptimizing the portfolio on a daily basis over a ten-year period, it is shown that options can be used to create a portfolio that outperforms the index. With ex post analysis, it is furthermore shown that we can create a portfolio that dominates the index in terms of mean and variance, i.e. at given level of risk we could have achieved a higher return using options.

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Article

The US Federal Reserve cut interest rates more vigorously in the recent recession than the European Central Bank did. By comparison with the Fed, the ECB followed a more measured course of action. We use an estimated dynamic general equilibrium model with financial frictions to show that comparisons based on such simple metrics as the variance of policy rates are misleading. We find that – because there is greater inertia in the ECB's policy rule – the ECB's policy actions actually had a greater stabilizing effect than did those of the Fed. As a consequence, a potentially severe recession turned out to be only a slowdown, and inflation never departed from levels consistent with the ECB's quantitative definition of price stability. Other factors that account for the different economic outcomes in the Euro Area and US include differences in shocks and differences in the degree of wage and price flexibility.

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Article

This paper suggests a new approach to solving the one-sector stochastic growth model using the method of parameterized expectations. The approach is to employ a `global’ genetic algorithm search for the parameters of the expectation function followed by a `local’ gradient-descent optimization method to ensure fine-tuning of the approximated solution. We use this search procedure in combination with either polynomial or neural network specifications for the expectation function. We find that our approach yields highly accurate solutions in the case where an exact analytic solution exists as well as in cases where no closed-form solution exists. Our results further suggest that neural network specifications for the expectation function may be preferred to the more commonly used polynomial specifications.

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Article

Optimal bank regulation is studied in a model where bank quality is private information and bank portfolio choice is subject to moral hazard. Regulators wish to control bank risk solely because high risk adversely affects a bank incentives to improve its mean return. Numerical methods are developed to study the model. Capital regulation alone has a limited ability to separate types. Including ex post fines achieve separation at lower cost, resulting in improved welfare. Low-quality banks are fined on high returns in order to control risk-taking. High-quality banks face fines on lower returns mainly to ensure truth-telling by low-quality banks. High-quality banks bear the full cost of regulation.

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Article

This paper examines the impact of voluntary export restraints (VERs) in an international duopoly modeled as a differential game. With a Ramsey capital accumulation dynamics, the game admits multiple steady states, and a VER cannot be ‘voluntarily’ employed by the foreign firm in case of Cournot behavior in demand substitutes. Hence, the dynamic framework confirms the results of the VERs literature with static interaction in output levels. In the case of price behavior, the adoption of an export restraint may increase the profits of both firms if products are substitutes and the steady state is ‘market-driven’. However, contrary to the acquired wisdom based upon the static approach, the dynamic analysis also admits an equilibrium outcome, identified by the Ramsey golden rule, where the incentive to adopt a VER is ruled out, irrespective of whether firms are quantity- or price-setters.

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Article

We outline the case for supporting self-insurance by imposing a tax on external borrowing in a model of an emerging market. Entrepreneurs finance tangible investments via bank intermediation of foreign borrowing, exposing the economy to negative fire-sale externalities at times of deleveraging; a risk that increases with the ratio of aggregate external borrowing to international reserves. Price taking economic agents ignore their marginal impact on the expected cost of a deleveraging crisis. The optimal borrowing tax reduces the distorted activity, external borrowing, and induces borrowers to co-finance the precautionary hoarding of international reserves.

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Article

The information content of prices is a central problem in the general equilibrium analysis of competitive markets. Rational expectations equilibrium identifies conditioning simultaneously on contemporaneous prices and private information as the mechanism by which information enters prices. Here we look to the ecology of markets for an explanation of the information content of prices. Markets could select across traders with different beliefs, or, reminiscent of 'the wisdom of crowds', markets could balance the diverse information of many participants. We provide theoretical support in favor of the first mechanism, and against the second. Along the way we demonstrate that the necessary condition for long-run survival in complete markets found in Sandroni [2000. Do markets favor agents able to make accurate predictions? Econometrica 68 (6), 1303-1342] and in Blume and Easley [2006. If you're so smart, why aren't you rich? Belief selection in complete and incomplete markets. Econometrica 74 (4), 929-966] is not sufficient for long-run survival. We also demonstrate some surprising behavior of market prices when several trader types with different beliefs survive. This paper continues the research program of Blume and Easley [1992. Evolution and market behavior. Journal of Eonomic theory 58 (1), 9-40] and Beker and Chattopadhyay [2006. Consumption dynamics in general equilibrium: a characterisation when markets are incomplete, University of Warwick, unpublished].

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