Endogenous innovation under New Keynesian dynamic stochastic general equilibrium model

This paper constructs an endogenous growth model using the framework of New Keynesian dynamic stochastic general equilibrium models. We incorporate the Schumpeterian approach that generates seemingly sticky prices and reinterpret the Calvo mechanism from the perspective of Bertrand competition and successful entrepreneurs. Our results demonstrate that both positive productivity shocks and endogenous innovation have a negative effect on subsequent endogenous innovation. These self-destructive effects of endogenous innovation might account for the IT productivity paradox and productivity slowdown seen in advanced countries. Furthermore, it is shown that there are both neutral and non-neutral properties of monetary policy shocks. They are neutral in terms of the growth effect, but non-neutral in terms of the level effect. In particular, expansionist monetary policies are desirable to facilitate endogenous innovation.     

Japanese manufacturing facing post-Fukushima power crisis: a dynamic computable general equilibrium analysis with foreign direct investment

The Great East Japan Earthquake and the subsequent tsunami that hit and severely damaged the Fukushima Daiichi Nuclear Power Station resulted indirectly in the shutdown of most of the nuclear power plants in Japan. To compensate for the lost nuclear power supply, more fossil fuels were used. People became concerned that this could be disadvantageous for domestic manufacturing industries and accelerated their offshoring to Asia, especially China, through foreign direct investment (FDI). We used a world trade computable general equilibrium (CGE) model with endogenous FDI from Japan to China to quantify the impact of the power crisis on the Japanese manufacturing sectors. We found that the power crisis as well as FDI would adversely affect several sectors that use power intensively, but would benefit the transportation equipment (TEQ), electric equipment (EEQ) and machinery sectors, despite the common expectation that these sectors would undergo a so-called ‘hollowing-out.’     

Forecasting South African macroeconomic variables with a Markov-switching small open-economy dynamic stochastic general equilibrium model

This paper seeks to identify evidence of regime-switching behaviour in the monetary policy response function and the variance of the shocks. It makes use of various specifications of a small open-economy Markov-switching dynamic stochastic general equilibrium model that is applied to South African data from 1989 to 2014. While the in-sample statistics suggest that some of the regime-switching models may provide superior results, the out-of-sample statistics suggest that the inclusion of various forms of regime-switching does not significantly improve upon the forecasting performance of the model. The results also suggest that the central bank response function has been consistently applied over the sample period.     

A dynamic general equilibrium model for public R&D investment in Taiwan

In terms of economic development policies, public research and development (R&D) investment may be one of the most critical and useful tools in Taiwan, having frequently played a role in leading related overall investment in Taiwan. Although the impact channels of R&D investment are varied and complex, its benefits in terms of the development of human capital, industrial productivity, and basic research are clear. With the rapid growth of the private sector in the Taiwan economy, it is, however, debatable whether the government should continue to use the public financial budget to invest in R&D. By using a computable general equilibrium (CGE) model to simulate the impact of public R&D investment on the economy in Taiwan, the empirical evidence of the present paper is that public R&D investment gives rise to different short-term and medium-term impacts on real GDP that are mostly felt in the third or fourth years of their implementation among different industries. These impacts then gradually converge back to equilibrium in the long run. Public R&D investment boosts the technology of high-tech industries and increases exports, but it also crowds out the output of primary industries. Although the public R&D investment has a positive effect on the real wage, its effect on inflation should not be overlooked. Because of the pros and cons surrounding the impact of public R&D investment on industries and the economy, the study provided by the present paper can serve as valuable reference not only to decision-makers in government agencies but also to academic researchers.     

Inequalities and fluctuations in a dynamic general equilibrium model

   Summary. In the present paper a tractable two-sector neo-classical growth model with heterogeneous agents is considered. The local dynamic properties of the equilibrium path are analyzed in relation with the underlying characteristics of the economy. In particular, the existence of fluctuations is related to the degree of heterogeneity in labor and in capital endowments. When applied to international trade theory, the analysis shows that free trade may distabilize a world economy that is originally stable under the regime of autarky. Received: December 28, 1998; revised version: October 29, 1999     

A simple dynamic general equilibrium model

We analyse a single sector economy with H > 1 infinitely-lived agents that operate in a continuous-time framework. Utility functions are recursive but not additive. Both efficient and perfect foresight competitive equilibrium allocations are considered. The existence and stability of such allocations are investigated locally, i.e., in a neighbourhood of steady-state allocations. The model is shown to be useful for explaining the distribution of wealth and consumption across agents, and for analysing the way in which wealth redistribution can affect the dynamics of aggregate economic variables.     

A Keynesian general equilibrium model with competitive firms and rational expectations

A Keynesian general equilibrium model is developed from neoclassical principles. The model is based on competitive firm behavior, and optimizing agents that form expectations rationally. Firms determine their product price to maximize expected profits. Non-neutrality results follow from micro foundations that view firms as committing to a price and output level before actual demand is observed. It follows that optimal output levels are in part determined by demand conditions. In the general equilibrium framework, increases in government spending lead to welfare-improving increases in aggregate output.I thank Tom Cosimano, Strat Douglas, Douglas Gale, Norm Miller, Nick Rowe, Geoffrey Woglom, and two anonymous referees for valuable comments. The responsibility for potential errors remains entirely my own.     

Tax incentives for investment: A dynamic general equilibrium perspective

Zusammenfassung In einem einfachen dynamischen Gleichgewichtsmodell mit überlappenden Generationen werden die Wachstumswirkungen von Investitionsförderungsmaßnahmen simuliert. Dabei stellt sich heraus, daß die Wirkung des Steuersatzes von den anderen Bestimmungen der Unternehmenssteuer abhängt. Wenn die Steuer bereits in der Ausgangslage durch großzügige steuerliche Absetzbarkeit der Investitionsausgaben investitionsfördernd ist, dann kann nur eine Erhöhung des Steuersatzes zusätzliche Investitionen induzieren. Der höhere Steuersatz steigert den Wert der Absetzbarkeit von Investitionsausgaben und schafft damit den Investitionsanreiz.Außerdem erweist sich die Erhöhung des Absetzbetrages als eine Investitionsförderungsmaßnahme, die sich selbst finanziert. Dennoch ist die Erhöhung des Absetzbetrages kein free lunch, weil die Reduktion der Anschaffungskosten für neues Kapital aufgrund einer einfachen Arbitrage-Bedingung auch das alte Kapital entwertet. Dieser Kapitalisierungseffekt von Investitionsförderungsmaßnahmen belastet die Kapitaleigner und wirkt daher wie eine versteckte Vermögenssteuer.

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An earlier version of the paper was presented at the annual meeting of the Austrian Economic Association 1988. I am indebted to J. R. Chen and the referees for valuable comments.     

Foreign direct investment as a signal

This paper models oligopolistic competition among potential multinational firms in an environment of firm heterogeneity, incomplete information on costs, and strategic interactions. We show that foreign direct investment is more likely if it can serve as a signal of productivity in an environment of incomplete information as firms would like to avoid sending a low productivity signal. Our model shows that this effect is strong enough such that foreign direct investment can be an optimal foreign entry mode even if trade costs are zero.     

Existence of a competitive equilibrium in a one sector growth model with heterogeneous agents and irreversible investment

Summary. We prove existence of a competitive equilibrium in a version of a Ramsey (one sector) model in which agents are heterogeneous and gross investment is constrained to be non negative. We do so by converting the infinite-dimensional fixed point problem stated in terms of prices and commodities into a finite-dimensional Negishi problem involving individual weights in a social value function. This method allows us to obtain detailed results concerning the properties of competitive equilibria. Because of the simplicity of the techniques utilized our approach is amenable to be adapted by practitioners in analogous problems often studied in macroeconomics. Received: September 13, 2001; revised version: December 9, 2002 RID="*" ID="*" We are grateful to Tapan Mitra for pointing out errors as well as making very valuable suggestions. Thanks are due to Raouf Boucekkine and Jorge Duran for additional helpful discussions. We also thank an anonymous referee for his/her helpful comments. The second author acknowledges the financial support of the Belgian Ministry of Scientific Research (Grant ARC 99/04-235 “Growth and incentive design”) and of the Belgian Federal Goverment (Grant PAI P5/10, “Equilibrium theory and optimization for public policy and industry regulation”). Correspondence to: C. Le Van     

Foreign direct investment and international trade in a continuum Ricardian trade model

We develop a continuum Ricardian trade model to capture both North–South trade and technology transfer via foreign direct investment (FDI) by multinational enterprises (MNEs). We show that there is a unique range of products produced in the South by MNEs. In the case of an infinitely elastic supply of expatriates, if the ability of Southern workers in absorbing Northern technology increases, then (a) the range of MNE production increases, (b) Northern workers's welfare and Southern workers' welfare change in opposite directions, and (c) the world aggregate welfare increases under certain conditions. We explore issues such as North–South wage gaps, FDI policies and the product cycle. We also derive results under a general supply of expatriates.     

A general equilibrium model of heterogeneous local property taxes

A formal model of an economy consisting of many production centres, each of which levies property taxes at a different rate, is developed and analyzed. In the context of the model, it is shown that holders of capital may have either a positive or negative willingness to pay for a heterogenous system of taxes relative to a uniform tax which raises the same revenue. Particular emphasis is placed on interpretation of the ‘new view’ of the property tax in light of this and other results which derive from the model.     

Optimal labor income taxation in a two-sector dynamic general equilibrium model

This paper presents a new approach to the two-sector optimal taxation problem. We derive the optimal labor income tax rate which depends on factor intensity across sectors. It is the labor intensity that determines the initial wage rate, and therefore the optimal labor tax rate. We show that an increase in the initial relative price of consumption goods decreases the optimal tax rate on labor income in the case that the consumption goods sector is capital-intensive while it increases the optimal tax rate on labor income in the case that the investment goods sector is capital-intensive.     

Supply and marginal firms in general equilibrium

For economies with a large number of small firms, price induced changes in supply are decomposed into substitution and entry effects. Marginal firms (those earning zero profit) play a significant role in the determination of the slope of aggregate supply.     

The direct estimation of the equilibrium response in a linear dynamic model

It is shown that any linear dynamic model can be written in a form which enables the equilibrium multipliers to be estimated directly. Furthermore, these estimates are directly equivalent to those derived from the unrestricted reduced form.     

Foreign direct investment,heterogeneous workers and employment security: Evidence from Germany

We analyze how foreign direct investment (FDI) affects employment security using administrative microdata for German employees. Measuring FDI intensity at the industry level enables us to take into account the sum of direct effects at multinationals as well as indirect effects of FDI throughout the affected industry. We find that both inward and outward FDI significantly reduce employment security. This is particularly the case for inward FDI coming from the western part of the European Union as well as for outward FDI going to Central and Eastern Europe. The effects are sizeable for older and low‐skilled workers.     

Potential economic reforms in North Korea: a dynamic general equilibrium model

We use a dynamic general equilibrium model to examine hypothetical market reforms in North Korea. We model partial reform, in which producers choose capital allocations across sectors, with the government still fixing total capital. We also consider two full market reform scenarios. In one, public infrastructure investment remains unchanged, while, in the other, it increases substantially. In all scenarios, we assume a closed economy and a constant military size. Our simulations show little hope for the North Korean economy without boosting infrastructure. Although all of the reforms raise consumption, only significant increases in infrastructure investment bring positive economic growth.     

Foreign direct investment in a world of multiple taxes

Governments impose multiple taxes on foreign investors, though studies of the effect of tax policy on the location of foreign direct investment (FDI) focus almost exclusively on corporate income taxes. This paper examines the impact of indirect (non-income) taxes on FDI by American multinational firms, using affiliate-level data that permit the introduction of controls for parent companies and affiliate industries. Indirect tax burdens significantly exceed the foreign income tax obligations of foreign affiliates of American companies. Estimates imply that 10% higher local indirect tax rates are associated with 7.1% lower affiliate assets, which is similar to the effect of 10% higher income tax rates. Affiliate output falls by 2.9% as indirect taxes rise by 10%, while higher income taxes have more modest output effects. High corporate income tax rates depress capital/labor ratios and profit rates of foreign affiliates, whereas high indirect tax rates do not. These patterns reveal the impact of indirect taxes and suggest the mechanisms by which direct and indirect taxes affect FDI.     

Capital taxation in a dynamic general equilibrium setting

The familiar two-factor, two-commodity incidence model is extended to a dynamic setting in which the supply of capital is variable and the government can use money or bonds to balance its budget in addition to neutral lump sum taxation. The dynamic incidence effects of a sectoral tax on capital are qualitatively similar to the static incidence effects when the government balances its budget with neutral taxes, but are qualitatively different when the government uses money or bonds. In this case, while capital bears the burden of the tax in the short run, it is able to shift it in the long run.