Working Papers And Computer Code
Burkhard Heer, Free University of Bolzano Bozen
(most recent on top)
On the modeling of the income distribution business cycle dynamics, revised version: June 2011
Empirically, the income share is procyclical for the low-income groups and
acyclical for the top 5\%. To generate this kind of behavior in a
DGE business cycle model, we consider overlapping generations and elastic labor
supply in addition to those elements considered by Casta\~{n}eda et al.~(1998).
However, these features do not help to constitute a major improvement vis-a-vis
their model.
Unemployment and Debt Dynamics in a Highly Indebted Small Open Economy (with Stefan Schubert), June 2011
The paper analyzes the dynamic effects of a total factor productivity shock and an interest rate risk premium shock in a highly indebted open economy. In contrast to the standard open economy framework, search unemployment and wage bargaining are introduced. We find that a negative total factor productivity shock primarily has effects on the economy's production side and on welfare, but not on its stock of foreign debt and the country specific risk premium, and large part of the adjustment happens in the short run. In contrast, a pure increase in the country specific risk premium causes substantial dynamics and a considerable reduction in foreign debt, allowing higher consumption in the long run and creating an intertemporal welfare gain, even though unemployment increases strongly in the short run. A 50% haircut of foreign debt significantly reduces the initial response of the unemployment rate. In case of a temporary productivity shock, sticky wages imply smaller employment, but generate higher welfare than flexible wages.
download CESifo working paper 3497
Asset Returns, the Business Cycle, and the Labor Market: A Sensitivity Analysis for the German economy (with Alfred Maussner), 2011
We review the labor market implications of recent real-business-cycle models
that successfully replicate the empirical equity premium. We document the fact
that all models considered in this survey with the exception of Boldrin,
Christiano, and Fisher (2001) imply a negative correlation of working hours and
output that is not observed empirically, while in their model, the equity
premium does not result from variation in the firm value, but from changes in
the relative price of two goods. In addition, we calibrate the models with
regard to characteristics from the German economy and show that the equity
premium is very sensitive with
regard to the utility parameters.
download CESifo working paper No. 3391
Log-Normal Approximation of the Equity Premium in the Production Model (with Alfred Maussner), 2010
The conditional equity premium in the model with production is often
approximated by assuming a jointly log-normal distribution of the marginal rate
of substitution in consumption and the marginal productivity of capital. We show
that, for standard parameterization, this premium is about one third less than
that implied by a non-linear approximation of the Euler equations.
download CESifo working paper No. 3311
Accepted: Applied Economics Letters, 2011
A Note on the computation of the equity premium and the market value of the firm (with Alfred Maussner), 2010
Turnovsky (1995) derives in a continuous-time model of a decentralized
economy that the correct specification of
the firm's objective function is to maximize the initial value of its
outstanding securities. The firm value is the discounted flow
of real earnings. For the discrete-time version of the model, we show that the
correct computation of the firm value needs to be modified.
Depending on the specific formula employed, different values of the equity
premium result.
download pdf CESifo working paper No. 3042
Computation of Business-Cycle Models with the Generalized Schur Method (with Alfred Maussner), 2009
We describe an algorithm that is able to compute the solution of a singular linear difference system under rational expectations. The algorithm uses the Generalized Schur Factorization and is illustrated by a simple example.
published: Indian Growth and Development Review, vol. 2, 2009, 173-182.
Population, Pensions, and Endogenous Economic Growth (with Andreas Irmen)
We study the effect of a declining labor force on the incentives to engage in labor-saving technical change and ask how this effect is influenced by institutional characteristics of the pension scheme. When labor is scarcer it becomes more expensive and innovation investments that increase labor productivity are more profitable. We incorporate this channel in a new dynamic general equilibrium model with endogenous economic growth and heterogeneous overlapping generations.
download pdf, this version: January 2009
Value function iteration as a solution method for the Ramsey Model (with Alfred Maussner)
Value function iteration is one of the standard tools for the solution of the Ramsey model. We compare six different ways of value function iteration with regard to speed and precision. We find that value function iteration with cubic spline interpolation between grid points dominates the other methods in most cases. For the initialization of the value function over a fine grid, modified policy function iteration over a coarse grid and subsequent linear interpolation between the grid points provides a very efficient way to reduce computational time.
Gauss computer programs for the published paper
published: Journal of Economics and Statistics, forthcoming
Inflation and Output Dynamics in a Model with Labor Market Search and Capital Accumulation (with Alfred Maussner)
In a sticky-price model with labor market search and habit persistence, Walsh (2005) shows that inertia in the interest rate policy helps to reconcile the inflation and output persistence with empirical observations for the US economy. We show that this finding is sensitive with regard to the introduction of capital formation. While we are able to replicate the findings for the inflation inertia in a model with capital adjustment costs and variable capacity utilization, the output response to an interest shock is found to be too large and no longer hump-shaped in this case. In addition we find that the response of output to a technology shock can only be reconciled with empirical findings if either the adjustment of the utilization rate is very costly or there is only a modest amount of nominal rigidity in the economy.
revised version with technical appendix: December 2008
download pdf-file, 1st version: June 2007
published: Review of Economic Dynamics, 2010, vol. 12, 654-86
The Burden of Unanticipated Inflation: Analysis of an Overlapping Generations Model with Progressive Income Taxation and Staggered Prices (with Alfred Maussner)
Inflation is often associated with a loss for the poor in the medium and long run. The cyclical effects are basically unknown. We study this question in a dynamic optimizing sticky price model. Agents are heterogeneous with regard to their age and their productivity. We emphasize three channels through which unanticipated inflation affects the income and wealth distribution: 1) factor prices, 2) the 'bracket creep', and 3) sticky pensions. In our model, unanticipated inflation decreases the inequality of factor income, while the redistributive effect of inflation on total income depends on whether the government is spending the additional revenues on transfers or public consumption.
Revised Version: November 2009
Technical Appendix to Revised Version
published: Dynamic Macroeconomics, 2011, forthcoming
The money-age distribution: Empirical facts and limited monetary models (with Alfred Maussner and Paul McNelis)
The money-age distribution is hump-shaped for the US post-war economy. There is
no clear cut relation between the variation of money holdings within generations
and age. Furthermore, money is found to be only weakly correlated with both
income and wealth. We analyze three motives for money demand in an overlapping
generations model in order to explain these observations: 1) money in the
utility, 2) an economy with costly credit service, and 3) limited participation.
All three models are consistent with the hump-shaped relation between average
money holdings and age, yet they predict a much closer association between money
holdings, income, wealth, and age than we find in the data. Only the
limited-participation model partly replicates the low bivariate correlation
between money and income as well as between money and interest bearing assets.
None of the three models satisfactorily explains these stylized facts.We compare the numerical methods that are most widely applied in the computation
of the standard business cycle model with flexible labor. The numerical
techniques imply economically insignificant differences with regard to business
cycle summary statistics except for the volatility of investment. Furthermore,
these results are robust with regard to the choice of the functional
form of the utility function and the model's parameterization. In conclusion,
the simplest and fastest method, the log-linearization
of the model around the steady state, is found to be most convenient and
appropriate for the standard business cycle model.
accepted: Journal of Macroeconomics, 2011
The Savings-Inflation Puzzle (joint with Bernd Suessmuth)
We find that inflation does not unanimously decrease savings in the US during
the postwar period. This result is puzzling as it contradicts the implications
of most monetary general equilibrium models.
published: Applied Economics Letters, 2009, vol. 16(6), 615-617.
Business Cycle Dynamics of a New Keynesian Overlapping Generations Model with Progressive Income Taxation (with Alfred Maussner)
In our dynamic optimizing sticky price model, agents are heterogeneous with regard to their age and their productivity. We find that the business cycle dynamics in the OLG model in response to both a technology shock and a monetary shock are similar, but not completely identical to those found in the corresponding representative-agent model. In particular, working hours in the OLG model decrease in response to a positive technological shock, since for young workers the income effect dominates the substitution effect. This is in line with the adverse effect of productivity shocks on employment found in structural vector autoregressions.
Projection methods and the curse of dimensionality (with Alfred Maussner)
We study the ability of three different projection methods to solve
high-dimensional state space problems: Galerkin, collocation, and least squares
projection. The curse of dimensionality can be reduced substantially for both
Least Squares and Galerkin projection methods through the use of monomial
formulas. Least Squares are shown to require a good initial value in order to
give an accurate solution. Alternatively, we suggest an ad hoc collocation
method for complete polynomials.
Effects of Inflation on Wealth Distribution: Do stock market participation fees and cpital income taxation matter? (joint with Bernd Suessmuth)
The effects of a permanent change in inflation on the distribution of wealth are
analyzed in a general equilibrium OLG model that is calibrated with regard to
the characteristics of the US economy. Poor agents accumulate savings
predominantly in the form of money, while rich agents participate in the stock
market and accumulate equity. Higher inflation results in higher nominal
interest rates and a higher real tax burden on interest income. Surprisingly, an
increase in inflation results in a lower stock market participation rate; in
addition, savings decrease and the distribution of wealth becomes even more
unequal.
published: Journal of Economic Dynamics and Control, 2007, vol. 31, 277-303
Computation of Business Cycle Models: A Comparison of Numerical Methods (with Alfred Maussner)
We compare the numerical methods that are most widely applied in the computation
of the standard business cycle model with flexible labor. The numerical
techniques imply economically insignificant differences with regard to business
cycle summary statistics except for the volatility of investment. Furthermore,
these results are robust with regard to the choice of the functional
form of the utility function and the model's parameterization. In conclusion,
the simplest and fastest method, the log-linearization
of the model around the steady state, is found to be most convenient and
appropriate for the standard business cycle model.
Revised version: download pdf
Fortran programs: download zip-file
published: Macroeconomic Dynamics, 2008, vol. 12, 641-663.
'Bracket Creep' and its Effects on Income Distribution (joint with Bernd Suessmuth)
We present new empirical evidence for the US economy that inflation reduces the
inequality of the earnings distribution. The
main mechanism emphasized in this paper is the tax income bracket effect.
Governments only adjust the nominal income tax brackets slowly to a rise in
prices, typically less often than once every other year in the US post-war
history. We also develop a
theoretical general equilibrium monetary model with income heterogeneity. In
this model, the effect of higher inflation on income distribution is shown to be
rather small. However, we find that a longer duration between two successive
adjustments of the
income tax schedule reduces employment, savings, and output significantly.
Should unemployment benefits be related to previous earnings?
In most OECD countries, unemployment benefits are tied to individual previous
labor earnings. We study the progressivity of this indexation in a calibrated
general equilibrium overlapping-generations model with flexible labor supply
keeping the government expenditures on unemployment insurance constant over the
different scenarios. We find that higher indexation of unemployment benefits to
previous earnings has only small quantitative effects on output, employment, the
distribution of
income, and welfare. We also provide a tentative analysis of the most recent
Hartz IV reform, where unemployment benefits decrease sharply after one year of
unemployment. This reform is found to have positive but very small efficiency
and welfare effects.
download 1st version of the paper: CESifo working paper No. 747, 2002
download revised version of the paper, May 2006
FORTRAN programs for the revised version
published: Public Finance Analysis, 2006, 530-550.
Nonsuperneutrality of Money in the Sidrauski Model with Heterogenous Agents
Superneutrality is demonstrated to no longer hold in the Sidrauski´model as soon as agents are heterogenous with regard to their productivity. However, quantitative effects of inflation on the capital stock are found to be rather small.
published: Economics Bulletin, 2004, vol. 5, 1-6.