Povoledo, L.; (2005) Dynamic stochastic general equilibrium models for the study of economics fluctuation. Doctoral thesis , University of London.

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Abstract

The thesis applies a variety of DSGE models to a set of problems whose common link is the analysis of economic fluctuations. The DSGE methodology is applied first to the analysis of economic fluctuations in Italy. After documenting' the crucial features of economic fluctuations in Italy (high volatility of hours worked and low volatility of employment), the thesis explains why the standard RBC model cannot reproduce them. Therefore, a modified RBC model with labour adjustment costs and an underground sector is introduced, and its performance analysed. Then, the thesis utilizes DSGE theory to study how fluctuations are transmitted within and between countries. Using a two-country general equilibrium model with monopolistic competition and sticky prices, it examines first the relative effects of a wide range (money, supply and demand) of shocks, and then the aggregate effects separately. The relative effects are the consequences of shocks for the relative price and quantities of domestic tradeables versus nontradeables. The main finding is that not only sector- specific shocks affect these relative prices and allocations, but also aggregate monetary shocks, thus contributing to explain why money has sectoral effects, as in the empirical literature. The aggregate effects are the consequences of shocks for the main macroeconomic variables. The analysis of the aggregate effects differs from the most recent literature because: 1) the role of critical parameters in the transmission is analysed simultaneously 2) the analysis is not confined to monetary shocks 3) supply and demand shocks are disaggregated by sector 4) the assumptions that the marginal productivity of labour may be decreasing, and that individuals cannot work in both sectors, are introduced. The aggregate effects of the shocks depend on the choice of parameters. The assump tion that individuals cannot work in both sectors leads to a lower elasticity of marginal costs with respect to output.

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