Dynamic General Equilibrium
http://lists.repec.orgmailman/listinfo/nep-dge
Dynamic General Equilibrium
2017-05-21
Farms, Fertiliser, and Financial Frictions; Yields from a DSGE Model
http://d.repec.org/n?u=RePEc:imf:imfwpa:17/112&r=dge
This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model with a financial accelerator which captures key features of low-income countries (LICs). The predominance of supply shocks in LICs poses distinct challenges for policymakers, given the negative correlation between inflation and the output gap in the case of supply shocks. Our results suggest that: (1) in the face of a supply-side shock, the most desirable interest rate rule involves simply targeting current inflation and smoothing the policy interest rate; and (2) ignoring financial frictions when evaluating policy rules can be particularly problematic in LICs, where financial frictions loom especially large.
Sébastien Walker
2017-05-05
Could the boom-bust in the eurozone periphery have been prevented?
http://d.repec.org/n?u=RePEc:nbp:nbpmis:263&r=dge
Boom-bust cycles in the eurozone periphery almost toppled the common currency and recent experience suggests that they may return soon. We check whether monetary or macroprudential policy could have prevented the periphery’s violent boom and bust after the euro adoption. We estimate a DSGE model for the two euro area regions, core and periphery, and conduct a series of historical counterfactual experiments in which monetary and macroprudential policy follow optimized rules that use area-wide welfare as the criterion. We show that common monetary policy could have better stabilized output in both regions, but not the housing market or the periphery’s trade balance.In contrast, region-specific macroprudential policy could have substantially smoothed the credit cycle in the periphery and reduced the build-up of external imbalances.
Marcin Bielecki
Michał Brzoza-Brzezina
Marcin Kolasa
Krzysztof Makarski
euro-area imbalances, monetary policy, macroprudential policy, Bayesian estimation
2017
On the sources of business cycles: implications for DSGE models
http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172058&r=dge
What are the drivers of business cycle fluctuations? And how many are there? By documenting strong and predictable co-movement of real variables during the business cycle in a sample of advanced economies, we argue that most business cycle ﬂuctuations are driven by one major factor. The positive co-movement of real output and inﬂation convincingly argues for a demand story. This feature—robust across time and space—provides a simple smell test for structural macroeconomic models. We propose a simple statistic that can compare data and models. Based on this statistic, we show that the recent vintage of structural economic models has difﬁculties replicating the stylized facts we document. JEL Classification: C10, E32, E50
Andrle, Michal
Brůha, Jan
Solmaz, Serhat
business cycle, demand shocks, DSGE models, dynamic principal component analysis
2017-05
The Effectiveness of Consumption Taxes and Transfers as Insurance against Idiosyncratic Risk
http://d.repec.org/n?u=RePEc:upd:utppwp:074&r=dge
We quantitatively evaluate the effectiveness of a consumption tax and transfer pro- gram as insurance against idiosyncratic earnings risk. Our framework is a heterogeneous- agent, incomplete-market model with idiosyncratic wage risk and indivisible labor. The model is calibrated to the U.S. economy. We find a weak insurance effect of the transfer program. Extending the transfer system from the current scale raises consumption un- certainty, which increases aggregate savings and reduces the interest rate. Furthermore, consumption inequality shows a small decrease.
Tomoyuki Nakajima
Shuhei Takahashi
Consumption taxes; Transfers; Risk sharing; Consumption inequality; Indivisible labor; Incomplete markets
2017-03
The natural rate of interest in a nonlinear DSGE model
http://d.repec.org/n?u=RePEc:een:camaaa:2017-38&r=dge
This paper investigates how and to what extent nonlinearity, including the zero lower bound on the nominal interest rate, affects the estimates of the natural rate of interest in a dynamic stochastic general equilibrium model with sticky prices and wages. We find that the estimated natural rate of interest in a nonlinear model is substantially different from that in its linear counterpart because of a contractionary effect of the zero lower bound, and that other nonlinearities such as price and wage dispersion, from which a linear model abstracts, play a minor role in identifying the natural rate.
Yasuo Hirose
Takeki Sunakawa
Natural rate of interest, Nonlinearity, Zero lower bound, Particle filter
2017-05
Exchange Rate Disconnect in General Equilibrium
http://d.repec.org/n?u=RePEc:nbr:nberwo:23401&r=dge
We propose a dynamic general equilibrium model of exchange rate determination, which simultaneously accounts for all major puzzles associated with nominal and real exchange rates. This includes the Meese-Rogoff disconnect puzzle, the PPP puzzle, the terms-of-trade puzzle, the Backus- Smith puzzle, and the UIP puzzle. The model has two main building blocks — the driving force (or the exogenous shock process) and the transmission mechanism — both crucial for the quantitative success of the model. The transmission mechanism — which relies on strategic complementarities in price setting, weak substitutability between domestic and foreign goods, and home bias in consumption — is tightly disciplined by the micro-level empirical estimates in the recent international macroeconomics literature. The driving force is an exogenous small but persistent shock to international asset demand, which we prove is the only type of shock that can generate the exchange rate disconnect properties. We then show that a model with this financial shock alone is quantitatively consistent with the moments describing the dynamic comovement between exchange rates and macro variables. Nominal rigidities improve on the margin the quantitative performance of the model, but are not necessary for exchange rate disconnect, as the driving force does not rely on the monetary shocks. We extend the analysis to multiple shocks and an explicit model of the financial sector to address the additional Mussa puzzle and Engel’s risk premium puzzle.
Oleg Itskhoki
Dmitry Mukhin
2017-05
Fiscal Rules and Sovereign Default
http://d.repec.org/n?u=RePEc:nbr:nberwo:23370&r=dge
Recurrent concerns over debt sustainability in emerging and developed nations have prompted renewed debate on the role of fiscal rules. Their optimality, however, remains unclear. We provide a quantitative analysis of fiscal rules in a standard model of sovereign debt accumulation and default modified to incorporate quasi-hyperbolic preferences. For reasons of political economy or aggregation of citizens’ preferences, government preferences are present biased, resulting in over-accumulation of debt. Calibrating this parameter with values in the literature, the model can reproduce debt levels and frequency of default typical of emerging markets even if the household impatience parameter is calibrated to local interest rates. A quantitative exercise finds welfare gains of the optimal fiscal policy to be economically substantial, and the optimal rule to not entail a countercyclical fiscal policy. A simple debt rule that limits the maximum amount of debt is analyzed and compared to a simple deficit rule that limits the maximum amount of deficit per period. Whereas the deficit rule does not perform well, the debt rule yields welfare gains virtually equal to the optimal rule.
Laura Alfaro
Fabio Kanczuk
2017-04
Coordinating the Household Retirement Decision
http://d.repec.org/n?u=RePEc:san:wpecon:1707&r=dge
This paper explores the sources of retirement synchronisation in dual career households. Empirical evidence suggests that majority of the couples exit the labor force within a short period of time, too tight to be explained by the age differences alone. This retirement coordination is frequently attributed to the complementarity of the spouses’ leisure. Contrary to this view, my estimates suggest that in a household with CES preferences the quantities of leisure consumed by husbands and wives are gross substitutes. Looking for alternative explanations, I develop a dynamic programming model of optimal retirement and labor supply decisions with uncertainty about the household structure, survival, future health status and income. Apart from leisure complementarity, four other channels may generate coordinated retirement in the model: correlated shocks to the individual health and wages, joint response to the shocks received by the household, correlated tastes for leisure due to sorting on unobservables captured by the household fixed effects, and spousal benefits provided by the Social Security. The model generates a distribution of optimal retirement timing that closely mimics the outcomes observed in the data. A counterfactual designed to shut down the family based provisions of the Social Security Act shows that most of the observed coordination can be explained by the existing Social Security policy.
Irina Merkurieva
retirement, intertemporal household choice, leisure complementarity
Measuring the size of the shadow economy using a dynamic general equilibrium model with trends
http://d.repec.org/n?u=RePEc:pra:mprapa:78968&r=dge
We propose a methodology for measuring the size and properties of the shadow economy. We use a two-sector dynamic deterministic general equilibrium model with four different trends: hours worked, investment-specific productivity, formal productivity, and shadow productivity. We find that the shadow productivity trend is endogenous, in the sense that it is an exact function of model parameters and the other three trends. We also document that, in order to be consistent with observed (real-world) trend growths, the shadow sector needs to exhibit increasing returns to scale, which is contrary to the standard procedure of imposing decreasing returns to this sector. We apply our methodology to a set of seven Latin American and Asian countries and document several empirical regularities that emerge from our analysis, the most important one being that the volatility of shadow sector output is considerably larger than the one in formal sector output.
Solis-Garcia, Mario
Xie, Yingtong
shadow economy, business cycles, DSGE models
2017-01-03
The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model
http://d.repec.org/n?u=RePEc:pra:mprapa:78955&r=dge
This paper analyses the macroeconomic effects of the ECB's quantitative easing programme using an open-economy DSGE model estimated with Bayesian techniques. Using data on government debt stocks and yields across maturities we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to EA year-on-year output growth and inflation of up to 0.4 and 0.5 pp in the standard linearised version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact up to 1.0 and 0.7 pp, respectively.
Hohberger, Stefan
Priftis, Romanos
Vogel, Lukas
E44, E52, E53, F41
2017-03-14
Liquidity Constraints in the U.S. Housing Market
http://d.repec.org/n?u=RePEc:nbr:nberwo:23345&r=dge
We study the severity of liquidity constraints in the U.S. housing market using a life-cycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents have the option to refinance their long-term mortgages or obtain home equity loans. The model reproduces well the distribution of individual-level balance sheets – the fraction of housing, mortgage debt and liquid assets in households' wealth, the fraction of hand-to-mouth homeowners (Kaplan and Violante, 2014), as well as the frequency of housing turnover and home equity extraction in the 2001 data. The model implies that 75% of homeowners are liquidity constrained and willing to pay an average of 8 cents to extract an additional dollar of liquidity from their home. Liquidity constraints imply sizable welfare losses equivalent to a 1.2% permanent reduction in consumption.
Denis Gorea
Virgiliu Midrigan
2017-04
Is GDP more volatile in developing countries after taking the shadow economy into account? Evidence from Latin America
http://d.repec.org/n?u=RePEc:pra:mprapa:78965&r=dge
Why is GDP more volatile in developing countries? In this paper we propose an explanation that can account for the substantial differences in the volatility of measured real GDP per capita between developing and developed countries. Our explanation involves the often overlooked fact that developing economies have a sizable shadow economy. We build a two-sector model that distinguishes between measured (formal) and total (formal and shadow) outputs; using data from Latin America, our model results suggest that developing and developed economies are fairly similar in terms of the volatility of total real GDP. We also document an apparent puzzle, in that the model suggests that the volatility of the size of the shadow economy should be substantially larger than what is observed in the real world. We believe that this may be indicative of frictions that prevent agents from optimally moving between the formal and shadow economies.
Solis-Garcia, Mario
Xie, Yingtong
shadow economy, business cycles, DSGE models, Bayesian estimation
2017-03-30
Monetary-Fiscal Interactions and the Euro Area's Malaise
http://d.repec.org/n?u=RePEc:cpr:ceprdp:12020&r=dge
When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB's objective.
Jarocinski, Marek
Mackowiak, Bartosz Adam
fiscal theory of the price level; eurobond; self-ful lfiling expectations; zero lower bound
2017-05
What determines Chinaís housing price dynamics? New evidence from a DSGE-VAR
http://d.repec.org/n?u=RePEc:cdf:wpaper:2017/4&r=dge
We investigate what determines Chinaís housing price dynamics using a DSGE-VAR estimated with priors allowing for the featured operating of normal and ëshadowí banks in China, with data observed between 2001 and 2014. We Önd that the housing demand shock, which is the essential factor for housing price ëbubblesí to happen, accounts for over 80% of the housing price áuctuation. We also Önd that a prosperous housing market could have led to future economic growth, though quantitatively its marginal impact is small. But this also means that, for policy-makers who wish to stabilise the housing market, the cost on output reduction would be rather limited.
Liu, Chunping
Ou, Zhirong
Housing price; Bubbles; Market spillovers; DSGE-VAR; China
2017-04
International Reserves, Credit Constraints, and Systemic Sudden Stops
http://d.repec.org/n?u=RePEc:fip:fedgif:1205&r=dge
Why do emerging market economies simultaneously hold very high levels of international reserves and foreign liabilities? Moreover, why, even with such huge amounts of international reserves, did countries barely use them during the Global Financial Crisis? I argue that including international reserves as an implicit collateral for external borrowing in a small open economy model subject to exogenous financial shocks can explain both of these puzzling facts. I find that the model can obtain ratios of international reserves and net foreign liabilities to GDP similar to those of Latin American countries. Additionally, the optimal policy implies that the government accumulates international reserves before a sudden stop and that there is a small depletion during it. Finally, an alternative policy of keeping international reserves constant at the average level yields results very similar to those of the optimal policy during sudden stops, highlighting the stabilizing role of international reserves even if central banks do not use them.
Samer Shousha
International reserves ; Emerging market economies ; Sudden stops ; International crises
2017-05-04
Interbank Market Frictions and Unconventional Policy in a Currency Union
http://d.repec.org/n?u=RePEc:zbw:esprep:157881&r=dge
In this paper we show how interbank market frictions can play an important role in propagating and enhancing the effects of shocks in a currency union, and discuss the efficacy of two unconventional policy measures; multi-period central bank refinance operations and large scale asset purchases. To this end, a two-country structural model with idiosyncratic risk and country-specific transactional costs on interbank lending is proposed and used to show that (i) the effectiveness of monetary policy is enhanced when banks face an external finance premium in the interbank market; (ii) adverse shocks to the real economy can be the source of banking crisis, causing an increase in the interbank finance premia, aggravating the initial shock; and (iii) asset purchase policies and long-term refinancing operations can both be successful in supporting conventional monetary policy in mitigating the adverse effects of shocks.
Swarbrick, Jonathan Mark
Blattner, Tobias
Interbank market,monetary union,financial frictions,unconventional monetary policy
2017
Do Misperceptions about Demand Matter? Theory and Evidence
http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01518467&r=dge
We assess theoretically and empirically the consequences of demand misperceptions. In a New Keynesian model with dispersed information, agents receive noisy signals about both supply and demand. Firms and consumers have an asymmetric access to information, so aggregate misperceptions of demand by the supply side can drive economic fluctuations. The model’s predictions are used to identify empirically fundamental and noise shocks on supply and demand. We exploit survey nowcast errors on both GDP growth and inflation, fundamental and noise shocks affecting the errors with opposite signs. We show that demand-related noise shocks have a negative effect on output and contribute substantially to business cycles. Additionally, monetary policy plays a key role in the transmission of demand noise.
Kenza Benhima
Céline Poilly
business cycles,information frictions,noise shocks,SVARs with sign restrictions
2017-05
Effects of Monetary Policy Shocks on Inequality in Japan
http://d.repec.org/n?u=RePEc:boj:bojwps:wp17e03&r=dge
Impacts of monetary easing on inequality have recently attracted increasing attention. In this paper, we use the micro-level data of Japanese households to study the distributional effects of monetary policy. We construct quarterly series of income and consumption inequality measures from 1981 to 2008, and estimate their response to a monetary policy shock. We do find that monetary policy shocks do not have statistically significant impacts on inequalities across Japanese households in a stable manner. We find evidence, when considering inequality across households whose head is employed, an expansionary monetary policy shock increased income inequality through a rise in earnings inequality, in the period before the 2000s. Such procyclical responses are, however, scarcely observed when the current data is included in the sample period, or when earnings inequality across all households is considered. We also find that, transmission of income inequality to consumption inequality is minor even during the period when procyclicality of income inequality was pronounced. Using a two-sector dynamic general equilibrium model with attached labor inputs, we show that labor market flexibility is the central to the dynamics of income inequality after monetary policy shocks. We also use the micro-level data of households' balance sheet and show that distributions of households' financial assets and liabilities do not play a significant role in the distributional effects of monetary policy.
Masayuki Inui
Nao Sudo
Tomoaki Yamada
Monetary Policy; Income inequality; Consumption inequality
2017-05-10
Growth Effects of Annuities and Government Transfers in Perpetual Youth Models
http://d.repec.org/n?u=RePEc:pra:mprapa:78982&r=dge
We show that in overlapping generations endogenous growth models with uncertain lifetime, the introduction of government transfers always increases economic growth by crowding out the private annuity market and increasing accidental bequests. In particular, if the government imposes a flat-rate consumption tax (which is neutral to the consumption-saving margin), uses part of the tax revenue for unproductive purposes, and rebates the rest equally across agents as a lump-sum transfer, the economy grows faster and improves the welfare of future generations.
Miyoshi, Yoshiyuki
Toda, Alexis Akira
annuity, endogenous growth, overlapping generations, redistribution
2016-05-16
Sovereign default risk and debt limits: Case of Slovakia
http://d.repec.org/n?u=RePEc:cbe:wpaper:201701&r=dge
We use a sovereign default model developed by Hatchondo et al. (2015) to study the implications of adopting constitutional debt limits. It can be shown, that for a benevolent government issuing long-term debt it is welfare-enhancing to introduce credible fiscal rules to mitigate the so called "debt dilution" problem. By calibrating the theoretical model to Slovak data, we estimate the optimal (net) debt brake threshold at 48 percent of the mean annual output. Compared to a no-rule economy, the introduction of a fully-credible debt limit represents a substantial decrease in average sovereign spreads (50 basis points). In the empirical part of the paper we find that the introduction of the constitutional Fiscal Responsibility Act in Slovakia in 2011 might have helped to lower sovereign spreads compared to euro area peers by 20-30 basis points.
Zuzana Mucka
Ludovit Odor
sovereign default risk, debt dilution, fiscal rules, debt limits
2017-04
A New Way to Quantify the Effect of Uncertainty
http://d.repec.org/n?u=RePEc:fip:feddwp:1705&r=dge
This paper develops a new method to quantify the effects of uncertainty using estimates from a nonlinear New Keynesian model. The model includes an occasionally binding zero lower bound constraint on the nominal interest rate, which creates time-varying endogenous uncertainty, and two exogenous types of time-varying uncertainty—a volatility shock to technology growth and a volatility shock to the risk premium. A filtered third-order approximation of the Euler equation shows consumption uncertainty on average reduced consumption by about 0.06% and the peak effect was 0.15% during the Great Recession. Other higher-order moments such as inflation uncertainty, technology growth uncertainty, consumption skewness, and inflation skewness had smaller
Richter, Alexander
Throckmorton, Nathaniel
Baysian estimation; uncertainty; stochastic volatility; zero lower bound
2017-05-04
Development, fertility and childbearing age: A unified growth theory
http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01452846&r=dge
During the last two centuries, fertility has exhibited, in industrialized economies, two distinct trends: the cohort total fertility rate follows a decreasing pattern, while the cohort average age at motherhood exhibits a U-shaped pattern. This paper proposes a unified growth theory aimed at rationalizing those two demographic stylized facts. We develop a three-period OLG model with two periods of fertility, and show how a traditional economy, where individuals do not invest in higher education, and where income rises push towards advancing births, can progressively converge towards a modern economy, where individuals invest in higher education, and where income rises encourage postponing births. Our findings are illustrated numerically by replicating the dynamics of the quantum and the tempo of births for Swedish cohorts born between 1876 and 1966.
Hippolyte D'Albis
Angela Greulich
Grégory Ponthière
fertility,childbearing age,births postponement,human capital,regime shift
2017-02
Banks as Tanks: A Continuous-Time Model of Financial Clearing
http://d.repec.org/n?u=RePEc:arx:papers:1705.05943&r=dge
We present a simple model of clearing in financial networks in continuous time. In the model, firms (banks) are represented as reservoirs (tanks) with liquid (money) flowing in and out. This approach provides a simple recursive solution to a classical static model of financial clearing introduced by Eisenberg and Noe (2001). The dynamic structure of our model helps to answer other related questions and, potentially, opens the way to handle more complicated dynamic financial networks. Also, our approach provides a useful tool for solving nonlinear equations involving linear system and max min operations similar to the Bellman equation for the optimal stopping of Markov chains and other optimization problems.
Isaac M. Sonin
Konstantin Sonin
2017-05
Bank Lending Constraints in the Euro Area
http://d.repec.org/n?u=RePEc:euf:dispap:043&r=dge
This paper constructs stylized scenarios to assess the lending constraints faced by the banking sectors of euro area Member States arising from a combination of low profitability, adverse bank equity markets and the phase in of new capital requirements. In this connection, it also presents a comprehensive review of the potential sources of increases in minimum bank capital requirements, providing projections for their evolution at Member State level. The combination of the aforementioned factors is seen to carry the potential to significantly constrain bank lending over the period of transition to higher capital ratios which, according to DSGE model simulations, can noticeably impair growth and investment levels in the short run.
Daniel P. Monteiro
Romanos Priftis
2017-02
An Estimated Structural Model of Entrepreneurial Behavior
http://d.repec.org/n?u=RePEc:fip:fedrwp:17-07&r=dge
Using a rich panel of owner-operated New York dairy farms, we provide new evidence on entrepreneurial behavior. We formulate a dynamic model of farms facing uninsured risks and financial constraints. Farmers derive nonpecuniary benefits from operating their businesses. We estimate the model via simulated minimum distance, matching both production and financial data. We find that financial factors and nonpecuniary benefits are of first-order importance. Collateral constraints and liquidity restrictions inhibit borrowing and the accumulation of capital. The nonpecuniary benefits to farming are large and keep small, low-productivity farms in business. Although farmers are risk averse, eliminating uninsured risk has only modest effects on capital and output.
Jones, John Bailey
Pratap, Sangeeta
Entrepreneurs; financial constraints
2017-05-08
The effects of Fiscal Consolidations: Theory and Evidence
http://d.repec.org/n?u=RePEc:cpr:ceprdp:12016&r=dge
We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, finding details on over 3500 measures. Government spending and transfer cuts are much less harmful than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigates the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices. This channel explains different sizes of multipliers found in fiscal stimuli compared to consolidation plans.
Alesina, Alberto
Barbiero, Omar
Favero, Carlo A.
Giavazzi, Francesco
Paradisi, Matteo
fiscal consolidation plans; Fiscal multipliers
2017-05
Huggett Economies with Multiple Stationary Equilibria
http://d.repec.org/n?u=RePEc:pra:mprapa:78984&r=dge
I obtain a closed-form solution to a Huggett economy with CARA utility when the vector of individual state variables follows a VAR(1) process with an arbitrary shock distribution. The stationary equilibrium is unique if the income process is AR(1), but not necessarily so otherwise. With Gaussian shocks, I provide general sufficient conditions for the existence of at least three equilibria when the income process is either ARMA(1,1), AR(2), or has a persistent-transitory (PT) representation with negatively correlated shocks. The possibility of multiple equilibria calls for caution in comparative statics exercises and policy analyses using heterogeneous-agent models.
Toda, Alexis Akira
CARA utility, income fluctuation problem, persistent-transitory representation
2017-03-13