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on Dynamic General Equilibrium |
| By: | Adam Elbourne; Sander Muns; Sander van Veldhuizen |
| Abstract: | We present a small-open-economy Dynamic Stochastic General Equilibrium model with distortionary taxation. The model has an overlapping generations structure with fully optimising agents following Blanchard (1985). Firms are monopolistically competitive and are subject to sticky prices. We also include capital and foreign bond adjustment costs. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:memodm:227&r=dge |
| By: | F. HEYLEN; R. VAN DE KERCKHOVE; |
| Abstract: | We build and parameterize a general equilibrium OLG model for an open economy to study hours of work in three age groups, education of the young, and aggregate per capita growth. The composition of fiscal policy plays a crucial role. The government sets tax rates on labor, capital and consumption. It allocates its revenue to productive expenditures (mainly for education), consumption and ‘non‐employment’ benefits. Labor taxes and benefits may differ across age groups. We find that our model’s predictions match the facts remarkably well for all key variables in many OECD countries. We then use the model to investigate the effects of various fiscal policy shocks on employment by age and growth, as well as on welfare of current and future generations. We identify ‘non‐employment’ benefits and labor taxes as the main policy variables affecting employment. Productive government expenditures are the most effective with respect to long‐run output and growth. Long‐run output and growth may benefit also from labor tax cuts targeted at older workers. Considering welfare effects, however, these policy measures may not be the ones preferred most by current generations. |
| Keywords: | employment by age, endogenous growth, fiscal policy, overlapping generations |
| JEL: | E62 J22 O41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:09/623&r=dge |
| By: | Javier Andrés Domingo (University of Valencia, Spain); José Emilio Boscá (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain) |
| Abstract: | Mortgage market deregulation in the early 1980s coincided in time with a sharp break in the cyclical behavior of many variables related to housing and to the labor market. This paper analyses the joint dynamics of labor market variables, output and housing prices in a search model with efficient bargaining and financial frictions. In a setting of household heterogeneity, only mortgaged-backed loans are available for impatient households, whose borrowing cannot exceed a proportion of the expected value of their real estate holdings. This feature of the credit market, together with search and matching frictions in the labor market, establish a strong link between credit constraints and consumption that significantly affects labor market outcomes: hours, wages and vacancies. The model is also able to explain the comovements of housing prices with output, productive investment and consumption. Our analysis confirms that the response of labor market variables to technology shocks has been substantially affected by the changes in the nature and tightness of imperfections in credit markets that occurred in the early 1980s. Allowing for a housing price shock, in addition to the technology shock, the model is also able to explain the observed reduction in the correlation of housing prices with both output and private investment. |
| Keywords: | general equilibrium, borrowing constraints, search frictions, housing prices |
| JEL: | E24 E32 E44 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:iei:wpaper:1001&r=dge |
| By: | De Graeve, Ferre (Research Department, Central Bank of Sweden); Dossche, Maarten (National Bank of Belgium); Emiris, Marina (Bank of Canada); Sneessens, Henri (University of Luxembourg); Wouters, Raf (National Bank of Belgium) |
| Abstract: | We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in attitude towards risk and intertemporal substitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. Based on the empirical estimates for the two sources of real macroeconomicrisk, the model generates significant and plausible time variation in both bond and equity risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession. |
| Keywords: | Macro-Finance; Heterogeneous agent; Limited participation; Equity premium; Bond premium |
| JEL: | E32 E44 G12 |
| Date: | 2010–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0236&r=dge |
| By: | Olaf Posch (School of Economics amd Management, Ahrhus University, Denmark); Klaus Wälde (Chair in Macroeconomics, Johannes Gutenberg-Universität Mainz, Germany) |
| Abstract: | A model highlighting the endogeneity of both volatility and growth is presented. Volatility and growth are therefore correlated but there is no causal link from volatility to growth. This joint endogeneity is illustrated by working out the eects through which economies with dierent tax levels dier both in their volatility and growth. Using a continuous-time dynamic stochastic general equilibrium (DSGE) model with plausible parametric restrictions, we obtain closed-form measures of macro volatility based on cyclical components and output growth rates. Given our results, empirical volatility-growth analysis should include controls in the conditional variance equation. Otherwise an omitted variable bias is likely. |
| Keywords: | Tax effects, Volatility measures, Poisson uncertainty, Endogenous cycles and growth, Continuous-time DSGE models |
| JEL: | E32 E62 H3 C65 |
| Date: | 2010–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:jgu:wpaper:1002&r=dge |
| By: | Freystätter, Hanna (Bank of Finland Research) |
| Abstract: | This paper studies financial market disturbances as sources of investment fluctuations in Finland during 1995–2008. We construct a DSGE model of the Finnish economy that incorporates two domestic financial market shocks and financial frictions in the form of a BGG financial accelerator. We investigate empirically the importance of financial market frictions and disturbances by estimating the model using a Bayesian Maximum Likelihood approach. The empirical evidence points to an operative financial accelerator mechanism in Finland. Our key result is that disturbances originating in the financial sector have played a significant role in the historical variation of investment activities in Finland. Even allowing for several shocks stemming from both domestic sources and the international economy, domestic financial market shocks emerge as key drivers of recent business cycle fluctuations in Finland. |
| Keywords: | financial market disturbances; DSGE models; Bayesian estimation |
| JEL: | E32 E44 F41 |
| Date: | 2010–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2010_005&r=dge |
| By: | Jules van Binsbergen; Jesús Fernández-Villaverde; Ralph S.J. Koijen; Juan F. Rubio-Ramírez |
| Abstract: | We solve a dynamic stochastic general equilibrium (DSGE) model in which the representative household has Epstein and Zin recursive preferences. The parameters governing preferences and technology are estimated by means of maximum likelihood using macroeconomic data and asset prices, with a particular focus on the term structure of interest rates. We estimate a large risk aversion, an elasticity of intertemporal substitution higher than one, and substantial adjustment costs. Furthermore, we identify the tensions within the model by estimating it on subsets of these data. We conclude by pointing out potential extensions that might improve the model's fit. |
| JEL: | E2 E3 G12 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15890&r=dge |
| By: | Marco Del Negro; Fabrizio Perri; Fabiano Schivardi |
| Abstract: | The paper studies a fiscal policy instrument that can reduce fiscal distortions without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each citizen, whereby the citizen can choose to pay a fixed price in exchange for a given reduction in her tax rate for a period of time. We introduce the tax buyout in a dynamic overlapping generations economy, calibrated to match several features of the US income, taxes and wealth distribution. Under simple pricing, the introduction of the buyout is revenue neutral but, by reducing distortions, it benefits a significant fraction of the population and leads to sizable increases in aggregate labor supply, income and consumption. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:441&r=dge |
| By: | Ippei Fujiwara (Financial Markets Department, Bank of Japan); Yasuo Hirose (Monetary Affairs Department, Bank of Japan); Mototsugu Shintani (Department of Economics, Vanderbilt University) |
| Abstract: | We examine whether the news shocks, as explored in Beaudry and Portier(2004), can be a major source of aggregate fluctuations. For this purpose, we extend a standard dynamic stochastic general equilibrium model of Christiano, Eichenbaum, and Evans (2005), and Smets and Wouters (2003, 2007) by allowing news shocks on the total factor productivity, and estimate the model using Bayesian methods. Estimation results on the U.S. and Japanese economies suggest that (1) news shocks play a relatively more important role in the U.S. than in Japan; (2) a news shock with a longer forecast horizon has larger effects on nominal variables; and (3) the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks. |
| Keywords: | Bayesian estimation, business cycles, news |
| JEL: | E30 E40 E50 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0921&r=dge |
| By: | Kim, Yong Jin (Ajou University); Lee, Jong-Wha (Asian Development Bank) |
| Abstract: | This paper presents a theoretical model to analyze the effects of technology change on growth rates of income and human capital in the uncertain environments of technology. The uncertainty comes from two sources; the possibility of a technology advance and the characteristics of new technologies. We set up an overlapping generations model in which young agents invest in both width and depth of human capital in order to adopt new technologies. The model develops explicitly the micro-mechanism of the role of human capital in adopting new technologies as well as that of the process of human capital production in uncertain environments. In our model, a higher level for width of human capital relative to the level of depth leads one country to a higher growth path. We also show that an economy can have different growth paths depending on the initial structure of human capital and the uncertainty about the nature of new technologies. In particular, new technologies with more uncertain characteristics may adversely affect human capital accumulation and income growth, leading the economy to a low growth trap. |
| Keywords: | education; endogenous growth; human capital; technology adoption |
| JEL: | J24 O33 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0149&r=dge |
| By: | Yi Wen |
| Abstract: | This paper provides an analytically tractable general-equilibrium model of money demand with micro-foundations. The model is based on the incomplete-market model of Bewley (1980) where money serves as a store of value and provides liquidity to smooth consumption. The model is applied to study the effects of monetary policies. It is shown that heterogeneous liquidity demand can lead to sluggish movements in aggregate prices and positive responses from aggregate output to transitory money injections. However, permanent money growth can be extremely costly: With log utility function and an endogenously determined distribution of money balances that matches the household data, agents are willing to reduce consumption by 8% (or more) to avoid 10% annual inflation. The large welfare cost of inflation arises because inflation destroys the liquidity value and the buffer-stock function of money, thus raising the volatility of consumption for low-income households. The astonishingly large welfare cost of moderate inflation provides a justification for adopting a low inflation target by central banks and offers an explanation for the empirical relationship between inflation and social unrest in developing countries. |
| Keywords: | Liquidity (Economics) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-009&r=dge |
| By: | Kazuo Nishimura (Institute of Economic Research, Kyoto University); Alain Venditti (CNRS - GREQAM and EDHEC) |
| Abstract: | We consider a continuous-time two-sector innite-horizon model with sector specic externalities, endogenous labor and a concave homogeneous non-separable utility function. We show that local indeterminacy arises with a low elasticity of intertempo- ral substitution in consumption provided the wage elasticity of the labor supply and the elasticity of substitution between consumption and leisure are low enough. Such a result cannot hold with additively-separable preferences for which local indeterminacy requires a large enough elasticity of intertemporal substitution in consumption. |
| Keywords: | Sector-specic externalities, endogenous labor, non-separable concave ho- mogeneous utility functions, intertemporal substitution in consumption, local indetermi- nacy. |
| JEL: | C62 E32 O41 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:702&r=dge |
| By: | Enrique Guilles |
| Abstract: | This paper considers an overlapping generations model in which capital investment is financed in a credit market with adverse selection. Lenders’ inability to commit ex-ante not to bailout ex-post, together with a wealthy position of entrepreneurs gives rise to the soft budget constraint syndrome, i.e. the absence of liquidation of poor performing firms on a regular basis. This problem arises endogenously as a result of the interaction between the economic behavior of agents, without relying on political economy ex- planations. We found the problem more binding along the business cycle, providing an explanation to creditors leniency during booms in some Latin- American countries in the late seventies and early nineties. |
| Date: | 2010–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:006885&r=dge |
| By: | Ronny Mazzocchi |
| Abstract: | The current consensus in macroeconomics, or New Neoclassical Synthesis (NNS), is based on dynamically stochastic general equilibrium (DSGE) modelling with a RBC core to which nominal rigidities are added by way of imperfect competition. The strategy is to minimize the frictions that are required to reproduce Keynesian results (in terms of persistent real effects of monetary policy) and Wicksellian results (in terms of interaction of interest and prices) in a rigorous framework with intertemporal optimization of consumption, forward-looking behavior and continously clearing markets. In reality the main contention of Keynes and Wicksell was saving-investment imbalances (i.e. capital market failures and intertemporal disequilibrium in modern parlance) that are notably absent from the NNS. The paper presents a dynamic model with endogenous capital stock whereby it is possible to assess, and hopefully clarify, some basic issues concerning the macroeconomics of saving-investment imbalances and to explore the dynamic properties of the system under different monetary policy rules. |
| Keywords: | macroeconomics, monetary policy, New Neoclassical Synthesis, saving-investment imbalances, intertemporal coordination failure. |
| JEL: | E21 E22 E31 E32 E52 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:usi:depfid:0210&r=dge |
| By: | Dimitrios Varvarigos |
| Abstract: | In an overlapping generations economy with endogenous income growth, I combine themes from the work of Cooper et al. (2001), Kapur (2005), and Eaton and Eswaran (2009) in order to provide an example of an economy whose welfare dynamics are non-monotonic. Particularly, the evolution of workers’ welfare can be distinguished between two different regimes that arise naturally during the process of economic development. At relatively early stages, status concerns are inactive and welfare increases following the rising consumption of normal goods. During the later stages, however, workers engage in some type of status competition that does not allow consumption to improve well-being: their welfare actually declines as successive generations of workers increase their labour effort at the expense of leisure. |
| Keywords: | Welfare; Economic growth; Positional goods; Leisure |
| JEL: | D62 O41 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:10/02&r=dge |
| By: | Richard Rogerson; Robert Shimer |
| Abstract: | This chapter assesses how models with search frictions have shaped our understanding of aggregate labor market outcomes in two contexts: business cycle fluctuations and long-run (trend) changes. We first consolidate data on aggregate labor market outcomes for a large set of OECD countries. We then ask how models with search improve our understanding of these data. Our results are mixed. Search models are useful for interpreting the behavior of some additional data series, but search frictions per se do not seem to improve our understanding of movements in total hours at either business cycle frequencies or in the long-run. Still, models with search seem promising as a framework for understanding how different wage setting processes affect aggregate labor market outcomes. |
| JEL: | E24 E32 J21 J64 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15901&r=dge |
| By: | Gianluca Moretti (Bank of Italy); Giulio Nicoletti (Bank of Italy) |
| Abstract: | Recent empirical literature shows that key macro variables such as GDP and productivity display long memory dynamics. For DSGE models, we propose a ‘Generalized’ Kalman Filter to deal effectively with this problem: our method connects to and innovates upon data-filtering techniques already used in the DSGE literature. We show our method produces more plausible estimates of the deep parameters as well as more accurate out-of-sample forecasts of macroeconomic data. |
| Keywords: | DSGE models, long memory, Kalman Filter. |
| JEL: | C51 C53 E37 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_750_10&r=dge |
| By: | Rob Aalbers |
| Abstract: | We use a dynamic stochastic general equilibrium model to determine efficient discount rates for climate (mitigation and adaptation) and non-climate investment in the face of climate change. Our main result is that the non-diversifiable risk in the economy may be related to both shocks in aggregate wealth and shocks in global average temperature. Therefore, both aggregate wealth and global average temperature will carry a risk premium reflecting their contribution to the total amount of non-diversifiable risk. We characterize both climate and non-climate investments by means of a contingent claim and show that climate and non-climate investments will in general be discounted at different rates. We discuss the conditions under which the discount rates of climate investments will be lower than the discount rate of non-climate investments. |
| Keywords: | discounting; adaptation; mitigation; climate change; risk premia; dynamic stochastic general equilibrium model |
| JEL: | G12 H43 Q5 Q54 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:126&r=dge |
| By: | Dorofeenko, Victor (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Lee, Gabriel S. (IREBS, University of Regensburg, Regensburg, Germany, and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Salyer, Kevin D. (Department of Economics, University of California, Davis, USA) |
| Abstract: | This paper analyzes the role of uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for the business cycle. Also, we demonstrate that bankruptcy costs act as an endogenous markup factor in housing prices; as a consequence, the volatility of housing prices is greater than that of output, as observed in the data. The model can also account for the observed countercyclical behavior of risk premia on loans to the housing sector. |
| Keywords: | Agency costs, credit channel, time-varying uncertainty, residential investment, housing production, calibration |
| JEL: | E4 E5 E2 R2 R3 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:249&r=dge |
| By: | Yun Jung Kim (University of Michigan); Jing Zhang (University of Michigan) |
| Abstract: | In the past, foreign borrowing by developing countries was comprised almost entirely of government borrowing. Recently, private firms and individuals in developing countries borrow substantially from foreign lenders. It is not clear whether the observed increase in private sector borrowing leads to overborrowing and frequent defaults by governments in developing countries. In this paper, we develop a tractable quantitative model in which private agents decide how much to borrow but the government decides whether to default. The model with decentralized borrowing increases aggregate credit costs and sovereign default risk, and reduces aggregate welfare, relative to a model with centralized borrowing. Private agents do not internalize the effect of their borrowing on economy-wide credit costs and thus would like to borrow more than the socially efficient level. Depending on the severity of default penalties, decentralized borrowing may lead to either too much or too little debt in equilibrium. The introduction of decentralized borrowing substantially improves the model's empirical fit in terms of matching observed debt levels and default rates. |
| Keywords: | Sovereign Default, Sovereign Debt, Private Borrowing, Capital Flows |
| JEL: | F32 F34 F41 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:596&r=dge |
| By: | Lorenzo Forni (Bank of Italy); Andrea Gerali (Bank of Italy); Massimiliano Pisani (Bank of Italy JEL classification: E62, H63) |
| Abstract: | We simulate the macroeconomic and welfare implications of different fiscal consolidation scenarios in Italy using a medium scale two-areas dynamic general equilibrium currency-union model. Differently from similar models, ours is rich in the terms of fiscal features. We assume distortionary taxes (on labor income, capital income and consumption) and welfare-enhancing public expenditure. We distinguish between public spending on final goods and services, public employment and transfers to households. The scenarios that we consider envisage a decreases in the public debt to GDP ratio of 10 percentage points in 5 years. Based on our simulations we find that: first, fiscal distortions are quantitatively significant; second, a consolidation strategy that reduces expenditure and simultaneously lowers tax rates has a positive effect on long-run GDP of 5% to 7% and on welfare of 4% to 7% of the initial levels, depending on the composition of the adjustment; third, consumption and investment are stable or grow on impact and along the path to the new steady state; finally, spillovers to the rest of the Euro area are expansionary and sizeable both in the long run and along the transition. |
| Keywords: | fiscal consolidation, monetary union, distortionary taxation, general equilibrium models |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_747_10&r=dge |
| By: | Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima |
| Abstract: | Should capital and labor be taxed, and if so how when individuals' labor and capital income are subject to uninsurable idiosyncratic risks? In a two period general equilibrium model with production, we first show that reducing investment is welfare improving if households are homogeneous enough ex ante. On the other hand, when the degree of heterogeneity is sufficientlyhigh a welfare improvement is achieved by increasing investment, even if the investment level is already higher than at the e¢ cient allocation obtained when full insurance markets were available. Consequently, the optimal capital tax rate might be negative. We derive a decomposition formula of the e¤ects of the tax which allow us to determine how the sign of optimal tax on capital and labor depends both on the nature of the shocks and the degree of heterogeneity among consumers as well as on the way in which the tax revenue is allocated. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2010/02&r=dge |
| By: | Gautam Bose (School of Economics, The University of New South Wales); Abhijit Sengupta (Discipline of Economics, University of Sydney) |
| Abstract: | This paper develops a dynamic model of an economy with search frictions in which homogeneous agents choose between specializing as producers or as merchants, and can change occupation at any time. Merchants operate alongside a decentralized search market and provide immediacy in trade in return for a price. Agents who know the location of a merchant have the option of paying the merchant’s price and avoiding search. We characterize equilibria in symmetric Markov strategies, and derive conditions under which merchants and their clients form a repeated relationship. We analyze welfare and explore conditions for the endogenous rise of an institution of intermediation. |
| Keywords: | Search; endogenous intermediation; repeated interaction |
| JEL: | D02 D51 D83 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2010-04&r=dge |
| By: | Fabien Tripier (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272) |
| Abstract: | In a matching and intrafi rm bargaining economy with constant return to scale production and matching technologies, large fi rms hire and train workers efficiently. The efficiency of the competitive economy relies on the ability of large fi rm to take into account the consequences of training on the wages bargained inside the fi rm. This intrafi rm bargaining process solves the hold-up problem that is associated with training costs that would otherwise lead to inefficient decisions of hiring and training. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00449625_v1&r=dge |
| By: | André Kurmann; Christopher Otrok |
| Abstract: | We provide a new structural interpretation of the relationship between the slope of the term structure of interest rates and macroeconomic fundamentals. We first adopt an agnostic identification approach that allows us to identify the shocks that explain most of the movements in the slope. We find that two shocks are sufficient to explain virtually all movements in the slope. Impulse response functions for the first shock, which explains the majority of the movements in the slope, lead us to interpret this main shock as a news shock about future productivity. We confirm this interpretation by formally identifying such a news shock as in Barsky and Sims (2009) and Sims (2009). We then assess to what extent a New Keynesian DSGE model is capable of generating the observed slope responses to a news shock. We find that augmenting DSGE models with a term structure provides valuable information to discipline the description of monetary policy and the model’s response to news shocks in general. |
| Keywords: | Term structure of interest rates, news, productivity shocks, business cycles, monetary policy |
| JEL: | E30 E43 E52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1005&r=dge |
| By: | Filippo Occhino; Andrea Pescatori |
| Abstract: | We study the macroeconomic implications of the debt overhang distortion. The probability that a firm will default acts like a tax that discourages its current investment. This is because the marginal return of the firm's investment will be seized by its creditors in the event of default, so the higher the firm's probability of default, the lower its expected marginal return of investment. The dynamics of this distortion, which moves counter-cyclically, amplify and propagate the effects of productivity, volatility, wealth redistribution and government spending shocks. Both the size and the persistence of these effects are quantitatively important, and the fiscal multiplier is large and hump-shaped. The model replicates important features of the joint dynamics of macro variables and credit risk variables, like default rates, recovery rates and credit spreads. |
| Keywords: | Corporations - Finance ; Debt ; Business cycles ; Risk |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1003&r=dge |
| By: | Stephen D. Williamson; Randall Wright |
| Abstract: | The purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understanding monetary issues. We survey recent papers on monetary theory, showing how they build on common foundations. We then lay out a tractable benchmark version of the model that allows us to address a variety of issues. We use it to analyze some classic economic topics, like the welfare effects of inflation, the relationship between money and capital accumulation, and the Phillips curve. We also extend the benchmark model in new ways, and show how it can be used to generate new insights in the study of payments, banking, and asset markets. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:443&r=dge |
| By: | Scrimgeour, Dean (Department of Economics, Colgate University) |
| Abstract: | This paper explores the dynamic behavior of a Romer-style endogenous growth model, analyzing how changes in tax rates affect government revenue in the short run and the long run. I show that in this environment lowering taxes on financial income is unlikely to stimulate tax revenue in the long run and has modest effects on the tax base, contrary to some other studies of the dynamic response of revenue to tax rates. Calibrations of the model that suggest Laffer curve effects can be substantial require implausibly low values for the elasticity of substitution between varieties of intermediate goods. For more plausible parameter values, I find that around 20% of a tax cut would be self-financing due to an expansion in the tax base. |
| Keywords: | dynamic scoring, endogenous growth |
| JEL: | O3 H3 |
| Date: | 2010–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:cgt:wpaper:2010-02&r=dge |
| By: | Raouf Boucekkine; Carmen Camacho; Giorgio Fabbri |
| Abstract: | We study the optimal dynamics of an AK economy where population is uniformly distributed along the unit circle. Locations only differ in initial capital endowments. Despite constant returns to capital, we prove that transition dynamics will set in. In particular, we prove that the spatio-temporal dynamics, induced by the willingness of the planner to give the same (detrended) consumption over space and time, lead to convergence in the level of capital across locations in the long-run. |
| Keywords: | Economic Growth, Inequality, Spatial Dynamics, Convergence |
| JEL: | C60 O11 R11 R12 R13 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2010_06&r=dge |
| By: | Reynard, Samuel (Swiss National Bank); Schabert, Andreas (University of Dortmund) |
| Abstract: | We develop a macroeconomic framework where money is supplied against only few eligible securities in open market operations. The relationship between the policy rate, expected inflation and consumption growth is affected by money market conditions, i.e. the varying liquidity value of eligible assets and the associated risk. This induces a liquidity premium, which explains the observed systematic wedge between the policy rate and consumption Euler interest rate that standard models equate. It further implies a dampened response of consumption to policy rate shocks that is humpshaped when we account for realistic central bank transfers and the dynamics of bond holdings. |
| Keywords: | Monetary Policy; Open market operations; Liquidity premium; Money market rate; Consumption Euler rate; Monetary policy transmission |
| JEL: | E32 E43 E52 E58 |
| Date: | 2009–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2010_004&r=dge |
| By: | Michiru Sakane |
| Abstract: | This paper studies the international transmission effects of the news about the Total Factor Productivity (TFP) of the US to the Canadian economy. First, using the Vector Error Correction Model (VECM), the impulse responses of Canadian macroeconomic variables to the US news shock are estimated. Next, I develop and estimate a two-country RBC model with the preference introduced by Jaimovich and Rebelo (2008) and investment adjustment cost to generate booms in Canadian variables in response to news about future US TFP. I find that international macroeconomic comovements between the US and Canada can be generated by the news about future TFP in the US. Unlike previous studies, I show that the response of Canadian TFP to the US news shock is important in order to generate the boom observed in empirical analysis. Estimated value of the preference parameter indicates that getting rid of the wealth effect on hours worked is important. I also show that low elasticity of substitution between domestically and foreign produced intermediate goods can also help explaining the domestic boom created by the news shock, which highlights the importance of analyzing an open economy. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd09-129&r=dge |
| By: | Eric M. Aldrich (Department of Economics, Duke University); Jesús Fernández-Villaverde (Department of Economics, University of Pennsylvania); Ronald Gallant (Fuqua School of Business, Duke University); Juan F. Rubio-Ramírez (Department of Economics, Duke University) |
| Abstract: | This paper shows how to build algorithms that use graphics processing units (GPUs) installed in most modern computers to solve dynamic equilibrium models in economics. In particular, we rely on the compute uni.ed device architecture (CUDA) of NVIDIA GPUs. We illustrate the power of the approach by solving a simple real business cycle model with value function iteration. We document improvements in speed of around 200 times and suggest that even further gains are likely. |
| Keywords: | GPU computing, Dynamic Equilibrium models |
| JEL: | E0 C87 |
| Date: | 2010–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:10-014&r=dge |
| By: | Thomas Bishop (Sungkyunkwan University); Cheolbeom Park (Korea University) |
| Abstract: | Available evidence suggests that the average marginal propensity to consume (MPC) from the 2001 tax rebate in the US was not nearly as large as that from previous tax cuts. We examine if this phenomenon can be explained by the fact that the widespread use of credit cards has made borrowing accessible for most US households by constructing a model that simulates the dynamic effect of relaxed borrowing constraints. Our model uses Kreps-Porteus preferences which account for independent measures of relative risk aversion and the elasticity of intertemporal substitution, both of which can theoretically affect the willingness to save or spend. Our model shows that the average MPC drops substantially immediately after borrowing constraints are relaxed because few consumers having binding borrowing constraints at that time. The model also shows that consumers gradually reduce their wealth after borrowing constraints are relaxed, causing more of them to have binding constraints over time, which in turn causes the average MPC to rise gradually to a new steady state value that is slightly lower than the original value. This dynamic pattern of the MPC suggests that a greater ability to borrow with credit cards could explain the lower effectiveness of the 2001 tax rebate. In addition, the model predicts that consumers choose to hold lower amounts of liquid assets for precautionary reasons when they have a greater ability to borrow unsecured debt. |
| Keywords: | marginal propensity to consumer, borrowing constraints, precautionary saving, elasticity of intertemporal subsitution, tax cut |
| JEL: | D91 E21 E62 H31 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:1008&r=dge |
| By: | Jürgen Jerger (Osteuropa-Institut, Regensburg (Institut for East European Studies)); Oke Röhe (University of Regensburg) |
| Abstract: | In this paper, we estimate a New Keynesian DSGE model developed by Ireland (2003) on French, German and Spanish data with the aim to explore the macroeconomic consequences of EMU. In order to validate the results from the DSGE model, we amend this analysis by stability tests of monetary policy reaction functions for these countries. We find that (a) the DSGE structure is well suited for the characterization of key macroeconomic features of the three economies; (b) significant effciency gains were realized in terms of lower adjustment cost of prices and the capital stock; (c) the behavior of monetary policy did not change in Germany, unlike in France and Spain. Specifically, the impact of inflation on interest rates increased considerably in the two latter countries. |
| Keywords: | DSGE, monetary policy, EMU |
| JEL: | E31 E32 E52 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:276&r=dge |
| By: | Lance J. Lochner (University of Western Ontario); Alexander Monge-Naranjo (Pennsylvania State University) |
| Abstract: | We develop a human capital model with borrowing constraints explicitly derived from government student loan programs and private lending under limited commitment. Two key implications of our analysis are: (i) binding constraints may not depress investment; and (ii) a positive relationship between investment and ability is unlikely to arise in standard exogenous constraint models but arises more generally in our framework. Our model also helps explain a number of important empirical observations in the U.S. higher education sector since the early 1980s: (i) a strong and stable positive correlation between ability and college attendance for all income and wealth backgrounds; (ii) the rising importance of family income as a determinant of college attendance; (iii) the increase in the share of undergraduates borrowing the maximum from government student loan programs; and (iv) the dramatic rise in student borrowing from private lenders. In our framework, all of these are natural responses to the rising costs and returns to college (with stable real government loan limits) observed in recent decades. In contrast, the standard exogenous constraint model cannot simultaneously explain observations (i) and (ii) under standard assumptions about preferences; it is also silent on the rise in private lending. Finally, by incorporating both public and private lending, our framework offers new insights regarding the interaction of government and private student lending as well as the responsiveness of private student credit to economic and policy changes. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:hcuwoc:20101&r=dge |
| By: | Luis J. Álvarez (Banco de España); Pablo Burriel (Banco de España) |
| Abstract: | This paper shows that the standard Calvo model clearly fails to account for the distribution of price durations found in micro data. We propose a novel price setting model that fully captures heterogeneity in individual pricing behavior. Specifically, we assume that there is a continuum of firms that set prices according to a Calvo mechanism, each of them with a possibly different price adjustment parameter. The model is estimated by maximum likelihood and closely matches individual consumer and producer price data. Incorporating estimated price setting rules into a standard DSGE model shows that fully accounting for pricing heterogeneity is crucial to understanding inflation and output dynamics. The standard calibration that assumes within sector homogeneity, as in Carvalho (2006), is at odds with micro data evidence and leads to a substantial distortion of estimates of the real impact of monetary policy. |
| Keywords: | price setting, Calvo model, heterogeneity, hazard rate |
| JEL: | C40 D40 E30 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1010&r=dge |
| By: | Raouf Boucekkine; Benteng Zou |
| Abstract: | This paper extends the standard neoclassical model by considering a technology sector through which an economy with limited human capital attempts to catch up with a given “locomotive” pushing exogenously technical progress. In periods of technological stagnation, economies close enough to the frontier may find it optimal to not catch up, which reinforces worldwide technological sclerosis. Under sustainable technological growth, all the other economies will sooner or later engage in imitation. Such a phase of technology adoption may be delayed depending on certain deep characteristics of the followers. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2010_07&r=dge |
| By: | Jean Boivin; Michael T. Kiley; Frederic S. Mishkin |
| Abstract: | We discuss the evolution in macroeconomic thought on the monetary policy transmission mechanism and present related empirical evidence. The core channels of policy transmission – the neoclassical links between short-term policy interest rates, other asset prices such as long-term interest rates, equity prices, and the exchange rate, and the consequent effects on household and business demand – have remained steady from early policy-oriented models (like the Penn-MIT-SSRC MPS model) to modern dynamic-stochastic-general-equilibrium (DSGE) models. In contrast, non-neoclassical channels, such as credit-based channels, have remained outside the core models. In conjunction with this evolution in theory and modeling, there have been notable changes in policy behavior (with policy more focused on price stability) and in the reduced form correlations of policy interest rates with activity in the United States. Regulatory effects on credit provision have also changed significantly. As a result, we review the empirical evidence on the changes in the effect of monetary policy actions on real activity and inflation and present new evidence, using both a relatively unrestricted factor-augmented vector autoregression (FAVAR) and a DSGE model. Both approaches yield similar results: Monetary policy innovations have a more muted effect on real activity and inflation in recent decades as compared to the effects before 1980. Our analysis suggests that these shifts are accounted for by changes in policy behavior and the effect of these changes on expectations, leaving little role for changes in underlying private-sector behavior (outside shifts related to monetary policy changes). |
| JEL: | E2 E3 E4 E5 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15879&r=dge |
| By: | Fatih Guvenen (Institute for Fiscal Studies and University of Rochester); Burhanettin Kuruscu; Serdar Ozkan |
| Abstract: | <p>Wage inequality has been significantly higher in the United States than in continental European countries (CEU) since the 1970s. Moreover, this inequality gap has further widened during this period as the US has experienced a large increase in wage inequality, whereas the CEU has seen only modest changes. This paper studies the role of labor income tax policies for understanding these facts. We begin by documenting two new empirical facts that link these inequality differences to tax policies. First, we show that countries with more progressive labor income tax schedules have significantly lower before-tax wage inequality at different points in time. Second, progressivity is also negatively correlated with the rise in wage inequality during this period. We then construct a life cycle model in which individuals decide each period whether to go to school, work, or be unemployed. Individuals can accumulate skills either in school or while working. Wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks. Progressive taxation compresses the (after-tax) wage structure, thereby distorting the incentives to accumulate human capital, in turn reducing the cross-sectional dispersion of (before-tax) wages. We find that these policies can account for half of the difference between the US and the CEU in overall wage inequality and 76% of the difference in inequality at the upper end (log 90-50 differential). When this economy experiences skill-biased technological change, progressivity also dampens the rise in wage dispersion over time. The model explains 41% of the difference in the total rise in inequality and 58% of the difference at the upper end.</p> |
| Keywords: | Wage inequality, human capital, skill-biased technical change, tax policies |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:09/23&r=dge |
| By: | Stephen D. Williamson; Randall Wright |
| Abstract: | This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: New Monetarism has something in common with Old Monetarism, but there are also important differences; it has little in common with Keynesianism. We describe the principles of these schools and contrast them with our approach. To show how it works, in practice, we build a benchmark New Monetarist model, and use it to study several issues, including the cost of inflation, liquidity and asset trading. We also develop a new model of banking. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:442&r=dge |