nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒01‒03
39 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. "Gesell Tax" and Efficiency of Monetary Exchange By Martin Menner
  2. Demography, capital flows and unemployment By Luca Marchiori; Olivier Pierrard; Henri R. Sneessens
  3. Social Welfare and Wage Inequality in Search Equilibrium with Personal Contacts By Anna Zaharieva
  4. Bayesian Estimation of DSGE models: Is the Workhorse Model Identified? By Evren Caglar; Jagjit S. Chadha; Katsuyuki Shibayama
  5. Asset pricing with concentrated ownership of capital By Kevin J. Lansing
  6. The macroeconomics of TANSTAAFL By Grossmann, Volker; Steger, Thomas M.; Trimborn, Timo
  7. Financial Frictions, Financial Shocks and Labour Market Fluctuations in Canada By Yahong Zhang
  8. The Credit Spread and U.S. Business Cycles By Junsang Lee; Keisuke Otsu
  9. Determining the motives for a positive optimal tax on capital By William B. Peterman
  10. Government bond risk premia and the cyclicality of fiscal policy By Kai Christoffel; Ivan Jaccard; Juha Kilponen
  11. A Macroeconomic Approach to Corporate Capital Structure By Mitsuru Katagiri
  12. Learning, capital-embodied technology and aggregate fluctuations By Gortz, Christoph; John, Tsoukalas
  13. Existence of equilibrium in OLG economies with increasing returns By Jean-Marc Bonnisseau; Lalaina Rakotonindrainy
  14. The Dynamics of Revenue-Neutral Trade Liberalization By Ligthart, J.E.; Meijden, G.C. van der
  15. An estimated DSGE model: explaining variation in term premia By Andreasen, Martin
  16. Bank Leverage Regulation and Macroeconomic Dynamics By Ian Christensen; Césaire Meh; Kevin Moran
  17. Wealth inequality and the optimal level of government debt By Sigrid Röhrs; Christoph Winter
  18. An equilibrium model of 'global imbalances' revisited By Körner, Finn Marten
  19. Fiscal Stimulus and Distortionary Taxation By Thorsten Drautzburg; Harald Uhlig
  20. The macroeconomics of firms' savings By Roc Armenter; Viktoria Hnatkovska
  21. Examining macroeconomic models through the lens of asset pricing By Jaroslav Borovicka; Lars Hansen
  22. Accounting for the economic relationship between Japan and the Asian Tigers By Hideaki Hirata; Keisuke Otsu
  23. Home Bias in Open Economy Financial Macroeconomics By Nicolas Coeurdacier; Hélène Rey
  24. Emerging from the war: Gold Standard mentality, current accounts and the international business cycle 1885-1939 By Mathias Hoffmann; Ulrich Woitek
  25. Targeting the Poor: A Macroeconomic Analysis of Cash By Berriel, Tiago C.; Zilberman, Eduardo
  26. How much can corporate tax reduction contribute to economic recovery, employment and feedback of tax revenue? By Kazuki Hiraga
  27. A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation By Arnaud Costinot; Guido Lorenzoni; Iván Werning
  28. Credit Constraints and Productive Entrepreneurship in Africa By Baliamoune-Lutz, Mina; Brixiova, Zuzana; Ndikumana, Leonce
  29. Consumption and the Great Recession By Mariacristina De Nardi; Eric French; David Benson
  30. Unemployment, commuting, and search intensity By Wrede, Matthias
  31. Risk Aversion Heterogeneity, Risky Jobs and Wealth Inequality By Marco Cozzi
  32. Empirical policy functions as benchmarks for evaluation of dynamic capital structure models By Bazdresch, Santiago
  33. Bank Finance Versus Bond Finance By Fiorella De Fiore; Harald Uhlig
  34. Conformism and Structural Change By Takeo Hori; Masako Ikefuji; Kazuo Mino
  35. The macroeconomic effects of large-scale asset purchase programs By Han Chen; Vasco Cúrdia; Andrea Ferrero
  36. Do Low Interest Rates Sow the Seeds of Financial Crises? By Simona E. Cociuba; Malik Shukayev; Alexander Ueberfeldt
  37. Trading Dynamics with Adverse Selection and Search: Market Freeze, Intervention and Recovery By Jonathan Chiu; Thorsten V. Koeppl
  38. Cross-Sectoral Variation in The Volatility of Plant-Level Idiosyncratic Shocks By Rui Castro; Gian Luca Clementi; Yoonsoo Lee
  39. ‘Love of Wealth’ and Economic Growth By Rehme, Günther

  1. By: Martin Menner (Universidad de Alicante)
    Abstract: A periodic "Gesell Tax" on money holdings as a way to overcome the zero-lower-bound on nominal interest rates is studied in a framework where money is essential. For this purpose, I characterize the efficiency properties of taxing money in a full-fledged macroeconomic business cycle model of the third-generation of monetary search models. Both, inflation and "Gesell taxes" maximize steady state capital stock, output, consumption, investment and welfare at moderate levels. The Friedman rule is sub-optimal, unless accompanied by a moderate “Gesell tax”. In a recession scenario a Gesell tax speeds up the recovery in a similar way as a large fiscal stimulus but avoids "crowding out" of private consumption and investment.
    Keywords: monetary search-theory, negative interest rates, Gesell tax, capital formation, DSGE model
    JEL: D83 E19 E32 E49
    Date: 2011–12
  2. By: Luca Marchiori; Olivier Pierrard; Henri R. Sneessens
    Abstract: This paper contributes to the already vast literature on demography-induced international capital flows by examining the role of labor market imperfections and institutions. We setup a two-country overlapping generations model with search unemployment, which we calibrate on EU15 and US data. Labor market imperfections are found to significantly increase the volume of capital flows, because of stronger employment adjustments in comparison with a competitive economy. We next exploit themodel to investigate how demographic asymmetriesmay have contributed to unemployment and welfare changes in the recent past (1950-2010). We show that a policy reform in one country also has an impact on labor markets in other countries when capital is mobile.
    Keywords: demographics; capital flows; overlapping generations; general equilibrium; unemployment
    JEL: J11 F21 D91 C68
    Date: 2011–12
  3. By: Anna Zaharieva (Institute of Mathematical Economics, Bielefeld University)
    Abstract: This paper incorporates job search through personal contacts into an equilibrium matching model with a segregated labour market. Job search in the public submarket is competitive which is in contrast with the bargaining nature of wages in the informal job market. Moreover, the social capital of unemployed workers is endogenous depending on the employment status of their contacts. This paper shows that the traditional Hosios (1990) condition continues to hold in an economy with family contacts but it fails to provide efficiency in an economy with weak ties. This inefficiency is explained by a network externality: weak ties yield higher wages in the informal submarket than family contacts. Furthermore, the spillovers between the two submarkets imply that wage premiums associated with personal contacts lead to higher wages paid to unemployed workers with low social capital but the probability to find a job for those workers is below the optimal level.
    Keywords: Personal contacts, family job search, social capital, wages, equilibrium efficiency
    JEL: J23 J31 J64 D10
    Date: 2011–12
  4. By: Evren Caglar; Jagjit S. Chadha; Katsuyuki Shibayama
    Abstract: Koop, Pesaran and Smith (2011) suggest a simple diagnostic indicator for the Bayesian estimation of the parameters of a DSGE model. They show that, if a parameter is well identified, the precision of the posterior should improve as the (artificial) data size T increases, and the indicator checks the speed at which precision improves. It does not require any additional programming; a researcher just needs to generate artificial data and estimate the model with different T. Applying this to Smets and Wouters'(2007) medium size US model, we find that while exogenous shock processes are well identified, most of the parameters in the structural equations are not.
    Keywords: Bayesian Estimation; Dynamic stochastic general equilibrium models; Identification
    JEL: C51 C52 E32
    Date: 2011–11
  5. By: Kevin J. Lansing (Norges Bank (Central Bank of Norway) and Federal Reserve Bank of San Francisco)
    Abstract: This paper investigates how concentrated ownership of capital influences the pricing of risky assets in a production economy. The model is designed to approximate the skewed distribution of wealth and income in U.S. data. I show that concentrated ownership significantly magnifies the equity risk premium relative to an otherwise similar representative-agent economy because the capital owners' consumption is more strongly linked to volatile dividends from equity. A temporary shock to the technology for producing new capital (an "investment shock") causes dividend growth to be much more volatile than aggregate consumption growth, as in long-run U.S. data. The investment shock can also be interpreted as a depreciation shock, or more generally, a financial friction that affects the supply of new capital. Under power utility with a risk aversion coeffecient of 3.5, the model can roughly match the first and second moments of key asset pricing variables in long-run U.S. data, including the historical equity risk premium. About one-half of the model equity premium is attributable to the investment shock while the other half is attributable to a standard productivity shock. On the macro side, the model performs reasonably well in matching the business cycle moments of aggregate variables, including the pro-cyclical movement of capital's share of total income in U.S. data.
    Keywords: Asset pricing, Equity premium, Term premium, Investment shocks, Real business cycles, Wealth inequality
    JEL: E25 E32 E44 G12 O40
    Date: 2011–12–22
  6. By: Grossmann, Volker; Steger, Thomas M.; Trimborn, Timo
    Abstract: This paper shows that dynamic inefficiency can occur in dynamic general equilibrium models with fully optimizing, infinitely-lived households even in a situation with underinvestment. We identify necessary conditions for such a possibility and illustrate it in a standard R&D-based growth model. Calibrating the model to the US, we show that a moderate increase in the R&D subsidy indeed leads to an intertemporal free lunch (i.e., an increase in per capita consumption at all times). Hence, Milton Friedman's conjecture There ain't no such thing as a free lunch (TANSTAAFL) may not apply. --
    Keywords: intertemporal free lunch,dynamic inefficiency,R&D-based growth,transitional dynamics
    JEL: E20 H20 O41
    Date: 2011
  7. By: Yahong Zhang
    Abstract: What are the effects of financial market imperfections on unemployment and vacancies in Canada? The author estimates the model of Zhang (2011) – a standard monetary dynamic stochastic general-equilibrium model augmented with explicit financial and labour market frictions – with Canadian data for the period 1984Q2–2010Q4, and uses it to examine the importance of financial shocks on labour market fluctuations in Canada. She finds that the estimated value of the elasticity of external finance, the key parameter capturing financial frictions, is much higher than the value suggested in the literature. This gives rise to a larger amplification effect from the financial accelerator mechanism, which helps the model generate a more volatile labour market. The author finds that the model accounts well for the cyclical behaviour of unemployment and vacancies observed in the data. She also finds that financial shocks are one of the main sources of fluctuations in the Canadian labour market. Overall, financial shocks contribute about 30 per cent of the fluctuations in unemployment and vacancies for the Canadian economy.
    Keywords: Economic models, Financial markets, Labour markets
    JEL: E32 E44 J6
    Date: 2011
  8. By: Junsang Lee; Keisuke Otsu
    Abstract: In this paper, we construct a dynamic stochastic general equilibrium model in order to investigate the impact of credit spread shocks on the U.S. business cycle. We find that the shocks to the investment specific technology and the preference weights on consumption and leisure are the main sources of output fluctuation. Shocks to the credit spread and productivity are the main source of the fluctuation in the investment to output ratio. Credit spread shocks also had a significant impact on the output during the recent financial crisis.
    Keywords: Credit Spread; Business Cycles; Investment Specific Technology
    JEL: E13 E32
    Date: 2011–11
  9. By: William B. Peterman
    Abstract: Previous literature demonstrates that in a computational life cycle model the optimal tax on capital is positive and large. Given the computational complexities of these overlapping generations models it is helpful to determine the relative importance of the economic factors driving this result. I highlight the impact of changing two common assumptions in a benchmark model that generates a large optimal tax on capital similar to the model in Conesa et al. (2009). First, the utility function is altered such that it implies an agent's Frisch labor supply elasticity is constant, as opposed to increasing, over his lifetime. Second, the government is allowed to tax accidental bequests at a separate rate from ordinary capital income. The main finding of this paper is that these two changes cause the optimal tax on capital to drop by almost half. Furthermore, I find that the welfare costs of adopting the high optimal tax on capital from the benchmark model in the model with the altered assumptions, which calls for a lower tax on capital, are equivalent to 0.35 percent of total lifetime consumption. Quantifying the impact of these assumptions in the benchmark model is important because the first has limited empirical evidence and the second, although included for tractability, confounds a motive for taxing capital with a motive for taxing accidental bequests.
    Keywords: Capital ; Taxation
    Date: 2011
  10. By: Kai Christoffel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ivan Jaccard (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Juha Kilponen (Bank of Finland, Rauhankatu 19, FI-00101 Helsinki, Finland and European Financial Stability Facility.)
    Abstract: We introduce a specification of habit formation featuring non-separability between consumption and leisure into an otherwise standard New Keynesian model. The model can be estimated with standard Bayesian techniques and the bond pricing implications are evaluated using higher-order approximations. The model is able to reproduce a sizeable risk premium on long-term bonds and the cyclicality of fiscal policy has an impact on the bond premium that is quantitatively important. Technology, government spending, and mark-up shocks are the main drivers of the time-variation in bond premia. JEL Classification: E5, E6, G1.
    Keywords: DSGE models, fiscal policy, bond risk premium, monetary policy.
    Date: 2011–12
  11. By: Mitsuru Katagiri (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In this paper, I investigate the cross-sectional determinants of corporate capital structure using a general equilibrium model with endogenous firm dynamics, a realistic tax environment, and financial frictions. I find that the equilibrium firm distribution in the model replicates fairly well the distribution of corporate capital structure as well as the relationship between capital structure, profitability, and firm size in the data. The key mechanisms here are economies of scale and two types of productivity shocks: persistent and transitory. The counterfactual experiment using the model implies, among other things, that tax benefits have relatively small effects on corporate capital structure choice compared with default costs and the costs of outside equity, including the dividend tax. It also reveals that the effects of those frictions on corporate capital structure choice are highly interrelated with each other.
    Keywords: Corporate Capital Structure, Dynamic Trade-off Theory, Heterogeneous Firm Model
    JEL: G32 G31 E22
    Date: 2011–12
  12. By: Gortz, Christoph; John, Tsoukalas
    Abstract: Business cycles in the U.S. and G-7 economies are asymmetric: recoveries and expansions tend to be long and gradual and busts tend to be short and sharp. Moreover, this type of asymmetry appears more pronounced in the last two cyclical episodes in the G-7. A large body of work views the last two cyclical U.S. episodes, namely, the``new economy" boom in the late 1990s, and the 2000s housing boom-bust as episodes where over-optimistic beliefs have played a significant role. These episodes have revived interest in expectations driven business cycles models. However, previous work in this area has not addressed the important asymmetry feature of business cycles. This paper takes a step towards addressing this limitation of expectations driven business cycle models. We propose a generalization of the Greenwood et al. (1988) model with vintage capital and learning about capital embodied productivity and show it can deliver fluctuations that are asymmetric as in the U.S. data. Learning, calibrated to match the procyclical forecast precision from the Survey of Professional Forecasters, is crucial for the model's ability to generate asymmetries. Forecast errors generated by the model are shown to: (a) amplify fluctuations, and (b) trigger recessions that mimic in magnitude, duration and depth the typical post WW II U.S. recession.
    Keywords: News shocks; expectations; growth asymmetry; Bayesian learning; business cycles
    JEL: E2 D83 E3
    Date: 2011–06
  13. By: Jean-Marc Bonnisseau (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Lalaina Rakotonindrainy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We consider a standard overlapping generation economy with a simple demographic structure with a new cohort of agents at each period with an economic activity extended over two successive periods and finitely many firms active forever. The production possibilities are described by a sequence of production mapping and the main innovation comes from the fact that we allow for increasing returns to scale of more general type of non-convexities. To describe the behavior of the firms, we consider loss-free pricing rules, which covers the case of the average pricing rule, the competitive behavior when the firms have convex production sets, and the competitive behavior with quantity constraints à la Dehez-Drèze. We prove the existence of an equilibrium under assumptions, which are at the same level of generality than the ones for the existence in an exchange economy.
    Keywords: Overlapping generation model, increasing returns to scale, loss-free pricing rules, equilibrium, existence.
    Date: 2011–11
  14. By: Ligthart, J.E.; Meijden, G.C. van der (Tilburg University, Center for Economic Research)
    Abstract: Abstract: The paper studies the dynamic welfare and macroeconomic effects of a revenue-neutral strategy of offsetting tariff reductions with increases in destination-based consumption taxes. To this end, we employ a dynamic general equilibrium model of a small open developing economy, featuring endogenous labor supply and sector-specific capital and land. In contrast to conventional results from tax-tariff reform studies based on fixed factor endowments, we find that instantaneous utility and the volume of trade fall on impact. Aggregate output rises in the short run, re ecting increased labor supply and a more efficient allocation of resources across sectors. In the long run, however, aggregate output declines, whereas instantaneous utility and the volume of trade increase compared to the pre-reform equilibrium. For a plausible calibration of the model, lifetime welfare is shown to increase.
    Keywords: Tariff reform;coordinated tax-tariff reform;consumption tax reform;trade liberalization.
    JEL: F13 F41 H20
    Date: 2011
  15. By: Andreasen, Martin (CREATES, Arhus University)
    Abstract: This paper develops a DSGE model which explains variation in the nominal and real term structure along with inflation surveys and four macro variables in the UK economy. The model is estimated based on a third-order approximation to allow for time-varying term premia. We find a fall in nominal term premia during the 1990s which mainly is due to lower inflation risk premia. A structural decomposition further shows that this fall is driven by negative preference shocks, lower fixed production costs, and positive investment shocks.
    Keywords: Market price of risk; non-linear filtering; quantity of risk; Epstein-Zin-Weil preferences; third-order perturbation
    JEL: C51 E10 E32 E43 E44
    Date: 2011–12–14
  16. By: Ian Christensen; Césaire Meh; Kevin Moran
    Abstract: This paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy. The framework used is a dynamic stochastic general equilibrium model with banks and bank capital, in which bank capital solves an asymmetric information problem between banks and their creditors. In this economy, the lending decisions of individual banks affect the riskiness of the whole banking sector, though banks do not internalize this impact. Regulation, in the form of a constraint on bank leverage, can mitigate the impact of this externality by inducing banks to alter the intensity of their monitoring efforts. We find that countercyclical bank leverage regulation can have desirable stabilization properties, particularly when financial shocks are an important source of economic fluctuations. However, the appropriate contribution of countercyclical capital requirements to stabilization after a technology shock depends on the size of the externality and on the conduct of the monetary authority.
    Keywords: Monetary policy framework; Transmission of monetary policy; Financial institutions; Financial system regulation and policies; Economic models
    JEL: E44 E52 G21
    Date: 2011
  17. By: Sigrid Röhrs; Christoph Winter
    Abstract: In this paper, we quantitatively analyze to what extent a benevolent government should issue debt in a model where households are subject to idiosyncratic productivity shocks, insurance markets are missing and borrowing is restricted. In this environment, issuing government bonds facilitates saving for self-insurance. Despite this, we find that in a calibrated version of the model that is consistent with the skewed wealth and earnings distribution observable in the U.S., the government should buy private bonds, and not issue public debt in the long run. The reason is that in the U.S., a large fraction of the population has almost no wealth or is even in debt. The wealth-poor, however, do not profit from an increase in the interest rate following an increase in public debt. Instead, they gain from higher wages that result from a reduction in debt. We show that even when the short run costs of higher capital taxation are taken into account, it still pays off to reduce government debt on overall. Moreover, we find that endogenizing household’s borrowing constraints by assuming limited commitment leads to even higher asset levels being optimal in the long run.
    Keywords: Government debt, endogenous borrowing constraints, incomplete markets, crowding out
    JEL: E2 H6 D52
    Date: 2011–12
  18. By: Körner, Finn Marten
    Abstract: Global imbalances are almost universally regarded as a disequilibrium phenomenon. Caballero, Farhi, and Gourinchas (2008) challenge this notion with their dynamic general equilibrium model of global imbalances. The authors conclude that current account deficit nations need not worry about long-lasting deficits as long as the model is in equilibrium. The joint model in this paper combines the two model extensions for exchange rates and FDI which are disjunct in the original model. An analytical solution to the new joint model is neither as straightforward as for the separate models nor can previous results from calibrated simulation be confirmed without restriction. The model is highly dependent on parameter assumptions: A variation of calibrated parameters highlights the prime impact of investment costs previously assumed away. Sustainable equilibrium paths for global imbalances are much narrower in updated simulations than previously predicted. Policy recommendations on the sustainability of international debt holdings therefore need to be a lot more cautious. --
    Keywords: international debt,financial market development,foreign direct investment,real exchange rate,international macro-finance
    JEL: F31 F34 G15 O41
    Date: 2011–07
  19. By: Thorsten Drautzburg (University of Chicago - Department of Economics); Harald Uhlig (University of Chicago - Department of Economics)
    Abstract: We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially.
    Keywords: Fiscal Stimulus; New Keynesian model; liquidity trap; zero lower bound; fiscal multiplier
    JEL: E62 E63 E65 H20 H62
    Date: 2011–05
  20. By: Roc Armenter; Viktoria Hnatkovska
    Abstract: The authors document that the U.S. non-financial corporate sector became a net lender in the 2000s, using aggregate and firm-level data. They develop a structural model with investment, debt, and equity. Debt is fiscally advantageous but subject to a no-default borrowing constraint. Equity allows the firm to suspend dividends when the cash flow is negative. Firms accumulate financial assets for precautionary reasons, yet value equity as partial insurance against shocks. The calibrated model replicates the prevalence of net savings in the period 2000-2007 and attributes the rise in corporate savings over the past 40 years to lower dividend taxes.
    Keywords: Corporations ; Debt ; Equity ; Dividends ; Taxation
    Date: 2011
  21. By: Jaroslav Borovicka; Lars Hansen
    Abstract: Dynamic stochastic equilibrium models of the macro economy are designed to match the macro time series including impulse response functions. Since these models aim to be structural, they also have implications for asset pricing. To assess these implications, we explore asset pricing counterparts to impulse response functions. We use the resulting dynamic value decomposition (DVD) methods to quantify the exposures of macroeconomic cash flows to shocks over alternative investment horizons and the corresponding prices or compensations that investors must receive because of the exposure to such shocks. We build on the continuous-time methods developed in Hansen and Scheinkman (2010), Borovicka et al. (2011) and Hansen (2011) by constructing discrete-time shock elasticities that measure the sensitivity of cash flows and their prices to economic shocks including economic shocks featured in the empirical macroeconomics literature. By design, our methods are applicable to economic models that are nonlinear, including models with stochastic volatility. We illustrate our methods by analyzing the asset pricing model of Ai et al. (2010) with tangible and intangible capital.
    Keywords: Asset pricing ; Macroeconomics ; Markov processes
    Date: 2012
  22. By: Hideaki Hirata; Keisuke Otsu
    Abstract: In this paper, we construct a two-country business cycle accounting model in order to investigate quantitatively the relationship between Japan and the Asian Tigers. Our model is based on Backus, Kehoe and Kydland (1994) in which each economy produces tradable intermediate goods that are aggregated to form final goods within each economy. We apply the business cycle accounting method of Chari, Kehoe and McGrattan (2007) and find that the main source of high frequency fluctuation in output in each economy is the fluctuation of production efficiency within its own economy. Furthermore, the growth in the Asian Tigers'production efficiency had a significant positive effect on Japanese economic growth over the 1980-2009 period through the endogenous terms of trade effect.
    Keywords: International Business Cycles; Business Cycle Accounting; Terms of trade; Productivity
    JEL: E13 E32 F41
    Date: 2011–11
  23. By: Nicolas Coeurdacier; Hélène Rey
    Abstract: Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modelling that incorporate international portfolio choices in standard two-country general equilibrium models. We refer to this new literature as Open Economy Financial Macroeconomics. We focus on three broad classes of explanations: (i) hedging motives in frictionless financial markets (real exchange rate and non-tradable income risk), (ii) asset trade costs in international financial markets (such as transaction costs or differences in tax treatments between national and foreign assets), (iii) informational frictions and behavioural biases. Recent theories call for new portfolio facts beyond equity home bias. We present new evidence on crossborder asset holdings across different types of assets: equities, bonds and bank lending and new micro data on institutional holdings of equity at the fund level. These data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment.
    JEL: F21 F3 F32 F4 F41 G11
    Date: 2011–12
  24. By: Mathias Hoffmann; Ulrich Woitek
    Abstract: We study international business cycles and capital flows in the UK, the United States and the Emerging Periphery in the period 1885-1939. Based on the same set of parameters, our model explains current account dynamics under both the Classical Gold Standard and during the Interwar period. We interpret this as evidence for Gold Standard mentality: the expectation formation mechanism with respect to major macroeconomic variables driving the current account – output, exchange rates and interest rates – has remained fundamentally stable between the two periods. Nonetheless, the macroeconomic environment changed: Volatility increased generally, but less so for international capital flows than for GDP. This pattern is consistent with shocks in the Interwar period becoming more persistent and more global.
    Keywords: Current accounts, capital flows, business cycles, Great Depression, Gold Standard, emerging markets, present-value models
    JEL: F32 F36 F40 F41 N1
    Date: 2011–12
  25. By: Berriel, Tiago C.; Zilberman, Eduardo
    Abstract: This paper introduces cash transfers targeting the poor in an incomplete marketsmodel with heterogeneous agents facing idiosyncratic risk. These transfers change thedegree of insurance in the economy and a ect precautionary motives asymmetrically,leading the poorest households to decrease savings proportionally more than theirricher counterparts. In a model economy calibrated to Brazil, once the cash transferprogram is adopted, wealth inequality and social welfare increase, poverty decreases,while employment and income inequality remain about the same. Imperfect access to nancial markets is important for these results, whereas whether the program is fundedwith lump sum or distortive taxes is not.
    Date: 2011–12–14
  26. By: Kazuki Hiraga (Faculty of Economics, Keio University)
    Abstract: Recently, discussion of corporate tax reduction is hot political issue in Japan. Especially, some researchers and politicians insist on the reduction of corporate tax rate, following the fact of "Corporate tax paradox", which means that corporate tax revenue per Gross Domestic Product (GDP) has a negative correlation with effective corporate tax rate. However, quantitative effect of corporate tax reduction is unclear and the discussion of finance methods does not proceed. Therefore, we examine the quantitative effect of corporate tax reduction to employment, output and total tax revenue which is the cost of tax reduction. To analyze the effect of corporate tax reduction, we use Dynamic General Equilibrium (DGE) model and we use shooting algorithm to calculate the large corporate tax reduction (i.e. 5% or 20% corporate tax rate reduction). As a result, long-run effect of corporate tax reduction not only prompts to economic growth, but also increases total tax revenue, when financed by lump-sum transfer. Because current corporate tax rate is the right hand side of the Laffer curve. With respect to the magnitude of tax reduction, absolute impact of 20% reduction is much larger than that of 5%. But relative impact (i.e. multiplier effect of tax reduction) of 20% reduction is a little smaller than that of 5%. However, short-run effect is smaller than long-run one. In the short-run, since capital accumulation is insufficient, households decrease consumption and tax revenue.
    Date: 2011–11
  27. By: Arnaud Costinot; Guido Lorenzoni; Iván Werning
    Abstract: This paper develops a simple theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that capital controls are not guided by the absolute desire to alter the intertemporal price of the goods produced in any given period, but rather by the relative strength of this desire between two consecutive periods. Specifically, it is optimal for the strategic country to tax capital inflows (or subsidize capital outflows) if it grows faster than the rest of the world and to tax capital outflows (or subsidize capital inflows) if it grows more slowly. In the long-run, if relative endowments converge to a steady state, taxes on international capital flows converge to zero. Although our theory emphasizes interest rate manipulation, the country's net financial position per se is irrelevant.
    JEL: F13 F32 F33
    Date: 2011–12
  28. By: Baliamoune-Lutz, Mina (University of North Florida); Brixiova, Zuzana (United Nations Development Programme (UNDP), Swaziland); Ndikumana, Leonce (University of Massachusetts Amherst)
    Abstract: Limited access of entrepreneurs to credit constrains the creation and growth of private firms. In Africa, access to credit is particularly limited for small and medium enterprises (SMEs) due to unclear property rights and the lack of assets that can be used as collateral. This paper presents a model where firm creation and growth hinge on matching potential entrepreneurs with productive technologies, while firm growth depends on acquired capital. The shortage of collateral creates a binding credit constraint on borrowing by SMEs and hence private sector growth and employment, even though the banking sectors have ample liquidity, as is the case in many African countries. The model is tested using a sample of 20 African countries over the period 2005-09. The empirical results suggest that policies aimed at easing the binding credit constraints (e.g., the depth of credit information and the strength of legal rights pertaining to collateral and bankruptcy) would stimulate productive entrepreneurship and private sector employment in Africa.
    Keywords: credit constraints, productive entrepreneurship, employment, policies
    JEL: G21 L26 D24
    Date: 2011–12
  29. By: Mariacristina De Nardi; Eric French; David Benson
    Abstract: We document some key facts about aggregate consumption and its subcomponents over time. We then document the behavior of some important determinants of consumption, such as consumers’ expectations about their future income, and changes in the consumers’ wealth positions. Finally, we use a simple permanent income model to show that the observed drop in consumption during the Great Recession can be explained by the observed drops in wealth and income expectations.
    JEL: E10 E21 E31 H31
    Date: 2011–12
  30. By: Wrede, Matthias
    Abstract: Employing a standard matching unemployment model extended by within-labor-market-regions commuting, this paper analyzes the tradeoff between commuting costs and unemployment. Depending on whether commuters are able to bargain for fringe benefits, search may or may not be biased towards distant workplaces and less productive centers. As a consequence, unemployment benefits should be tied to search in high productivity regions. Using German county data, the paper tests some positive predictions that emerge from of the model. In particular, it confirms that increasing labor market tightness reduces the willingness to out-commute. --
    Keywords: unemployment,matching,commuting,search,labor market policy
    JEL: R12 R13 R14 H22
    Date: 2011
  31. By: Marco Cozzi (Queen's University)
    Abstract: This paper considers the macroeconomic implications of a set of empirical studies finding a high degree of dispersion in preference heterogeneity. It develops a model with both uninsurable idiosyncratic income risk and risk aversion heterogeneity to quantify their effects on wealth inequality. The results show that with the available estimates of the risk aversion distribution from PSID data the model can match the observed degree of wealth inequality in the U.S., accounting for the wealth Gini index in several cases. The model replicates well several features of the wealth distribution. However, the share of wealth held by the top 1% is still substantially underestimated. It is also shown that models without risk aversion heterogeneity underestimate the size of precautionary savings, and that the results are robust to both different income process specifications and to self-selection into risky jobs.
    Keywords: Wealth Inequality, Heterogeneous Agents, Incomplete Markets, Computable General Equilibrium
    JEL: E21 D52 D58 C68
    Date: 2011–12
  32. By: Bazdresch, Santiago
    Abstract: This paper presents a set of benchmark moments for evaluation or estimation of quantitative capital structure models. The moments are directly related to the models being studied: the main features of each models' empirical policy functions. The paper describe a general method for estimating these benchmarks and shows that they ‘capture’ a substantial part of the actual variation in firms actions in the data. Two versions of these benchmarks are presented: one dimensional ones and two dimensional ones. In both cases we express these as the total change in the control variable and the change relative to the change in the state variable. The empirical policy functions turn out to be smooth and mostly monotonous. Three key numbers that we suggest quantitative dynamic models have match closely are that within firms, for every 10% increase in debt relative to assets investment relative to assets declines 3.7%, debt issuance relative to market value decreases 1.1% and equity issuance relative to market value increases 0.5%.
    Keywords: dynamic models of capital structure; policy function; value function; model evaluation
    JEL: G31 C52 C14 C61 G32
    Date: 2011–04–01
  33. By: Fiorella De Fiore (European Central Bank (ECB) - Directorate General Research); Harald Uhlig (University of Chicago - Department of Economics)
    Abstract: We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose among two alternative instruments of external finance - corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the US and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms' credit worthiness and to higher efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP.
    Keywords: Financial structure; agency costs; heterogeneity
    JEL: E20 E44 C68
    Date: 2011–04
  34. By: Takeo Hori; Masako Ikefuji; Kazuo Mino
    Abstract: We study structural change in a simple, two-sector endogenous growth model and show that the presence of commodity-specific consumption externalities can be a source of structural change. When the degrees of consumption externalities are different between different goods, the two sectors grow at different rates, whereas the aggregate economy exhibits balanced growth in the sense that capital stock and expenditure grow at the same constant rate. Under the more restrictive condition such that the degrees of consumption externalities are the same, structural change does not occur. We also show that the dependence of the benchmark consumption levels on the past consumption is crucial for the divergent patterns of structural change across countries.
    Date: 2011–12
  35. By: Han Chen; Vasco Cúrdia; Andrea Ferrero
    Abstract: The effects of asset purchase programs on macroeconomic variables are likely to be moderate. We reach this conclusion after simulating the impact of the Federal Reserve’s second large-scale asset purchase program (LSAP II) in a DSGE model enriched with a preferred habitat framework and estimated on U.S. data. Our simulations suggest that such a program increases GDP growth by less than half a percentage point, although the effect on the level of GDP is very persistent. The program’s marginal contribution to inflation is very small. One key reason for our findings is that we estimate a small degree of financial market segmentation. If we enrich the set of observables with a measure of long-term debt, the semi-elasticity of the risk premium to the amount of debt in private-sector hands is substantially smaller than that reported in the recent empirical literature. In this case, our baseline estimates of the effects of LSAP II on the macroeconomy decrease by at least a factor of two. Throughout the analysis, a commitment to an extended period at the zero lower bound for nominal interest rates increases the effects of asset purchase programs on GDP growth and inflation.
    Keywords: Macroeconomics ; Gross domestic product ; Federal Reserve System ; Inflation (Finance) ; Debt ; Stochastic analysis
    Date: 2011
  36. By: Simona E. Cociuba; Malik Shukayev; Alexander Ueberfeldt
    Abstract: A view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries. We evaluate this view in a quantitative dynamic model in which interest rate policy affects risk taking by changing the amount of safe bonds that intermediaries use as collateral in the repo market. In this model with properly-priced collateral, lower than optimal interest rates reduce risk taking. We also consider the possibility that intermediaries can augment their collateral by issuing assets whose risk is underestimated by credit rating agencies, as was observed prior to the crisis. In the presence of such mispriced collateral, lower than optimal interest rates contribute to excessive risk taking and amplify the severity of recessions.
    Keywords: Transmission of monetary policy; Financial system regulation and policies
    JEL: E44 E52 G28 D53
    Date: 2011
  37. By: Jonathan Chiu; Thorsten V. Koeppl
    Abstract: We study the trading dynamics in an asset market where the quality of assets is private information of the owner and finding a counterparty takes time. When trading of a financial asset ceases in equilibrium as a response to an adverse shock to asset quality, a large player can resurrect the market by buying up lemons which involves assuming financial losses. The equilibrium response to such a policy is intricate as it creates an announcement effect: a mere announcement of intervening at a later point in time can cause markets to function again. This effect leads to a gradual recovery in trading volume, with asset prices converging non-monotonically to their normal values. The optimal policy is to intervene immediately with minimal size when markets are deemed important and losses are small. As losses increase and the importance of the market declines, the optimal intervention is delayed and it can be desirable to rely more on the announcement effect by increasing the size of the intervention. Search frictions are important for all these results. They compound adverse selection, making a market more fragile with respect to a classic lemons problem. They dampen the announcement effect and cause the optimal policy to be more aggressive, leading to an earlier intervention at a larger scale.
    Keywords: Financial markets, Financial stability
    JEL: G1 E6
    Date: 2011
  38. By: Rui Castro; Gian Luca Clementi; Yoonsoo Lee
    Abstract: We estimate plant--level idiosyncratic risk in the U.S. manufacturing sector. Our proxy for risk is the volatility of the portion of TFP growth which is not explained by either industry- or economy-wide factors, or by establishments' characteristics systematically associated with growth itself. Consistent with previous studies, we find that idiosyncratic shocks are much larger than aggregate random disturbances, accounting for about 90% of the overall uncertainty faced by plants. The extent of cross-sectoral variation in idiosyncratic risk is remarkable. Plants in the most volatile sector are subject to at least three times as much uncertainty as plants in the least volatile. Our evidence indicates that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater.
    JEL: D24 L16 L60 O30 O31
    Date: 2011–12
  39. By: Rehme, Günther
    Date: 2011–12–20

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