|
on Dynamic General Equilibrium |
|
Issue of 2013‒02‒08
seventeen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Engin Kara; Jasmin Sin |
| Abstract: | Using a dynamic stochastic general equilibrium (DSGE) model that accounts for credit constraints, we study the effects of fiscal stimulus on the macroeconomy. We show that the presence of credit constraints results in larger fiscal multipliers than indicated by the standard DSGE models. If credit-crunch conditions persist, the multipliers become large enough for fiscal policy to be highly effective. |
| Keywords: | DSGE models, Monetary Policy, Fiscal Policy, Liquidity Trap, Credit constraints |
| JEL: | E32 E52 E58 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:12/634&r=dge |
| By: | Carlos Carrillo-Tudela; Ludo Visschers |
| Abstract: | We build an analytically and computationally tractable stochastic equilibrium model of unemployment in heterogeneous labor markets. Facing search frictions within markets and reallocation frictions between markets, workers endogenously separate from employment and endogenously reallocate between markets, in response to changing aggregate and local conditions. Empirically, using the 1986-2008 SIPP panels, we document the occupational mobility patterns of the unemployed, finding notably that occupational change of unemployed workers is procyclical. The heterogeneous-market model yields highly volatile countercyclical unemployment, and is simultaneously consistent with procyclical reallocation, countercyclical separations and a negativelysloped Beveridge curve. Moreover, the model exhibits unemployment duration dependence, which (when calibrated to long-term averages) responds realistically to the business cycle, creating substantial longer-term unemployment in downturns. Finally, the model is also consistent with different employment and reallocation outcomes as workers gain experience in the labor market, on average and over the business cycle. |
| Keywords: | Unemployment, Business Cycle, Search, Endogenous Separations, Reallocation, Occupational Mobility |
| JEL: | E24 E30 J62 J63 J64 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1302&r=dge |
| By: | Brant Abbott (University of British Columbia); Giovanni Gallipoli (University of British Columbia); Costas Meghir (Cowles Foundation, Yale University); Giovanni L. Violante (New York University) |
| Abstract: | This paper compares partial and general equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Altruistic parents make inter vivos transfers to their children. Labor supply during college, government grants and loans, as well as private loans, complement parental transfers as sources of funding for college education. We find that the current financial aid system in the U.S. improves welfare, and removing it would reduce GDP by two percentage points in the long-run. Any further relaxation of government-sponsored loan limits would have no salient effects. The short-run partial equilibrium effects of expanding tuition grants (especially their need-based component) are sizeable. However, long-run general equilibrium effects are 3-4 times smaller. Every additional dollar of government grants crowds out 20-30 cents of parental transfers. |
| Keywords: | Education, Education policy, Public finance, Financial aid, Inter vivos transfers, Altruism, Overlapping generations, Credit constraints, Labor supply, Equilibrium |
| JEL: | E24 I22 J23 J24 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1887&r=dge |
| By: | Pei Kuang |
| Abstract: | I develop an equilibrium model with collateral constraints in which rational agents are uncertain and learn about the equilibrium mapping between fundamentals and collateral prices. Bayesian updating of beliefs by agents can endogenously generate booms and busts in collateral prices and largely strengthen the role of colateral constraints as an amplification mechanism through the interaction of agents' beliefs, collateral prices and credit limits. Over-optimism or pessimism is fueled when a surprise in price expectations is interpreted partially by the agents as a permanent change in the parameters governing the collateral price process and is validated by subsequently realized prices. I show that the model can quantitatively account for the recent US boom-bust cycle in house prices, household debt and aggregate consumption dynamics during 2001-2008. I also demonstrate that the leveraged economy with a higher steady state leverage ratio is more prone to self-reinforcing learning dynamics. |
| Keywords: | Booms and Busts, Collateral Constraints, Learning, Leverage |
| JEL: | D83 D84 E32 E44 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:13-02&r=dge |
| By: | Kirill Borissov |
| Abstract: | An AK-model with borrowing constraints and endogenous time preferences is considered. It is assumed that the discount factor of a household is a continuous function of its relative income. We propose a definition of an equilibrium path and prove its existence. |
| Keywords: | AK-model, endogenous time preferences |
| JEL: | D90 O41 |
| Date: | 2013–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:eus:wpaper:ec0113&r=dge |
| By: | Robert Kollmann |
| Keywords: | DSGE Models; Kalman Filter; smoothing |
| JEL: | E37 C32 C68 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/139176&r=dge |
| By: | LUISITO BERTINELLI (University of Luxembourg CREA); OLIVIER CARDI (University Panthéon-Assas ERMES and Ecole Polytechnique); PARTHA SEN (Department of Economics, Delhi School of Economics, Delhi, India) |
| Abstract: | In a dynamic general equilibrium model with endogenous markups and labor market frictions, we investigate the e®ects of increased product market competition. Unlike most macroeconomic models of search, we endogenize the labor supply along the extensive mar- gin. We ¯nd numerically that a model with endogenous labor force participation decision produces a decline in the unemployment rate which is almost three times larger than that in a model with ¯xed labor force. For a calibration capturing alternatively European and the U.S. labor markets, a deregulation episode, which lowers the markup by 3 percent- age points, results in a fall in the unemployment rate by 0.17 and 0.07 percentage point, respectively, while the labor share is almost una®ected in the long-run. The sensitivity analysis reveals that product market deregulation is more e®ective in countries where labor market regulation is high, product markets are initially highly regulated, unemployment bene¯ts are smaller and labor force is more responsive. |
| Keywords: | Imperfect competition; Endogenous markup; Search theory; Unemployment; Deregulation. |
| JEL: | E24 J63 L16 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:221&r=dge |
| By: | Jeremy Lise (University College London and IFS); Costas Meghir (Cowles Foundation, Yale University); Jean-Marc Robin (Sciences Po, Paris and University College of London) |
| Abstract: | We develop an empirical search-matching model which is suitable for analyzing the wage, employment and welfare impact of regulation in a labor market with heterogeneous workers and jobs. To achieve this we develop an equilibrium model of wage determination and employment which extends the current literature on equilibrium wage determination with matching and provides a bridge between some of the most prominent macro models and microeconometric research. The model incorporates productivity shocks, long-term contracts, on-the-job search and counter-offers. Importantly, the model allows for the possibility of assortative matching between workers and jobs due to complementarities between worker and job characteristics. We use the model to estimate the potential gain from optimal regulation and we consider the potential gains and redistributive impacts from optimal unemployment insurance policy. The model is estimated on the NLSY using the method of moments. |
| Keywords: | Matching, Equilibrium wage distributions, Job mobility, Simulated method of moments, MCMC |
| JEL: | J3 J6 J64 J65 J68 C15 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1886&r=dge |
| By: | Tiago Pinheiro; Francisco Rivadeneyra; Marc Teignier |
| Abstract: | This paper presents a general equilibrium model with endogenous collateral constraints to study the relationship between financial development and business cycle fluctuations in a cross-section of economies with different sizes of their financial sector. The financial sector can amplify or dampen the volatility of income by increasing or reducing the business cycle effects of technological shocks. We find a non-monotonic relationship between the volatility of income and financial development measured by total borrowing and lending. A more developed financial system unambiguously increases the income level however the volatility can rise or fall depending on the degree of financial development. |
| Keywords: | Credit and credit aggregates; Financial stability |
| JEL: | E32 E60 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-4&r=dge |
| By: | Ellen R. McGrattan; Edward C. Prescott |
| Abstract: | A problem facing the United States is financing retirement consumption as its population ages. Policy analysts increasingly advocate savings-for-retirement systems, but are concerned with insufficient savings opportunities with limited government debt. This concern is unwarranted. First, there is more productive capital than commonly assumed in macroeconomic modeling. Second, if the policy reform subsumes the elimination of capital income taxes, then the value of business equity increases relative to the capital stock. Phasing in a switch from the current U.S. system to a savings-for-retirement system without capital income taxes increases welfare of all current and future cohorts. |
| JEL: | E20 G18 H21 H61 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18760&r=dge |
| By: | Jonathan Heathcote; Fabrizio Perri |
| Abstract: | In one-good international macro models with nondiversifiable labor income risk, country portfolios are heavily biased toward foreign assets. The fact that the opposite pattern of diversification is observed empirically constitutes the international diversification puzzle. This paper embeds a portfolio choice decision in a two-country, two-good version of the stochastic growth model. In this environment, which is a workhorse for international business cycle research, equilibrium country portfolios can be characterized in closed form. Portfolios are biased toward domestic assets, as in the data. Home bias arises because endogenous international relative price uctuations make domestic assets a good hedge against labor income risk. Evidence from developed economies in recent years is qualitatively and quantitatively consistent with the mechanisms highlighted by the theory. keywords: Country portfolios, International business cycles, Home bias jel classification codes : F36, F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:472&r=dge |
| By: | Mario J. Crucini; J. Scott Davis |
| Abstract: | International business-cycle models assume that home and foreign goods are poor substitutes. International trade models assume they are close substitutes. This paper constructs a model where this discrepancy is due to frictions in distribution. Imports need to be combined with a local non-traded input, distribution capital, which is slow to adjust. As a result, imported and domestic goods appear as poor substitutes in the short run. In the long run this non-traded input can be reallocated, and quantities can shift following a change in relative prices. Thus the observed substitutability between home and foreign goods gets larger as time passes. |
| JEL: | F1 F14 F44 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18753&r=dge |
| By: | Patrick Kline; Enrico Moretti |
| Abstract: | Many countries have policies aimed at creating jobs in depressed areas with high unemployment rates. In standard spatial equilibrium models with perfectly competitive labor and land markets, local job creation efforts are distortionary. We develop a stylized model of frictional local labor markets with the goal of studying the efficiency of unemployment differences across areas and the potential for place based policies to correct local market failures. Our model builds on the heavily studied Diamond - Mortensen - Pissarides framework, adapted to a local labor market setting with a competitive housing market. The result is a simple search analogue of the classic Roback (1982) model that provides a tractable environment for studying the effects of local job creation efforts. In the model, workers are perfectly mobile and the productivity of worker-firm matches may vary across metropolitan areas. In equilibrium, higher local productivity results in higher nominal wages, higher housing costs, and lower unemployment rates. Although workers can move freely to arbitrage away differences in expected utility across metropolitan areas, equilibrium unemployment rates are not equalized across space. We find that if hiring costs are excessive, firms may post too few vacancies. This problem may be offset via local hiring subsidies of the sort found in many place based policies. The optimal hiring subsidy is city specific in the sense that it depends upon the local productivity level. |
| JEL: | J48 J6 J61 J64 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18758&r=dge |
| By: | Michael Hatcher |
| Abstract: | This paper presents a DSGE model in which long run inflation risk matters for social welfare. Aggregate and welfare effects of long run inflation risk are assessed under two monetary regimes: inflation targeting (IT) and price-level targeting (PT). These effects differ because IT implies base-level drift in the price level, while PT makes the price level stationary around a target price path. Under IT, the welfare cost of long run inflation risk is equal to 0.35 per cent of aggregate consumption. Under PT, where long run inflation risk is largely eliminated, it is lowered to only 0.01 per cent. There are welfare gains from PT because it raises average consumption for the young and lowers consumption risk substantially for the old. These results are strongly robust to changes in the PT target horizon and fairly robust to imperfect credibility, fiscal policy, and model calibration. While the distributional effects of an unexpected transition to PT are sizeable, they are short-lived and not welfare-reducing. |
| Keywords: | inflation targeting, price-level targeting, inflation risk, monetary policy. |
| JEL: | E52 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2013_03&r=dge |
| By: | Stéphane Auray (ENSAI); Aurélien Eyquem (Université de Lyon); Fréderic Jouneau-Sion (Université de Lille) |
| Abstract: | We present an annual sequence of wages in England starting in 1245. We show that a standard AK-type growth model with capital externality and stochastic productivity shocks is unable to explain important features of the data. We then consider random returns to scale. Moderate episodes of increasing returns to scale and growth are shown to be compatible with stationarity. Further, random returns to scale generate heteroskedasticity, a feature common to macroeconomic time series. Third, stationary distributions display fat tails if returns to scale are episodically increasing. We provide several inference results to support randomness of returns to scale. |
| Keywords: | Economic growth, Unified growth theory, Heteroskedasticity, Fat tails |
| JEL: | C22 C46 N13 O41 O47 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2012-29&r=dge |
| By: | Patrick Carter |
| Abstract: | This paper studies the aid allocation rule used by major development agencies, and investigates optimal allocations when recipients are neoclassical economies undergoing transition dynamics. When recipients face aid absorption constraints, allocations that favor poorer recipients are not always optimal, contrary to what is assumed in assessments of donor performance. The most quantitatively significant determinants of the optimal sensitivity to recipient characteristics are the generosity of the aid budget and the extent of absorption constraints. In neoclassical recipients aid can only accelerate growth where there is already growth, so the optimal rule places little weight on growth and optimality is largely a matter of balancing recipient need against absorption constraints. |
| Keywords: | Foreign Aid, Allocation Rules, Economic Growth, Absorption Constraints |
| JEL: | F35 O4 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:12/630&r=dge |
| By: | Pelin Ilbas (National Bank of Belgium); Øistein Røisland (Norges Bank (Central Bank of Norway)); Tommy Sveen (BI Norwegian Business School) |
| Abstract: | We analyze the influence of the Taylor rule on US monetary policy by estimating the policy preferences of the Fed within a DSGE framework. The policy preferences are represented by a standard loss function, extended with a term that represents the degree of reluctance to letting the interest rate deviate from the Taylor rule. The empirical support for the presence of a Taylor rule term in the policy preferences is strong and robust to alternative specifications of the loss function. Analyzing the Fed's monetary policy in the period 2001 - 2006, we find no support for a decreased weight on the Taylor rule, contrary to what has been argued in the literature. The large deviations from the Taylor rule in this period are due to large, negative demand-side shocks, and represent optimal deviations for a given weight on the Taylor rule. |
| Keywords: | Optimal monetary policy, Simple rules, Central bank preferences |
| JEL: | E42 E52 E58 E61 E65 |
| Date: | 2013–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2013_04&r=dge |