|
on Dynamic General Equilibrium |
|
Issue of 2013‒04‒20
thirty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Stefan Notz (University of Zurich) |
| Abstract: | I develop a Dynamic Stochastic General Equilibrium (DSGE) model featuring imperfect competition in banking to shed light on the macroeconomic repercussions of U.S. banking deregulation during the 1980s and 1990s. Banks function as traditional financial intermediaries, transferring funds from private households to entrepreneurs in the economy. Prior to deregulation, banks exploit their market power and charge high interest rates on loans to entrepreneurs. Financial liberalisation leads to more vigorous competition among banks, which effectively ameliorates credit market access of investors. I construct model generated panel data and reproduce various regression exercises implemented in related studies. In doing so, I contribute to bridging the gap between my theoretical framework and the vast empirical literature on U.S. banking deregulation. The model succeeds in both qualitatively and quantitatively replicating several empirical findings. In particular, bank market integration is associated with (i) an increase in investment in new firms, (ii) a decline in average firm size, (iii) an erosion of the bank capital ratio, (iv) a reduction of state business cycle volatility, and (v) improved consumption risk sharing of entrepreneurs. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:552&r=dge |
| By: | Kurt Mitman (University of Pennsylvania) |
| Abstract: | Bankruptcy laws govern consumer default on unsecured credit. Foreclosure laws regulate default on secured mortgage debt. In this paper I use a structural model to argue that bankruptcy and foreclosure are inter-related. This interaction is important for understanding the cross-state variation in bankruptcy rates and evaluating reforms to default policies. To study this interaction, I construct a general-equilibrium model where heterogeneous households have access to unsecured borrowing and can finance housing purchases with mortgages. Households can default separately on both types of debt. The calibrated model is quantitatively consistent with the observed cross-state correlation between policies and default rates. In particular, the model correctly predicts that bankruptcy rates are lower in states with more generous homestead exemptions (the amount of home equity that may be retained after filing for bankruptcy), despite the decreased penalty of declaring bankruptcy. In equilibrium, that lower penalty of going bankrupt in high exemption states raises the price of unsecured credit. Households respond to the higher price by taking on more highly leveraged mortgages and less unsecured credit. As a result, bankruptcy rates are lower in high exemption states than in low exemption states, but foreclosure rates are higher. I use the model to evaluate the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act which made it more difficult for high income households to declare bankruptcy. Despite being intended to reduce bankruptcy rates, I find that the reform substantially increases them. In addition, the reform has the unintended consequence of considerably increasing foreclosure rates. Nevertheless, the reform yields large welfare gains. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:563&r=dge |
| By: | Carlos De Resende; Ali Dib; René Lalonde; Nikita Perevalov |
| Abstract: | Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle. Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target. |
| Keywords: | Economic models; Financial Institutions; Financial stability; International topics |
| JEL: | E32 E44 E5 G1 G2 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-8&r=dge |
| By: | Karl Schmedders (University of Zurich and Swiss Finance Institute); Felix Kubler (IBF, University of Zurich and Swiss Finance Institute) |
| Abstract: | In this paper we examine the volatility of asset returns in a canonical stochastic overlapping generations economy with sequentially complete markets. We show that movements in the in- tergenerational wealth distribution strongly affect asset prices since older generations have a lower propensity to save than younger generations. We investigate effects of aggregate shocks on the wealth distribution and show that they are generally small if agents have identical be- liefs. Differences in opinion, however, can lead to large movements in the wealth distribution even when aggregate shocks are absent. The interplay of belief heterogeneity and life-cycle investments leads to considerable changes in the wealth distribution which in turn result in substantial asset price volatility. In fact, the model generates realistic second moments of asset returns. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:536&r=dge |
| By: | Thien Nguyen (Wharton, UPenn); Lukas Schmid (Duke University); Howard Kung (Duke University); Mariano Croce (University of North Carolina at Chapel H) |
| Abstract: | The surge in public debt triggered by the financial crisis has raised uncertainty about future tax pressure and economic activity. We contribute to the current fiscal debate by examining the asset pricing effects of fiscal policies in a production-based general equilibrium model in which taxation affects corporate decisions by: i) distorting profits and investment; ii) reducing the cost of debt through a tax shield; and iii) weakening productivity growth. In settings with recursive preferences, these three tax-based channels generate sizable risk premia making tax uncertainty a first order concern. We document further that corporate tax smoothing significantly affects the cost of equity by altering the intertemporal distribution of consumption. While common tax smoothing increases the annual cost of equity by almost 1%, public financing policies aimed at stabilizing capital accumulation reduce both long-run consumption risk and the cost of capital, producing relevant welfare benefits. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:565&r=dge |
| By: | Jean-Paul Kimbambu, Tsasa Vangu (LARÉQ (LAREQ, Laréq) - Laboratoire d'Analyse-Recherche Économie Quantitative - Université protestante au Congo - Université de Kinshasa) |
| Abstract: | This paper focuses on the DSGE macroeconomic modeling and their application in Démocratic Republic of Congo. The interest of this study is that the DSGE macroeconomic modeling appears as the last step in the development of macroeconomics since the publication of Keynes's General Theory in 1936. |
| Keywords: | DSGE Model, VAR Approach |
| Date: | 2012–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00808113&r=dge |
| By: | Kjetil Storesletten (FRB Minneapolis); Gianluca Violante (NYU); Jonathan Heathcote (Federal Reserve Bank of Minneapolis) |
| Abstract: | We explore the optimal progressivity of the income tax system in an incomplete-markets model. Agents value private and public consumption and leisure, and are heterogeneous with respect to innate ability, idiosyncratic shock histories, and preferences. This heterogeneity generates a potential role for public insurance. Agents make education and labor supply choices, save in a risk-free bond, and are able to insure a subset of idiosyncratic risks privately. Equilibrium allocations and social welfare are characterized in closed form, which illuminates the various trade-offs in favor of more or less progressive taxation. In a calibration to the United States, we find that the actual US tax and transfer system is more progressive than the one that maximizes social welfare for a utilitarian planner. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:588&r=dge |
| By: | Christopher Taber (University of Wisconsin-Madison) |
| Abstract: | The four most important models of post-schooling wage determination in economics are al- most certainly human capital, the Roy model, the compensating differentials model, and the search model. All four lead to wage heterogeneity. While separating human capital accumulation from the others is quite common, we know remarkably little about the relative importance of the other three sources of inequality. The key aspect of the Roy model is comparative advantage in which some workers earn more than others as a result of different skill levels at labor market entry. Workers choose the job for which they achieve the highest level of earnings. By contrast, in a compensating wage differentials model a worker is willing to be paid less in order to work on a job that they enjoy more. Thus, workers with identical talent can earn different salaries. Finally, workers may have had poor luck in finding their ideal job. This type of search friction can also lead to heterogeneity in earnings as some workers may work for higher wage firms. In short, one worker may earn more than another a) because he has more talent at labor market entry (Roy Model), b) because he has accu- mulated more human capital while working (human capital), c) because he has chosen more unpleasant job (compensating differentials), or d) because he has had better luck in finding a good job (search frictions). The goal of this work is to uncover the contribution of these different components to overall earnings inequality. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:566&r=dge |
| By: | C. Bora Durdu (Federal Reserve Board); Ricardo Nunes (Federal Reserve Board); Horacio Sapriza (Federal Reserve Board) |
| Abstract: | This paper builds a model of sovereign debt in which default risk, interest rates, and debt depend not only on current fundamentals but also on news about future fundamentals. News shocks affect equilibrium outcomes because they contain information about the likelihood that the government repays its debt in the future. First, in the model with news shocks not all defaults occur in bad times, bringing the model closer to the data. Second, the news shocks help account for key differences between developing and more developed economies: as the precision of news improves, the model predicts lower variability of consumption, less countercyclical trade balance and interest rate spreads, as well as a higher level of debt more in line with the characteristics of more developed economies. Third, the model also captures the hump-shaped relationship between default rates and the precision of news obtained from the data. Finally, the news shocks have a nonmonotonic effect on the welfare. |
| Keywords: | sovereign default risk; news shocks; endogenous borrowing constraints. |
| JEL: | F34 F41 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1309&r=dge |
| By: | Michael Reiter (Institute for Advanced Studies); Christian Haefke (Institut for Advanced Studies) |
| Abstract: | In this paper we use information on the cyclical variation of labor market participation to learn about the aggregate labor supply elasticity. For this purpose, we extend the standard labor market matching model to allow for endogenous participation. A model that is calibrated to replicate the variability of unemployment and participation, and the negative correlation of unemployment and GDP, implies an aggregate labor supply elasticity along the extensive margin of around 0.3 for men and 0.5 for women. This is in line with recent microeconometric estimates. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:594&r=dge |
| By: | Fang Yang (SUNY-Albany); John Jones (University at Albany, SUNY) |
| Abstract: | We document trends in higher education costs and tuition over the past 50 years. To explain these trends, we develop and simulate a general equilibrium model with unbalanced technical change. We assume that higher education suffers from Baumol's (1967) service sector disease, in that the quantity of labor and capital needed to educate a student is constant over time. Calibrating the model, we show that it can explain the rise in college costs between 1959 and 2000. We then use the model to perform a number of numerical experiments. We find, consistent with a number of studies, that changes in the tuition discount rate have little long-run effect on college attainment. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:597&r=dge |
| By: | Marianne Andries (Chicago Booth) |
| Abstract: | I incorporate loss aversion in a consumption-based asset pricing model with recursive preferences and solve for asset prices in closed-form. I find loss aversion increases expected returns substantially relative to the standard recursive utility model. This feature of my model improves the ability to match moments on asset prices. Further, I find loss aversion induces important nonlinearities into the expected excess returns as a function of the exposure to the consumption shocks. In particular, the elasticities of expected returns with respect to the exposure to the consumption shocks are greater for assets with smaller exposures to the shocks, thus generating interesting predictions for the cross-section of returns. I provide strong empirical evidence supporting this outcome. The model with loss aversion correctly predicts both a negative premium for skewness and a security market line, the excess returns as a function of the exposure to market risk, flatter than the CAPM. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:571&r=dge |
| By: | Gustavo Ventura (Arizona State University) |
| Abstract: | Consider the following facts. First, with dramatic changes in the household and family structure in every major industrialized country during the last couple of decades, today's households are very far from traditional breadwinner husband and housekeeper wife paradigm. Second, average households face significant uninsurable idiosyncratic risk and countries differ significantly on their social insurance expenditure. Third, since mid 1980s, household income inequality has been rising, generating a renewed interest in role of social insurance policies -- OECD (2005). Fourth, structure of families (who is married with whom) and female labor supply behavior can play an important role for income inequality. According to Hyslop (2001), changes in marital sorting can account for about 25\% of the rise of income inequality between 1979 and 1985 in the U.S. while changes in female labor supply contribute to another 20\% of the rise. Finally, there are significant differences in the extent of marital status of population, assortative mating, female labor participation, and wage-gender gap across countries. The existing general equilibrium models that economists use to evaluate social insurance policies largely rely on models populated by single-earner households. In such models a single decision maker, given government policies, decides how much to work and how much to save. Today's household structure, however, should force us to think beyond single-earner household models. The role of social insurance policies for an economy in which every household has only one worker can be very different than for an economy in which both household members work. Similarly, the role of social insurance policies can also be very different for an economy with a low degree of assortative matching in which agents from different educational backgrounds mix with each other by marriage, than for an economy with more segregation in marriages. Social policy can also play a very different role for an economy with low gender wage gap than one with high-gender wage gap. Finally, thinking beyond single-earner households should also force us to consider very diverse social insurance policies, such as income maintenance programs and parental leave policies, under the same light. Despite this background, we are unaware of systematic attempts to study public policies in environments that allow for heterogeneous two-earner households that face uninsurable idiosyncratic risk, an explicit consideration of labor supply responses in extensive and intensive margins, and a rich description of marital status of population (who is married with whom). We fill this void in this paper. We have three main goals. First, we build a model economy populated with heterogeneous two-earner households facing idiosyncratic income risk. Second, we use this framework to evaluate effects of public policies on allocations and welfare. Finally, we investigate how the effects of these policies can depend on the structure of the economy in terms of degree of marital sorting, the extent of female labor force participation, and the wage-gender gap. We build a life-cycle economy populated by married and single households. Individual wages are composed of two parts: their human capital and idiosyncratic shocks. Each male agent starts his life with a given level of education (human capital) and each education level is associated with a given lifecycle human capital profile. Females also start their life with a given education (human capital) level. Their human capital, however, evolves endogenously as enter and exit to the labor market. Idiosyncratic shocks to wages are modeled as in Heathcote, Storesletten and Violante (2010). The key feature of the wage process is that within a married couple household, innovations to shocks are \emph{correlated} between husband and wife. The asic structure of the model follows Guner, Kaygusuz and Ventura (2011). Married couples and single females have children that appear exogenously along their life cycle. Children are costly, if a female with a child decides to work, she has to pay child care expenses. Married couples also face a cost (monetary or utility) of joint work. Each period, agents decide how much to consume, how much to save, and how much to work. Agents' labor supply can vary along extensive as well as the intensive margins. In particular, females might decide not to participate in this economy, since participation for them is costly. However, taking time from the market is also costly due to human capital accumulation. We study the effects of public policy within this environment. We plan to consider two different types of public policies. First are the standard tools of social insurance, like income maintenance programs that provide cash transfers to households whose income falls below a certain threshold or progressive taxation. Second are policies that make labor supply of females less costly for households, like child care subsidies. Although such policies are mainly studies for their effects on female labor supply, the current environment also allows studying their effects on welfare. In this environment, public policy can play an important role and this role will depend critically on the extent of the correlation between husbands' and wives' permanent characteristics and income shocks. First, consider the extreme case that only husband work and wives are not allowed to work. Then, this economy is effectively a single agent economy. Now imagine wives can decide whether to work or not. If the household is hit by a negative income shock, then the wife is more likely to enter the work force. This will be more likely if income shocks to husbands and wives incomes are not very highly correlated. This will also depend on the extent of gender gap as well as the existing government polices. If female labor supply behavior provides a significant level of insurance for the household, then it is less likely that traditional social insurance will be very important. On the other hand, policies that make female labor supply less costly can be as important as the traditional welfare programs. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:585&r=dge |
| By: | Andre Silva (Universidade Nova de Lisboa); Bernardino Adao (Banco de Portugal) |
| Abstract: | We show that the predictions about the effects of financing the debt with taxes or inflation change when households react by changing their demand for money. In the model, the households change the optimal interval between bond trades to change the demand for money. In standard cash-in-advance models, the interval between trades is fixed, which implies an inelastic demand for money in the long run. With optimal trading intervals, the demand for money is elastic and has a better fit to the data. We find that consumption decreases in similar magnitudes for fixed or optimal time intervals for an increase of 10% in government purchases financed with taxes. On the other hand, the decrease in consumption is much higher with optimal time intervals when the increase in government purchases is financed with inflation. According to the model, financing the increase in purchases with inflation implies a decrease in consumption of 3.4% with fixed intervals, but a decrease in consumption of 21% with endogenous intervals. Moreover, the predicted welfare losses are much larger when the reaction of households is taken into account. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:577&r=dge |
| By: | Jonathan Heathcote; Fabrizio Perri |
| Abstract: | This paper is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of esources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow faster in the long run also tend to save more both domestically and internationally. These facts suggest that either the long-run allocation of resources across countries is inefficient, or that there is a systematic relation between fast growth and preference for delayed consumption. The third part applies the methodology to the allocation of resources across developed countries at the business cycle frequency. Here we discuss how evidence on international quantity comovement, exchange rates, asset prices, and international portfolio holdings can be used to assess efficiency. Overall, quantities and portfolios appear consistent with efficiency, while evidence from prices is difficult to interpret using standard models. The welfare costs associated with an inefficient allocation of resources over the business cycle can be significant if shocks to relative country permanent income are large. In those cases partial financial liberalization can lower welfare. keywords: International risk sharing, Long-run risk, Long-run growth, International business cycles, Real exchange ratejel classification codes: F21, F32, F36, F41, F43, F44 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:476&r=dge |
| By: | Stephen Millard (Bank of England); Eran Yashiv (Tel Aviv University); Renato Faccini (Queen Mary, University of London) |
| Abstract: | We embed convex hiring and investment costs and their interaction in a New Keynesian DSGE model with Nash wage bargaining. We explore the implications with respect to inflation dynamics in the New Keynesian Phillips curve. We use two structural estimation methods (GMM and Bayesian estimation) and two aggregate data sets (the U.S. and the U.K. economies). Our results indicate that : (i) one-step ahead inflation rate predictions are much closer to the data in the model with hiring and investment costs than in the standard New-Keynesian model without these costs. (ii) The model provides new estimates for hiring and investment frictions, price adjustment costs, wage bargaining power and the disutility of labor. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:556&r=dge |
| By: | Michael Grill (Deutsche Bundesbank); Karl Schmedders (University of Zurich and Swiss Finance Institute); Felix Kubler (University of Zurich and SFI); Johannes Brumm (University of Zurich) |
| Abstract: | In this paper we examine the effect of collateral constraints and margin requirements on the prices of long-lived assets. We consider a Lucas-style infinite-horizon exchange economy with heterogenous agents and collateral constraints. In our calibrated economy collateral constraints lead to a forty percent increase in asset return volatility and a regulation of margin requirements potentially has strong stabilizing effects. While this finding is in line with the existing theoretical literature the empirical evidence indicates that historically the regulation of margin requirements on securities had little effect on volatility. Our main contribution is to reconcile the empirical evidence with our theoretical findings. In a calibrated model with several collateralizable assets, stocks are only a comparatively small fraction of total margin eligible assets. The regulation of margin requirements on this fraction of collateralizable assets might have no or even an elevating effect on volatility. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:533&r=dge |
| By: | Eerola, Essi; Määttänen, Niku |
| Abstract: | Abstract:We develop a model of the housing market that features both financial and matching frictions. In the model, risk-averse households may save or borrow in order to smooth consumption over time and finance owner housing. Each household either rents or owns its house. Some renter households become dissatisfied with rental housing and want to buy a house. Prospective sellers and buyers meet randomly and bargain over the price. We show how the outcome of the bargaining process depends on buyer’s and seller’s asset positions. The results also illustrate how financial frictions magnify the effects of matching frictions. For instance, because of the borrowing constraint, some matches do not result in trade and identical houses are traded at different prices. |
| Keywords: | housing, matching, house prices |
| JEL: | E21 R21 C78 |
| Date: | 2013–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:rif:wpaper:3&r=dge |
| By: | Shengxing Zhang (New York University) |
| Abstract: | We show that the dispersion of private valuation reduces market liquidity and allocative efficiency of a dynamic OTC market. In this decentralized market, traders have time varying and heterogeneous private value over the asset and dealers act as competing mechanism designers. We characterize the optimal liquidity provision with endogenous valuation, outside options and type distributions. Depending on traders' value, liquidity can be distorted in three ways, trade breakdown, trade delay or price distortion. The three distortions coexist in the equilibrium. Trade with small gain breaks down. Trade with intermediate gain is delayed. And trade with large gain faces largest distortion in price. As the dispersion of private valuation increases, price dispersion increases and trade is more likely to be delayed or break down for any type. Welfare loss increases as dispersion of private value increases. Quantitatively, welfare loss from liquidity misallocation could reach 5%. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:529&r=dge |
| By: | Burak Uras (Tilburg University) |
| Abstract: | Cross-country data shows a strong positive correlation between the level of financial contract enforcement and macroeconomic development. This paper emphasizes the role of entrepreneurial investment technology choice in explaining this empirical observation. We develop a life-cycle model with limited financial contract enforcement, entrepreneurial heterogeneity (ability and financial pledgeability) and a discrete investment technology choice. In the model production processes can be undertaken using either a Short-Term or a Long-Term technology investment. Depending on the entrepreneurial ability, the long-term technology investment is more productive relative to the short-term investment, but the latter can be exploited to build collateral in the short-run. In equilibrium the level of contract enforcement and entrepreneurial characteristics endogenously determine (1) the investment size and (2) the investment technology choice at the firm level. Key results of the paper indicate that when financial contract enforcement is weak, the investment size and the intensity of long-term technology use of entrepreneurial firms are positively correlated with financial pledgeability. We calibrate the model to study its quantitative macroeconomic properties. Quantitative experiments illustrate sizeable positive effects of financial contract enforcement on aggregate output and aggregate long-term investment. Specifically, the counterfactual policy analysis shows that if financial contract enforcement in Turkey improves to the U.S. level, output rises by 13-15%; and more importantly for our analysis, we can identify that one third of this change is due to the increase in the rate of long-term investment. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:599&r=dge |
| By: | Berardino Palazzo (Boston University, School of management); Gian Luca Clementi (Stern School of Business) |
| Abstract: | Since the seminal contribution of Berk, Green, and Naik (Journal of Finance, 1999), we have witnessed a growing interest in rationalizing the observed cross-sectional relation between investment and stock returns. Unfortunately, however, the extant literature falls short of ensuring that the models in use are consistent with stylized facts on firm dynamics long established by the empirical I&O literature. The contribution of this paper is to study the cross-section of returns in a standard neoclassical model of firm dynamics parameterized to match those stylized facts. We start by characterizing the investment process among public firms in the United States, along the lines of what accomplished by Cooper & Haltiwanger (ReStud, 2006) for the universe of manufacturing establishments. Then, we write down a model of industry dynamics along the lines of Hopenhayn (Econometrica, 1992) augmented with aggregate shocks, capital accumulation, and a time-varying discount factor. The parameters are calibrated to ensure that the simulated investment behavior is consistent with our empirical findings. The goal is to quantify the role of investment as a determinant (and predictor) of the cross-sectoral variation in returns. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:543&r=dge |
| By: | Barbara Annicchiarico; Fabio Di Dio; Francesco Felici; Libero Monteforte |
| Abstract: | This paper provides a full technical account of the Italian General Equilibrium Model (IGEM), a new dynamic general equilibrium model for the Italian economy developed at the Department of Treasury of the Italian Ministry of the Economy and Finance. IGEM integrates typical New Keynesian elements, such as imperfect competition and nominal rigidities, into a general equilibrium framework. One of the key features of the model is the detailed representation of the labor market, designed to capture the dualism of the Italian economic system. The new model will serve as a laboratory for policy analysis. |
| Keywords: | Dynamic General Equilibrium Model, Simulation Analysis, Italy |
| JEL: | E27 E30 E60 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:itt:wpaper:wp2013-04&r=dge |
| By: | Jack Favilukis (London School of Economics); Xiaoji Lin (The Ohio State University) |
| Abstract: | In standard production based models labor income volatility is far too high and equity return volatility is far too low (excess volatility puzzle). We show that a simple modification of the standard model - infrequent renegotiation of labor income - allows the model to match both the smoother wages and the high equity return volatility observed in the data. Furthermore, the model produces several other hard to explain features of financial data: high unconditional Sharpe Ratios; time-varying equity premium, equity volatility, and Sharpe Ratio; as well a higher expected returns for value stocks over growth stocks. The intuition is that in standard models, highly pro-cyclical and volatile wages act as a hedge for the firm, reducing profits in good times and increasing them in bad times; this causes profit and returns to be too smooth. Infrequent renegotiation smoothes wages and smooth wages act like operating leverage, making profits more risky. Bad times and unproductive firms are especially risky because committed wage payments are high relative to output. Consistent with our model, we show that in the data wage growth can forecast long horizon returns, furthermore we find the same predictability at the industry level, with more rigid industries having stronger predictability. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:589&r=dge |
| By: | Martin M. Andreasen (Aarhus University and CREATES); Jesús Fernández-Villaverde (University of Pennsylvania, FEDEA, NBER, and CEPR); Juan F. Rubio-Ramírez (Duke University, Federal Reserve Bank of Atlanta, and FEDEA) |
| Abstract: | This paper studies the pruned state-space system for higher-order approximations to the solutions of DSGE models. For second- and third-order approximations, we derive the statistical properties of this system and provide closed-form expressions for ?first and second unconditional moments and impulse response functions. Thus, our analysis introduces GMM estimation for DSGE models approximated up to third-order and provides the foundation for indirect inference and SMM when simulation is required. We illustrate the usefulness of our approach by estimating a New Keynesian model with habits and Epstein-Zin preferences by GMM when using ?rst and second unconditional moments of macroeconomic and ?nancial data and by SMM when using additional third and fourth unconditional moments and non-Gaussian innovations. |
| JEL: | C15 C53 E30 |
| Date: | 2013–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2013-12&r=dge |
| By: | Tanaka Hiroatsu (Federal Reserve Board) |
| Abstract: | I study how two different monetary policy regimes characterized by their difference in degrees of credibility (a 'commitment' regime, in which the central bank can credibly commit to future policy and a 'discretion' regime, in which it cannot) affect the term structure of interest rates and attempt to evaluate which monetary policy regime seems more consistent with the data on macroeconomic variables and term structure dynamics. To this end, I construct a no-arbitrage affine-term structure model based on a New-Keynesian type micro-foundation. The model is augmented with Epstein-Zin (EZ) preferences, real wage rigidity and a simple central bank optimization problem. A shock structure that exhibits stochastic volatility in long-run risk of TFP growth parsimoniously generates time-varying term premia. The estimation of the model suggests that the assumption of a discretion regime performs better than a commitment regime in terms of quantitatively ÃÂfitting some salient features of the US data on the term structure and the business cycle during the Volcker-Greenspan-Bernanke era. The lack of policy credibility leads to volatile and persistent inflation, which generates volatile expected long-run inflation that is negatively correlated with future continuation values. This is perceived particularly risky by EZ nominal bond holders and results in upward sloping average nominal yields, long-term yield volatility and excess return predictability closer to the magnitude observed in the data while keeping the unconditional volatilities of consumption growth and inflation realistic. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:557&r=dge |
| By: | Raouf Boucekkine (Aix-Marseille University (Aix-Marseille School of Economics, CNRS & EHESS, IRES and CORE, Université Catholique de Louvain.); Natali Hritonenko (Department of Mathematics, Prairie View A&M University); Yuri Yatsenko (Houston Baptist University) |
| Abstract: | Work significantly affects human life and health. Overworking may decrease the quality of life and cause direct economic losses. Technological innovations encourage modernization of firms’ capital and improve labor productivity in the workplace. The paper investigates the optimal individual choice of work intensity under improving technology embodied in new equipment leading to shorter lifetime of capital goods (obsolescence). The balanced growth trajectories are analyzed in this context to find out, in particular, how the optimal choice of work intensity is tied to the rate of embodied technological change. The impact of embodied technological advances on the work/life balance problem is discussed and their macroeconomic consequences are highlighted. |
| Keywords: | work-life balance, rational individual choice, technological development, vintage capital. |
| JEL: | D91 D92 O11 I10 C60 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1320&r=dge |
| By: | Jochen Michaelis (University of Kassel) |
| Abstract: | Nicht alle Ökonomen teilen die Einschätzung des IWF-Chefökonomen, von den Nicht-Ökonomen ganz zu schweigen. Die Kluft zwischen den professionellen Makroökonomen und der (Fach-)Öffentlichkeit ist nicht zuletzt angesichts der Finanz- und Wirtschaftskrise größer geworden. Vordergründig mag dies in dem Vorwurf münden, die Makroökonomen hätten mit ihren Modellen die Krise nicht vorhergesehen, aber dies ist mehr Reflex der Unkenntnis dar-über, was Modelle leisten oder eben nicht leisten können. Etwas tiefer geht der Vorwurf, die in der Forschung dominierenden DSGE (Dynamic Stochastic General Equilibrium)-Modelle seien „blutleer“, die Makro reduziere sich weitgehend auf das Hantieren mit griechischen Buchstaben, die ökonomische Intuition ginge verloren. Wenn selbst solide ausgebildete Diplom-Volkswirte die Grundmechanismen von Schocks und/oder Politikmaßnahmen nicht mehr nachvollziehen können, dann geht die Akzeptanz und damit die entscheidende Bedingung für eine Umsetzung in die Wirtschaftspolitik verloren. Ziel dieses Beitrags ist es zu verdeutlichen, warum wir auf der einen Seite solche abstrakten Modelle für die Forschungsfront benö-tigen, warum wir aber gleichwohl bspw. im Hörsaal an dem Verwenden kleiner handlicher Modelle festhalten sollten |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201323&r=dge |
| By: | Engler, Philipp; Voigts, Simon |
| Abstract: | We show in a dynamic stochastic general equilibrium framework that the introduction of a common currency by a group of countries with only partially integrated goods markets, incomplete financial markets and no labor migration across member states, significantly increases volatility of consumption and employment in the face of asymmetric shocks. We propose a simple transfer mechanism between member countries of the union that reduces this volatility. Furthermore, we show that this mechanism is more efficient than anticyclical policies at the national level in terms of a better stabilization for the same budgetary effects for households while in the long run deeper integration of goods markets could reduce volatility significantly. Regarding its implementation, we show that the centralized provision of public goods and services at the level of the monetary union implies cross-country transfers comparable to the scheme under study. -- |
| Keywords: | monetary union,asymmetric shocks,fiscal policy,fiscal transfers |
| JEL: | F41 F44 E2 E3 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:20132&r=dge |
| By: | Scott Dressler (Villanova University) |
| Abstract: | This paper assesses the long-run and short-run (i.e. along the transition path) welfare implications of permanent changes in inflation in an environment with essential money and perfectly competitive markets. The model delivers a monetary distribution that matches moments of the distribution seen in the US data. Although there is potential for wealth redistribution to deliver welfare gains from inflation, the (total) costs of 10 percent inflation relative to zero is over 7 percent of consumption. While these results suggest a dominating real-balance effect of inflation, a politico-economic analysis concludes that the prevailing (majority rule) inflation rate is above the Friedman Rule. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:546&r=dge |
| By: | Alexander Monge-Naranjo (Penn State University) |
| Abstract: | This paper examines a key policy question for many developing countries: Should they allow and even subsidize the entry and operation of multinational firms? I consider a model in which spillovers drive the formation of productive knowledge, the typical rationale for attracting multinational firms. I depart from most work on the gains of openness and instead of using simple counterfactual policies (i.e. compare complete openness or complete closedness with each other or with actual policies) I characterize the gains attainable under a Ramsey program, when taxes are set to maximize the welfare of the recipient country subject to the equilibrium behavior of national and foreign agents. I find that contrary to laissez-faire, openness under optimal taxation always leads developing countries to catch up with developed countries and improves their welfare. However, in stark contrast with some observed practice, I find that a developing country should only subsidize the entry of foreign firms if the domestic accumulation of know-how is also subsidized. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:593&r=dge |
| By: | Silvana Tenreyro (London School of Economics); Miklos Koren (Central European University); Francesco Caselli (London School of Economics) |
| Abstract: | Existing wisdom links increased openness to trade to greater macroeconomic volatility, as trade induces a country to specialize, increasing its exposure to sector-specific shocks. Evidence suggests, however, that country-wide shocks are at least as important as sectoral shocks in shaping volatility patterns. We argue that if country-wide shocks are dominant, the impact of trade on volatility can be negative, because trade becomes a source of diversification. For example, trade allows domestic goods producers to respond to shocks to the domestic supply chain by shifting sourcing abroad. Similarly, when a country has multiple trading partners, a domestic recession or a recession in any one of the trading partners translates into a smaller demand shock for its producers than when trade is more limited. Using a calibrated version of the Eaton-Kortum and Alvarez-Lucas model, we quantitatively assess the impact of lower trade barriers on volatility since the 1970s in a broad group of countries. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:539&r=dge |