nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒06‒30
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Uncertainty shocks, banking frictions, and economic activity By Dario Bonciani; Björn van Roye
  2. Estimating nonlinear DSGE models with moments based methods By Sergei Ivashchenko
  3. A positional game for an overlapping generation economy By Ahmad Naimzada; Marina Pireddu
  4. Tractable latent state filtering for non-linear DSGE models using a second-order Approximation By Robert Kollmann
  5. Optimal fiscal and monetary policy with occasionally binding zero bound constraints By Taisuke Nakata
  6. Reverse mortgage loans: a quantitative analysis By Makoto Nakajima; Irina A. Telyukova
  7. Labour Market Dynamics in Australia By Wesselbaum, Dennis
  8. The "emersion" effect: an ex post and ex ante social program evaluation on labor tax evasion in Italy By Edoardo Di Porto; Leandro Elia; Cristina Tealdi
  9. Financial Frictions, Capital Misallocation, and Structural Change By Naohisa Hirakata; Takeki Sunakawa
  10. The Influence of Decision Costs on Investments in Indivudual Savings Accounts By Justin van de Ven
  11. Global Banks, Financial Shocks And International Business Cycles: Evidence From An Estimated Model By Robert Kollmann
  12. Fear of Sovereign Default, Banks, and Expectations-driven Business Cycles By Christopher M. Gunn; Alok Johri
  13. Sur les interactions entre politiques de dette publique et de transfert. By Bessec, Marie; Desbonnet, Audrey; Kankanamge, Sumudu; Weitzenblum, Thomas
  14. Liquidity Provision, Interest Rates, and Unemployment By Guillaume Rocheteau; Jose Antonio Rodriguez-Lopez

  1. By: Dario Bonciani; Björn van Roye
    Abstract: In this paper we investigate the effects of uncertainty shocks on economic activity using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in banking retail interest rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy
    Keywords: Uncertainty Shocks, Financial frictions, Monetary Policy, Stochastic Volatility, Perturbation Methods, Third-order approximation
    JEL: E32 E52
    Date: 2013–06
  2. By: Sergei Ivashchenko
    Abstract: This article suggests new approach to approximation of moments of nonlinear DSGE models. These approximations are fast and accurate enough to use them for estimation of parameters of nonlinear DSGE models. A small financial DSGE model is repeatedly estimated by several approaches. Approximations of moments are close to moments calculated for large sample simulations. The quality of estimation with suggested approach is close to the Central Difference Kalman Filter (CDKF) based. At the same time suggested approach is much faster.
    Keywords: DSGE, DSGE-VAR, GMM, nonlinear estimation
    JEL: C13 C32 E32
    Date: 2013–06–11
  3. By: Ahmad Naimzada; Marina Pireddu
    Abstract: We develop a model with intra-generational consumption externalities, based on the overlapping generation version of Diamond (1965) model. More specifically, we consider a two-period lived overlapping generation economy, assuming that the utility of each consumer depends also on the average level of consumption by other consumers in the same generation. In this way we obtain a positional game embedded in an overlapping generation economy. We characterize the consumption and saving choices for the two periods in the Nash equilibrium path and we determine a dynamic equation for capital accumulation coherent with the agents' choices in the Nash equilibrium. Hence, also the behavior, both static and dynamic, described by the equation for the capital accumulation is coherent with the Nash equilibrium. For the associated dynamical system we find a unique positive steady state for capital, which is globally stable. Its position is decreasing with respect to positive variations in the degree of interaction in the first period, while the opposite relation holds in the second period. We then compare the steady states for capital with and without social interaction. In this respect we show that the steady state with social interaction is larger than the steady state in the absence of social interaction if and only if the degree of interaction in the second period exceeds the degree of interaction in the first period. In particular, if the degrees of interaction in the two periods coincide, the dynamical system is equivalent to the one without social interaction.
    Keywords: Positional game, overlapping generations, consumption externalities
    JEL: C72 D91 E21 O41
    Date: 2013–06
  4. By: Robert Kollmann
    Abstract: This paper develops a novel approach for estimating latent state variables of Dynamic Stochastic General Equilibrium (DSGE) models that are solved using a second-order accurate approximation. I apply the Kalman filter to a state-space representation of the second-order solution based on the ‘pruning’ scheme of Kim, Kim, Schaumburg and Sims (2008). By contrast to particle filters, no stochastic simulations are needed for the filter here--the present method is thus much faster. In Monte Carlo experiments, the filter here generates more accurate estimates of latent state variables than the standard particle filter. The present filter is also more accurate than a conventional Kalman filter that treats the linearized model as the true data generating process. Due to its high speed, the filter presented here is suited for the estimation of model parameters; a quasimaximum likelihood procedure can be used for that purpose.
    Keywords: Latent state filtering; estimation of DSGE models; second-order approximation; pruning; Kalman filter; particle filter; quasi-maximum likelihood.
    JEL: C63 C68 E37
    Date: 2013–05
  5. By: Taisuke Nakata
    Abstract: This paper studies optimal government spending and monetary policy when the nominal interest rate is subject to the zero lower bound constraint in a stochastic New Keynesian economy. I find that the government chooses to increase its spending when at the zero lower bound by a substantially larger amount in the stochastic environment than it would in the deterministic environment. The presence of uncertainty creates a unique time-consistency problem if the steady-state is inefficient. Although access to government spending policy increases welfare in the face of a large deflationary shock, it decreases welfare during normal times as the government reduces the nominal interest rate less aggressively before reaching the zero lower bound
    Date: 2013
  6. By: Makoto Nakajima; Irina A. Telyukova
    Abstract: Reverse mortgage loans (RMLs) allow older homeowners to borrow against housing wealth without moving. In spite of growth in this market, only 2.1% of eligible homeowners had RMLs in 2011. In this paper, we analyze reverse mortgages in a life-cycle model of retirement, calibrated to age-asset profiles. The ex-ante welfare gain from RMLs is sizable at $1,000 per household; ex-post, low-income, low-wealth and poor-health households use them. Bequest motives, nursing-home moving risk, house price risk, and interest and insurance costs all contribute to the low take-up rate. The model predicts market potential for RMLs to be 5.5% of households.
    Keywords: Mortgages ; Mortgage loans, Reverse ; Housing ; Retirement ; Home equity loans
    Date: 2013
  7. By: Wesselbaum, Dennis
    Abstract: This paper estimates a stylized search and matching model on data for Australia covering the period 1978-2008. Using Bayesian methods we find that the model does a fairly good job in replicating the data. Surprisingly, we find a large value for the worker’s bargaining power and low vacancy posting costs. The model generates a strong Beveridge curve and matches the standard deviations of all variables but vacancies. We identify technology and separation shocks to be the main driver of fluctuations.
    Keywords: Bayesian Methods, Business Cycle Fluctuations, Search and Matching, Unemployment.
    JEL: C11 E24 E32 J6 J60
    Date: 2013
  8. By: Edoardo Di Porto (MEMOTEF, Department "Sapienza" University of Rome and EQUIPPE USTL/Lille); Leandro Elia (Institute for the Protection and Security of the Citizen European Commission-Joint Research Centre); Cristina Tealdi (IMT Lucca Institute for Advanced Studies)
    Abstract: We analyze how different policy interventions may incentive the transition of workers from the informal to the formal sector. We use Italian data over the period 1998-2008 to evaluate ex post whether the 2003 Italian labor market reform was able to reach the objective to reduce the share of shadow employment. Based on our empirical results, we develop an ex ante evaluation based on a search and matching model, á la Mortensen and Pissarides to determine the right combination of policy interventions which may be effective in generating a significant reduction in undeclared work together with an expansion of the formal sector. We find that in an economy where permanent and temporary contracts coexist, the combination of lower payroll taxes for permanent jobs and higher probability of being audited generates a compression of the informal sector, leaving unemployment unchanged. A similar result can be obtained through a reduction of the firing cost associated with permanent jobs, even though this causes temporary contracts to increase relatively more than permanent contracts.
    Keywords: Labor tax evasion, temporary contracts, firing costs, search frictions, policy evaluation
    JEL: J38 J63 J64 H26
    Date: 2013–06
  9. By: Naohisa Hirakata (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail:; Takeki Sunakawa (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, International Department), Bank of Japan (E-mail:
    Abstract: We develop a two-sector growth model with financial frictions to examine the effects of a decline in the working population ratio and change in the structure of household demand on sectoral TFP and structural change. Our findings are twofold. First, with financial frictions, a decline in labor input reduces the real interest rate and increases excess demand for borrowing, tightening collateral constraints at a given credit-to-value ratio and generating capital misallocation and lower sectoral TFP. Second, compared to the case with no financial frictions, such changes in sectoral TFP impede structural changes driven by the change in the structure of household demand.
    Keywords: Financial frictions, heterogeneous firms, capital misallocation, total factor productivity, structural change
    JEL: E23 E44 O41 O47
    Date: 2013–06
  10. By: Justin van de Ven (National Institute of Economic and Social Research, London; Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This study considers the efficacy of a tax incentivised savings scheme in context of decision making rigidities. Analysis is based on a classical life-cycle model of savings and investment decisions, augmented with a salience cost over participation in Individual Savings Accounts (ISAs) currently run in the UK. Calibration results indicate that salience costs help to match the model to observed rates of participation in ISAs. The calibrated model suggests that the price effects of ISAs are insufficient to generate appreciable increases in private sector savings, with or without salience costs. In this context, salience costs have an important influence on the distribution of welfare benefits that are delivered by the ISAs scheme.
    Keywords: Decision costs, saving, uncertainty, pensions
    JEL: D12 D14 D81 H31
    Date: 2013–06
  11. By: Robert Kollmann
    Abstract: This paper estimates a two-country model with a global bank, using US and Euro Area (EA) data, and Bayesian methods. The estimated model matches key US and EA business cycle statistics. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for US real activity. Banking shocks account for about 3%-5% of the unconditional variance of US GDP and for 4%-14% of the variance of EA GDP. During the Great Recession (2007-09), banking shocks accounted for about 12%-20% of the fall in US and EA GDP, and for more than a third of the fall in EA investment and employment.
    Keywords: financial crisis, global banking, real activity, investment, Bayesian econometrics.
    JEL: F36 F37 E44 G21
    Date: 2013–05
  12. By: Christopher M. Gunn; Alok Johri
    Abstract: What is the effect of the fear of future sovereign default on the economy of the defaulting country? The typical sovereign default model does not address this question. In this paper we wish to explore the possibility that changing expectations about future default themselves can lead to financial stress (as measured by credit spreads) and recessionary outcomes. We exploit the "news-shock" framework to consider an environment in which sovereign debt-holders receive imperfect signals about the portion of debt that a sovereign may default on in the future. We then investigate how domestic banks can play a role in transmitting the expectation of default into a realized recession through the interaction of the domestic banks' holdings of government debt and their risk-weighted capital requirements. Our results suggest that, consistent with the data, even in the absence of actual realized government default, an increase in pessimism regarding the prospect of future default results in a rise in yields on government debt and an increase in interest rates on private domestic loans, as well as a recession in the economy.
    Keywords: expectations-driven business cycles, sovereign defaults; financial inter-mediation, news shocks, business cycles, interest rate spreads, capital adequacy requirements
    JEL: E3 E44 F36 F37 F4 G21
    Date: 2013–06
  13. By: Bessec, Marie; Desbonnet, Audrey; Kankanamge, Sumudu; Weitzenblum, Thomas
    Abstract: Dans cet article, nous analysons les interactions entre les politiques de dette publique et de transfert dans le modèle de Floden [2001], que nous étendons en modélisant la dynamique transitoire d’un état stationnaire à un autre. Dans un premier temps, dans le cas où la dette aurait atteint un niveau élevé, nous montrons qu’il est possible de mettre en œuvre une politique de désendettement de l’Etat qui ne détériore pas le bien-être, en l’associant à un ajustement transitoire du transfert. Dans un second temps, nous proposons un équilibre intégrant les incitations à court terme de surprendre les agents en modifiant les niveaux de dette publique et de transferts. Nous montrons que l’optimum de long terme sur la dette et les transferts proposé par Floden [2001] n’est pas stable au regard de ces incitations. Quantitativement, l’équilibre que nous obtenons s’éloigne considérablement de ce dernier.
    Abstract: In this paper, we investigate the interactions between public debt and transfer policies in a framework based on Floden [2001], that we extend to allow for transitional dynamics between steady states. First, we show that, starting from a high level of public debt, it is possible to implement a policy that reduces public debt without generating welfare losses, as long as it is associated with transitory transfers adjustments. Secondly, we define and compute an equilibrium that takes into consideration the government’s incentive to implement unexpected adjustments in both public debt and transfers. We show that the long run equilibrium over public debt and transfers in Floden [2001] is not stable with respect to these short term incentives. Simulations reveal that our equilibrium and Floden [2001]’s one considerably differ in quantitative terms.
    Keywords: Fiscal policy; public debt; transfers; Fiscalité; dette publique; transferts; transition;
    JEL: E20 E60 H20 H60
    Date: 2012
  14. By: Guillaume Rocheteau (Department of Economics, University of California-Irvine); Jose Antonio Rodriguez-Lopez (Department of Economics, University of California-Irvine)
    Abstract: This paper develops a model of the public and private provision of liquidity and its relation to unemployment. We extend the Mortensen-Pissarides model of the labor market by adding an over-the-counter (OTC) market. Trades in the OTC market are collateralized with liquid assets, which are created through the financing of firms and by some public entity. As a result, the real interest rate is endogenous and depends on the financing needs of firms, the liquidity needs of OTC-traders, and the public supply of liquidity. We show that under some conditions the policymaker faces a trade-off between the provision of liquidity to the OTC market and the need to keep the cost of financing firms low. When the unemployment is inefficiently high, it is optimal to keep liquidity scarce, thereby reducing the total surplus of OTC-traders, to lower interest rates and promote job creations. We study the dynamics of the labor market under a liquidity shortage and we introduce heterogeneity across private assets in order to illustrate how a shock to liquidity demand can generate collateral expansion.
    Keywords: Unemployment; Liquidity; Interest rates
    JEL: D82 D83 E40 E50
    Date: 2013–06

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