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on Dynamic General Equilibrium |
| By: | Leonardo Martinez (International Monetary Fund); Juan Hatchondo (Federal Reserve Bank of Richmond); Javier Bianchi (NYU and Wisconsin) |
| Abstract: | A long-standing puzzle of international capital flows is why countries hold large amount of external debt and foreign reserves at the same time. To address this puzzle, we propose a sovereign default model where the government decides jointly over the accumulation of long-duration bonds and foreign reserves. When calibrated to the data, the model can successfully explain the simultaneous holdings of debt and foreign reserves. We also show that the relationship between reserves and default risk may be non-monotonic. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:1125&r=dge |
| By: | Leonardo Gambacorta; Federico M Signoretti |
| Abstract: | The global financial crisis has reaffirmed the importance of financial factors for macroeconomic fluctuations. Recent work has shown how the conventional pre-crisis prescription that monetary policy should pay no attention to financial variables over and above their effects on inflation may no longer be valid in models that consider frictions in financial intermediation (Cúrdia and Woodford, 2009). This paper analyzes whether Taylor rules augmented with asset prices and credit can improve upon a standard rule in terms of macroeconomic stabilization in a DSGE with both a firms' balance-sheet channel and a bank-lending channel and in which the spread between lending and policy rates endogenously depends on banks' leverage. The main result is that, even in a model in which financial stability does not represent a distinctive policy objective, leaning-against-the-wind policies are desirable in the case of supply-side shocks whenever the central bank is concerned with output stabilization, while both strict inflation targeting and a standard rule are less effective. The gains are amplified if the economy is characterized by high private sector indebtedness. |
| Keywords: | DSGE, monetary policy, asset prices, credit channel, Taylor rule, leaning-against-the-wind |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:418&r=dge |
| By: | Meixing Dai (BETA, University of Strasbourg); Frédéric Dufourt (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Qiao Zhang (BETA, University of Strasbourg) |
| Abstract: | We introduce Large Scale Asset Purchases (LSAPs) in a New-Keynesian DSGE model that features distinct mortgage and corporate loan markets. We show that following a significant disruption of financial intermediation, central-bank purchases of mortgage-backed securities (MBS) are uniformly less effective at easing credit market conditions and stabilizing economic activity than outright purchases of corporate bonds. Moreover, the size of the effects crucially depends on the extent to which credit markets are segmented, i.e. to which a "portfolio balance channel" is at work in the economy. More segmented credit markets imply larger, but more local effects of particular asset purchases. With strongly segmented credit markets, large scale purchases of MBS are useful to stabilize the housing market but do little to mitigate the contractionary effect of the crisis on employment and output. |
| Keywords: | Financial frictions, mortgage-backed securities (MBS), corporate bonds, unconventional monetary policy, large scale asset purchases (LSAPs), portfolio balance channel, credit spreads. |
| JEL: | E32 E44 E52 E58 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1336&r=dge |
| By: | Ching-Yang Lin (International University of University); Hiroaki Miyamoto (International University of University) |
| Abstract: | This paper studies how well a simple search and matching model can describe aggregate Japanese labor market dynamics in a full information setting. We develop a discrete-time search and matching model with a convex vacancy posting cost and three shocks: productivity, separation, and mark-up shocks. We use the model as a data-generating process for our empirical analysis and estimate it by using Bayesian methods. The model is successful in replicating the behavior of unemployment and vacancies in Japan. However, we also find that the success of the model relies on shock processes that are not empirically plausible. |
| Keywords: | Search and matching model, Unemployment, Bayesian Estimation, Japanese labor market |
| JEL: | C11 C51 E24 J64 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:iuj:wpaper:ems_2013_09&r=dge |
| By: | Karl Farmer (Karl-Franzens University of Graz) |
| Abstract: | The pronounced increase in external imbalances in the European Economic and Monetary Union (EMU) during the years running up to 2008 is traditionally explained by financial integration through the common currency. This paper examines in a one-good, two-country overlapping generations' model, with production, capital accumulation and public debt, the effects of financial integration on the net foreign asset positions of initially low-interest and high-interest rate EMU countries. We find that a lower savings rate and government expenditure quota, together with a higher capital production share in the latter can in fact be transformed into the observed external imbalances when interest rates converge. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2013-07&r=dge |
| By: | Diogo Guillen (Princeton University); Wei Cui (Princeton University) |
| Abstract: | Should monetary policy react to asset prices levels and changes? In answering this question, we provide a tractable monetary Ramsey approach for a heterogeneous agents model with conventional policy (interest rate or money growth target) and unconventional policy (purchase of private illiquid assets) as instruments, in which heterogeneous agents' interaction is summarized in one implementability condition. We show that entrepreneurs hold too much liquid asset in a model with equity issuance and resale (liquidity) constraints. In the steady state, optimal policy involves paying interest on liquid assets or reducing the money supply available, leading to an equivalent increase of .40% in permanent consumption compared to the economy with no policy. In responding to liquidity shocks, the paths of macroeconomic variables under no policy and optimal policy are sharply different and suggest the need for policy on changing the rate of return on liquid assets. Finally, we prove that the unconventional policy dominates the conventional counterpart, but, quantitatively, the welfare difference of them is negligible. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:1106&r=dge |
| By: | Lukasz Drozd (University of Pennsilvania) |
| Abstract: | This paper evaluates the performance of leading micro-founded pricing-to-market frictions vis-a-vis a set of robust stylized facts about international prices. In order to make that evaluation meaningful, we embed each friction into a unified IRBC framework and parameterize the models in a uniform way. Our goal is to evaluate the broad-based applicability of these frictions for policy-oriented DSGE modeling by documenting their strengths and weaknesses. We make three points: (i) the mechanisms generating pricing to market are not always neutral to business cycle dynamics of quantities, (ii) some mechanisms require producer markups at least 50% to account for the full range of estimates of the empirical exchange rate pass-through to export prices of 35%-50%, (iii) some frictions crucially depend on a particular driver of uncertainty in the underlying model. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:1108&r=dge |
| By: | Sorger, Gerhard; Stark, Oded; Wang, Yong |
| Abstract: | This paper studies the growth dynamics of a developing country under migration. Assuming that human capital formation is subject to a strong enough, positive intertemporal externality, the prospect of migration will increase growth in the home country in the long run. If the external effect is less strong, there exists at least a level effect on the stock of human capital in the home country. In either case, the home country experiences a welfare gain, provided that migration is sufficiently restrictive. These results, obtained in a dynamic general equilibrium setting, extend and strengthen the results of Stark and Wang (2002) obtained in the context of a static model. -- |
| Keywords: | Overlapping-generations growth model,Intertemporal human capital externalities,Long-run growth effect of the prospect of migration |
| JEL: | F22 I30 J24 J61 O15 O40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuewef:58&r=dge |
| By: | Bethencourt, Carlos; Kunze, Lars |
| Abstract: | This paper proposes a theoretical model to account for the most relevant micro- and macroeconomic empirical facts in the tax evasion literature. To do so, we integrate tax morale into a dynamic overlapping generations model of capital income tax evasion. Tax morale is modeled as a social norm for tax compliance. It is shown that accounting for such nonpecuniary costs of evasion may not only explain (i) why some taxpayers never evade even if the gamble is profitable, and (ii) how a higher tax rate can increase evasion, but also that (iii) the share of evaded taxes over GDP decreases with the stage of economic development and (iv) that tax morale is positively correlated with the level of GDP per capita as suggested by recent empirical evidence. Finally, a higher tax rate increases aggregate evasion as well as the number of evaders in the economy when taxpayers decisions are interdependent. |
| Keywords: | tax evasion, social norms, overlapping generations, economic growth |
| JEL: | D91 H26 Z13 |
| Date: | 2013–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48427&r=dge |
| By: | Thomas J. Holmes; Ellen R. McGrattan; Edward C. Prescott |
| Abstract: | Despite the recent rapid development and greater openness of China's economy, FDI flows between China and technologically advanced countries are relatively small in both directions. We assess global capital flows in light of China's quid pro quo policy of exchanging market access for transfers of technology capital—accumulated know-how such as research and development that can be used in multiple production locations. We first provide empirical evidence of this policy and then incorporate it into a multicountry dynamic general equilibrium model. This extension leads to a significantly better fit of the model to data. We also find large welfare gains for China—and welfare losses for its FDI partners—from quid pro quo. |
| JEL: | F23 F41 O33 O34 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19249&r=dge |
| By: | Barnett, Richard (Department of Economics & International Business LeBow College of Business Drexel University); Bhattacharya, Joydeep (Department of Economics Iowa State University); Puhakka, Mikko (Department of Economics University of Oulu) |
| Abstract: | We compare two institutions head on, a family compact – a parent makes a transfer to her parent in anticipation of a possible future gift from her children – with a pay-as-you-go, social security system in a lifecycle model with endogenous fertility wherein children are valued both as consumption and investment goods. Our focus is strictly on the pension dimension of these competing institutions. We show that an optimally-chosen family compact and a social security system cannot co-exist; indeed, the former may be preferred. A strong-enough negative shock to middle-age incomes destroys family compacts. While such a setting might appear ideal for the introduction of a social security system – as the experience of Europe, circa 1880s, would suggest – this turns out not to be the case: if incomes are too depressed to allow family compacts to flourish, they are also too low to permit introduction of an optimal social security system. |
| Keywords: | fertility; family compacts; social security; intergenerational cooperation; pensions; self-enforcing constitutions |
| JEL: | E21 E32 |
| Date: | 2012–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2012_014&r=dge |
| By: | Barnett, Richard (Department of Economics & International Business LeBow College of Business Drexel University); Bhattacharya, Joydeep (Department of Economics Iowa State University); Puhakka, Mikko (Department of Economics University of Oulu) |
| Abstract: | Evidence supports the notion that those who grow up to be patient do better than those who do not. Parents can inculcate the virtue of delayed gratification in their children by taking the right actions. We study a model in which parents, for selfish reasons, invest resources to raise patient children. In the model, patience raises the marginal return to human capital acquisition giving the patient young an incentive to spend more on their own education at the expense of investment in their own progeny’s patience. This dynamic generates intergenerational patience cycles. |
| Keywords: | patience; delayed gratification; preference transmission; human capital |
| JEL: | E20 J24 |
| Date: | 2012–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2012_007&r=dge |