|
on Dynamic General Equilibrium |
| By: | Sandra Gomes; Nikolay Iskrev; Caterina Mendicino |
| Abstract: | We augment a medium-scale DSGE model with monetary policy news shocks and t it to US data. Monetary policy news shocks improve the performance of the model both in terms of marginal data density and in terms of its ability to match the empirical moments of the variables used as observables. We estimate several versions of the model and nd that the one with news shocks over a two-quarter horizon dominates in terms of overall goodness of t. We show that, in the estimated model: (1) adding monetary policy news shocks to the model does not lead to identi cation problems; (2) monetary policy news shocks account for a larger fraction of the unconditional variance of the observables than the standard unanticipated monetary policy shock; (3) these news shocks also help to achieve a better matching of the covariances of consumption growth and the interest rate. |
| JEL: | C50 E32 E44 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201307&r=dge |
| By: | Javier Bianchi; Juan Carlos Hatchondo |
| Abstract: | This paper provides a theoretical framework for quantitatively investigating the optimal accumulation of international reserves as a hedge against rollover risk. We study a dynamic model of endogenous default in which the government faces a tradeoff between the insurance benefits of reserves and the cost of keeping larger gross debt positions. A calibrated version of our model is able to rationalize large holdings of international reserves, as well as the procyclicality of reserves and gross debt positions. Model simulations are also consistent with spread dynamics and other key macroeconomic variables in emerging economies. The benefits of insurance arrangements and the effects of restricting the use of reserves after default are also analyzed. |
| Keywords: | Macroeconomics - Econometric models |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:151&r=dge |
| By: | Edward P. Herbst; Frank Schorfheide |
| Abstract: | We develop a sequential Monte Carlo (SMC) algorithm for estimating Bayesian dynamic stochastic general equilibrium (DSGE) models, wherein a particle approximation to the posterior is built iteratively through tempering the likelihood. Using three examples--an artificial state-space model, the Smets and Wouters (2007) model, and Schmitt-Grohe and Uribe's (2012) news shock model--we show that the SMC algorithm is better suited for multimodal and irregular posterior distributions than the widely-used random-walk Metropolis-Hastings algorithm. We find that a more diffuse prior for the Smets and Wouters (2007) model improves its marginal data density and that a slight modification of the prior for the news shock model leads to important changes in the posterior inference about the importance of news shocks for fluctuations in hours worked. Unlike standard Markov chain Monte Carlo (MCMC) techniques, the SMC algorithm is well suited for parallel computing. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-43&r=dge |
| By: | S. Boragan Aruoba; Frank Schorfheide |
| Abstract: | This paper studies the dynamics of a New Keynesian dynamic stochastic general equilibrium (DSGE) model near the zero lower bound (ZLB) on nominal interest rates. In addition to the standard targeted-inflation equilibrium, we consider a deflation equilibrium as well as a Markov sunspot equilibrium that switches between a targeted-inflation and a deflation regime. We use the particle filter to estimate the state of the U.S. economy during and after the 2008-09 recession under the assumptions that the U.S. economy has been in either the targeted-inflation or the sunspot equilibrium. We consider a combination of fiscal policy (calibrated to the American Recovery and Reinvestment Act) and monetary policy (that tries to keep interest rates near zero) and compute government spending multipliers. Ex-ante multipliers (cumulative over one year) under the targeted-inflation regime are around 0.9. A monetary policy that keeps interest rates at zero can raise the multiplier to 1.7. The ex-post (conditioning on the realized shocks in 2009-11) multiplier is estimated to be 1.3. Conditional on the sunspot equilibrium, the multipliers are generally smaller and the scope for conventional expansionary monetary policy is severely limited. |
| Keywords: | Government spending policy ; Monetary policy ; Fiscal policy ; Macroeconomics - United States |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-29&r=dge |
| By: | Ngoc-Sang Pham (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | This paper considers an infinite-horizon monetary economy with collateralized assets. A Central BanK lends money to households by creating short- and long-term loans. Households can deposit or borrow money on both short- and long-term maturity loans. If households want to sell a financial asset, they are required to hold certain commodities as collateral. They face a cash-in-advance constraints when buying commodities and financial assets. Under Uniform or Sequential Gains to Trade Hypothesis, the existence of collateral monetary equilibrium is ensured. I also provide some properties of equilibria, including the liquidity trap. |
| Keywords: | Monetary economy; liquidity constraint; collateralized asset; infinite horizon; liquidity trap |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00848057&r=dge |
| By: | Daniel Barczyk (McGill University); Matthias Kredler (Universidad Carlos III de Madrid) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:12-193&r=dge |
| By: | Lawrence J. Christiano; Martin S. Eichenbaum; Mathias Trabandt |
| Abstract: | We develop and estimate a general equilibrium model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, wages are not subject to exogenous nominal rigidities. Instead we derive wage inertia from our specification of how firms and workers interact when negotiating wages. Our model outperforms the standard Diamond-Mortensen-Pissarides model both statistically and in terms of the plausibility of the estimated structural parameter values. Our model also outperforms an estimated sticky wage model. |
| JEL: | E2 E24 E32 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19265&r=dge |
| By: | Aoki, Takaaki |
| Abstract: | This article describes some dynamic aspects on dynastic utility incorporating two-sided altruism with an OLG setting. We analyzed the special case where the weights of two-sided altruism are dynamically inconsistent. The Bellman equation for two-sided altruism proves to be reduced to one-sided dynamic problem, but the effective discount factor is different only in the current generation. We show that a contraction mapping result of value function cannot be achieved in general, and that there can locally exist an infinite number of self-consistent policy functions with distinct steady states (indeterminacy of self-consistent policy functions). |
| Keywords: | Bellman equation, Two-sided altruism, Dynamic inconsistency, Self-consistent policy functions, Indeterminacy, Overlapping generations model. |
| JEL: | C61 D91 O41 |
| Date: | 2013–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:44994&r=dge |
| By: | Athanasios Geromichalos; Lucas Herrenbrueck; Kevin Salyer (Department of Economics, University of California Davis) |
| Abstract: | A consistent empirical feature of bond yields is that term premia are, on average, positive. That is, investors in long term bonds receive higher returns than investors in similar (i.e. same default risk) shorter maturity bonds over the same holding period. The majority of theoretical explanations for this observation have viewed the term premia through the lens of the consumption based capital asset pricing model. In contrast, we harken to an older empirical literature which attributes the term premium to the idea that short maturity bonds are inherently more liquid. The goal of this paper is to provide a theoretical justification of this concept. To that end,we employ a model in the tradition of modern monetary theory extended to include assets of different maturities. Short term assets always mature in time to take advantage of random consumption opportunities. Long term assets do not, but agents may liquidate them in a secondary asset market, characterized by search and bargaining frictions a la Duffie, Garleanu, and Pedersen (2005). In equilibrium, long term assets have higher rates of return to compensate agents for their relative lack of liquidity. Consistent with empirical findings, our model predicts a steeper yield curve for assets that trade in less liquid secondary markets. |
| Keywords: | monetary-search models, liquidity, over-the-counter markets, yield curve |
| JEL: | E31 E43 E52 G12 |
| Date: | 2013–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:cda:wpaper:13-9&r=dge |
| By: | Pascal Michaillat; Emmanuel Saez |
| Abstract: | We present a static model of aggregate demand and unemployment. The economy has a nonproduced good, a produced good, and labor. Product and labor markets have matching frictions. A general equilibrium is a set of prices, market tightnesses, and quantities such that buyers and sellers optimize given prices and tightnesses, and actual tightnesses equal posted tightnesses. In each frictional market,there is one more variable than equilibrium condition. To close the model, we take all prices as parameters. We obtain the following results: (1) unemployment and unsold production prevail in equilibrium; (2) each market can be slack, efficient, or tight if the price is too high, efficient, or too low; (3) product market tightness and sales are positively correlated under aggregate demand shocks but negatively correlated under aggregate supply shocks; (4) transfers from savers to spenders stimulate aggregate demand, product market tightness, and employment; (5) the government-purchase multiplier is positive when the economy is slack, zero when the economy is efficient,and negative when the economy is tight; (6) with unequal distribution of profits and labor income, a wage increase may stimulate aggregate demand and reduce unemployment. |
| Keywords: | Unemployment, aggregate demand, matching frictions |
| JEL: | E10 E30 E24 E21 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1235&r=dge |
| By: | Daniel Rees (Reserve Bank of Australia) |
| Abstract: | The terms of trade are subject to both permanent and transitory shocks. Particularly for commodity-producing small open economies, it is sometimes argued that the inability of agents to determine which of these shocks are permanent and which are transitory leads to more macroeconomic volatility than would be the case if agents had perfect information about the persistence of these shocks. I set up a small open economy model in which agents have imperfect information about the persistence of terms of trade shocks and estimate the parameters of the model using Australian data. The results point to the existence of large informational frictions. In fact, agents' beliefs about the future path of the terms of trade following transitory and permanent shocks are almost identical. However, the results also suggest that incomplete information causes agents to respond more cautiously to terms of trade shocks. Consequently, consumption, output and the trade balance are less volatile under incomplete information than they are under full information. |
| Keywords: | terms of trade; imperfect information; small open economy; real business cycle |
| JEL: | C32 E32 F41 Q33 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2013-09&r=dge |
| By: | Baldi, Guido |
| Abstract: | The macroeconomic literature has found puzzling effects of government spending on private consumption, the real exchange rate and the terms of trade. Some authors find that private consumption increases after a shock to government spending, while others report a decrease. The same ambiguity can be found for the real exchange rate and the terms of trade. Our paper offers an intuitive explanation for these divergent results by distinguishing between productive and unproductive government spending. We show within a calibrated two-sector DSGE model that the two government spending categories have different effects on private consumption, the real exchange rate and the terms of trade. Hence, our findings suggest that the composition of government spending matters not only for long-run growth, but also impacts on the short-run. |
| Keywords: | Fiscal Policy, Productive Public Capital, Government Spending, Open Economy Macroeconomics |
| JEL: | E62 F41 H11 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48600&r=dge |
| By: | Yin-Chi Wang; Ping Wang |
| Abstract: | Why have some poor countries been able to take off while others are still stuck in the poverty trap? To address this old question, we observe that (i) with similar or higher levels of educational attainment, trapped countries tend to have much poorer health conditions compared to the initially poor countries that later took off, and (ii) improving health conditions in poor countries usually involves large-scale investment where such resources can be easily misallocated. We construct a dynamic general equilibrium model with endogenous health and knowledge accumulation, allowing health-related institutional barriers to affect individual incentives and equilibrium outcomes. We then calibrate the model to fit (i) the U.S. economy (as a benchmark), (ii) a representative trapped economy based on the average economic performance and economic conditions of 41 countries that are still in the poverty trap, (iii) a group of trapped economies with richer institutional data (Bangladesh, Kenya and Nigeria), and (iv) two initially poor countries that later took off (China and India). The results show that, although low among all countries in this study, the U.S. economy still faced a health-related institutional barrier of 15%. The trapped economies all suffered much large barriers ranging from 50% to 73% under which the incentive to invest in health is severely hindered. For China and India, the magnitudes of such barriers were large (about twice as much as for the U.S. and half that for the trapped economies on average) but not enough to undermine the willingness to invest in health. This paper thereby advances our understanding of the role played by barriers to health in the poverty trap. |
| JEL: | I15 I25 O4 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19263&r=dge |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Lardo Stander (Department of Economics, University of Pretoria) |
| Abstract: | Conventional models of social status purport a positive infl ation-growth relationship, and attribute this empirical contradiction to the presence of a consumer's desire for social status. These models are dominated by a substitution effect of money holdings for capital holdings, as an increase in the in ation rate due to money growth raises the cost of holding money and depresses the real money holdings. Using a monetary endogenous growth model, the effects of wealth-induced social status on long-run growth is reconsidered. The analysis is enhanced through the addition of a competitive banking sector that intermediates the available capital in the economy, subject to a mandatory cash reserve requirement. The cash reserve requirement creates a wedge between the deposit rate and the loan rate. While, the real loan rate is tied with the constant marginal product of capital, the real deposit rate is negatively related to the rate of infl ation. This leads to another, opposing substitution effect of deposit holdings for real money holdings and hence, increases the cost of holding deposits as infl ation increases. The consolidated theoretical model described herein supports a diverse range of theoretical findings, contingent on the presence of wealth effects or the spirit of capitalism, using a simpler and more tractable framework that accounts for the role of the banking system in monetary policy decision outcomes. Significantly, as long as the mandatory reserve requirement imposed on the banking system by the monetary authority exceeds a (small) critical value, an increase in the money growth rate will lead to a decrease in the long-run growth rate of the economy. |
| Keywords: | Social status, reserve requirements, monetary model with endogenous growth, cash-in-advance |
| JEL: | E58 O4 P1 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201336&r=dge |
| By: | Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria |
| Abstract: | Using PESSOA, a small open economy DSGE model, we analyze the size of short-runfiscal multipliers associated with fiscal consolidation under two distinct alternative scenarios, viz "normal times" and "crisis times." The crisis times scenario embodies a higher share of hand-to-mouth households, stronger nominal rigidities, and more severe financial frictions, which purportedly better refflect the underlying economic environment during the "Great Recession." Results show that fiscal multipliers can be twice as large in crisis times, being approximately 2 for a government consumptionbased fiscal consolidation in the first year. One-year ahead effects are also substantially larger if this type of consolidation is performed in crisis times. Revenue-based fiscal consolidations are also more recessive in crisis times, though the differences against normal times are less pronounced. |
| JEL: | E62 F41 H62 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201311&r=dge |
| By: | Rodolfo E. Manuelli; Ananth Seshadri |
| Abstract: | Empirical evidence suggests that there is a long lag between the time a new technology is introduced and the time at which it is widely adopted. The conventional wisdom is that this fact is inconsistent with the predictions of the frictionless neoclassical model. In this paper we study the specific case of the diffusion of the tractor in American agriculture between 1910 and 1960. There are three important driving forces: changes in quality, wage rates and prices of substitutes such as horses and mules. We demonstrate that once these exogenous forces are taken into account, the standard neoclassical model can account for ”slow” pattern of adoption of tractors that took more than 50 years. |
| Keywords: | Technology - Economic aspects |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-022&r=dge |