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on Dynamic General Equilibrium |
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Issue of 2013‒09‒06
thirteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Hylton Hollander and Guangling Liu |
| Abstract: | This paper studies the role of the equity price channel in business cycle fluctuations, and highlights its systemic risk across all sectors of the economy. We develop a canonical New-Keynesian dynamic stochastic general equilibrium model with a tractable role for the equity market in banking, entrepreneur and household economic interactions. The model is estimated with Bayesian techniques using U.S. data over the sample period 1982Q01 - 2012Q01. We show that a New-Keynesian DSGE model with an equity price channel well mimics the U.S. business cycle. Moreover, the equity price channel significantly exacerbates business cycle fluctuations through both the financial accelerator and bank funding channels. This study highlights the equity price channel as a different aspect to general equilibrium models with financial frictions, and emphasizes the consequences of the (in)stability of financial markets on the real economy. |
| Keywords: | Equity price channel, asset pricing, financial frictions, bank capital, New-Keynesian, Bayesian |
| JEL: | E32 E43 E44 E51 G12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:360&r=dge |
| By: | Burkhard Heer (University of Augsburg); Andreas Irmen (CREA, Université de Luxembourg) |
| Abstract: | We study the effect of a declining labor force on the incentives to engage in labor-saving technical change and ask how this effect is influenced by institutional characteristics of the pension scheme. When labor is scarcer it becomes more expensive and innovation investments that increase labor productivity are more profitable. We incorporate this channel in a new dynamic general equilibrium model with endogenous economic growth and heterogeneous overlapping generations. We calibrate the model for the US economy and obtain the following results. First, the effect of a decline in population growth on labor productivity growth is positive and quantitatively significant. In our benchmark, it is predicted to increase from an average annual growth rate of 1.74% over 1990-2000 to 2.41% in 2100. Second, institutional characteristics of the pension system matter both for the growth performance and for individual welfare. Third, the assessment of pension reform proposals may depend on whether economic growth is endogenous or exogenous. |
| Keywords: | Growth, Demographic Transition, Capital Accumulation, Pension Reform |
| JEL: | O41 C68 O11 D91 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:13-17&r=dge |
| By: | Yu Zhu (University of Wisconsin - Madison); Randall Wright (University of Wisconsin); Chao He (Renmin University of China) |
| Abstract: | Housing, in addition to providing direct utility, facilitates credit transactions when home equity serves as collateral. We document big increases in home-equity loans coinciding with the start of the house-price boom, and suggest an explanation. When it is used as collateral, housing can bear a liquidity premium. Since liquidity is endogenous, even when fundamentals are deterministic and time invariant equilibrium house prices can display complicated patterns -- including cyclic, chaotic and stochastic trajectories -- some of which resemble bubbles. Our framework is tractable, with exogenous or with endogenous supply, and with exogenous or endogenous credit limits. Yet it captures several salient qualitative features of actual housing markets. Numerical work shows the model can also capture some, if not all, quantitative features, as well. The effects of monetary policy are also discussed. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:168&r=dge |
| By: | Moritz Kuhn (University of Bonn); Sebastian Koehne (Stockholm University) |
| Abstract: | We study optimal capital taxation in a dynamic Mirrleesian model with time-nonseparable preferences. The model covers the widely used cases of habit formation and durable consumption. Time-nonseparable preferences change labor supply incentives across time and thereby generate novel motives to distort capital accumulation decisions. We decompose intertemporal wedges (implicit capital taxes) into three components and provide conditions under which intertemporal wedges are positive. We derive a recursive formulation of constrained efficient allocations and evaluate the quantitative importance of habit formation for intertemporal wedges. In our baseline parameterization, habit formation reduces average intertemporal wedges by about 40 percent compared to the time-separable case. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:322&r=dge |
| By: | Zhiwei Xu (Hong Kong University of Science and Technology); Pengfei Wang (Hong Kong University of Science and Tech); Jianjun Miao (Boston University) |
| Abstract: | We present an estimated DSGE model of stock market bubbles and business cycles using Bayesian methods. Bubbles emerge through a positive feedback loop mechanism supported by self-fulfilling beliefs. We identify a sentiment shock which drives the movements of bubbles and is transmitted to the real economy through endogenous credit constraints. This shock explains more than 96 percent of the stock market volatility and about 25 to 45 percent of the variations in investment and output. It generates the comovements between stock prices and macroeconomic quantities and is the dominant force in driving the internet bubbles and the Great Recession. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:167&r=dge |
| By: | Hasui, Kohei |
| Abstract: | This paper analyzes the effects of monetary policy shock when there is a non-negative constraint on the nominal interest rate. I employ two algorithms: the piecewise linear solution and Holden and Paetz's (2012) algolithm (the HP algorithm). I apply these methods to a dynamic stochastic general equilibrium (DSGE) model which has sticky prices, sticky wages, and adjustment costs of investment. The main findings are as follows. First, the impulse responses obtained with the HP algorithm do not differ much from those obtained with the piecewise linear solution. Second, the non-negative constraint influences the effects of monetary policy shocks under the Taylor rule under some parameters. In contrast, the constraint has little effects on the response to money growth shocks. Third, wage stickiness contributes to the effects of the non-negative constraint through the marginal cost of the product. The result of money growth shock suggests that it is important to analyze the effects of the zero lower bound (ZLB) in a model which generates a significant liquidity effect. |
| Keywords: | Zero lower bound; Monetary policy shock; Wage stickiness; Liquidity effect |
| JEL: | E47 E49 E52 |
| Date: | 2013–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49394&r=dge |
| By: | Kevin J. Lansing (FRB San Francisco and Norges Bank); Agnieszka Markiewicz (Erasmus University Rotterdam) |
| Abstract: | This paper develops a general-equilibrium production model of skill-biased technological change that approximates the dramatic upward shift in the share of total income going to the top decile of U.S. households since 1980. Under realistic assumptions, we show that all agents in the economy can benefit from the technology change, provided that the observed rise in U.S. redistributive transfers over this period is taken into account. We show that the increase in capital?'s share of total income and the presence of capital-entrepreneurial skill complementarity are two key features that help support the wages of ordinary workers as the new technology diffuses. |
| Keywords: | Income Inequality, Skill-biased Technological Change, Capital-skill Complementarity, Redistribution, Welfare |
| JEL: | D31 E32 E44 H23 O33 |
| Date: | 2013–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1304&r=dge |
| By: | Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Lise Clain-Chamosset-Yvrard (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM and EHESS) |
| Abstract: | We explore the existence of endogenous fluctuations with a rational bubble and the stabilizing role of fiscal and monetary policies. Consumers' credit constraints, the role of collateral and a portfolio choice are the key ingredients of our analysis. We consider an overlapping generations model where households realize a portfolio choice between three assets with different returns (capital, money and bonds). Expectation-driven fluctuations and the multiplicity of steady states occur under a positive bubble on bonds, gross substitutability and large input substitution because of credit market imperfections. Focusing on the stabilizing role of policies, we show that a progressive taxation on capital income may rule out expectation-driven fluctuations and the multiplicity of steady states. In contrast, a monetary policy under a Taylor rule has a mitigated stabilizing role, depending on the reactiveness of the policy rule and the concavity of the utility function. When the monetary authority decides instead to fix the nominal interest rate regardless the inflation, decreasing the level of the nominal interest rate can rule out expectation-driven fluctuations, restore the uniqueness of steady states, but can damage the welfare at the steady state. |
| Keywords: | Indeterminacy; Rational bubble; Cash-in-advance constraint; Collateral; Progressive taxation; Monetary policy. |
| JEL: | D91 E32 E63 |
| Date: | 2013–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1343&r=dge |
| By: | Lodewijk Visschers (Universidad Carlos III); Carlos Carrillo-Tudela (Essex) |
| Abstract: | We study, empirically and theoretically, the flows from and to unemployment, and from job to job, and relate these to occupational mobility. We are also particularly interested in the cyclical patterns of these flows. Using the Survey of Income and Program Participation, we document patterns of job mobility with and without occupational change, and in particular, focus on these workers’ subsequent labor market outcomes. We then model these flows in an adaptation of Carrillo-Tudela and Visschers (2011, 2013) that incorporates on-the-job search. Due to its block-recursive structure, the model stays tractable, even when the agents are subject to aggregate productivity shocks. We investigate whether the observed patterns of occupational mobility are consistent with an attachment to occupations growing with occupational tenure, also when incorporating job-to-job transitions; whether this attachment is in line with estimated returns to occupational human capital; and how this attachment varies over the business cycle, and over the life cycle. We then plan to relate our outcomes to the overall strength of reallocative forces for workers, and what role the business cycle plays in this. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:165&r=dge |
| By: | Philipp Kircher (LSE and University of Edinburgh); Michele Tertilt (University of Mannheim); Cezar Santos (University of Mannheim); Jeremy Greenwood (University of Pennsylvania) |
| Abstract: | Eleven percent of the Malawian population is HIV infected. Eighteen percent of sexual encounters are casual. A condom is used one quarter of the time. A choice-theoretic general equilibrium search model is constructed to analyze the Malawian epidemic. In the developed framework, people select between different sexual practices while knowing the inherent risk. The analysis suggests that the efficacy of public policy depends upon the induced behavioral changes and general equilibrium effects that are typically absent in epidemiological studies and small-scale field experiments. For some interventions (some forms of promoting condoms or marriage), the quantitative exercise suggests that these effects may increase HIV prevalence, while for others (such as male circumcision or increased incomes) they strengthen the effectiveness of the intervention. The underlying channels giving rise to these effects are discussed in detail. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:195&r=dge |
| By: | Martin Kliem (Deuthsche Bundesbank); Alexander Kriwoluzky (University of Bonn) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:12-15&r=dge |
| By: | Pirovano, Mara |
| Abstract: | This paper presents a framework to analyze the interplay between ?financial frictions at the household and fi?rm level, liability dollarization and monetary policy in a small open economy subject to productivity and capital infl?ow shocks. Optimized monetary policy rules are calculated under several speci?cations (infl?ation targeting, exchange rate targeting, fi?xed exchange rate, credit growth targeting) and for two central bank?s objectives (macreconomic stability and macroeconomic plus fi?nancial stability). I ?find that, fi?rst, adding ?financial stability to the central bank?s objectives results in more inertial monetary policy rules. Second, the optimized Taylor rules under the ?financial stability objective achieve a lower volatility of infl?ation and of credit growth at the same time. However, this comes at the expense of a higher standard deviation of production. Third, when ?financial stability is included among the central bank?s objectives, engaging in exchange rate smoothing delivers the smallest value of the central bank?s loss function, mainly arising through a much reduced volatility of the credit aggregate. In the considered economy, credit growth targeting is suboptimal because of the effect of stronger interest rate increase on currency ?uctuations, which reinforce the ?financial accelerator. Finally, for the considered shocks, the extent of co-movement of fi?nancial variables pertaining to entrepreneurs and homeowners crucially depends on the degree of exchange rate fl?exibility. |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2013014&r=dge |
| By: | Jorge Duran (Université Libre de Bruxelles); Omar Licandro (IAE-CSIC and Barcelona GSE) |
| Abstract: | The permanent decline of equipment prices relative to nondurable consumption prices rendered fixed-base quantity indexes obsolete, because of the well-known substitution bias. National Income and Product Accounts (NIPA) responded by switching to a flexible-base quantity index to measure GDP growth. We argue this is a welfare measure of output growth. In a two-sector endogenous growth model, we use the Bellman equation to explicitly represent preferences on consumption and investment, we apply a Fisher-Shell true quantity index to the this utility representation and show it is equal to the Divisia index, well approximated by the flexible-base quantity index used by NIPA. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:191&r=dge |