|
on Dynamic General Equilibrium |
| By: | Kliem, Martin; Uhlig, Harald |
| Abstract: | This paper presents a novel Bayesian method for estimating dynamic stochastic general equilibrium (DSGE) models subject to a constrained posterior distribution of the implied Sharpe ratio. We apply our methodology to a DSGE model with habit formation in consumption and leisure, using an estimate of the Sharpe ratio to construct the constraint. We show that the constrained estimation produces a quantitative model with both reasonable asset-pricing as well as business-cycle implications. -- |
| Keywords: | Bayesian estimation,stochastic steady-state,prior choice,Sharpe ratio |
| JEL: | C11 E32 E44 G12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:372013&r=dge |
| By: | Beatrice Pataracchia; Rafal Raciborski; Marco Ratto; Werner Roeger |
| Abstract: | The paper provides an extension to first generation DSGE models with a financial sector – for which QUEST III would be a typical example – by explicitly modelling (mortgage) loan demand and supply decisions. We estimate a DSGE model with a housing sector where housing capital is used as collateral against which impatient consumers borrow from more patient lenders. While in existing estimated models with a construction sector the Loan-to-Value (LTV) ratio is imposed exogenously and constant (e.g., Iacoviello and Neri, 2010, In’t Veld et al., 2011), we introduce an endogenous LTV ratio by explicitly modelling the riskiness of loans in order to capture changing credit conditions. Using data of the Euro Area, we show that, compared to similar models with an exogenous LTV ratio, the business cycle properties of our model improve. The endogenous default mechanism allows estimating an important amplification mechanism driven by the riskiness of collateral values and propagating, in turn, into the real economy. Housing market-related shocks appear to be the main driver of the pre-crisis growth of mortgage-backed loans and a subsequent reversal of the sentiment on the housing market may have been a trigger that led to a credit crunch, house price bubble burst and a collapse in the construction sector. Shocks on the housing market had also a substantial impact on several demand aggregates, in particular, consumption. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0505&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. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1089&r=dge |
| By: | Zheng Liu; Mark M. Spiegel |
| Abstract: | The recent financial crisis has led to large declines in world interest rates and surges of capital flows to emerging market economies. We examine the effectiveness and welfare implications of capital control policies in the face of such external shocks in a monetary DSGE model of a small open economy. We consider both optimal, time-varying restrictions on capital inflows and a simple capital account restriction, such as a constant tax on foreign debt holdings. We then compare the effectiveness of such capital account restrictions under alternative monetary regimes. We find that the optimal time-varying capital control policy is very effective in mitigating foreign interest rate shocks, but less effective for insulating the economy from export demand shocks; in the presence of export demand shocks, an exchange-rate stabilizing monetary policy regime can enhance macroeconomic stability and improve welfare. Under a simple and more practical capital control policy, a monetary policy regime that places larger weight on inflation fluctuations leads to additional gains in macroeconomic stability, although an exchange-rate stabilizing regime leads to even greater gains. Our findings suggest that, with either type of capital control policies, stabilizing the real exchange rate is a robust and effective monetary policy to help weather external shocks. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2013-33&r=dge |
| By: | Marco Del Negro; Stefano Eusepi; Marc Giannoni; Argia Sbordone; Andrea Tambalotti; Matthew Cocci; Raiden Hasegawa; M. Henry Linder |
| Abstract: | The goal of this paper is to present the dynamic stochastic general equilibrium (DSGE) model developed and used at the Federal Reserve Bank of New York. The paper describes how the model works, how it is estimated, how it rationalizes past history, including the Great Recession, and how it is used for forecasting and policy analysis. |
| Keywords: | Econometric models ; Equilibrium (Economics) ; Stochastic analysis ; Federal Reserve Bank of New York |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:647&r=dge |
| By: | Pedro Brinca (Department of Economics, Stockholm University, Sweden) |
| Abstract: | This paper investigates the properties of distortions that manifest themselves as wedges in the equilibrium conditions of the neoclassical growth model across a sample of OECD countries for the 1970-2011 period. The quantitative relevance of each wedge and its robustness in generating fluctuations in macroeconomic aggregates is assessed. The efficiency wedge proves to be determinant in enabling models to replicate movements in output and investment, while the labor wedge is important to predict fluctuations in hours worked. Modeling distortions to the savings decision holds little quantitative or qualitative relevance. Also, investment seems to be the hardest aggregate to replicate, as prediction errors concerning output and hours worked are typically one order of magnitude smaller. These conclusions are statistically significant across the countries in the sample and are not limited to output drops. Finally, the geographical distance between countries and their degree of openness to trade are shown to contain information with regard to the wedges, stressing the importance of international mechanisms of transmission between distortions to the equilibrium conditions of the neoclassical growth model. |
| Keywords: | Business cycle accounting, Frictions, Economic fluctuations. |
| JEL: | E27 E30 E32 E37 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2013-24.&r=dge |
| By: | Francesco Lippi; Stefania Ragni; Nicholas Trachter |
| Abstract: | We study the optimal anticipated monetary policy in a flexible-price economy featuring heterogenous agents and incomplete markets, which give rise to a business cycle. In this setting money policy has distributional effects that depend on the state of the cycle. We parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by cash-poor unproductive agents. To minimize the inflationary effect of these expansions, the policy prescribes monetary contractions in good times. Although the optimal money growth rate varies greatly through the business cycle, this policy "echoes" Friedman's principle in the sense that the expected real return of money approaches the rate of time preference. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:13-17&r=dge |
| By: | Andras Simonovits (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences also Mathematical Institute, Budapest University of Technology, and Department of Economics, CEU) |
| Abstract: | van Groezen, Leers and Meijdam (2003) (for short, GLM) analyzed combination of public pension and child support in an OLG model. We impose credit constraint on workers, and extend GLM's analysis from the case where workers do not understand the cost also to the case where they do. GLM's infinite stream of generations is simplified into three generations but heterogeneity of rearing costs and of enjoying children is introduced. Two major results: (i) excluding negative savings, fertility decreases with pension contributions and increases with taxes; (ii) the introduction of fertility-dependent pensions may strengthen heterogeneity in fertility. |
| Keywords: | Child support, Endogenous fertility, Overlapping generations, Pensions |
| JEL: | D10 H55 J13 J14 J18 J26 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1335&r=dge |
| By: | Yoske Igarashi (Department of Economics, University of Exeter) |
| Abstract: | How would a policy that bans the use of networks in hiring (e.g., anti-old boy network laws) affect welfare? To answer this question, we examine a variant of Galenianos (2013), a version of a random search model with two matching technologies: a standard matching function and worker networks. Our model has two types of workers, networked workers and non-networked workers. It is shown that the effects of such a policy on non-networked workers can be either positive or negative, depending on model parameters. In our calibration such a policy would make non-networked workers slightly worse off and networked workers substantially worse off. |
| Keywords: | random search, network, referral, policy analysis, welfare, dynamics. |
| JEL: | C78 E24 E60 I3 J20 J30 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1309&r=dge |
| By: | Hilberg, Björn; Hollmayr, Josef |
| Abstract: | In this paper we set up a New-Keynesian model with a heterogenous banking sector to analyze liquidity problems on the interbank market. The presence of an interbank market is essential to consider a situation where an increased liquidity supply by the central bank is only partially passed on to the interbank market. Moreover, this framework allows us to examine the implications of an unconventional monetary policy tool modeled as a haircut rule applied to eligible assets in repurchase agreements ('Repos') on the interbank market. We can show that this tool is suited to bring down the interest rate charged among banks on the interbank market. Furthermore an exogenous bubble process is modeled to evaluate the effects of the haircut rule for a central bank which decides to implement a 'leaning-against-the- wind'-policy. Finally, we analyze the long-run consequences of reacting to asset price movements and examine the effects of different exit strategies. We find that the central bank can stabilize all variables at the cost of higher inflation and that macroeconomic volatility is smallest if the central bank communicates the exit date in advance and credibly commits to it. -- |
| Keywords: | New-Keynesian Model,Monetary Policy,Business Cycle,Collateral,Haircuts |
| JEL: | E4 E5 E61 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:362013&r=dge |
| By: | David Andolfatto; Aleksander Berentsen; Christopher J. Waller |
| Abstract: | We study the use of intermediated assets as media of exchange in a neo- classical growth model. An intermediary is delegated control over productive capital and finances itself by issuing claims against the revenue generated by its operations. Unlike physical capital, intermediated claims are assumed to be liquid-they constitute a form of asset-backed money. The intermediary is assumed to control 1) the number of claims outstanding, 2) the dividends paid out to claim holders and 3) the fee charged for collecting the dividend. We find that for patient economies, the first-best allocation can always be implemented as a competitive equilibrium through an appropriately designed intermediary policy rule. The optimal policy requires strictly positive inflation. While it is also possible to implement the first-best by introducing at money and a lump- sum tax instrument, our results demonstrate that neither of these interventions are necessary for efficiency. |
| Keywords: | Monetary policy ; Asset-backed financing |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-030&r=dge |
| By: | Nguyen Thang DAO (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium and Vietnam Centre for Economic and Policy Research (VEPR), Hanoi, Vietnam); Julio DÁVILA (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium and Paris School of Economics, Paris, France) |
| Abstract: | This paper develops a unied growth model capturing issues of endogenous economic growth, fertility, and technological progress considering the effects of geographical conditions to interpret the long transition from Malthusian stagnation, through demographic transition to modern sustained growth, and the great divergence in GDP per capita across societies. The paper shows how the interplay of size of "land" and its "accessibility" and technological progress play a very important role for an economy to escape Malthusian stagnation and to take off. Thus differences in these geographical factors lead to differences in take off timings, generating great divergence across societies. |
| Keywords: | Geographical land, land accessible, level of technology, human capital, fertility |
| JEL: | J11 O11 O33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:1713&r=dge |
| By: | Vincent Boitier (UP1 UFR02 - Université Paris 1, Panthéon-Sorbonne - UFR d'Économie - Université Paris I - Panthéon-Sorbonne - PRES HESAM) |
| Abstract: | This theoretical note aims at studying the role of reference points in generating unemployment volatility. For this purpose, I introduce the notion of reference points in a standard Mortensen-Pissarides model. I obtain two results. First, I find that the obtained model is similar to the one found by Pissarides (2009) with matching costs. Second, I show that the introduction of reference points can increase significantly unemployment volatility through a mechanism à la Hagerdorn and Manovskii (2008). |
| Keywords: | Reference points; Unemployment volatility; Job matching |
| Date: | 2013–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00878107&r=dge |
| By: | Lucas Bretschger (ETH Zurich, Switzerland); Christos Karydas (ETH Zurich, Switzerland) |
| Abstract: | We study the effects of greenhouse gas emissions on optimum growth and environmental policy by using an expansion-in-varieties growth model with polluting non-renewable resources. Climate change harms the capital stock. Our main contribution is to introduce and extensively explore the naturally determined time lag between greenhouse gas emission and the damages due to climate change which proves to be crucial for the transition of the economy towards its steady state. The social optimum and optimal abatement policies are fully characterized. The inclusion of a green technology delays optimal resource extraction. The optimal tax rate on emissions is proportional to output. Poor understanding of the emissions dissusion process leads to suboptimal carbon taxes and suboptimal growth and resource extraction. |
| Keywords: | Non-Renewable Resource Extraction; Climate Policy; Optimum Growth; Pollution Diusion lag. |
| JEL: | Q54 O11 Q52 Q32 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:13-184&r=dge |
| By: | Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti |
| Abstract: | This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. The theory is similar in spirit to, but distinct from, unpleasant monetarist arithmetic and the fiscal theory of the price level. Because the assumption of imperfect knowledge breaks Ricardian equivalence, details of fiscal policy, such as the average scale and composition of the public debt, matter for inflation. As a result, fiscal policy constrains the efficacy of monetary policy. Heavily indebted economies with debt maturity structures observed in many countries require aggressive monetary policy to anchor inflation expectations. The model predicts that the Great Moderation period would not have been so moderate had fiscal policy been characterized by a scale and composition of public debt now witnessed in some advanced economies in the aftermath of the 2007-09 global recession. |
| Keywords: | Balance of trade ; Economic conditions ; Housing - Prices ; Debt ; Capital movements |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:648&r=dge |
| By: | David Cook; Michael B. Devereux |
| Abstract: | Open economy macro theory says that when a country is subject to idiosyncratic macro shocks, it should have its own currency and a flexible exchange rate. But recently in many countries policy rates have been pushed down close to the lower bound, limiting the ability of policy-makers to accommodate shocks, even in open economies with flexible exchange rates. In this paper, we show that if the zero bound constraint is binding and policy lacks an effective `forward guidance' mechanism, a flexible exchange rate system may be inferior to a single currency area, even when there are country-specific macro shocks. When monetary policy is constrained by the zero bound, under independent currencies with flexible exchange rates, the exchange rate exacerbates the impact of shocks. Remarkably, this may hold true even if only a subset of countries are constrained by the zero bound, and other countries freely adjust their interest rates. In order for a regime of multiple currencies to dominate a single currency area in a liquidity trap environment, it is necessary to have effective forward guidance in monetary policy. |
| JEL: | F3 F33 F4 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19588&r=dge |