|
on Dynamic General Equilibrium |
|
Issue of 2013‒11‒14
eighteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Zheng Liu; Jianjun Miao; Tao Zha |
| Abstract: | We integrate the housing market and the labor market in a dynamic general equilibrium model with credit and search frictions. The model is confronted with the U.S. macroeconomic time series. Our estimated model can account for two prominent facts observed in the data. First, the land price and the unemployment rate tend to move in opposite directions over the business cycle. Second, a shock that moves the land price is capable of generating large volatility in unemployment. Our estimation indicates that a 10 percent drop in the land price leads to a 0.34 percentage point increase in the unemployment rate (relative to its steady state). |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2013-06&r=dge |
| By: | Tobias Adrian; Nina Boyarchenko |
| Abstract: | We document the cyclical properties of the balance sheets of different types of intermediaries. While the leverage of the bank sector is highly procyclical, the leverage of the nonbank financial sector is acyclical. We propose a theory of a two-agent financial intermediary sector within a dynamic model of the macroeconomy. Banks are financed by issuing risky debt to households and face risk-based capital constraints, which leads to procyclical leverage. Households can also participate in financial markets by investing in a nonbank “fund” sector where fund managers face skin-in-the-game constraints, leading to acyclical leverage in equilibrium. The model also reproduces the empirical feature that the banking sector’s leverage growth leads the financial sector’s asset growth, while leverage in the fund sector does not precede growth in financial-sector assets. The procyclicality of the banking sector is due to its risk-based funding constraints, which give a central role to the time variation of endogenous uncertainty. |
| Keywords: | Intermediation (Finance) ; Uncertainty ; Households - Economic aspects ; Bank loans ; Business cycles |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:651&r=dge |
| By: | Marion Davin (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM)) |
| Abstract: | This paper examines the interplay between public education expenditure and economic growth in a two-sector model. We reveal that agents' preferences for services, education and savings play a major role in the relationship between growth and public education expenditures, as long as production is taxed at a different rate in each sector. |
| Keywords: | public education; two-sector model; sectoral taxes; endogenous growth |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00881048&r=dge |
| By: | Marios Karabarbounis |
| Abstract: | Standard public finance principles imply that workers with more elastic labor supply should face smaller tax distortions. This paper quantitatively tests the potential of such an idea within a life-cycle model with heterogeneous two-member households. I find that younger and older-wealthier households have a larger labor supply elasticity than middle-aged households. The same is true for household members who are not the sole financial provider in the unit relative to primary breadwinners. To decrease inefficient distortions I study a tax system that uses information on the age, assets, and number of working members inside the household. The optimal tax code decreases tax rates on 1) younger and older workers, 2) wealthier households that are closer to retirement, and 3) two-earner households. The tax system raises revenues by targeting middle-aged households with a single earner. As a result, total supply of labor increases by 3.18 percent and consumption by 4.47 percent, which translates into welfare gains of 0.91 percent in terms of annual consumption. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:13-13&r=dge |
| By: | Anastasios G. Karantounias |
| Abstract: | I study optimal capital and labor income taxation in a business cycle model with the recursive preferences of Epstein and Zin (1989) and Weil (1990). In contrast to the case of time-additive expected utility, I find that it is no longer optimal to make the welfare cost of distortionary taxes constant over states and dates. This dramatically alters standard taxation prescriptions: optimal policy calls for taxation at the intertemporal margin, variation of taxation at the intratemporal margin, and persistence of labor taxes independent of the stochastic properties of exogenous shocks. Ignoring the distinction between smoothing over time and smoothing over states is not an innocuous assumption for optimal policy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2013-07&r=dge |
| By: | Cristina Arellano; Yan Bai |
| Abstract: | We develop a multicountry model in which default in one country triggers default in other countries. Countries are linked to one another by borrowing from and renegotiating with common lenders with concave payoffs. A foreign default increases incentives to default at home because it makes new borrowing more expensive and defaulting less costly. Foreign defaults tighten home bond prices because they lower lenders' payoffs. Foreign defaults make home default less costly by lowering future recoveries, because countries can extract more surplus if they renegotiate simultaneously. In our model, the home country may default only because the foreign country is defaulting. This dependency arises during fundamental foreign defaults, where the foreign country defaults because of high debt and low income, and also during self-fulfilling defaults, where both countries default only because the other is defaulting. The simultaneity in defaults induces a correlation in interest rate spreads across countries. The model can rationalize some of the recent economic events in Europe. |
| Keywords: | Europe ; Debt |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:491&r=dge |
| By: | Pidong Huang (Korea University); Yoske Igarashi (Department of Economics, University of Exeter) |
| Abstract: | This paper investigates a Trejos-Wright random matching model of money with a consumer take-it-or-leave-it offer and with individual money holdings in the set {0, 1, 2}. It is shown that three kinds of monetary steady state exist generically: (1) pure-strategy full-support steady states, (2) mixed-strategy full-support steady states, and (3) non-full-support steady states. A full-support steady state exists if and only if a non-full-support steady state exists. Stability of these steady states is also studied. Both pure-strategy and mixedstrategy full-support steady states are locally stable. However, non-full-support steady states are unstable. |
| Keywords: | random matching model; monetary steady state; local stability; determinacy; instability; Zhu (2003). |
| JEL: | C62 C78 E40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1311&r=dge |
| By: | Pidong Huang (Korea University); Yoske Igarashi (Department of Economics, University of Exeter) |
| Abstract: | We study the stability of monetary steady states in a random matching model of money where money is indivisible, the bound on individual money holding is finite, and the trading protocol is buyer take-it-or-leave-it offers. The class of steady states we study have a non-full-support money-holding distribution and are constructed from the steady states of Zhu (2003). We show that no equilibrium path converges to those steady states if the initial distribution has a different support. |
| Keywords: | random matching model; monetary steady state; instability; Zhu (2003). |
| JEL: | C62 C78 E40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1310&r=dge |
| By: | Robert Becker (Department of Economics, Indiana University); Stefano Bosi (EPEE, University of Evry); Cuong Le Van (CES, CNRS, VCREME and Hanoi WRU); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS and EHESS) |
| Abstract: | We address the fundamental issues of existence and efficiency of an equilibrium in a Ramsey model with many agents, where agents have heterogenous discounting, elastic labor supply and face borrowing constraints. The existence of rational bubbles is also tackled. In the first part, we prove the equilibrium existence in a truncated bounded economy through a fixed-point argument by Gale and Mas-Colell (1975). This equilibrium is also an equilibrium of any unbounded economy with the same fundamentals. The proof of existence is eventually given for an infinitehorizon economy as a limit of a sequence of truncated economies. Our general approach is suitable for applications to other models with different market imperfections. In the second part, we show the impossibility of bubbles in a productive economy and we give sufficient conditions for equilibrium efficiency. |
| JEL: | C62 D31 D91 G10 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:1513&r=dge |
| By: | Ippei Fujiwara; Yuki Teranishi |
| Abstract: | Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in its own country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination. |
| Keywords: | Sacrifice Ratio, Time-Varying Parameters |
| JEL: | E50 F41 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-71&r=dge |
| By: | Thomas A. Lubik |
| Abstract: | One of the most striking aspects of the Great Recession in the United States is the persistently high level of unemployment despite an uptick in economic activity and an increased willingness by firms to hire. This has stimulated a debate on mismatch in the labor market. The argument is that despite the high unemployment rate the effective pool of job seekers is considerably smaller due to adverse effects of long-term unemployment, high unemployment benefits or structural change. Despite high vacancy postings, firms are therefore unable to hire desired workers. I study this issue from an aggregate perspective by deriving the Beveridge curve from a discrete-time search and matching model of the labor market driven by a variety of shocks. I first establish that the observed pattern in the data can only be described in the context of the model by the interaction of a cyclical decline in productivity and a decline in match efficiency. I then estimate the model using Bayesian methods on unemployment and vacancy data before the onset of the Great Recession. The posterior estimates indicate that the recent behavior of the Beveridge curve is most likely explained by a structural decline in match efficiency. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:13-16&r=dge |
| By: | Jose-Victor Rios-Rull; Zhen Huo |
| Abstract: | Standard neoclassical models are unable to generate large values for the fiscal multiplier, the aggregate economic response to increased government spending. Empirical estimates place the multiplier between 0.7 and 1.0. Standard models deliver figures close to zero. In an earlier policy paper, we modified the standard model, with features of demand-based productivity. These modifications raised the figure to just 0.17, still very far from the range found in the empirical literature. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmep:13-5&r=dge |
| By: | Lee H. Endress (University of Hawaii at Manoa); Sittidaj Pongkijvorasin (Chulalongkorn University); James Roumasset (University of Hawaii at Manoa); Christopher Wada (University of Hawaii Economic Research Organization) |
| Abstract: | Among the ethical objections to intergenerational impartiality is the violation of consumer sovereignty given that individuals are impatient. We accommodate that concern by distinguishing intra- and inter-generational discounting in an OLG model suitable for analyzing sustainability issues. Under the assumption of constant elasticity of marginal felicity, the optimum trajectory of aggregate consumption is guided, via the Ramsey condition, by the intergenerational discount rate but not the personal discount rate. In an economy with produced capital and a renewable resource, intergenerational neutrality results in a sustained growth path, without the necessity of a sustainability constraint, even in the presence of intragenerational impatience. We also find that green net national product remains constant along the optimal approach path to golden rule consumption. |
| Keywords: | Sustainability of optimal growth, intergenerational equity, intra-generational discounting, renewable resources, GNNP |
| JEL: | Q56 Q41 Q01 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:hae:wpaper:2013-9&r=dge |
| By: | Michal Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics); Krzysztof Makarski (National Bank of Poland, Warsaw School of Economics); Grzegorz Wesolowski (National Bank of Poland, Warsaw School of Economics) |
| Abstract: | Giving up an independent monetary policy and a flexible exchange rate are the key sources of costs and benefits entailed to joining a monetary union. In this paper we analyze their ex post impact on the stability of the Polish economy during the recent financial crisis. To this end we construct a small open economy DSGE model and estimate it for Poland and the euro area. Then we run a counterfactual simulation, assuming Poland's euro area accession in 1q2007. The results are striking - volatilities of GDP and inflation increase substantially. In particular, had Poland adopted the euro, GDP growth would have oscillated between -6% and +9% (-9% to +11% under more extreme assumptions) instead of between 1% and 7%. We conclude that during the analyzed period independent monetary policy and, in particular, the flexible exchange rate played an important stabilizing role for the Polish economy. |
| Keywords: | optimum currency area, euro-area accession, emerging market |
| JEL: | E32 E58 E65 |
| Date: | 2013–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:wse:wpaper:70&r=dge |
| By: | Jim Dolmas |
| Abstract: | In this paper, I combine disappointment aversion, as employed by Routledge and Zin and Campanale, Castro and Clementi, with rare disasters in the spirit of Rietz, Barro, Gourio, Gabaix and others. I find that, when the model’s representative agent is endowed with an empirically plausible degree of disappointment aversion, a rare disaster model can produce moments of asset returns that match the data reasonably well, using disaster probabilities and disaster sizes much smaller than have been employed previously in the literature. This is good news. Quantifying the disaster risk faced by any one country is inherently difficult with limited time series data. And, it is open to debate whether the disaster risk relevant to, say, US investors is well-approximated by the sizable risks found by Barro and co-authors in cross-country data. On the other hand, we have evidence that individuals tend to over-weight bad or disappointing outcomes, relative to the outcomes’ weights under expected utility. Recognizing aversion to disappointment means that disaster risks need not be nearly as large as suggested by the cross-country evidence for a rare disaster model to produce average equity premia and risk-free rates that match the data. I illustrate the interaction between disaster risk and disappointment aversion both analytically and in the context of a simple Rietz-like model of asset-pricing with rare disasters. I then analyze a richer model, in the spirit of Barro, with a distribution of disaster sizes, Epstein-Zin preferences, and partial default (in the event of a disaster) on the economy’s ‘risk-free’ asset. For small elasticities of intertemporal substitution, the model is able to match almost exactly the means and standard deviations of the equity return and risk-free rate, for disaster risks one-half or one-fourth the estimated sizes from Barro. For larger elasticities of intertemporal substitution, the model’s fit is less satisfactory, though it fails in a direction not often viewed as problematic—it under-predicts the volatility of the riskfree rate. Even so, apart from that failing, the results are broadly similar to those obtained by Gourio but with disaster risks one-half or onefourth as large. |
| Keywords: | Interest rates ; Financial markets |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1309&r=dge |
| By: | Josef Hollmayr; Christian Matthes |
| Abstract: | The recent crisis in the United States has often been associated with substantial amounts of policy uncertainty. In this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession. The agents in our model act as econometricians by estimating the policy rules for the different fiscal policy instruments, which include distortionary tax rates. ; Comparing the outcomes in our model to those under full-information rational expectations, we find that assuming the agents are not instantaneously aware of the new fiscal policy regime (or policy rule) in place leads to substantially more volatility in the short run and persistent differences in average outcomes |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:13-15&r=dge |
| By: | Marcelo Ochoa |
| Abstract: | This paper shows that a firm's reliance on skilled labor is an underlying determinant of its exposure to aggregate volatility risk. I present a model in which firms make hiring and firing decisions in an environment of time-varying aggregate volatility, and face linear adjustment costs that increase with the skill of a worker. In the model, an increase in aggregate volatility slows a firm's labor demand reaction to changes in economic conditions, reducing its ability to smooth cash flows. The rise in aggregate volatility has a more pronounced impact on firms with a high share of skilled labor because their labor is more costly to adjust. Therefore, the compensation for volatility risk and its contribution to risk compensation increases with a firm's reliance on skilled labor. I empirically test the implications of the model using occupational estimates to construct a measure of a firm's reliance on skilled labor, and find a positive and statistically significant cross-sectional relation between the reliance on skilled labor and expected returns. In times of high aggregate volatility, firms with a high share of skilled workers earn an annual return of 2.7% above those with a high share of unskilled workers. This spread reduces by one third in times when volatility is back to normal. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-71&r=dge |
| By: | Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | Academic macroeconomics as it has been practiced for the last three decades has a bad reputation, especially after the onset of the 2008 recession. The aim of this paper is to reflect on this state of affairs. To begin, I draw a comparison between Keynesian and Lucasian macroeconomics, bringing to light that they are based on different tenets. Next, I claim that because of its higher internal consistency, Lucasian macroeconomics is superior to Keynesian. However, I also claim that espousing it bears a heavy price — in particular a limited usefulness for policymaking and an inability to come to grips with economic crises. |
| Keywords: | Keynesian macroeconomics, Lucas, Real Business Cycle models |
| JEL: | B E E |
| Date: | 2013–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2013022&r=dge |