|
on Dynamic General Equilibrium |
| By: | M. Falagiarda; A. Saia |
| Abstract: | This paper proposes a new Dynamic Stochastic General Equilibrium (DSGE) model with credit frictions and a banking sector, which endogenizes loan-to-value (LTV) ratios of households and banks by expressing them as a function of systemic and idiosyncratic proxies for risk. Moreover, the model features endogenous balance sheet choices and a novel formulation of the targeted leverage ratio, in which assets are risk-weighted by risk-sensitivity measures. The results highlighted in this paper are important along two dimensions. First of all, the presence of endogenous LTV ratios exacerbates the procyclicality of lending conditions. Second, the model contributes to deeper understand the role of prudential regulatory frameworks in affecting business cycle fluctuations and in restoring macroeconomic and financial stability. The results suggest that when the economy is severely stressed by shocks originating in the financial sector, prudential regimes such as Basel II and Basel III are capable of downsizing substantially aggregate volatility, with Basel III found to be significantly more effective than Basel II. |
| JEL: | E32 E44 E61 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp916&r=dge |
| By: | Pau Rabanal (IMF); Dominic Quint (Free University Berlin) |
| Abstract: | In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policies can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policies always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policies may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:604&r=dge |
| By: | Martin Gervais; Nir Jaimovich; Henry E. Siu; Yaniv Yedid-Levi |
| Abstract: | The search-and-matching model of the labor market fails to match two important business cycle facts: (i) a high volatility of unemployment relative to labor productivity, and (ii) a mild correlation between these two variables. We address these shortcomings by focusing on technological learning-by-doing: the notion that it takes workers time using a technology before reaching their full productive potential with it. We consider a novel source of business cycles, namely, fluctuations in the speed of technological learning and show that a search-and-matching model featuring such shocks can account for both facts. Moreover, our model provides a new interpretation of recently discussed “news shocks.” |
| JEL: | E24 E32 J64 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19767&r=dge |
| By: | Jeremy Lise; Costas Meghir (UCL Department of Economics); Jean-Marc Robin (Département d'économie) |
| Abstract: | We develop an empirical search-matching model with productivity shocks so as to analyze policy interventions in a labor market with heterogeneous agents. To achieve this we develop an equilibrium model of wage determination and employment, which is consistent with key empirical facts. As such our model extends the current literature on equilibrium wage determination with matching and provides a bridge between some of the most prominent macro models and microeconometric research. The model incorporates long-term contracts, on-the-job search and counter-offers, and a vacancy creation and destruction process linked to productivity shocks. Importantly, the model allows for the possibility of assortative matching between workers and jobs, a feature that had been ruled out by assumption in the empirical equilibrium search literature to date. We use the model to estimate the potential gain from an optimal unemployment insurance scheme, as well as the redistributive effects of such a policy |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/6ggbvnr6munghes9od0s108ro&r=dge |
| By: | Vasilev, Aleksandar |
| Abstract: | Motivated by the high public employment, and the public wage premia observed in Europe, a Real-Business-Cycle model, calibrated to German data (1970-2007), is set up with a richer government spending side, and an endogenous private-public sector labor choice. To illustrate the e ects of scal policy, two regimes are compared and contrasted to one another - exogenous vs. optimal (Ramsey) policy case. The main ndings from the computational experiments performed in this paper are: (i) The optimal steady-state capital tax rate is zero; (ii) A higher labor tax rate is needed in the Ramsey case to compensate for the loss in capital tax revenue; (iii) Under the optimal policy regime, public sector employment is lower, but government employees receive higher wages; (iv) The benevolent Ramsey planner provides the optimal amount of the public good, substitutes labor for capital in the input mix for public services production, and private output; (v) Government wage bill is smaller, while public investment is three times higher than in the exogenous policy case. |
| Keywords: | optimal policy, government spending, public employment and wages, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:518&r=dge |
| By: | Céspedes, Nikita (Banco Central de Reserva del Perú; PUCP); Kuklik, Michael (Long Island University) |
| Abstract: | The optimal capital income tax rate is 36 percent as reported by Conesa, Kitao, and Krueger (2009). This result is mainly driven by the market incompleteness as well as the endogenous labor supply in a life-cycle framework. We show that this model fails to account for the basic life-cycle features of the labor supply observed in the U.S. data. In this paper, we introduce into this model non-linear wages and inter-vivos transfers into this model in order to account for the life-cycle features of labor supply. The former makes hours of work highly persistent and helps to account for labor choices at the extensive margin over the life cycle. The latter allows us to account for labor choices early in life. The suggested model delivers an optimal capital income tax rate of 7.4 percent, which is significantly lower than what Conesa, Kitao, and Krueger (2009) found. |
| Keywords: | Labor supply, optimal taxation, capital taxation, non-linear wage, inter-vivos transfer |
| JEL: | E13 H21 H24 H25 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2013-020&r=dge |
| By: | Paulina Restrepo-Echavarria (The Ohio State University); Antonella Tutino (Federal Reserve Bank of Dallas); Anton Cheremukhin (Federal Reserve Bank of Dallas) |
| Abstract: | We develop a model of matching where participants have finite information processing capacity. The equilibrium of our model covers the middle ground between the equilibria of random matching and the directed search literatures and reproduces them as limiting cases. Our theory of targeted search generates a unique equilibrium which is generally inefficient. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:664&r=dge |
| By: | Moons, Cindy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ner:leuven:urn:hdl:123456789/428251&r=dge |
| By: | Canova, F.; Ferroni, F.; Matthes, C. |
| Abstract: | We propose two methods to choose the variables to be used in the estimation of the structural parameters of a singular DSGE model. The first selects the vector of observables that optimizes parameter identification; the second the vector that minimizes the informational discrepancy between the singular and non-singular model. An application to a standard model is discussed and the estimation properties of different setups compared. Practical suggestions for applied researchers are provided. |
| Keywords: | ABCD representation, Identification, Density ratio, DSGE models. |
| JEL: | C10 E27 E32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:461&r=dge |
| By: | Pinter, Gabor (Bank of England); Theodoridis, Konstantinos (Bank of England); Yates, Tony (University of Bristol and Centre for Macroeconomics) |
| Abstract: | We identify a ‘risk news' shock in a vector autoregression (VAR), modifying Barsky and Sims’s procedure, while incorporating sign restrictions to simultaneously identify monetary policy, technology and demand shocks. The VAR-identifed risk news shock is estimated to account for around 2%-12% of business cycle fluctuations depending on which risk proxy we use; regardless, contemporaneous risk and risk news shocks together account for about 20%. This is substantially lower than the 60% reported in Christiano, Motto, and Rostagno’s full-information exercise. We fit a DSGE model with financial frictions to these impulse responses and find that, in order to match the fall in consumption recorded by the VAR, we have to allow for 75% of consumers to be living hand-to-mouth. |
| Keywords: | News shock; business cycles; risk; financial frictions; vector autoregression |
| JEL: | C10 C32 E20 E30 E58 G21 |
| Date: | 2013–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0483&r=dge |
| By: | Hatcher, Michael |
| Abstract: | This paper presents a general equilibrium model in which nominal government debt pays an inflation risk premium. The model predicts that the inflation risk premium will be higher in economies which are exposed to unanticipated inflation through nominal asset holdings. In particular, the inflation risk premium is higher when government debt is primarily nominal, steady-state inflation is low, and when cash and nominal debt account for a large fraction of consumers' retirement portfolios. These channels do not appear to have been highlighted in previous models or tested empirically. Numerical results suggest that the inflation risk premium is comparable in magnitude to standard representative agent models. These findings have implications for management of government debt, since the inflation risk premium makes it more costly for governments to borrow using nominal rather than indexed debt. Simulations of an extended model with Epstein-Zin preferences suggest that increasing the share of indexed debt would enable governments to permanently lower taxes by an amount that is quantitatively non-trivial. |
| Keywords: | government debt, inflation risk premium, overlapping generations, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:517&r=dge |
| By: | Andrea Lanteri (London School of Economics) |
| Abstract: | This paper explains the procyclicality of capital reallocation documented by Eisfeldt and Rampini (2006) and Cui (2012) by endogenising the resale price of capital in a dynamic general equilibrium model with heterogeneous firms hit by aggregate and idiosyncratic productivity shocks. I build a simple theory of endogenous investment irreversibility by assuming that used investment goods are imperfect substitutes for newly produced ones because of firm-level capital specificity. This creates a downward sloping demand for used capital that shifts with aggregate shocks. In recessions, the wedge between the price of new investment goods and the resale price becomes larger, so that the option value of holding capital for unproductive firms rises and they optimally choose to sell less capital to productive firms, inducing an amplification mechanism on total output and measured Total Factor Productivity. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:608&r=dge |
| By: | Mathieu Taschereau-Dumouchel (University of Pennsylvania - Wharton School); Edouard Schaal (New York University); Pablo Fajgelbaum (UCLA) |
| Abstract: | We develop a quantitative theory of endogenous uncertainty and business cycles. In the model, higher uncertainty about fundamentals discourages investment but agents can learn from the actions of others. Therefore, in times of low activity information flows slowly and uncertainty stays high, further discouraging investment. This creates room for uncertainty traps -- self-reinforcing episodes of high uncertainty and low activity. We characterize conditions that give rise to uncertainty traps. Negative shocks to average productivity or beliefs may have permanent effects on the level of activity through the persistence of uncertainty. We also characterize optimal policy interventions. The socially efficient allocation can be implemented with aggregate-beliefs dependent subsidies, but under certain conditions it necessarily features uncertainty traps. We embed these forces into a standard quantitative model of the business cycle to evaluate the impact of uncertainty traps. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:677&r=dge |
| By: | Jesús Fernández-Villaverde; Pablo Guerrón-Quintana; Juan Rubio-Ramirez |
| Abstract: | We propose a novel method to estimate dynamic equilibrium models with stochastic volatility. First, we characterize the properties of the solution to this class of models. Second, we take advantage of the results about the structure of the solution to build a sequential Monte Carlo algorithm to evaluate the likelihood function of the model. The approach, which exploits the profusion of shocks in stochastic volatility models, is versatile and computationally tractable even in large-scale models, such as those often employed by policy-making institutions. As an application, we use our algorithm and Bayesian methods to estimate a business cycle model of the U.S. economy with both stochastic volatility and parameter drifting in monetary policy. Our application shows the importance of stochastic volatility in accounting for the dynamics of the data. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2013-23&r=dge |
| By: | Julieta Caunedo (Washington University in St. Louis) |
| Abstract: | This paper investigates how features of the business cycle interact with technological restrictions at the firm level to generate dispersion in marginal products of ex ante identical firms. The model is able to deliver a non-monotonic relationship between dispersion in marginal products, aggregate productivity and the features of the business cycle. When aggregate uncertainty is low and dispersion in marginal products is low, aggregate productivity is high. But when aggregate uncertainty is high, aggregate productivity is low, and the allocation can be consistent with low dispersion in marginal products. These two alternative economies differ in their underlying industry dynamic. Hence, dispersion is an imperfect statistic of aggregate productivity in the model. Allocations are typically non efficient due to imperfect competition and non-convexities in production. I study the properties of the optimal industrial policy. In general, the efficient allocation does not dictate equalization of capital labor ratios across all firms. Allocations are dynamically optimal so there is no room for further reallocation. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:1078&r=dge |
| By: | Ufuk Akcigit (Department of Economics, University of Pennsylvania); Murat Alp Celik (Department of Economics, University of Pennsylvania); Jeremy Greenwood (Department of Economics, University of Pennsylvania) |
| Abstract: | An endogenous growth model is developed where each period firms invest in researching and developing new ideas. An idea increases a firm's productivity. By how much depends on how central the idea is to a firm's activity. Ideas can be bought and sold on a market for patents. A firm can sell an idea that is not relevant to its business or buy one if it fails to innovate. The developed model is matched up with stylized facts about the market for patents in the U.S. The analysis attempts to gauge how efficiency in the patent market affects growth. |
| Keywords: | Growth, Ideas, Innovation, Misallocation, Patents, Patent Agents, Research and Development, Search frictions |
| JEL: | O31 O41 |
| Date: | 2013–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:13-069&r=dge |
| By: | Sun, Gang |
| Abstract: | Although standard incomplete market models can account for the magnitude of the rise in consumption inequality over the life cycle, they generate unrealistically concave age pro.les of consumption inequality and unrealistically less wealth inequality. In this paper, I investigate the role of discount rate heterogeneity on consumption inequality in the context of incomplete market life cycle models. The distribution of discount rates is estimated using moments from the wealth distribution. I .nd that the model with heterogeneous income pro.les (HIP) and discount rate heterogeneity can successfully account for the empirical age pro.le of consumption inequality, both in its magnitude and in its non-concave shape. Generating realistic wealth inequality, this simulated model also highlights the importance of ex ante heterogeneities as main sources of life time inequality. |
| Keywords: | consumption inequality, discount rate heterogeneity, life cycle, risk sharing, incomplete market, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:522&r=dge |
| By: | Hashmat Khan (Department of Economics, Carleton University); Abeer Reza (Bank of Canada) |
| Abstract: | We highlight that a broad class of DSGE models with housing and collateralized borrowing predict a fall in both house prices and consumption following positive government spending shocks. By contrast, we show that house prices and consumption in the U.S. rise persistently after identified positive government spending shocks, using a structural vector autoregression methodology and accounting for anticipated effects. We clarify that modifying preferences alone, as previously suggested in the literature, does not help in obtaining the correct house price response. We then show that only when monetary policy strongly accommodates government spending shocks, the impact effects on house prices and total consumption are positive. The model, however, does not deliver the persistent rise in house prices and consumption as evident in the data. Properly accounting for the empirical evidence on government spending shocks and house prices using a DSGE model, therefore, remains a significant challenge. |
| Keywords: | House prices; Consumption; Government spending |
| JEL: | E21 E44 E62 |
| Date: | 2013–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:13-10&r=dge |
| By: | Michael, Hatcher |
| Abstract: | This paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a much better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a better store of value relative to indexed bonds. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. From a policy perspective, a key finding is that accounting for optimal indexation has important welfare implications for comparisons of IT and PT. |
| Keywords: | government debt, inflation risk, inflation targeting, price-level targeting, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:483&r=dge |
| By: | Vasilev, Aleksandar |
| Abstract: | Motivated by the highly-unionized public sectors, the high public shares in total employment, and the public sector wage premia observed in Europe, this paper examines the importance of public sector unions for macroeconomic theory. The model generates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly-unionized public sector, namely Germany during the period 1970-2007. The union model is a signifi cant improvement over a model with exogenous public employment. In addition, endogenously-determined public wage and hours add to the distortionary e ffect of contractionary tax reforms by generating greater tax rate changes, thus producing signi ficantly higher welfare losses. |
| Keywords: | fiscal policy, public wages, public employment, public sector labor union, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:519&r=dge |
| By: | Lehmann, Etienne (CRED, Université Panthéon Assas Paris 2); Montero Ledezma, Paola L. (IRES, Université catholique de Louvain); Van der Linden, Bruno (IRES, Université catholique de Louvain) |
| Abstract: | This article examines unemployment disparities and efficiency in a densely populated economy with two job centers and workers distributed between them. We introduce commuting costs and search-matching frictions to deal with the spatial mismatch between workers and firms. In equilibrium, there exists a unique threshold location where job-seekers are indifferent between job centers. In a decentralized economy job-seekers do not internalize a composition externality they impose on all the unemployed. Their decisions over job-search are thus typically not optimal and hence the equilibrium unemployment rates are inefficient. We calibrate the model for Los Angeles and Chicago Metropolitan Statistical Areas. Simulations exercises suggest that changes in the workforce distribution have non-negligible effects on unemployment rates, wages and net output. |
| Keywords: | spatial mismatch, commuting, urban unemployment, externality, United States |
| JEL: | J64 R13 R23 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7828&r=dge |
| By: | Konstantinos, Angelopoulos; James, Malley; Apostolis, Philippopoulos |
| Abstract: | This paper develops a dynamic general equilibrium model to highlight the role of human capital accumulation of agents differentiated by skill type in the joint determination of social mobility and the skill premium. We first show that our model captures the empirical co-movement of the skill premium, the relative supply of skilled to unskilled workers and aggregate output in the U.S. data from 1970-2000. We next show that endogenous social mobility and human capital accumulation are key channels through which the effects of capital tax cuts and increases in public spending on both pre- and post-college education are transmitted. In particular, social mobility creates additional incentives for the agents which enhance the beneficial effects of policy reforms. Moreover, the dynamics of human capital accumulation imply that, post reform, the skill premium is higher in the short- to medium-run than in the long-run. |
| Keywords: | social mobility, skill premium, tax and education policy, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:482&r=dge |
| By: | Alok Kumar (Department of Economics, University of Victoria) |
| Abstract: | Empirical evidence suggests that inflation has positive effect on both output and unemployment in the long run in the United States. This paper develops a monetary model in which a higher inflation rate increases both output and unemployment. The model has two key features: (i) separation between workers and owners of firms (employers) and (ii) endogenous labor force participation. Changes in money supply redistributes consumption between employers and workers. This redistribution along with endogenous labor force participation creates a channel by which a higher inflation rate increases output, unemployment, and labor force participation. The Friedman rule does not maximize social welfare. |
| Keywords: | employers, workers, money creation, inflation, output, unemployment, labor force participation rate, welfare |
| JEL: | E21 E31 E41 E52 |
| Date: | 2013–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicddp:1302&r=dge |
| By: | Hans Fehr; Manuel Kallweit; Fabian Kindermann |
| Abstract: | The present paper quantifies the economic consequences of eliminating the system of income splitting in Germany. We apply a dynamic simulation model with overlapping generations where single and married agents have to decide on labor supply and homework facing income and lifespan risk. The numerical exercise computes the resulting welfare changes across households and isolates aggregate efficiency effects of a move towards either individual taxation or family splitting. Our results indicate strongly that a switch towards individual taxation performs best in terms of economic efficiency due to reduced labor market distortions and improved insurance provision. In our benchmark calibration the efficiency gain amounts to roughly 0.4 percent of aggregate resources. Excluding home production significantly reduces aggregate efficiency gains while including marital risk slightly improves the efficiency of individual taxation. |
| Keywords: | Stochastic general equilibrium, home production, female labor supply, tax unit choice, insurance provision |
| JEL: | H21 H24 J12 J22 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp613&r=dge |
| By: | Alok Kumar (Department of Economics, University of Victoria) |
| Abstract: | The optimal infation rate and the relationship between inflation and unemployment are central issues in macroeconomics. It is widely accepted that inflation is a monetary phenomenon. However, there is little consensus with regard to unemployment. Economists differ widely in their view of labor markets and wage-setting mechanisms. The present paper develops a search-theoretic monetary model with imperfect labor markets. It studies the issue of the optimal inflation rate and the relationship between inflation and unemployment under four widely used wage-setting mechanisms: search and matching, wage posting, union bargaining, and efficiency wage. It finds that a higher inflation rate reduces output and employment under all wage setting mechanisms. The Friedman rule is not optimal under any wage setting mechanism except wage posting. |
| Keywords: | search-theoretic monetary model, inflation, unemployment, Friedman Rule, search and matching, wage posting, unions, efficiency wage |
| JEL: | E40 E30 |
| Date: | 2013–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicddp:1303&r=dge |
| By: | Andrew Foerster; Juan Rubio-Ramirez; Dan Waggoner; Ta Zha |
| Abstract: | This paper develops a general perturbation methodology for constructing high-order approximations to the solutions of Markov-switching DSGE models. We introduce an important and practical idea of partitioning the Markov-switching parameter space so that a steady state is well de?ned. With this de?nition, we show that the problem of ?nding an approximation of any order can be reduced to solving a system of quadratic equations. We propose using the theory of Gröbner bases in searching all the solutions to the quadratic system. This approach allows us to obtain all the approximations and ascertain how many of them are stable. Our methodology is applied to three models to illustrate its feasibility and practicality. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2013-22&r=dge |
| By: | Dennis, Richard |
| Abstract: | We study a business cycle model in which a benevolent fiscal authority must determine the optimal provision of government services, while lacking credibility, lump-sum taxes, and the ability to bond finance deficits. Households and the fiscal authority have risk sensitive preferences. We find that outcomes are affected importantly by the household's risk sensitivity, but not by the fiscal authority's. Further, while household risk-sensitivity induces a strong precautionary saving motive, which raises capital and lowers the return on assets, its effects on fluctuations and the business cycle are generally small, although more pronounced for negative shocks. Holding the stochastic steady state constant, increases in household risk-sensitivity lower the risk-free rate and raise the return on equity, increasing the equity premium. Finally, although risk-sensitivity has little effect on the provision of government services, it does cause the fiscal authority to lower the income tax rate. An additional contribution of this paper is to present a method for computing Markov-perfect equilibria in models where private agents and the government are risk-sensitive decisionmakers. |
| Keywords: | Asset prices, business cycles, risk-sensitivity, Markov-Perfect, fiscal policy, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:515&r=dge |
| By: | Eric Sims; Jonathan Wolff |
| Abstract: | How does the magnitude of the output response to a change in government spending vary over the business cycle? What are the welfare effects of fiscal shocks? This paper studies the state-dependence of the output and welfare effects of shocks to government purchases in a DSGE model with real and nominal frictions and a rich fiscal financing structure. Both the output multiplier (the change in output for a one dollar change in government spending) and the welfare multiplier (the consumption equivalent change in welfare for the same change in spending) move significantly across states, though movements in the welfare multiplier are quantitatively much larger than for the output multiplier. The output multiplier is high in bad states of the world resulting from negative "supply" shocks and low when bad states result from "demand" shocks. The welfare multiplier displays the opposite pattern -- it tends to be high in demand-driven recessions and low in supply-driven downturns. In an historical simulation based on estimation of the model parameters, the output multiplier is found to be countercyclical and strongly negatively correlated with the welfare multiplier. |
| JEL: | E0 E1 E2 E3 E31 E6 E62 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19749&r=dge |
| By: | Yuliy Sannikov (Princeton University); Markus Brunnermeier (Princeton University) |
| Abstract: | This paper provides a theory of money, whose value depends on the functioning of the intermediary sector, and a unified framework for analyzing the interaction between price and financial stability. Households that happen to be productive in this period finance their capital purchases with credit from intermediaries. Less productive household save by holding deposits with intermediaries (inside money) or outside money. Intermediation involves risk-taking, and intermediaries' ability to lend is compromised when they suffer losses. After an adverse productivity shock, credit and inside money shrink, and the value of (outside) money increases, causing deflation that hurts borrowers. An accommodating monetary policy in downturns can mitigate these destabilizing adverse feedback eects. Lowering short-term interest rates increases the value of long-term bonds, recapitalizes the intermediaries by redistributes wealth. While this policy helps the economy ex-post, ex-ante it can lead to excessive risk-taking by the intermediary sector. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:620&r=dge |
| By: | Stéphane Auray (CREST-ENSAI); David L. Fuller (Concordia University); damba Lkhagvasuren (Concordia University) |
| Abstract: | In the US unemployment insurance (UI) system, only a fraction of those eligible for benefits actually collect them. We estimate this fraction using CPS data and detailed state-level eligibility criteria. It averaged 77% from 1989 - 2012 and is negatively correlated with the unemployment rate. These empirical facts are explained in an equilibrium search model where firms finance UI benefits and are heterogeneous with respect to their specific tax rate, which is experience rated. In equilibrium, low tax firms effectively offer workers an alternative UI scheme featuring a faster job arrival rate and a higher wage offer. Some eligible workers prefer the “market" scheme and thus do not collect UI. The model captures the negative correlation between the take-up and unemployment rate. If all eligible unemployed collect, benefit expenditures increase by 16% and welfare increases. Average search effort decreases, but the unemployment rate and duration decrease as vacancy creation increases |
| Keywords: | Unemployment insurance, Take-up, Matching frictions, Search |
| JEL: | E61 J32 J64 J65 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2013-12&r=dge |
| By: | Giorgio Motta; Raffaele Rossi |
| Abstract: | We study Ramsey monetary and fiscal policy in a small scale New Keynesian model where government spending has intrinsic value, public debt is state-noncontingent and the fiscal authority is constrained by using distortive taxation. We show that Ramsey policy is remarkably altered when consumption taxation is considered as a source of government revenues alongside or as an alternative to labour income taxes. First, we show that the optimal steady-state size of the public spending is, ceteris paribus, greater under consumption taxation than under labour income tax. We further show that adopting consumption taxation has enormous long run welfare gains and that these gains are increasing in the level of outstanding public debt. These welfare gains are not limited to the steady-state, but they are also present in the dynamic stochastic equilibrium. The reason is that the dynamic nature of consumption taxation enables the policy-maker to affect the stochastic discount factor via modifications of the marginal utility of consumption. This extra wedge impacts on the pricing decisions of firms, and hence on inflation stabilization, and greatly improves welfare in the stochastic equilibrium. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:44449031&r=dge |
| By: | Daniel Yi Xu (Duke University) |
| Abstract: | We develop a model of matching where participants have finite information processing capacity. The equilibrium of our model covers the middle ground between the equilibria of random matching and the directed search literatures and reproduces them as limiting cases. Our theory of targeted search generates a unique equilibrium which is changes in trade volume are not sufficient for determining the gains from trade. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:653&r=dge |
| By: | Selahattin Imrohoroglu (University of Southern California); Gary Hansen (UCLA) |
| Abstract: | Past government spending in Japan is currently imposing a significant fiscal bur- den that is reflected in a net debt to GNP ratio above 100 percent. In addition, the aging of Japanese society implies that public expenditures and transfers payments relative to GNP are projected to continue to rise until at least 2050. In this paper we use a standard growth model to measure the size of this burden in the form of additional taxes required to meet these obligations that maintain current promised levels of per capita public pension and health services. The fiscal adjustment needed is about a 30 percentage point increase in taxes, using either the consumption tax rate or the labor income tax rate. The latter is far more distorting than the former, leading to a significant loss in welfare. Our results highlight the importance of containing the projected increases in public spending and exploring policies designed to enlarge the tax base. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:697&r=dge |
| By: | Angelopoulos, Konstantinos; Asimakopoulos, Stylianosulos; Malley, James |
| Abstract: | This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income households. A model incorporating capital-skill complementarity in production and differential access to capital and labour markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We .nd that the tax rate for high income agents is optimally the least volatile and the tax rate for low income agents the least countercyclical. In contrast, the path of optimal taxes for the middle income group is found to be very volatile and counter-cyclical. We further find that the optimal response to output-enhancing capital equipment technology and spending cuts is to increase the progressivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years. |
| Keywords: | optimal taxation, business cycle, skill premium, income distribution, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:516&r=dge |
| By: | Nan Yang (Business School, National University of); Jeffrey Campbell (Federal Reserve Bank of Chicago); Jan Tilly (University of Pennsylvania); Jaap Abbring (Tilburg University) |
| Abstract: | This paper develops an econometric model of firm entry, competition, and exit in dynamic oligopolistic markets. The model entertains market-level demand and cost shocks, sunk entry costs, and parameters that capture economic barriers to entry and the toughness of price competition. Nevertheless its analysis is very simple, because it takes firms to be homogenous. We show that the model has an essentially unique symmetric Markov-perfect equilibrium that can be computed quickly by solving a finite- sequence of low-dimensional contraction mappings. We develop a nested fixed-point procedure for the model's maximum-likelihood estimation from market-level panel data and compare the procedure's performance to that of a mathematical programming with equilibrium constraints approach. The framework is rich enough for a range of applications, such as the welfare analysis of licensing requirements, start-up subsidies, and environmental laws. Moreover, its analysis provides a starting point for the solution of more general models. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:673&r=dge |
| By: | Strulik, Holger |
| Abstract: | This paper integrates imperfect self-control into the standard model of endogenous growth. Individuals are conceptualized as dual-selves consisting of a long-run planner and a short-run doer. The long-run self can partly control the short-run self´s strife for immediate gratification. It is shown that the solution is structurally equivalent to the one of the standard endogenous growth model as long as self-control is sufficiently strong. Within a certain range of self-control an investment subsidy can be useful in order to reduce consumption and to increase investment, growth, and welfare of the long-run self. A consumption tax, perhaps surprisingly, is counterproductive. It induces individuals with limited self-control to consume even more. -- |
| Keywords: | temptation,self-control,consumption,investment,endogenous growth |
| JEL: | D91 E21 O40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:181&r=dge |
| By: | Andrea Raffo (Board of Governors of the Federal Reserv); Andrea Ferrero (Federal Reserve Bank of New York); Gauti Eggertsson (Brown University) |
| Abstract: | Structural reforms that increase competition in product and labor markets may have large effects on the long-run level of output. We find that, in a medium scale DSGE model, a 10 percent reduction in product and labor markups increases output by nearly 7 percent after 5 years. The short-run transmission of these reforms, however, depends critically on the presence of the zero lower bound (ZLB). When monetary policy is at the ZLB, structural reforms may have perverse effects, as they increase deflationary pressures and delay the normalization of policy rates. Hence, contrary to conventional wisdom, we argue that labor market reforms should precede product market reforms. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:637&r=dge |
| By: | Fabia A. de Carvalho; Marcos R. Castro; Silvio M. A. Costa |
| Abstract: | This paper investigates the transmission channel of macroprudential instruments in a closed-economy DSGE model with a rich set of financial frictions. Banks' decisions on risky retail loan concessions are based on borrowers' capacity to settle their debt with labor income. We also introduce frictions in banks' optimal choices of balance sheet composition to better reproduce banks' strategic reactions to changes in funding costs, in risk perception and in the regulatory environment. The model is able to reproduce not only price effects from macroprudential policies, but also quantity effects. The model is estimated with Brazilian data using Bayesian techniques. Unanticipated changes in reserve requirements have important quantitative effects, especially on banks' optimal asset allocation and on the choice of funding. This result holds true even for required reserves deposited at the central bank that are remunerated at the base rate. Changes in required core capital substantially impact the real economy and banks' balance sheet. When there is a lag between announcements and actual implementation of increased capital requirement ratios, agents immediately engage in anticipatory behavior. Banks immediately start to retain dividends so as to smooth the impact of higher required capital on their assets, more particularly on loans. The impact on the real economy also shifts to nearer horizons. Announcements that allow the new regulation on required capital to be anticipated also improve banks' risk positions, since banks achieve higher capital adequacy ratios right after the announcement and throughout the impact period. The effects of regulatory changes to risk weights on bank assets are not constrained to impact the segment whose risk was reassessed. We compare the model responses with those generated by models with collateral constraints traditionally used in the literature. The choice of collateral constraint is found to have important implications for the transmission of shocks to the economy |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:336&r=dge |
| By: | Yue ZHAO (yGraduate School of Economics, Kyoto University) |
| Abstract: | Jermann and Quadrini (2012) show that compared with productivity shocks, direct shocks to the credit system ("nancial shocks") have contributed to the most frequently observed dynamics of both real and nancial variables in the US within a closed economy framework. We develop a simple two-country model featuring an international bond market and enforcement constraints within both countries in an attempt to quantify the role of productivity and nancial shocks. We construct time series of productivity shocks and nancial shocks using the US and Japanese quarterly data since 2001 and conduct simultaneous replication on major indicators of real variables and aggregate nancial ows. The main results were as follows. First, for both the US and Japan, productivity shocks account for most real variable dynamics such as output and investment, while nancial shocks well capture the trend of consumption, current account, and labor trends in the US and succeed in replicating Japan's debt repurchase behavior. Nevertheless, it is noteworthy that nancial shocks served as key factors in accounting for the observed troughs of output, labor, and consumption, as well as the peaks of debt repurchase and the US current account during the 2007-09 nancial crisis. Second, it is surprising that observable international spillover eect appeared only in Japan's debt repurchases. As it is widely considered that the Japanese economy have been deeply in uenced by US economic uctuations, our quantitative results raise questions about this opinion. |
| Keywords: | Business uctuations, nancial friction, open economy, simulation |
| JEL: | E32 E37 E44 F41 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:881&r=dge |
| By: | Sun, Gang |
| Abstract: | Recent risk sharing tests strongly reject the hypothesis of complete markets, because in the data: (1) the individual consumption comoves with income and (2) the consumption dispersion increases over the life cycle. In this paper, I revisit the implications of these risk sharing tests in the context of a complete market model with discount rate heterogeneity, which is extended to introduce the individual choices of effort in education. I .nd that a complete market model with discount rate heterogeneity can pass both types of the risk sharing tests. The endogenous positive correlation between income growth rate and patience makes the individual consumption comove with income, even if the markets are complete. I also show that this model is quantitatively admissible to account for both the observed comovement of consumption and income and the increase of consumption dispersion over the life cycle. |
| Keywords: | complete markets, discount rate heterogeneity, risk sharing, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:513&r=dge |
| By: | Michael, Hatcher |
| Abstract: | This paper presents a DSGE model in which long run inflation risk matters for social welfare. Aggregate and welfare effects of long run inflation risk are assessed under two monetary regimes: inflation targeting (IT) and price-level targeting (PT). These effects differ because IT implies base-level drift in the price level, while PT makes the price level stationary around a target price path. Under IT, the welfare cost of long run inflation risk is equal to 0.35 percent of aggregate consumption. Under PT, where long run inflation risk is largely eliminated, it is lowered to only 0.01 per cent. There are welfare gains from PT because it raises average consumption for the young and lowers consumption risk substantially for the old. These results are strongly robust to changes in the PT target horizon and fairly robust to imperfect credibility, fiscal policy, and model calibration. While the distributional effects of an unexpected transition to PT are sizeable, they are short-lived and not welfare-reducing. |
| Keywords: | inflation targeting, price-level targeting, inflation risk, monetary policy, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:450&r=dge |
| By: | Vasilev, Aleksandar |
| Abstract: | This paper studies the wasteful e ffect of bureaucracy on the economy by addressing the link between rent-seeking behavior of government bureaucrats and the public sector wage bill, which is taken to represent the rent component. In particular, public o fficials are modeled as individuals competing for a larger share of those public funds. The rent-seeking extraction technology in the government administration is modeled as in Murphy et al. (1991) and incorporated in an otherwise standard Real-Business-Cycle (RBC) framework with public sector. The model is calibrated to German data for the period 1970-2007. The main fi ndings are: (i) Due to the existence of a signi ficant public sector wage premium and the high public sector employment, a substantial amount of working time is spent rent-seeking, which in turn leads to signifi cant losses in terms of output; (ii) The measures for the rent-seeking cost obtained from the model for the major EU countries are highly-correlated to indices of bureaucratic ineffi ciency; (iii) Under the optimal scal policy regime,steady-state rent-seeking is smaller relative to the exogenous policy case, as the government chooses a higher public wage premium, but sets a much lower public employment, thus achieving a decrease in rent-seeking. |
| Keywords: | Rent-seeking, bureaucracy, public employment, government wages, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:520&r=dge |
| By: | Kirsanova, Tatiana; Leith, Campbell; Chen, Xiaoshan |
| Abstract: | Most of the literature estimating DSGE models for monetary policy analysis assume that policy follows a simple rule. In this paper we allow policy to be described by various forms of optimal policy - commitment, discretion and quasi-commitment. We find that, even after allowing for Markov switching in shock variances, the inflation target and/or rule parameters, the data preferred description of policy is that the US Fed operates under discretion with a marked increase in conservatism after the 1970s. Parameter estimates are similar to those obtained under simple rules, except that the degree of habits is significantly lower and the prevalence of cost-push shocks greater. Moreover, we find that the greatest welfare gains from the ‘Great Moderation’ arose from the reduction in the variances in shocks hitting the economy, rather than increased inflation aversion. However, much of the high inflation of the 1970s could have been avoided had policy makers been able to commit, even without adopting stronger anti-inflation objectives. More recently the Fed appears to have temporarily relaxed policy following the 1987 stock market crash, and has lost, without regaining, its post-Volcker conservatism following the bursting of the dot-com bubble in 2000. |
| Keywords: | Bayesian Estimation, Interest Rate Rules, Optimal Monetary Policy, Great Moderation, Commitment, Discretion, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:480&r=dge |
| By: | Roland Meeks; Benjamin Nelson; Piergiorgio Alessandri |
| Abstract: | We develop a macroeconomic model in which commercial banks can offload risky loans to a ‘shadow’ banking sector, and financial intermediaries trade in securitized assets. We analyze the responses of aggregate activity, credit supply and credit spreads to business cycle and financial shocks. We find that: interactions and spillover effects between financial institutions affect credit dynamics; high leverage in the shadow banking system makes the economy excessively vulnerable to aggregate disturbances; and following a financial shock, stabilization policy aimed solely at the securitization markets is relatively ineffective. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-78&r=dge |
| By: | Satyajit Chatterjee (Federal Reserve Bank of Philadelphia); Burcu Eyigungor (Phildalephia Federal Reserve Bank) |
| Abstract: | An important source of inefficiency in long-term debt contracts is the debt dilution problem, wherein a borrower ignores the adverse impact of new borrowing on the market value of outstanding debt and, therefore, borrows too much and defaults too frequently. A commonly proposed remedy to the debt dilution problem is seniority of debt, wherein creditors who lent first are given priority in any bankruptcy or restructuring proceedings. The goal of this paper is to incorporate seniority in a quantitatively realistic, infinite horizon model of sovereign debt and default and examine, both theoretically and quantitatively, the extent to which seniority can mitigate the debt dilution problem. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:654&r=dge |
| By: | Karl Walentin (Sveriges Riksbank (Bank of Sweden)); Guido Lorenzoni (Northwestern University); Dan Cao (Georgetown University) |
| Abstract: | We develop a model of investment with financial constraints and use it to investigate the relation between investment and Tobin's q. A firm is financed partly by insiders, who control its assets, and partly by outside investors. When their wealth is scarce, insiders earn a rate of return higher than the market rate of return, i.e., they receive a quasi-rent on invested capital. This rent is priced into the value of the firm, so Tobin's q is driven by two forces: changes in the value of invested capital, and changes in the value of the insiders' future rents per unit of capital. This weakens the correlation between q and investment, relative to the frictionless benchmark. We present a calibrated version of the model, which, due to this effect, generates realistic correlations between investment, q, and cash flow. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:634&r=dge |
| By: | Daisuke Ikeda; Toan Phan |
| Abstract: | We introduce asymmetry in financial frictions into a two-country growth model with overlapping generations, by assuming that the South faces more severe financial frictions than the North. We show that this asymmetry causes capital to flow upstream from South to North, thus explaining the so called global imbalances. More importantly, we show that capital inflows from the South enable a rational bubble to emerge in the North, despite that a Northern bubble could never emerge if the North were a closed economy. Furthermore, the bubble is inefficient as it crowds out global investment in Northern capital, and the bubble reduces steady state welfare in both North and South. Our model formalizes the idea that a “savings glut†flowing from financially underdeveloped emerging economies into the U.S. fueled the boom of a subprime mortgage bubble in the 2000s. |
| Keywords: | inefficient rational bubble; financial friction; global imbalances. |
| JEL: | F32 F41 F44 |
| Date: | 2013–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:41&r=dge |
| By: | Carlos Garriga; Finn E. Kydland; Roman Sustek |
| Abstract: | Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates |
| JEL: | E32 E52 G21 R21 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19744&r=dge |
| By: | Giovanni Favara (Federal Reserve Board) |
| Abstract: | In mortgage markets with low concentration, lenders have an excessive propensity to foreclose defaulting mortgages. Though rational, foreclosure decisions by individual lenders may increase aggregate losses because they generate a pecuniary externality that causes house price drops and contagious strategic defaults. In concentrated markets, instead, lenders internalize the adverse effects of mortgage foreclosures on local house prices and are more inclined to renegotiate defaulting mortgages. Thus, negative income shocks do not trigger strategic defaults, foreclosure rates are lower, and house prices less volatile. We provide empirical evidence consistent with the theory using U.S. counties during the 2007-2009 housing market collapse. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:643&r=dge |
| By: | James Albrecht (Georgetown University) |
| Abstract: | In this paper, we consider the efficiency of entry in a model of competitive search. By "competitive search" we mean that we analyze a large market in which buyers (or sellers) can direct their search based on the terms of trade that are posted (with commitment) by their counterparts on the other side of the market. We consider in particular entry on the side of the market on which the terms of trade are advertised. We generalize this literature on efficiency entry on competitive search in two directions. First, we allow for many-on-one meetings; e.g., a seller may interact with two or more buyers at the same time. Second, we allow for asymmetric information; e.g., a seller may not know how much the buyers she is interacting with value her good. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:602&r=dge |
| By: | Pinheiro, Roberto; Visschers, Ludo |
| Abstract: | Workers in less secure jobs are often paid less than identical-looking workers in more secure jobs. We show that this lack of compensating differentials for unemployment risk can arise in equilibrium when all workers are identical and firms differ only in job security (i.e. the probability that the worker is not sent into unemployment). In a setting where workers search for new positions both on and off the job, the worker's marginal willingness to pay for job security is endogenous: it depends on the behavior of all firms in the labor market and increases with the rent the employing firm leaves to the worker. We solve for the labor market equilibrium, finding that wages increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. Meanwhile, unemployment becomes persistent for low-wage and unemployed workers, a seeming pattern of 'unemployment scarring' created entirely by firm heterogeneity. Higher in the wage distribution, workers can take wage cuts to move to more stable employment. |
| Keywords: | Layoff Rates, Unemployment risk, Wage Differentials, Unemployment Scarring, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:500&r=dge |
| By: | Michael Rousakis (European University Institute) |
| Abstract: | This paper reconsiders the effects of expectations on economic fluctuations. It does so within a competitive monetary economy featuring producers and consumers with heterogeneous information about productivity. Agents' expectations are coordinated by a noisy public signal which generates non-fundamental, purely expectational shocks. Agents' expectations, however, have different implications for the economy. Hence, depending on how monetary policy is pursued, purely expectational shocks can behave like either demand shocks, as conventionally thought, or supply shocks - increasing output and employment yet lowering inflation. On the policy front, conventional policy recommendations are overturned: inflation stabilization is suboptimal, whereas output-gap stabilization is optimal. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:681&r=dge |
| By: | Joseph Mullins (NYU); Gaston Navarro (New York University); Julio Blanco (New York University) |
| Abstract: | The 2007-2009 financial crisis generated a striking short-lived increase in the employment separation rate and a persistent decrease in its finding probability, which resulted in an increase in unemployment and a slow recovery. In this paper we propose a novel mechanism that can account for these patterns. The key innovation relies on the interaction between firms' number of workers and its willingness to default: firms with more debt per worker are less likely to repay and consequently face higher credit spreads. Therefore, at the aggregate level, credit conditions worsen with higher unemployment, which further reduces firms' incentives to hire resulting in a loop between the financial and the labor market. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:694&r=dge |
| By: | Gao, Xiaodan; Hnatkovska, Viktoria; Marmer, Vadim |
| Abstract: | This paper contains supplemental material for Gao, Hnatkovska, and Marmer (2013) "Limited Participation in International Business Cycle Models: A Formal Evaluation". |
| Keywords: | international business cycles, incomplete markets, limited asset market participation |
| Date: | 2013–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:vadim_marmer-2013-54&r=dge |
| By: | Jang, Tae-Seok; Okano, Eiji |
| Abstract: | In this paper, we examine the effects of foreign productivity shocks on monetary policy in a symmetric open economy. Our two-country model incorporates the New Keynesian features of price stickiness and monopolistic competition based on the cost channel of Ravenna and Walsh (2006). In particular, in response to asymmetric productivity shocks, firms in one country achieve a more efficient level of production than those in another economy. Because the terms of trade are directly affected by changes in both economies’ output levels, international trade creates a transmission channel for inflation dynamics in which a deflationary spiral in foreign producer prices reduces domestic output. When there is a decline in economic activity, the monetary authority should react to this adverse situation by lowering the key interest rate. The impulse response function from the model shows that a productivity shock can cause a real depreciation of the exchange rate when economies are closely integrated through international trade. |
| Keywords: | cost channel; new Keynesian model; productivity shocks; terms of trade; two-country model |
| JEL: | E24 E31 J3 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:029&r=dge |
| By: | Eric Young (University of Virginia); Alessandro Rebucci (Inter-American Development Bank); Christopher Otrok (University of Missouri/St Louis Fed) |
| Abstract: | In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy toolkit (the so-called macro-prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, we show that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls as it can achieve the unconstrained allocation. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:641&r=dge |
| By: | Hyeon-seung Huh (Yonsei University, Republic of Korea); David Kim (University of Sydney, Australia) |
| Abstract: | This paper investigates the validity of technology shocks as a driving force of U.S. business cycle fluctuations. Using three well-known structural vector autoregression (SVAR) models, we analyze how structural shocks are associated with the variations of output and hours worked at business cycle frequencies. Empirical results reveal that technology shocks remain an important source of cyclical movements in output. Furthermore, a positive technology shock does not lead to a decline in hours worked in contrast to previous studies. Our SVARbased evidence does not support discarding a technology shock-driven business cycle theory. |
| Keywords: | Structural vector autoregression, Technology shocks, Demand shocks, Real business cycles |
| JEL: | C32 E32 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2013rwp-59&r=dge |