|
on Dynamic General Equilibrium |
| By: | Francesco Zanetti; Haroon Mumtaz |
| Abstract: | This paper embeds labor market search frictions into a New Keynesian model with financial frictions as in Bernanke, Gertler and Gilchrist (1999).� The econometric estimation establishes that labor market frictions substantially improve the empirical fit of the model.� The effect of the interaction between labor and financial frictions on aggregate fluctuations depends on the nature of the shock.� For monetary policy, technology and entrepreneurial wealth shocks, labor market frictions amplify the effect of financial frictions since robust changes in hiring lead to persistent movements in employment and the return on capital that reinforce the original effect of financial frictions.� For cost-push, labor supply, marginal efficiency of investment and preference shocks, labor market frictions dampen the effect of financial frictions by reducing the real cost of repaying existing debt that lowers the exernal finance premium. |
| Keywords: | Financial frictions, search and matching frictions, New Keynesian model |
| JEL: | E24 E32 E52 |
| Date: | 2013–12–24 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:690&r=dge |
| By: | Ronny Mazzocchi |
| Abstract: | The current consensus in macroeconomics, or New Neoclassical Synthesis (NNS), is based on dynamically stochastic general equilibrium (DSGE) modeling with a RBC core to which nominal rigidities are added by way of imperfect competition. The strategy is to minimize the frictions that are required to reproduce both persistent real effects of monetary policy and interaction of interest and prices in a rigorous framework with intertemporal optimization, forward-looking behavior and continuously clearing markets. Unfortunately this Òequi- libriumÓ framework do not allow to discuss the effects and the rela- tions between financial markets and real economy, which were the core of the economic crisis of 2008. This paper presents a dynamic model with endogenous capital stock whereby it is possible to assess, and hopefully clarify, some basic issues concerning the macroeconomics of saving-investment imbalances. |
| JEL: | E21 E22 E31 E32 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpem:2013/14&r=dge |
| By: | Mandelman, Federico S. (Federal Reserve Bank of Atlanta); Zanetti, Francesco (Oxford University) |
| Abstract: | Recent empirical evidence establishes that a positive technology shock leads to a decline in labor inputs. Can a flexible price model enriched with labor market frictions replicate this stylized fact? We develop and estimate a standard flexible price model using Bayesian methods that allows, but does not require, labor market frictions to generate a negative response of employment to a technology shock. We find that labor market frictions account for the fall in labor inputs. |
| Keywords: | technology shocks; employment; labor market frictions |
| JEL: | E32 |
| Date: | 2013–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2013-16&r=dge |
| By: | Alfonso Novales (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid. Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)); Rafaela Pérez (Departamento de Fundamentos del Análisis Económico I (Department of Foundations of Economic Analysis I), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid). Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)); Jesús Rúiz (Departamento de Fundamentos del Análisis Económico I (Department of Foundations of Economic Analysis I), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid). Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)) |
| Abstract: | In an endogenous growth model with public consumption and public investment, we explore the time-consistent optimal choice for two policy instruments: an income tax rate and the split of government spending between consumption and investment. We show that under the time-consistent, Markov policy, the economy lacks any transitional dynamics and also that there is local and global determinacy of equilibrium. We compare the Markovian optimal policy with the Ramsey policy as well as with the solution to the planner’s problem under lump-sum taxation. For empirically plausible parameter values we find that the Markov-perfect policy implies a higher tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint. As a result, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy, with growth under lump-sum taxes being highest. |
| Keywords: | Time-consistency, Markov-perfect optimal policy, Ramsey optimal policy, Endogenous growth, Income tax rate, Government spending composition. |
| JEL: | E61 E62 H21 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1323&r=dge |
| By: | Etienne LEHMANN (CRED (TEPP) University Panthéon-Assas Paris 2 and CREST); Paola L. MONTERO LEDEZMA (Stockholm University and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Bruno VAN DER LINDEN (FNRS and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| 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 is 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: | 2013–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2013033&r=dge |
| By: | Gunes Kamber; Konstantinos Theodoridis; Christoph Thoenissen |
| Abstract: | The focus of this paper is on expectations driven business cycles in small open economies. We make two significant contributions. First, we identify news shocks for a set advanced small open economies using the methodology of Beaudry et al. (2011). We find, in line with the previous VAR evidence for the US economy that expected shocks about the future Total Factor Productivity generate business cycle co-movements in output, hours, consumption and investment. We also find that news shocks are associated with countercyclical current account dynamics. Second, we develop a small open economy model with financial frictions, along the lines of Jermann and Quadrini (2012) that is able to replicate the positive co-movements identified in the data. |
| Keywords: | News shocks, business cycles, open economy macroeconomics, financial frictions, VAR |
| JEL: | E32 F4 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-02&r=dge |
| By: | Amedeo Argentiero; Carlo Andrea BOLLINO |
| Abstract: | This paper presents a theoretical contribution to model and dynamically analyze underground economy. We build a DSGE model with two sectors and one homogeneous good produced either by the sunlight and the underground firm. The sunlight firm is subject to distortionary taxation, whereas the underground firm evades taxation. The economy is subject to stochastic uncorrelated technology shocks on total factor productivity on private sectors and public labor. The demand side of the economy is populated by an infinite number of households with preferences defined over legal good consumption, public expenditure and labor services on a period-by-period basis. The government collects taxation from the sunlight sector and fights tax evasion through audit activity undertaken by public officers. When detected, underground firms are subject to regular taxation and additional fine payments. We simulate the model under the productivity shocks for Italy, over the sample 1974:01-2011:02. We find that in Italy underground economy share of GDP is on average about 23%. The dynamic behavior of the model shows that: (i) an efficient audit activity has a negative impact on public accounts thus generating a tradeoff between the reduction of underground economy and the worsening of public finance; (ii) sunlight production has a greater relative volatility with respect to undeground production; iii) all variables of the underground sector appear to be negatively correlated with the corresponding ones of regular economy. This implies that underground activity is a sort of buffer for the economy, whenever the business cycle is in downturn phases. |
| Date: | 2013–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:pia:wpaper:123/2013&r=dge |
| By: | Mandelman, Federico S. (Federal Reserve Bank of Atlanta) |
| Abstract: | During the last thirty years, labor markets in advanced economies were characterized by their remarkable polarization. As job opportunities in middle-skill occupations disappeared, employment opportunities concentrated in the highest- and lowest-wage occupations. I develop a two-country stochastic growth model that incorporates trade in tasks, rather than in goods, and reveal that this setup can replicate the observed polarization in the United States. This polarization was not a steady process: the relative employment share of each skill group fluctuated significantly over short-to-medium horizons. I show that the domestic and international aggregate shocks estimated within this framework can rationalize such employment dynamics while providing a good fit to the macroeconomic data. The model is estimated with employment data for different skills groups and trade-weighted macroeconomic indicators. |
| Keywords: | labor market polarization; international business cycles; heterogeneous agents; stochastic growth; two-country models |
| JEL: | F16 F41 |
| Date: | 2013–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2013-17&r=dge |
| By: | Lorenzo Forni; Massimiliano Pisani |
| Abstract: | We assess the macroeconomic effects of a sovereign restructuring in a small economy belonging to a monetary union by simulating a dynamic general equilibrium model. In line with the empirical evidence, we make the following three key assumptions. First, sovereign debt is held by domestic agents and by agents in the rest of the monetary union. Second, after the restructuring the sovereign borrowing rate increases and its increase is fully transmitted to the borrowing rate paid by the domestic agents. Third, the government cannot discriminate between domestic and foreign agents when restructuring. We show that the macroeconomic effects of the restructuring depend on: (a) the share of sovereign bonds held by residents in the country as compared to that held by foreign residents, (b) the increase in the spread paid by domestic agents and (c) its net foreign asset position at the moment of the restructuring. Our results also suggest that the sovereign restructuring implies persistent reductions of output, consumption and investment, that can be large, in particular if the share of public debt held domestically is large, the private foreign debt is high and the spread paid by the government and the households does increase. |
| Keywords: | Sovereign debt;Monetary unions;Public debt;Debt restructuring;Fiscal consolidation;Fiscal policy;Economic models;Fiscal policy, DSGE modeling, sovereign restructuring |
| Date: | 2013–12–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/269&r=dge |
| By: | Alfonso Novales (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid. Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)); Rafaela Pérez (Departamento de Fundamentos del Análisis Económico I (Department of Foundations of Economic Analysis I), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid). Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)); Jesús Rúiz (Departamento de Fundamentos del Análisis Económico I (Department of Foundations of Economic Analysis I), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid). Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)) |
| Abstract: | In an endogenous growth model with public consumption and investment and an elastic labour supply, we explore the time-consistent optimal choice for two policy instruments: an income tax rate and the split of government spending between consumption and investment. We compare the Markovian optimal policy with the Ramsey policy, extending previous works that characterized optimal fiscal policy either in an exogenous growth framework, assuming an exogenously given split of income between consumption and investment, or an inelastic supply of labour. The Markov-perfect policy implies a higher income tax rate. To compensate for the lower disposable income, a larger proportion of government spending is allocated to consumption than those chosen under a commitment constraint on the part of the government. As a result, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy. The welfare loss relative to the benevolent planner’s solution is mainly due to the difference in growth rates. |
| Keywords: | ime-consistency, Markov-perfect optimal policy, Ramsey optimal policy, Endogenous growth, Income tax rate, Government spending composition. |
| JEL: | E61 E62 H21 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1324&r=dge |
| By: | Frédéric DOCQUIER (FNRS and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Tobias MÜLLER (University of Geneva, Switzerland); Joaquín NAVAL (Universitat Autònoma de Barcelona, Spain) |
| Abstract: | One of the most salient features of developing economies is the existence of a large informal sector. This paper uses quantitative theory to study the dynamic implications of informality on wage inequality, human capital accumulation, child labor and long-run growth. Our model can generate transitory informality equilibria or informality-induced poverty traps. Its calibration reveals that the case for the poverty-trap hypothesis is strong: although informality serves to protect low-skilled workers from extreme poverty in the short-run, it prevents income convergence between developed and developing nations in the long run. Sudden elimination of informality would induce severe welfare losses for several generations on the transition path. Hence, we examine the effectiveness of different development policies to exit the poverty trap. Our numerical experiments show that using means-tested education subsidies is the most cost-effective single policy option. However, for longer time horizons, or as the economy gets closer to the poverty trap threshold, combining means-tested education and wage subsidies is even more effective. |
| Keywords: | informality, development, education, child labor, inequality |
| JEL: | O11 O15 O17 |
| Date: | 2013–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2013034&r=dge |
| By: | Chu, Hsun; Lai, Ching-Chong; Cheng, Chu-Chuan |
| Abstract: | This paper develops an endogenous growth model featuring tax havens, and uses it to examine how the existence of tax havens affects the economic growth rate and social welfare in high-tax countries. We show that the presence of tax havens generates two conflicting channels in determining the growth effect. First, the public investment effect states that tax havens may erode tax revenues and in turn decrease the government’s infrastructure expenditure, thereby reducing growth. Second, the tax planning effect of tax havens reduces marginal cost of capital and hence encourages capital accumulation so as to spur economic growth. The overall growth effect is ambiguous and is determined by the extent of these two effects. The welfare analysis shows that tax havens are more likely to be welfare-enhancing if the government expenditure share in production is low, or the initial income tax rate is high. Moreover, the welfare-maximizing income tax rate is lower than the growth-maximizing income tax rate if tax havens are present. |
| Keywords: | tax havens, endogenous growth, optimal income tax |
| JEL: | H21 H26 O11 O40 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52878&r=dge |
| By: | Ronny Mazzocchi |
| Abstract: | The current consensus in macroeconomics represented by the New Neoclassical Synthesis (NNS) is based on dynamically stochastic general equilibrium (DSGE) modeling with Real Business Cycle (RBC) core to which nominal rigidities are added by way of imperfect competition. The claim is that the NNS model is capable of rigorously reproducing observable phenomena and is able to provide a microeconomically well-founded basis for the design of optimal policy rules, since it is amenable to welfare analysis. Nevertheless these results come at the price of many ad-hocery and other shortcomings which are indispensable for intertemporal equilibrium modelling of the current kind. Moreover the NNS did not let us think about the financial crisis and the macroeconomic imbalances that were forming in the years of the Great Moderation. |
| JEL: | B22 D50 E21 E22 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpem:2013/13&r=dge |
| By: | Neustroev, Dmitry |
| Abstract: | This article offers the modification of the Uzawa-Lucas growth model. The model also includes natural resources as a factor of production. The necessary and sufficient conditions for this model are considered. Growth rates of the main macroeconomic indicators along balanced growth path are obtained. The analysis of influence of natural resources on economic growth along balanced growth path is considered. |
| Keywords: | Uzawa-Lucas model, human capital, natural resources |
| JEL: | C61 O41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52937&r=dge |
| By: | Andreas Hubener (Goethe University of Frankfurt); Raimond Maurer (Goethe University of Frankfurt); Olivia S. Mitchell (The Wharton School, University of Pennsylvania) |
| Abstract: | Household decisions are profoundly shaped by a complex set of financial options due to Social Security rules determining retirement, spousal, and survivor benefits, along with benefit adjustments that vary with the age at which these are claimed. These rules influence optimal household asset allocation, insurance, and work decisions, given life cycle demographic shocks such as marriage, divorce, and children. Our model generates a wealth profile and a low and stable equity fraction consistent with empirical evidence. We also confirm predictions that wives will claim retirement benefits earlier than husbands, while life insurance is mainly purchased by younger men. Our policy simulations imply that eliminating survivor benefits would sharply reduce claiming differences by sex while dramatically increasing men’s life insurance purchases. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp293&r=dge |
| By: | Viktors Ajevskis |
| Abstract: | This paper presents a method to construct a sequence of approximate policy functions of increasing accuracy on non-local domains. The method is based upon the notion of stable manifold originated from dynamical systems theory. The approximate policy functions are constructed employing the contraction mapping theorem and the fact that solutions to rational expectations models converge to a steady state. The approach allows us to derive the accuracy of the approximations and their domain of definition. The method is applied to the neoclassical growth model and compared with the perturbation method. Just the second approximation of the proposed approach yields very high accuracy of the approximate solution on a global domain. In contrast to the Taylor series expansions, the solutions of the method inherit globally the properties of the true solution such as monotonicity and concavity. |
| Keywords: | dynamic equilibrium, rational expectations, non-linear perfect foresight models, stable manifold, perturbation method, extended path, neoclassical growth model |
| JEL: | C62 C63 D9 D58 |
| Date: | 2013–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:201303&r=dge |
| By: | Michal Andrle; Jaromir Benes |
| Abstract: | This paper proposes a novel way of formulating priors for estimating economic models. System priors are priors about the model's features and behavior as a system, such as the sacrifice ratio or the maximum duration of response of inflation to a particular shock, for instance. System priors represent a very transparent and economically meaningful way of formulating priors about parameters, without the unintended consequences of independent priors about individual parameters. System priors may complement or also substitute for independent marginal priors. The new philosophy of formulating priors is motivated, explained and illustrated using a structural model for monetary policy. |
| Keywords: | Economic models;Monetary policy;system priors; Bayesian inference; DSGE; smell test |
| Date: | 2013–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/257&r=dge |
| By: | Paries, Matthieu Darraq; Faia, Ester; Palenzuela, Diego Rodriguez |
| Abstract: | Euro area data show a positive connection between sovereign and bank risk, which increases with banks' and sovereign long run fragility. We build a macro model with banks subject to incentive problems and liquidity risk (in the form of liquidity based banks' runs) which provides a link between endogenous bank capital and macro and policy risk. Our banks also invest in risky government bonds used as capital buffer to self-insure against liquidity risk. The model can replicate the positive connection between sovereign and bank risk observed in the data. Central bank liquidity policy, through full allotment policy, is successful in stabilizing the spiraling feedback loops between bank and sovereign risk. -- |
| Keywords: | liquidity risk,sovereign risk,capital regulations |
| JEL: | E5 G2 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:7&r=dge |
| By: | Real Arai (Graduate School of Social Sciences, Hiroshima University); Takuma Kunieda (Department of Economics and Finance,City University of Hong Kong); Keigo Nishida (Faculty of Economics, Fukuoka University) |
| Abstract: | To understand mixed evidence provided by empirical studies for the relationship between the accumulation of public debt and economic growth, it is necessary to consider not only the crowd-out effect of public debt on economic growth but also the growth-enhancing crowd-in effect that cannot be uncovered by the traditional theoretical achievements. We develop a dynamic general equilibrium model with infinitely lived agents and derive an inverted U-shaped relationship between the accumulation of public debt and economic growth. The analysis focuses on both crowd-out and crowd-in effects that public debt has on private investment in a financially constrained economy and clarifies the mechanism inducing the inverted U-shaped relationship in the growth process. When the public debt-to-GDP ratio is below a certain threshold level, the crowd-in effect dominates the crowd-out effect and the accumulation of public debt promotes economic growth. When the public debt-to-GDP ratio exceeds the threshold level, the accumulation of public debt begins to hinder economic growth with the crowd-out effect dominating the crowd-in effect. |
| Keywords: | Economic growth; Public debt; Crowd-in effect; Financial market imperfections |
| JEL: | O41 E62 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:884&r=dge |
| By: | Camera, Gabriele; Chien, YiLi |
| Abstract: | We present a thought-provoking study of two monetary models: the cash-in-advance and the Lagos and Wright (2005) models. We report that the different approach to modeling money - reduced-form vs. explicit role - neither induces theoretical nor quantitative differences in results. Given conformity of preferences, technologies and shocks, both models reduce to one difference equation. The equations do not coincide only if price distortions are differentially imposed across models. To illustrate, when cash prices are equally distorted in both models equally large welfare costs of inflation are obtained in each model. Our insight is that if results differ, then this is due to differential assumptions about the pricing mechanism that governs cash transactions, not the explicit microfoundation of money. -- |
| Keywords: | cash-in-advance,matching,microfoundations,money,inflation |
| JEL: | E1 E4 E5 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:33&r=dge |
| By: | Chu, Hsun; Lai, Ching-Chong |
| Abstract: | This paper develops an endogenous growth model featuring environmental externalities, abatement R&D, and market imperfections. We compare the economic performances under three distinct regimes that encompass public abatement, private abatement without tax recycling, and private abatement with tax recycling. It is found that the benefit arising from the private conduct of abatement will be larger if the degree of the firms’ monopoly power is greater. With a reasonably high degree of monopoly power, a mixed abatement policy by which the government recycles environmental tax revenues to subsidize the private abatement R&D is a plausible way of reaching the highest growth rate and welfare. |
| Keywords: | abatement R&D, market imperfections, endogenous growth |
| JEL: | H23 O32 O44 Q56 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52869&r=dge |
| By: | Jaromir Benes; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula |
| Abstract: | This paper uses two of the IMF’s DSGE models to simulate the benefits of international fiscal and macroprudential policy coordination. The key argument is that these two policies are similar in that, unlike monetary policy, they have long-run effects on the level of GDP that need to be traded off with short-run effects on the volatility of GDP. Furthermore, the short-run effects are potentially much larger than those of conventional monetary policy, especially in the presence of nonlinearities such as the zero interest rate floor, minimum capital adequacy regulations, and lending risk that depends in a convex fashion on loan-to-value ratios. As a consequence we find that coordinated fiscal and/or macroprudential policy measures can have much larger stimulus and spillover effects than what has traditionally been found in the literature on conventional monetary policy. |
| Keywords: | Fiscal policy;Macroprudential Policy;Monetary policy;Stabilization measures;International cooperation;Economic models;Monetary Policy, Fiscal Policy, Macroprudential Policy, International Policy Coordination, International Spillovers, Nonlinearities, Fiscal Multipliers, Macrofinancial Linkages, Prudential Regulation |
| Date: | 2013–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/262&r=dge |
| By: | John Karl Scholz (University of Wisconsin-Madison); Ananth Seshadri (University of Wisconsin-Madison) |
| Abstract: | We develop a rich model to study the complex interrelationship between health insurance and retirement decisions. The decision to retire depends on a number of factors including availability of health insurance, health shocks, pensions, Social Security, and how consumption and health interact in the utility function. We incorporate these features in a computational model of optimal wealth and retirement decisions, solving the model household-by-household using data from the HRS. We use the model to study two important SSA priority areas: first, to what extent do people remain in the labor force until age 65 in order to maintain health insurance for themselves (and after age 65 to maintain health insurance for their spouses)? Second, do early retirees have poorer health than others and does the availability of Medicare interact with their decision to claim benefits? |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp292&r=dge |
| By: | Christopher J. Erceg; Andrew Levin |
| Abstract: | In this paper, we provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. We then proceed to formulate a stylized New Keynesian model in which labor force participation is essentially acyclical during “normal times†(that is, in response to small or transitory shocks) but drops markedly in the wake of a large and persistent aggregate demand shock. Finally, we show that these considerations can have potentially crucial implications for the design of monetary policy, especially under circumstances in which adjustments to the short-term interest rate are constrained by the zero lower bound. |
| Keywords: | Economic recession;United States;Labor markets;Unemployment;Monetary policy;labor force participation, unemployment, and monetary policy rules |
| Date: | 2013–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/245&r=dge |
| By: | Kraft, Holger; Munk, Claus; Seifried, Frank Thomas; Wagner, Sebastian |
| Abstract: | We show that the optimal consumption of an individual over the life cycle can have the hump shape (inverted U-shape) observed empirically if the preferences of the individual exhibit internal habit formation. In the absence of habit formation, an impatient individual would prefer a decreasing consumption path over life. However, because of habit formation, a high initial consumption would lead to high required consumption in the future. To cover the future required consumption, wealth is set aside, but the necessary amount decreases with age which allows consumption to increase in the early part of life. At some age, the impatience outweighs the habit concerns so that consumption starts to decrease. We derive the optimal consumption strategy in closed form, deduce sufficient conditions for the presence of a consumption hump, and characterize the age at which the hump occurs. Numerical examples illustrate our findings. We show that our model calibrates well to U.S. consumption data from the Consumer Expenditure Survey. -- |
| Keywords: | Consumption hump,life-cycle utility maximization,habit formation,impatience |
| JEL: | D91 D11 D14 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:15&r=dge |
| By: | Branger, Nicole; Kraft, Holger; Meinerding, Christoph |
| Abstract: | This paper analyzes the equilibrium pricing implications of contagion risk in a Lucastree economy with recursive preferences and jumps. We introduce a new economic channel allowing for the possibility that endowment shocks simultaneously trigger a regime shift to a bad economic state. We document that these contagious jumps have far-reaching asset pricing implications. The risk premium for such shocks is superadditive, i.e. it is 2.5% larger than the sum of the risk premia for pure endowment shocks and regime switches. Moreover, contagion risk reduces the risk-free rate by around 0.5%. We also derive semiclosed-form solutions for the wealth-consumption ratio and the price-dividend ratios in an economy with two Lucas trees and analyze cross-sectional effects of contagion risk qualitatively. We find that heterogeneity among the assets with respect to contagion risk can increase risk premia disproportionately. In particular, big assets with a large exposure to contagious shocks carry significantly higher risk premia. -- |
| Keywords: | Contagion,General Equilibrium,Asset Pricing,Recursive Preferences |
| JEL: | G01 G12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:11&r=dge |
| By: | Francis Vitek |
| Abstract: | This paper develops a structural macroeconometric model of the world economy, disaggregated into thirty five national economies. This panel unobserved components model encompasses an approximate linear panel dynamic stochastic general equilibrium model featuring a monetary transmission mechanism, a fiscal transmission mechanism, and extensive macrofinancial linkages, both within and across economies. A variety of monetary policy analysis, fiscal policy analysis, spillover analysis, and forecasting applications of the estimated model are demonstrated, based on a Bayesian framework for conditioning on judgment. |
| Keywords: | Monetary transmission mechanism;Spillovers;Monetary policy;Fiscal policy;Economic forecasting;Cross country analysis;Economic models;Monetary policy analysis; Fiscal policy analysis; Spillover analysis; Forecasting |
| Date: | 2013–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/253&r=dge |
| By: | John Duffy; Jonathan Lafky |
| Abstract: | We explore the effect of fixed versus dynamic group membership on public good provision. In a novel experimental design, we modify the traditional voluntary contribution mechanism (VCM) by periodically replacing old members of a group with new members over time. Under this dynamic, overlapping generations matching protocol we find that average contributions experience significantly less decay over time relative to a traditional VCM environment with fixed group membership. These findings suggest that the traditional pattern of contribution and decay seen in many public goods experiments may not accurately reflect behavior in groups with changing membership, as is the case in many real-world environments. |
| Keywords: | Public goods, Overlapping generations, Voluntary contribution mechanism, Experimental economics |
| JEL: | C72 C92 D64 H41 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:520&r=dge |
| By: | Luo, Yulei; Young, Eric |
| Abstract: | We study the portfolio decision of a household with limited information-processing capacity (rational inattention or RI) in a setting with recursive utility. We find that rational inattention combined with a preference for early resolution of uncertainty could lead to a significant drop in the share of portfolios held in risky assets, even when the departure from standard expected utility with rational expectations is small. In addition, we show that the equilibrium equity premium increases with the degree of inattention because inattentive investors with recursive utility face greater long-run risk and thus require higher compensation in equilibrium. Our results are robust to the presence of correlation between the equity return and the RI-induced noise and the presence of non-tradable labor income. |
| Keywords: | Rational Inattention, Recursive Utility, Portfolio Choice, Asset Pricing |
| JEL: | D53 D81 G11 |
| Date: | 2013–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52904&r=dge |