|
on Dynamic General Equilibrium |
|
Issue of 2014‒02‒02
forty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Lisi Shi (University of Connecticut); Richard M. H. Suen (University of Connecticut) |
| Abstract: | This paper examines the e¤ects of asset bubbles in an overlapping generations model with endogenous labor supply. We show analytically that asset bubbles can lead to an expansion in steady-state capital, investment, employment and output under certain conditions. The analytical results are followed by a speci c numerical example. |
| Keywords: | Asset Bubbles, Overlapping Generations, Endogenous Labor |
| JEL: | E22 E44 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2014-02&r=dge |
| By: | Afanasyeva, Elena; Karasulu, Meral |
| Abstract: | We use a microfounded dynamic stochastic general equilibrium (DSGE) model with banks to study interactions between monetary and macroprudential policies in a small open economy. The model is calibrated/estimated for Korea. Cooperation of monetary and macroprudential policies is optimal under a financial shock. Prolonged periods of monetary accommodation lead to inflationary pressures, lower the effectiveness of macroprudential instrument (loan-to-value ratio) and contribute to further credit growth, increasing vulnerabilities. -- |
| JEL: | E58 E61 G28 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79884&r=dge |
| By: | Marotzke, Petra |
| Abstract: | Empirical studies find that the age-variance profile of wages is U-shaped. The objective of this paper is to explore the driving forces of the U-shape in a model with search frictions. I introduce endogenous search effort and a fixed retirement age into Cahuc, Postel-Vinay, and Robin s (2006) strategic wage bargaining model with counteroffers and heterogeneous firm-worker matches. Three factors shape the age-inequality profile of wages in the model economy: the time horizon before retirement, match heterogeneity, and the worker's bargaining power. Because the working life is finite, the optimal search effort decreases with age. Furthermore, the probability of meeting an outside firm with a higher match quality decreases in the quality of the current match. The bargaining power parameter influences the worker's reservation wage. The model can reproduce the U-shape of the age-inequality profile of wages if the bargaining power of workers is sufficiently high. Furthermore, the model captures the shapes of the empirically observed age profiles of average wages, the unemployment rate, the unemployment to employment transition rate, and the employment to employment transition rate. -- |
| JEL: | J31 J41 J64 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80007&r=dge |
| By: | Merola, Rossana |
| Abstract: | After the recent banking crisis in 2008, financial market conditions have turned out to be a relevant factor for economic fluctuations. This paper provides a quantitative assessment of the impact of financial frictions on the U.S. business cycle. The analysis compares the original Smets and Wouters model (2003, 2007) with an alternative version augmented with the financial accelerator mechanism à la Bernanke, Gertler and Gilchrist (1996, a 1999). Both versions are estimated using Bayesian techniques over a sample extended to 2012. The analysis supports the role of financial channels, namely the financial accelerator mechanism, in transmitting dysfunctions from financial markets to the real economy. The Smets and Wouters model, augmented with the financial accelerator mechanism, is suitable to capture much of the historical developments in U.S. financial markets that led to the financial crisis. The model can account for the output contraction in 2008, as well as the widening in corporate spreads and supports the argument that financial conditions have amplified the U.S. business cycle and the intensity of the recession. |
| Keywords: | DSGE models; business cycle; financial frictions; Bayesian estimation |
| JEL: | C11 E32 E44 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:033&r=dge |
| By: | Espen Moen (Norwegian Business School-BI); Anna Godøy (The Ragnar Frisch Centre for) |
| Abstract: | In search theory, an important distinction can be drawn between models with competitive search and with random search; empirical work on job search models overwhelmingly assume random search. This paper uses linked register data on workers and rms to explore patterns of wages at job to job transitions. We argue that models with random search provide insufficient structure to match the tight correspondence in the data between the rm wage in the old and the new job. In an archetypical model with directed on-the-job search, we nd that the pure job ladder equilibrium of this model is also unable to account for observed wage patterns, this time by predicting too little variation in the conditional distribution of new wages after a job change. Next, we present a model where workers and firms meet through both directed and undirected search; we call this mixed search. This model is qualitatively consistent with patterns of wages across job-to-job transitions with wage gains. To account for wage cuts at job-to-job transitions, an extended model version makes search behavior contingent on realized match specific productivity, revealed to workers and firms after the match is formed. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:857&r=dge |
| By: | He, Hui; Huang, Kevin X. D.; Hung, Sheng-Ti |
| Abstract: | This paper first documents several important business cycle properties of health status and health expenditures in the US. We find that health expenditures are pro-cyclical while health status is counter-cyclical. We then develop a stochastic dynamic general equilibrium model with endogenous health accumulation. The model has four distinct features: 1) Both medical expenditures and leisure time are used to produce health stock; 2) Health enters into production function; 3) Depreciation rate of health stock negatively depends on working hours; 4) Health enters into utility function. We calibrate the model to US economy. The results show that the model can jointly rationalize the counter-cyclicality of health status and pro-cyclicality of medical expenditure. We also investigate the relative importance of each feature in affecting the business cycle properties of health status. We find that the joint presence of the time channel (feature 1) and the production channel (features 2 and 3) is crucial in replicating counter-cyclicality of health status. |
| Keywords: | business cycles; health status; health expenditure |
| JEL: | E22 E32 I12 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:031&r=dge |
| By: | Sergey, Ivashchenko |
| Abstract: | This article suggests the new approach to an approximation of nonlinear DSGE models moments. This approach is fast and accurate enough to use it for an estimation of nonlinear DSGE models. The small financial DSGE model is repeatedly estimated by several modifications of suggested approach. Approximations of moments are close to the results of large sample Monte Carlo estimation. Quality of parameters estimation with suggested approach is close to the Central Difference Kalman Filter (the CDKF) based. At the same time suggested approach is much faster. |
| Keywords: | DSGE; DSGE-VAR; GMM; nonlinear estimation |
| JEL: | C13 C32 E32 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:032&r=dge |
| By: | Ahmed, Waqas; Rehman, Muhammad; Malik, Jahanzeb |
| Abstract: | In this paper we use the Bayesian methodology to estimate the structural and shocks‟ parameters of the DSGE model in Ahmad et al. (2012). This model includes formal and informal firms both at intermediate and final goods production levels. Households derive utility from leisure, real money balances and consumption. Each household is treated as a unit of labor which is a composite of formal (skilled) and informal (unskilled) labor. The formal (skilled) labor is further divided into types “r” and households have monopoly over each type “r” labor which depends upon degree of education. We go a step further by converting the existing annually calibrated model to quarterly frequency. As a result our impulse response functions have more relevant and realistic policy implications. From the results we do find the shock absorbing role of the informal sector, however, with short term existence. The model estimation diagnostics also confirm robustness and reasonability of the estimation results. |
| Keywords: | Bayesian Estimation, DSGE Model, Shock Process. |
| JEL: | E17 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53168&r=dge |
| By: | Seung-Gyu Sim (University of Tokyo) |
| Abstract: | This paper develops an equilibrium job search model in which the employed worker privately accumulates human capital and continually searches for a better paying job. In order to encourage production and discourage job turnover, firms reward their workers having better performance and longer job tenure by bonus payments and long service allowances. The resulting wages grow with human capital accumulation (productive promotion), and job tenure (non-productive promotion) as well as job-to-job transition. I estimate the model using indirect inference to investigate the effect of human capital accumulation on individual wage growth. In the NLSY79 data, the average wage of white male high school graduates after 20 years of market experience is 1.88 times larger than the average of the first full-time wages. A counterfactual experiment using the structural parameter estimates shows that if a typical worker were not able to accumulate human capital, his wage would grow by 41.8%. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:887&r=dge |
| By: | Frömel, Maren |
| Abstract: | This paper deals with fiscal policy over the business cycle when international financial markets are imperfect. I document evidence that government expenditure tends to be more procyclical the higher is the borrowing cost for a sovereign. Decomposing government expenditure components shows that the cyclical correlations of government social transfers are the most important components driving cross-country differences in the behavior of government spending over the business cycle. I build a simple model of optimal fiscal policy in the presence of income inequality where government spending is financed by costly taxation and by external debt in form of a risk free bond. Government spending consists of a public good which provides direct utility, and of social transfers that can be targeted towards low income agents. When additional frictions are in the form of exogenous borrowing constraints, the government runs a procyclical tax and transfer policy in the neighbourhood of the constraint and a counteryclical policy when asset or debt holdings are not close to the constraint. The need to smooth both aggregate consumption and tax cost over the business cycle deliver the qualitative difference in transfer policy when the government cannot borrow enough. The procyclicality of transfers is stronger the tighter is the borrowing constraint in this model. In contrast, government spending on public goods is always procyclical. The results implied by the theoretical model are qualitatively consistent with the data and emphasize the need to decompose government expenditure to understand fiscal procyclicality. -- |
| JEL: | E62 F34 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79820&r=dge |
| By: | Koehne, Sebastian; Kuhn, Moritz |
| Abstract: | We study optimal capital taxation in a dynamic Mirrleesian model with time-nonseparable preferences. The model covers the widely used cases of habit formation and durable consumption. Time-nonseparable preferences change labor supply incentives across time and thereby generate novel motives to distort capital accumulation decisions. We decompose intertemporal wedges (implicit capital taxes) into three components and provide conditions under which intertemporal wedges are positive. We derive a recursive formulation of constrained efficient allocations and evaluate the quantitative importance of habit formation for intertemporal wedges. In our baseline parameterization, habit formation reduces average intertemporal wedges by about 40 percent compared to the time-separable case. -- |
| JEL: | D82 E21 H21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79951&r=dge |
| By: | Winkler, Roland; Lewis, Vivien |
| Abstract: | Using VAR analysis on US data, we show that unanticipated fiscal expansions boost private consumption and business formation. Models with an extensive investment margin, i.e. endogenous firm and product entry, have difficulties explaining these two phenomena simultaneously. Considering different variants of an endogenous-entry business cycle model, we show that crowding-in of both consumption and entry can be generated only under very specific assumptions. In a static model with full depreciation, labor supply has to be extremely elastic. In a dynamic model, the fiscal stimulus must be sufficiently persistent such that future profits are high enough to generate entry. However, consumption falls for conventional parameter values. Lowering the wealth effect through the introduction of rule-of-thumb consumers or GHH preferences does not help to bring the model closer to the data. -- |
| JEL: | E32 E62 E21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79947&r=dge |
| By: | Edwin Lai (Hong Kong University of Science and Tech) |
| Abstract: | We construct a tractable general equilibrium model of cumulative innovation and growth, in which new ideas strictly improve upon frontier technologies, and productivity improvements are drawn in a stochastic manner. The presence of positive knowledge spillovers implies that the decentralized equilibrium features an allocation of labor to R&D activity that is strictly lower than the social planner's benchmark, which suggests a role for patent policy. We focus on a "non-infringing inventive step" requirement, which stipulates the minimum improvement to the best patented technology that a new idea needs to make for it to be patentable and non-infringing. We establish that there exists a finite required inventive step that maximizes the rate of innovation, as well as a separate optimal required inventive step that maximizes welfare, with the former being strictly greater than the latter. These conclusions are robust to allowing for the availability of an additional instrument in the form of patent length policy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:854&r=dge |
| By: | Marco Cozzi (Queen's University) |
| Abstract: | This paper considers the macroeconomic implications of a se t of empirical studies finding a high degree of dispersion in preference heterogeneity. It develops a model with risk aversion heterogeneity, uninsurable idiosyncratic income risk, and self-selection into risky jobs to quantify their effects on wealth inequality. The results show that, when estimating the risk aversion distribution with the appropriate PSID data on income lotteries, the model can match the observed degree of wealth inequality in the U.S., accounting for the wealth Gini index in several cases. The model replicates well many features of the wealth distribution, such as its quintiles. However, the share of wealth held by the top 1% is still substantially lower than in the data. Quantitatively, with fairly persistent income processes, the variance of the income shocks greatly matters in generating enough wealth inequality. It is also shown that models without risk aversion heterogeneity underestimate the size of precautionary savings by up to 14 percentage points, and that they account for up to a 55% increase of the complete markets capital stock. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:842&r=dge |
| By: | Nicolas Werquin (Yale University); Aleh Tsyvinski (Yale University); Mikhail Golosov (Princeton University) |
| Abstract: | This paper derives novel formulas for the welfare gains of any tax reform around initial (optimal or suboptimal) dynamic tax systems. We use a perturbation-based method to express these formulas in terms of easily interpretable and empirically estimable parameters: elasticities of income and savings with respect to the tax rates, and the shape of the income and savings distributions. This generates new theoretical insights about dynamic optimal taxes, as well as policy implications regarding directions of tax reforms of the current US tax code. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:879&r=dge |
| By: | Zaharieva, Anna |
| Abstract: | This paper develops a labour market matching model with heterogeneous firms, on-thejob search and referrals. Social capital is endogenous, so that better connected workers bargain higher wages for a given level of productivity. This is a positive effect of referrals on reservation wages. At the same time, employees accept job offers from more productive employers and forward other offers to their unemployed social contacts. Therefore, the average productivity of a referred worker is lower than the average productivity in the market. This is a negative selection effect of referrals on wages. In the equilibrium, wage premiums (penalties) associated with referrals are more likely in labour markets with lower (higher) productivity heterogeneity and lower (higher) worker s bargaining power. Next, the model is extended to allow workers help each other climb a wage ladder. On-the-job search is then intensified and wage inequality is reduced as workers employed in high paid jobs pool their less successful contacts towards the middle range of the productivity distribution. -- |
| JEL: | J23 J31 J64 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79891&r=dge |
| By: | Balleer, Almut; Enders, Zeno |
| Abstract: | This paper examines the effects of expansionary technology shocks (shocks that increase labor productivity and factor inputs) as opposed to contractionary technology shocks (shocks that increase labor productivity, but decrease factor inputs). We estimate these two shocks jointly based on a minimum set of identifying restrictions in a structural VAR. We show that most of the business cycle variation of key macroeconomic variables such as output and consumption is driven by expansionary technology shocks. However, contractionary technology shocks are important to understand the variation in labor productivity and production inputs. In addition, these shocks trigger different reactions of certain variables, which can help explain why existing evidence on technology shocks does not deliver clear results. In a simple DSGE model with managerial technology, which is consistent with our identifying restrictions, we interpret contractionary technology shocks as process innovations and motivate the difference to expansionary technology shocks. -- |
| JEL: | E32 E24 E25 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80046&r=dge |
| By: | Rausch, Sebastian |
| Abstract: | We examine the distributional and e ciency impacts of climate policy in the context of fiscal consolidation in a dynamic general-equilibrium overlapping generations model of the US economy. The model includes a disaggregated production structure, including energy sector detail and advanced low- or zero-carbon energy technologies, and detail on government taxes and spending. In contrast to revenue-neutral carbon tax swaps, using the carbon revenue for deficit reduction implies a relaxation of future public budgets as debt repayment results in lower interest obligations. While we show that the intergenerational welfare impacts depend importantly on what tax recycling instrument is used, we find that combining debt consolidation with a carbon policy entails the possibility of sustained welfare gains for future generations. We thus argue that combining fiscal and climate policy may o er the chance for positive societal gains (without considering potential benefits from averted climate change). Importantly, this may enhance the political support for revenue-raising climate policies that are framed over the next couples of decades. -- |
| JEL: | Q54 C68 H60 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80026&r=dge |
| By: | Kuhn, Michael; Prettner, Klaus |
| Abstract: | We study the effects of a labor-intensive health care sector within an R&D-driven growth model with overlapping generations. Health care increases longevity and labor participation/productivity. We examine under which conditions expanding health care enhances growth and welfare. Even if the provision of health care diverts labor from productive activities, it may still fuel R&D and economic growth if the additional wealth that comes with expanding longevity translates into a more capital/machine-intensive final goods production and, thereby, raises the return to developing new machines. We establish mild conditions under which an expansion of health care beyond the growth-maximizing level is Pareto-improving. -- |
| JEL: | I11 O41 O11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79970&r=dge |
| By: | Lütticke, Ralph; Bayer, Christian; Pham, Lien; Tjaden, Volker |
| Abstract: | This paper examines the effects of changes in uncertainty of household income on the macroeconomy. Households face substantial idiosyncratic income risk that is up to two orders of magnitude larger than total factor productivity uncertainty, very persistent and varies substantially over the business cycle. We build a New Keynesian model with heterogeneous agents, where changes in precautionary savings due to time-varying uncertainty depress aggregate activity. With countercyclical markups through sticky prices, increased precautionary savings lower aggregate demand and generate significant output losses as the economy is demand-driven in the short-run. The decline in output is more severe, if the central bank is constrained by the zero lower bound. Our results imply that household income uncertainty may be an important factor in explaining the persistent decline of consumption during the Great Recession. -- |
| JEL: | E21 E32 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79868&r=dge |
| By: | Bulent Guler (Indiana University - Bloomington) |
| Abstract: | We quantify the contribution of women's labor force attachment on the declining trend in interstate migration. Using CPS and SIPP data, we first document that families in which both spouses have similar incomes, the propensity to migrate is significantly lower than in families with unequal spousal earnings. We construct a labor search model in which households make location, marriage, and divorce decisions. We calibrate the model to match aggregate U.S. statistics on mobility, marriage and labor flows and use it to quantify the effect of a fall in the gender wage gap on interstate migration. Narrowing the gender wage gap increases the women's contribution to the total family income; it induces a higher share of families with both spouses working and more couples with similar incomes. Our model predicts that the observed change in the gender wage gap accounts for 33% of the drop in family migration since 1991. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:898&r=dge |
| By: | Nathaniel Throckmorton (Indiana University Bloomington); Benjamin Keen (University of Oklahoma); Alexander Richter (Auburn University); William Gavin (Federal Reserve Bank of St. louis) |
| Abstract: | This article presents global solutions to standard New Keynesian models to show how economic dynamics change when the nominal interest rate is constrained at its zero lower bound (ZLB). We focus on the canonical New Keynesian model without capital, but we also study the model with capital, with and without investment adjustment costs. Our solution method emphasizes accuracy to capture the expectational effects of hitting the ZLB and returning to a positive interest rate. We find that the response to a technology shock has perverse consequences when the ZLB binds, even when a discount factor shock drives the interest rate to zero. Although we do not model the large scale asset purchases used by the Fed since 2009, our results suggest that the economy may have trouble recovering if the interest rate remains at zero. Given the perverse dynamics at the ZLB, we evaluate how monetary policy affects the likelihood of encountering the ZLB. We find that the probability of hitting the ZLB depends importantly on the monetary policy rule. A policy rule based on a dual mandate, such as the one proposed by Taylor (1993), is more likely to cause ZLB events when the central bank places greater emphasis on the output gap. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:839&r=dge |
| By: | Holzner, Christian; Gautier, Pieter |
| Abstract: | When workers send applications to vacancies they create a bipartite network. Coordination frictions arise if workers and firms only observe their own links. We show that those frictions and the wage mechanism are in general not independent. Only wage mechanisms that allow for ex post competition generate the maximum matching on a realized network. We show that random search with ex post competition in wages leads to the maximum number of matches and is socially efficient in terms of vacancy creation, worker participation and the number of applications send out, if workers and not firms have the power to make offers. -- |
| JEL: | D83 D85 J64 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79740&r=dge |
| By: | Schneider, Maik; Winkler, Ralph |
| Abstract: | Welfare aspects of longevity increases are often discussed neglecting the complex relationship between longevity and economic growth, which is the focal point of another literature. Combining both perspectives, we develop an endogenous growth OLG-framework to investigate how longevity affects economic growth and welfare. In our model, life expectancy is determined endogenously by individuals' investments in healthcare. In our benchmark specification growth effects are small, but direct welfare gains from longer lifetimes can be substantial. In the generalized model specification the growth effect dominates and may even lead to overall welfare losses from longevity increases. We interpret our results with respect to real world data and discuss the importance of assumptions about the engine of growth as well as the externalities associated with healthcare investments. -- |
| JEL: | O10 I10 J10 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80018&r=dge |
| By: | Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani |
| Abstract: | In the 1990s, the empirical relation between money demand and interest rates began to fall apart. We analyze to what extent improved access to money markets can explain this break-down. For this purpose, we construct a microfounded monetary model with a money market, which provides insurance against liquidity shocks by offering short-term loans and by paying interest on money market deposits. We calibrate the model to U.S. data and find that improved access to money markets can explain the behavior of money demand very well. Furthermore, we show that, by allocating money more efficiently, better access to money markets decrease the welfare cost of inflation substantially. |
| Keywords: | Monetary economics |
| JEL: | E52 E58 E59 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:136&r=dge |
| By: | Wollmershäuser, Timo; Hristov, Nikolay; Hülsewig, Oliver |
| Abstract: | This paper uses panel vector autoregressive models and simulations of an estimated DSGE model to explore the reaction of Euro area banks to the global financial crisis. We focus on their interest rate setting behavior in response to standard macroeconomic shocks. Our main empirical finding is that the pass through from changes in the money market rate to retail bank rates became significantly less complete during the crisis. Model simulations show that this result can be well explained by a significant increase in the frictions that the banks business is subject to. -- |
| JEL: | E40 E43 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79976&r=dge |
| By: | Hürtgen, Patrick; Rühmkorf, Ronald |
| Abstract: | This paper studies the impact of the state-dependent risk of a government default on the correlation of the scal balance and current account. We use a small open economy model where nonlinear risk premia arise endogenously when the government operates close to its scal limit, i.e. the maximum capacity of a country to repay its debt. The presence of the possible sovereign default leads to dynamics of sovereign debt which cause taxes to rise and increase the dispersion of resulting tax levels. In line with data for industrialized countries household saving increases at high debt-to-GDP levels and the correlation of the scal balance and current account decreases. We calibrate the model to Greece and simulate the debt crisis as a result of negative TFP shocks and nd that the model dynamics t to the data. -- |
| JEL: | E62 F32 H31 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79834&r=dge |
| By: | Reicher, Christopher Phillip |
| Abstract: | In this paper I discuss the estimation of the process governing the structural shocks (or wedges) to a DSGE model, arguing that a well-specified model would satisfy certain sets of moment conditions. Based on tests for overidentifying restrictions, I compare three specifications of the Taylor rule within a simple New Keynesian model. I find that a rule which allows for the Fed to respond to four lags of inflation shows less evidence of misspecification than one where the Fed responds only to contemporaneous inflation. Raising the coe cient on the output gap to 1 instead of 0.5 gives more ambiguous results. -- |
| JEL: | C12 C22 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79955&r=dge |
| By: | Denis Beau; Christophe Cahn; Laurent Clerc; Benoît Mojon |
| Abstract: | In this paper, we analyse the interactions between monetary and macro-prudential policies and the circumstances under which such interactions call for their coordinated implementation. We start with a review of the interdependencies between monetary and macro-prudential policies. Then, we use a DSGE model incorporating financial frictions, heterogeneous agents and housing, which is estimated for the euro area over the period 1985 -2010, to identify the circumstances under which monetary and macro-prudential policies may have compounding, neutral or conflicting impacts on price stability. We compare inflation dynamics across four “policy regimes” depending on: (a) the monetary policy objectives – that is, whether the policy instrument, the short-term interest rate factors in financial stability considerations by leaning against credit growth; and (b) the existence, or not, of an authority in charge of a financial stability objective through the implementation of macroprudential policies that can “lean against credit” without affecting the short-term interest rate. Our main result is that under most circumstances, macro-prudential policies have either a limited or a stabilizing effect on inflation. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:715&r=dge |
| By: | Toni Whited (University of Rochester); Jonas Fisher (Federal Reserve Bank of Chicago); Morris Davis (University of Wisconsin-Madison, School) |
| Abstract: | Cities exist because of the productivity gains arising from clustering production and workers, a process called agglomeration. How important is agglomeration for aggregate growth? This paper constructs a dynamic stochastic general equilibrium model of cities and uses it to estimate the effect of local agglomeration on aggregate growth. We combine aggregate time series and city-level panel data to estimate our model’s parameters by the Generalized Method of Moments. The estimates imply that local agglomeration has an economically and statistically significant impact on the growth rate of per capita consumption, raising it by about 10 percent. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:893&r=dge |
| By: | Offick, Sven; Winkler, Roland C. |
| Abstract: | A recent theoretical literature highlights the role of endogenous firm entry as an internal amplification mechanism of business cycle fluctuations. The amplification mechanism works through the competition and the variety effect. This paper tests the significance of this amplification mechanism, quantifies its importance, and disentangles the competition and the variety effect. To this end, we estimate a medium-scale real business cycle model with firm entry for the U.S. economy. The parameter governing the competition and variety effect is estimated to be statistically significant. We find that firm entry substantially amplifies output by 8.5 percent. The competition effect accounts for most amplification, whereas the variety effect only plays a minor role. -- |
| Keywords: | Bayesian estimation,Business Cycles,Competition Effect,Entry,Mark-ups,Variety Effect |
| JEL: | E20 E32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201401&r=dge |
| By: | McGrattan, Ellen R. (Federal Reserve Bank of Minneapolis); Prescott, Edward C. (Federal Reserve Bank of Minneapolis) |
| Abstract: | During the downturn of 2008–2009, output and hours fell significantly, but labor productivity rose. These facts have led many to conclude that there is a significant deviation between observations and current macrotheories that assume business cycles are driven, at least in part, by fluctuations in total factor productivities of firms. We show that once investment in intangible capital is included in the analysis, there is no inconsistency. Measured labor productivity rises if the fall in output is underestimated; this occurs when there are large unmeasured intangible investments. Microevidence suggests that these investments are large and cyclically important. |
| Keywords: | Intangible capital; Business cycles; Productivity |
| JEL: | E13 E32 |
| Date: | 2014–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:494&r=dge |
| By: | Loris Rubini |
| Abstract: | I study how growth, via structural transformation, affects volatility. Growth in the United States has led to a shift in resources from agriculture and manufacturing to services. Since the service sector is the least volatile, this shift can potentially reduce aggregate volatility. Existing studies have explored this idea by aggregating sectoral volatilities to the economy-wide volatility when the sector shares are independent of sectoral shocks. But theories of structural transformation highlight the strong links between these: sectoral shocks are the source of changes in sectoral shares. I incorporate this relationship by developing a fully specified dynamic model of structural transformation with real business cycles, and use it to derive the equilibrium relationship between sectoral and aggregate volatilities. I then feed into my model the measured sectoral volatilities and growth trends. I find that growth, via structural transformation, can account for one third of the reduction in the volatility of US GDP in 1984-2007 compared to 1947-1983. This contrasts existing work that suggests that aggregate volatility is largely influenced by sectoral composition. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:444&r=dge |
| By: | Hafedh Bouakez; Michel Guillard; Jordan Roulleau-Pasdeloup |
| Abstract: | Public investment represents a non-negligible fraction of total public expenditures. Yet, theoretical studies of the effects of public spending when the economy is stuck in a liquidity trap invariably assume that government expenditures are entirely wasteful. In this paper, we consider a new-Keynesian economy in which a fraction of government spending increases the stock of public capital-which is an external input in the production technology-subject to a time-to-build constraint. In this environment, an increase in public spending has two conflicting effects on current and expected inflation: a positive effect due to higher aggregate demand and a negative effect reflecting future declines in real marginal cost. We solve the model analytically both in normal times and when the zero lower bound (ZLB) on nominal interest rates binds. We show that under relatively short time-to-build delays, the spending multiplier at the ZLB decreases with the fraction of public investment in a stimulus plan. Conversely, when several quarters are required to build new public capital, this relationship is reversed. In the limiting case where a fiscal stimulus is entirely allocated to investment in public infrastructure, the spending multiplier at the ZLB is 4 to 5 times larger than in normal times when the time to build is 12 quarters. |
| Keywords: | Public spending, Public investment, Time to build, Multiplier, Zero lower bound |
| JEL: | E4 E52 E62 H54 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1402&r=dge |
| By: | Matias Escudero; Martin Gonzalez-Rozada; Martin Sola |
| Abstract: | Using a dynamic stochastic general equilibrium model with financial frictions we study the effects of a rule that incorporates not only the interest rate but also the legal reserve requirements as instruments of the monetary policy. We evaluate the effectiveness of both instruments to accomplish the inflationary and/or financial stability objectives of the Central Bank of Uruguay. The main findings are that: (i) reserve requirements can be used to achieve the inflationary objectives of the Central Bank. However, reducing inflation using this instrument, it also produces a real appreciation of the Uruguayan peso; (ii) when the Central Bank uses the monetary policy rate as an instrument, the effect of the reserve requirements is to contribute to reduce the negative impact over consumption, investment and output of an eventual increase in this rate. Nevertheless, the quantitative results in terms of inflation reduction are rather poor; and (iii) the monetary policy rate becomes more effective to reduce inflation when the reserve requirement instrument is solely directed to achieve financial stability and the monetary policy rate used to achieve the inflationary target. Overall, the main policy conclusion of the paper is that having a non-conventional policy instrument, when well-targeted, can help effectively inflation control. Moving reserve requirements can also be instrumental in offsetting the impact of monetary policy on the real exchange rate. |
| Keywords: | dynamic stochastic general equilibrium models, financial frictions, monetary policy, reserve requirements, inflation targeting, non-conventional policy instruments |
| JEL: | E52 E58 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpecon:wp201401&r=dge |
| By: | Jose Rodriguez Mora (University of Edinburgh) |
| Abstract: | Some agents are better treated by the market than others. In our model this arises from statistical discrimination based on the observables on the background of an individual. Advantages thus created increase the intergenerational correlation of income. This has some strong implications. First, it implies that intergenerational mobility and income inequality should correlate negatively. Second, the amplication mechanism generated by advantages may produce a multiplicity of steady states. Third, the introduction of "meritocracy" (informative signals on talent) may actually decrease mobility due to general equilibrium effects: by increasing income dispersion, they also increase the value of background. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:872&r=dge |
| By: | Sacht, Stephen |
| Abstract: | In this paper we analyze a hybrid small-scale New-Keynesian model with an arbitrary frequency of the agents' synchronized decision making. We study the impact of various demand and supply shocks on the dynamics of the model variables. We show that the corresponding impulse-response functions of high-frequency versions of the model can qualitatively as well as quantitatively be fairly dissimilar from their quarterly counterparts. This can be explained by the decrease in the effectiveness of monetary policy responses to these shocks and the overall increase of inertia in the model variables. In particular, different kinds of frequency-dependent persistence effects occur, which dampen the pass-through of output gap movements into inflation rate dynamics as the period length decreases. The main conclusion is that DSGE modelling may be more sensitive to its choice of the agents' decision interval. -- |
| Keywords: | Hybrid New-Keynesian model,high-frequency modelling,monetary policy,frequency-dependent persistence |
| JEL: | C63 C68 E32 E52 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201402&r=dge |
| By: | Yong Wang (Hong Kong University of Science and Tech); Xuewen Liu (HKUST); Xi Li (HKUST) |
| Abstract: | This paper documents a hallmark feature of China’s state capitalism as the state controlling the economy in a vertical structure: State-owned enterprises (SOEs) monopolize key industries in the upstream, whereas the downstream industries are largely open to private competition. We develop a general-equilibrium model to show that this unique vertical structure, when combined with openness and labor abundance, is critical in explaining the puzzling fact that China’s SOEs outperformed non-SOEs in the past decade while the opposite was true in the 1990s. We show how the upstream SOEs extract rents from the liberalized downstream industries in the process of industrialization and globalization. The unprecedented prosperity of SOEs is shown to be an efficiency-undermining symptom of the incompleteness of market-oriented reforms rather than a proof of SOE superiority. Emergence, sustainability, redistributive effects, and general implications for other countries of this state capitalism are also discussed. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:853&r=dge |
| By: | Groll, Dominik |
| Abstract: | The New Keynesian DSGE literature has come to the consensus that, from the perspective of business cycle stabilization, countries are worse off in terms of welfare by forming a monetary union. This consensus, however, is based on the assumption of monetary policy being optimal. Using a standard two-country model, this paper shows that under suboptimal monetary policy, countries may gain in welfare by forming a monetary union, highlighting an important inherent benefit of fixing the exchange rate. Whether countries benefit from a monetary union depends primarily on the degree of price stickiness and how monetary policy is conducted: If prices are rather sticky and if monetary policy is not very aggressive towards inflation, forming a monetary union is beneficial. In contrast, asymmetries in the degree of price stickiness between countries are not of any importance for a monetary union to be welfare-enhancing or not. -- |
| JEL: | F41 F33 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79787&r=dge |
| By: | Arellano, Cristina (Federal Reserve Bank of Minneapolis); Bai, Yan (University of Rochester) |
| Abstract: | This paper studies an optimal renegotiation protocol designed by a benevolent planner when two countries renegotiate with the same lender. The solution calls for recoveries that induce each country to default or repay, trading off the deadweight costs and the redistribution benefits of default independently of the other country. This outcome contrasts with a decentralized bargaining solution where default in one country increases the likelihood of default in the second country because recoveries are lower when both countries renegotiate. The paper suggests that policies geared at designing renegotiation processes that treat countries in isolation can prevent contagion of debt crises. |
| Keywords: | Renegotiation policy; Contagion; Sovereign default |
| JEL: | F30 G01 |
| Date: | 2014–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:495&r=dge |
| By: | Vogel, Lukas; Kollmann, Robert; Ratto, Marco; Roeger, Werner; In 't Veld, Jan |
| Abstract: | The paper estimates a structural model to analyse the drivers of Germany's external surplus since the start of EMU. The analysis suggests that the most important factors behind the build-up of Germany's external surplus have been the disappearance of country risk premia in the context of EMU, which has led to the convergence of interest rates in the euro area, strong growth in emerging economies with the associated increase in the demand for German exports, exogenous changes in savings behaviour and wage moderation/labour market reform in Germany. Germany's trade surplus has reduced net exports in the rest of the euro area and the rest of the world alike, but spillover for GDP is likely to be positive. -- |
| JEL: | F41 C54 F32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79896&r=dge |