|
on Dynamic General Equilibrium |
|
Issue of 2014‒04‒29
fourteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Artheya, Kartik (Federal Reserve Bank of Richmond); Owens, Andrew (Federal Reserve Bank of Richmond); Schwartzman, Felipe (Federal Reserve Bank of Richmond) |
| Abstract: | The aftermath of the recent recession has seen numerous calls to use transfers to poorer households as a means to enhance aggregate activity. We show that the key to understanding the direction and size of such interventions lies in labor supply decisions. We study the aggregate impact of short-term redistributive economic policy in a standard incomplete-markets model. We characterize analytically conditions under which redistribution leads to an increase or decrease in effective hours worked, and hence, output. We then show that under the parameterization that matches the wealth distribution in the U.S. economy (Castaneda et al., 2003), wealth redistribution leads to a boom in consumption, but not in output. |
| Keywords: | Multipliers; Redistribution; Labor supply; Idiosyncratic Risk |
| JEL: | D90 E21 E25 E63 |
| Date: | 2014–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-04&r=dge |
| By: | Cea-Echenique, Sebastián; Torres-Martínez, Juan Pablo |
| Abstract: | We build a general equilibrium model where agents are subject to endogenous trading constraints, making the access to financial trade dependent on prices and consumption decisions. Besides, our framework is compatible with the existence of endogenous financial segmentation and credit markets' exclusion. Two results of equilibrium existence are shown. In the first one, we assume individuals can super-replicate financial payments buying durable commodities and investing in assets that give liquidity to all agents. In the second result, under strict monotonicity of preferences, we suppose there are agents that may compensate with increments in present demand the losses of well-being generated by reductions of future consumption. |
| Keywords: | Incomplete Markets; General Equilibrium; Endogenous Trading Constraints |
| JEL: | C62 D52 D53 G1 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55359&r=dge |
| By: | Cogley, Timothy (New York University); Matthes, Christian (Federal Reserve Bank of Richmond); Sbordone, Argia M. (Federal Reserve Bank of New York) |
| Abstract: | Highly volatile transition dynamics can emerge when a central bank disinflates while operating without full transparency. In our model, a central bank commits to a Taylor rule whose form is known but whose coefficient are not. Private agents learn about policy parameters via Bayesian updating. Under McCallum's (1999) timing protocol, temporarily explosive dynamics can arise, making the transition highly volatile. Locally-unstable dynamics emerge when there is substantial disagreement between actual and perceived feedback parameters. The central bank can achieve low average inflation, but its ability to adjust reaction coefficients is more limited. |
| Keywords: | Inflation; Monetary policy; Learning; Policy reforms; Transitions |
| JEL: | E31 E52 |
| Date: | 2014–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-07&r=dge |
| By: | Lubik, Thomas A. (Federal Reserve Bank of Richmond); Sarte, Pierre-Daniel G. (Federal Reserve Bank of Richmond); Schwartzman, Felipe (Federal Reserve Bank of Richmond) |
| Abstract: | Beginning in the mid-1980s, the nature of U.S. business cycles changed in important ways, as made evident by distinctive shifts in the comovement and relative volatilities of key economic aggregates. These include labor productivity, hours, output, and inventories. Unlike the widely documented change in absolute volatility over that period, known as the Great Moderation, these shifts in comovement and relative volatilities persist into the Great Recession. To understand these changes, we exploit the fact that inventory data are informative about sources of business cycles. Specifically, they provide additional information relative to aggregate investment regarding firms' intertemporal decisions. In this paper, we show that the "investment wedge" estimated with inventories, unlike previous measures, correlates well with established independent measures of credit market frictions. Furthermore, contrary to previous findings, our generalized investment wedge informed by inventory behavior plays a key role in explaining the shifts in U.S. business cycles observed after the mid-1980s. |
| Keywords: | Business Cycles; Inventories; Investment Wedge; Financial Frictions |
| JEL: | E32 E44 |
| Date: | 2014–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-06&r=dge |
| By: | Lassila, Jukka; Valkonen, Tarmo |
| Abstract: | Can longer working lives bring sufficient tax revenues to pay for the growing public health and care expenditure that longer lifetimes cause? We review studies concerning retirement decisions and pension policies, the role of mortality in health and long-term care costs, and errors in mortality projections. We combine key results into a numerical OLG model where changes in mortality have direct effects both on working careers and on per capita use of health and long-term care services. The model has been calibrated to the Finnish economy and demographics. Although there are huge uncertainties concerning future health and long-term care expenditure when people live longer, our simulations show that without policies directed to disability admission rules and old-age pension eligibility ages, working lives are unlikely to extend sufficiently. But, importantly, with such policies it seems quite possible that generations enjoying longer lifetimes can also pay for the full costs by working longer. |
| Keywords: | life expectancy, working careers, health and long-term care expenditure, fiscal sustainability |
| JEL: | H30 H63 H68 J11 |
| Date: | 2014–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:rif:wpaper:24&r=dge |
| By: | Artheya, Kartik (Federal Reserve Bank of Richmond); Reilly, Devin (University of Pennsylvania); Simpson, Nicole B. (Colgate University) |
| Abstract: | The Earned Income Tax Credit (EITC) is the single most important transfer program in place in the United States. An aspect of the EITC that has received little attention thus far is its role as a public insurance program. Yet, the structure of the EITC necessarily protects its primary class of recipients, unskilled single mothers, against major risks they face to both wages and changes in family structure. Our study provides the first quantitative statement about the insurance provided by the EITC. We study a dynamic model of consumption, savings, and labor supply in which households face wage and demographic risk, but have only limited self-insurance capacity. We use the model to compare outcomes under the EITC to the counterfactual in which it is completely eliminated. We find that the EITC provides substantial insurance to unskilled single mothers: The program reduces consumption volatility, as measured by the coefficient of the variation, by 12 percentage points or more, even as it allows these households to save less. Importantly, this insurance provision may not be compromising incentives to work: The model suggests that the EITC increases the labor supply of unskilled single mothers substantially at the extensive margin. |
| Keywords: | Taxation and Subsidies; Labor Supply; Insurance |
| JEL: | H22 H24 J22 |
| Date: | 2014–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-11&r=dge |
| By: | Josef Falkinger |
| Abstract: | This paper presents a general equilibrium model with technological uncertainty, financial markets and imperfect information. The future consists of uncertain environments that are more or less clearly distinguishable (measurable). This limits the possibilities of specialization and diversification. Households have no direct information about the productivity of risky technologies. They rely on the information conveyed by the set of financial products provided by the financial sector, the pay-off promises of the products and their prices. Unreliable information-processing by financial markets leads to deception of households. As a result, extending the space spanned by financial products is not unambiguously good. This suggests a policy rule which ties financial innovations to the experience base of the economy. |
| Keywords: | Real and financial economics, incomplete knowledge, risk and uncertainty, financial crisis, size of financial sector, responsible finance |
| JEL: | D53 D83 G01 G21 B41 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:154&r=dge |
| By: | P. Rupert; G. Zanella |
| Abstract: | We document empirical life cycle profiles of wages, earnings, and hours of work for pay from the Panel Study of Income Dynamics, following the same workers for up to four decades. For six of the eight cohorts we analyze the wage profile does not decline with age (not before 65, at least), while the earnings profile always does. The discrepancy is explained by a sharp drop in the hours of work for pay profile beginning shortly after age 50, when many workers start a smooth transition into retirement by working progressively fewer hours. This pattern is not an artifact of staggered abrupt retirement, and is robust to attrition and selection-correction (i.e., taking into account that the composition of our sample, for a given cohort, changes over time). We explore the nontrivial restrictions on dynamic models of the aggregate economy that this evidence suggests, and we provide numerical profiles that can be readily used in quantitative macroeconomic analysis. |
| JEL: | E24 J13 J22 J24 J26 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp936&r=dge |
| By: | Rong Hai (Department of Economics, University of Chicago); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Dirk Krueger (Department of Economics, University of Pennsylvania) |
| Abstract: | We propose a new category of consumption goods, memorable goods, that generate a flow of utility after consumption. We analyze an otherwise standard consumption model that distinguishes memorable goods from other nondurable goods. Consumers optimally choose lumpy consumption of memorable goods. We then empirically document significant differences between levels and volatilities of memorable and other nondurable good expenditures. In two applications we find that the welfare cost of consumption fluctuations driven by income shocks are significantly overstated if memorable goods are not accounted for and that estimates of excess sensitivity of consumption might be entirely due to memorable goods. |
| Keywords: | Memorable Goods, Consumption Volatility, Welfare Cost |
| JEL: | D91 E21 |
| Date: | 2013–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:14-012&r=dge |
| By: | Martin Kuncl |
| Abstract: | This paper studies the effciency of financial intermediation through securitization with asymmetric information about the quality of securitized loans. In this theoretical model, I show that, in general, by providing reputation-based implicit recourse, the issuer of a loan can credibly signal its quality. However, in boom stages of the business cycle, information on loan quality remains private, and lower quality loans accumulate on balance sheets. This deepens a subsequent downturn. The longer the duration of a boom, the deeper will be the fall of output in a subsequent recession. In recessions, the model also produces amplification of adverse selection problems on re-sale markets for securitized loans. These are especially severe after a prolonged boom period and when securitized loans of high quality are no longer traded. Finally, the model suggests that excessive regulation that requires higher explicit risk-retention by the originators of loans can adversely affect both quantity and quality of investment in the economy. |
| Keywords: | securitization; financial crisis; asymmetric information; reputation; implicit recourse; market shutdowns; macro-prudential policy; |
| JEL: | E32 E44 G01 G20 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp506&r=dge |
| By: | Lubik, Thomas A. (Federal Reserve Bank of Richmond); Matthes, Christian (Federal Reserve Bank of Richmond) |
| Abstract: | We argue in this paper that the Great Inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices. We show, however, that the Federal Reserve inadvertently pursued policies that were not anti-inflationary enough because it did not fully understand the economic environment it was operating in. Specifically, it had imperfect knowledge about the structure of the U.S. economy and it was subject to data misperceptions. The real-time data flow at that time did not capture the true state of the economy, as large subsequent revisions showed. It is the combination of learning about the economy and, more importantly, the use of data riddled with measurement error that resulted in policies, which the Federal Reserve believed to be optimal, but when implemented led to equilibrium indeterminacy in the economy. |
| Keywords: | Federal Reserve; Great Moderation; Bayesian Estimation; Least Squares Learning |
| JEL: | C11 C32 E52 |
| Date: | 2014–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-02&r=dge |
| By: | Chan, Rosanna |
| Abstract: | Under financial constraints, exporting may have less to do with productivity and more to do with financial resources. The established relationship between exporting and productivity would differ when examined through the lens of the working capital needs of the firm. The hypothesis that working capital matters in the firm's exporting decision is explored in two ways: first, by articulating a dynamic working capital model of the firm that incorporates the firm's export decision. Secondly, by testing the hypothesis empirically using a unique firm level dataset from Bangladesh, where issues of financial constraints are particularly acute. The model shows that productivity determines export status of the firm as long as it is not under financial constraints. However, under financial constraints, export status is less dependent on productivity and more dependent on the availability of working capital. Empirical results support the model's prediction. The relationship between exporting time and the need for greater liquidity is also borne out empirically as shown by a positive and significant correlation between the amount of working capital and the distance of export destination. An important policy implication from the analysis is that short term liquidity is critical in allowing productive firms to export and that access to finance may prevent the benefits of trade liberalization within a country to be fully realized. |
| Keywords: | Economic Theory&Research,Banks&Banking Reform,Access to Finance,Debt Markets,Labor Policies |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6839&r=dge |
| By: | Menzio, Guido (University of Pennsylvania and NBER); Trachter, Nicholas (Federal Reserve Bank of Richmond) |
| Abstract: | The paper studies equilibrium pricing in a product market for an indivisible good where buyers search for sellers. Buyers search sequentially for sellers but do not meet every seller with the same probability. Specifically, a fraction of the buyers' meetings lead to one particular large seller, while the remaining meetings lead to one of a continuum of small sellers. In this environment, the small sellers would like to set a price that makes the buyers indifferent between purchasing the good and searching for another seller. The large seller would like to price the small sellers out of the market by posting a price that is low enough to induce buyers not to purchase from the small sellers. These incentives give rise to a game of cat and mouse, whose only equilibrium involves mixed strategies for both the large and the small sellers. The fact that the small sellers play mixed strategies implies that there is price dispersion. The fact that the large seller plays mixed strategies implies that prices and allocations vary over time. We show that the fraction of the gains from trade accruing to the buyers is positive and nonmonotonic in the degree of market power of the large seller. As long as the large seller has some positive but incomplete market power, the fraction of the gains from trade accruing to the buyers depends in a natural way on the extent of search frictions. |
| Keywords: | Imperfect competition; Search frictions; Price dispersion |
| JEL: | D21 D43 |
| Date: | 2014–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-08&r=dge |
| By: | Hatchondo, Juan Carlos (Federal Reserve Bank of Richmond); Krusell, Per (IIES); Schneider, Martin (Stanford University) |
| Abstract: | This paper considers an asset market where investors have private information not only about asset payoffs, but also about their own exposure to an aggregate risk factor. In equilibrium, rational investors disagree about asset payoffs: Those with higher exposure to the risk factor are (endogenously) more optimistic about claims on the risk factor. Thus, information asymmetry limits risk sharing and trading volumes. Moreover, uncertainty about exposure amplifies the effect of aggregate exposure on asset prices, and can thereby help explain the excess volatility of prices and the predictability of excess returns. |
| Keywords: | Asset trading; Asset valuation |
| Date: | 2014–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-05&r=dge |