|
on Dynamic General Equilibrium |
| By: | Sapci, Ayse (Department of Economics, Colgate University) |
| Abstract: | This paper documents the cyclical properties of financial intermediation costs and uses their dynamics to explain excess consumption volatility differences across countries in a dynamic stochastic general equilibrium (DSGE) framework. I find that financial development levels have no role in explaining excess consumption volatilities. Instead, the volatility of the financial sector plays the determinative role. The model matches the data, finding excess consumption volatility to be four times higher in an average emerging country compared to the US. This paper also shows that if the US had the same intermediation cost structure as the average emerging country, deteriorations in the production, consumption, labor market, business investment, and real estate market following a financial shock would increase sixfold, on average. |
| Keywords: | Financial intermediation costs; Excess consumption volatility; Housing market; Financial development; Financial shocks |
| JEL: | E21 E32 E44 G01 G21 O16 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cgt:wpaper:2014-04&r=dge |
| By: | Chen, Han (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Standard dynamic stochastic general equilibrium (DSGE) models assume a Taylor rule and forecast an increase in interest rates immediately after the 2007-2009 economic recession given the predicted output and inflation, contradictory to the extended period of near-zero interest rate policy (ZIRP) conducted by the Federal Reserve. In this paper, I study two methods of modeling the ZIRP in DSGE models: the perfect foresight rational expectations model and the Markov regime-switching model, which I develop in this paper. In this regime-switching model, I assume that, in one regime, the policy follows a Taylor rule, while, in the other regime, it involves a zero interest rate. I also construct the optimal filter to estimate this regime-switching DSGE model with Bayesian methods. I fit those modified DSGE models to the U.S. data from the third quarter of 1987 to the third quarter of 2010, and then, starting from the fourth quarter of 2010, I simulate the U.S. economy forward with and without the ZIRP intervention. I compare the predicted paths of the macro variables, and I find that the ZIRP intervention has a significant effect. The estimated regime-switching model I develop implies a substantial stimulative effect (on average a 0.12% increase in output growth rate and a 0.9% increase in inflation accumulatively over 20 quarters if ZIRP is kept for 6 quarters). The actual path from the fourth quarter of 2010 onward is closer to the predicted path derived from the regime-switching model than that generated by the perfect foresight model. The perfect foresight model generates an explosive and spurious rise in inflation. Therefore, the regime-switching model I propose is more appropriate to assess the effectiveness of the ZIRP, which is effective in stimulating the economy. |
| Keywords: | Regime switching; zero interest rate policy; unconventional monetary policy |
| Date: | 2014–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-38&r=dge |
| By: | Den Haan, Wouter |
| Abstract: | Changes in the stock of inventories are important for fluctuations in aggregate output. However, the possibility that firms do not sell all produced goods and inventory accumulation are typically ignored in business cycle models. This paper captures this with a goods-market friction. Using US data, "goods-market efficiency" is shown to be strongly procyclical. By including both a goods-market friction and a standard labor-market search friction, the model developed can substantially magnify and propagate shocks. Despite its simplicity, the model can also replicate key inventory facts. However, when these inventory facts are used to discipline parameter values, then goods-market frictions are quantitatively not very important. |
| Keywords: | matching models, search frictions, magnification, propagation |
| JEL: | E12 E24 E32 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1402&r=dge |
| By: | DeGroot, Oliver (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | This paper examines how monetary policy affects the riskiness of the financial sector's aggregate balance sheet, a mechanism referred to as the risk channel of monetary policy. I study the risk channel in a DSGE model with nominal frictions and a banking sector that can issue both outside equity and debt, making banks' exposure to risk an endogenous choice, and dependent on the (monetary) policy environment. Banks' equilibrium portfolio choice is determined by solving the model around a risk-adjusted steady state. I find that banks reduce their reliance on debt finance and decrease leverage when monetary policy shocks are prevalent. A monetary policy reaction function that responds to movements in bank leverage or to movements in credit spreads can incentivize banks to increase their use of debt finance and increase leverage, ceteris paribus, increasing the riskiness of the financial sector for the real economy. |
| Keywords: | Financial intermediation; portfolio choice; debt and equity; monetary policy; risk-adjusted steady state |
| Date: | 2014–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-31&r=dge |
| By: | Arseneau, David M. (Board of Governors of the Federal Reserve System (U.S.)); Epstein, Brendan (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Skill-mismatch employment occurs when high-skilled individuals accept employment in jobs for which they are over-qualified. These employment relationships can be beneficial because they allow high-skilled individuals to more rapidly transition out of unemployment. They come at the cost, however, in the form of lower wage compensation. Moreover, an externality arises as high-skilled individuals do not take into account the effect that their search activity in the market for low-tech jobs has on low-skilled individuals. This paper presents a tractable general equilibrium model featuring mismatch employment and on-the-job search to articulate these tradeoffs. We derive a set of efficiency conditions that describe the labor market distortions associated with these two model features and illustrate how they alter the standard notion of the labor wedges inherent in general equilibrium search models. Finally, we calibrate the model to U.S. data and show that the distortions associated with mismatch employment are largely distributional and can be quantitatively large. |
| Keywords: | Job-to-job transitions; labor market frictions; skill premium |
| Date: | 2014–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-42&r=dge |
| By: | Camille Landais (London School of Economics (LSE), Economics Department); Pascal Michaillat (London School of Economics (LSE), Economics Department; Centre for Macroeconomics (CFM)); Emmanuel Saez (University of California-Berkeley, Department of Economics) |
| Abstract: | This paper analyzes optimal unemployment insurance (UI) over the business cycle. We consider a general matching model of the labor market. For a given UI, the economy is efficient if tightness satisfies a generalized Hosios condition, slack if tightness is too low, and tight if tightness is too high. The optimal UI formula is the sum of the standard Baily-Chetty term, which trades off search incentives and insurance, and an externality-correction term, which is positive if UI brings the economy closer to efficiency and negative otherwise. Our formula therefore deviates from the Baily-Chetty formula when the economy is inefficient and UI affects labor market tightness. In a model with rigid wages and concave production function, UI increases tightness; hence, UI should be more generous than in the Baily-Chetty formula when the economy is slack, and less generous otherwise. In contrast, in a model with linear production function and Nash bargaining, UI increases wages and reduces tightness; hence, UI should be less generous than in the Baily-Chetty formula when the economy is slack, and more generous otherwise. Deviations from the Baily-Chetty formula can be quantitatively large using realistic empirical parameters. |
| Keywords: | business cycle, unemployment insurance |
| JEL: | E24 E27 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1303&r=dge |
| By: | Goldberg, Jonathan E. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | I show that, due to imperfect risk sharing, aggregate shocks to uncertainty about idiosyncratic return on investment generate economic contractions with elevated risk premia and a decrease in the risk-free rate. I present a tractable real business cycle model in which firms experience idiosyncratic shocks, to which managers are at least partially exposed; the distribution of these shocks is time-varying and stochastic. I show that the path for aggregate quantities, the price of physical capital, and the equity premium are the same as in a model without idiosyncratic risk, but with time-preference shocks. That is, in response to an increase in idiosyncratic uncertainty, the response of these variables is the same as if there were no idiosyncratic uncertainty but managers were suddenly reluctant to invest. However, time-preference and idiosyncratic uncertainty shocks are not isomorphic: an increase in idiosyncratic uncertainty leads to greater demand for precautionary saving and hence a decrease in the risk-free rate; in contrast, an increase in impatience has the opposite effect. In addition, with an idiosyncratic uncertainty shock, investment in physical capital can remain low even after the stock market and firm profitability recover, because managers cannot fully transfer idiosyncratic risk to diversified investors. Thus, shocks to idiosyncratic investment risk can explain, qualitatively, the aftermath of financial panics--elevated risk premia, a sharp and persistent decrease in investment, and a decrease in the risk-free rate. In a calibration, an increase in idiosyncratic investment risk similar to that experienced during the Great Recession leads firms to invest as if their cost of capital were 10 percentage points higher than the cost of capital implied by financial markets, and to a large decrease in the real risk-free rate. |
| Keywords: | Incomplete markets; idiosyncratic risk; business cycles; equity premium; risk-free rate |
| Date: | 2014–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-05&r=dge |
| By: | Peterman, William B. (Board of Governors of the Federal Reserve System (U.S.)); Sommer, Kamila (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | This paper quantifies the welfare implications of the U.S. Social Security program during the Great Recession. We find that the average welfare losses due to the Great Recession for agents alive at the time of the shock are notably smaller in an economy with Social Security relative to an economy without a Social Security program. Moreover, Social Security is particularly effective at mitigating the welfare losses for agents who are poorer, less productive, or older at the time of the shock. Importantly, in addition to mitigating the welfare losses for these potentially more vulnerable agents, we do not find any specific age, income, wealth or ability group for which Social Security substantially exacerbates the welfare consequences of the Great Recession. Taken as a whole, our results indicate that the U.S. Social Security program is particularly effective at providing insurance against business cycle episodes like the Great Recession. |
| Keywords: | Social Security; recessions; overlapping generations |
| Date: | 2014–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-13&r=dge |
| By: | Carlos Garriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California-Santa Barbara (UCSB)); Roman Šustek (Queen Mary, School of Economics and Finance) |
| Abstract: | Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates. |
| Keywords: | Mortgages, debt servicing costs, monetary policy, transmission mechanism, housing investment |
| JEL: | E32 E52 G21 R21 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1306&r=dge |
| By: | Cairo, Isabel (Universitat Pompeu Fabra); Cajner, Tomaz (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Why do more educated workers experience lower unemployment rates and lower employment volatility? A closer look at the data reveals that these workers have similar job finding rates, but much lower and less volatile separation rates than their less educated peers. We argue that on-the-job training, being complementary to formal education, is the reason for this pattern. Using a search and matching model with endogenous separations, we show that investments in match-specific human capital reduce the outside option of workers, implying less incentives to separate. The model generates unemployment dynamics that are quantitatively consistent with the cross-sectional empirical patterns. |
| Keywords: | Unemployment; education; on-the-job training; specific human capital |
| Date: | 2013–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-09&r=dge |
| By: | Queraltó, Albert (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | This paper documents highly persistent effects of financial crises on output, labor productivity and employment in a sample of emerging economies. To address these facts, it introduces a quantitative macroeconomic model that includes endogenous TFP growth through firm creation. Firm creators obtain funding from a financial intermediation sector which is subject to frictions. These frictions become especially severe in a financial crisis, increasing the cost of credit for firm creators and thereby lowering the growth rate of aggregate TFP. As a consequence, the model produces medium-run dynamics following crises that are in line with the data. |
| Keywords: | Business cycles; financial crises; total factor productivity |
| Date: | 2013–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1097&r=dge |
| By: | Olovsson, Conny (Research Department, Central Bank of Sweden) |
| Abstract: | Optimal taxes for Europe and the U.S. are derived in a realistically calibrated model in which agents buy consumption goods and services and use home capital and labor to produce household services. The optimal tax rate on services is substantially lower than the tax rate on goods. Specifically, the planner cannot tax home production directly and instead lowers the tax rate on market services to increase the relative price of home production. The optimal tax rate on the return to home capital is strictly positive and the welfare gains from switching to optimal taxes are large. |
| Keywords: | Optimal Taxation; Household Production; Time Allocation; Labor Supply |
| JEL: | D13 H21 J22 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0284&r=dge |
| By: | Lin, Li (International Monetary Fund); Tsomocos, Dimitrios P. (University of Oxford); Vardoulakis, Alexandros (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | This paper assesses the role that monetary policy plays in the decision to default using a General Equilibrium model with collateralized loans, trade in fiat money and production. Long-term nominal loans are backed by collateral, the value of which depends on monetary policy. The decision to default is endogenous and depends on the relative value of the collateral to face value of the loan. Default results in foreclosure, higher borrowing costs, inefficient investment and a decrease in total output. We show that pre-crisis contractionary monetary policy interacts with Fisherian debt-deflation dynamics and can increase the probability that a crisis occurs. |
| Keywords: | Default; collateral; debt deflation |
| Date: | 2014–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-37&r=dge |
| By: | Mierau, Jochen O.; Heijdra, Ben J.; Trimborn, Timo (Groningen University) |
| Abstract: | We study the short-, medium-, and long-run implications of stimulating annuity markets in a dynamic general-equilibrium overlapping-generations model. We find that beneficial partial-equilibrium effects of stimulating annuity markets are counteracted by negative general-equilibrium repercussions. Balancing the positive partial-equilibrium and negative general-equilibrium forces we show that there exists some intermediate level of annuitization such that long-run welfare is maximized. Studying the transition to the optimal degree of annuitization shows that currently middle-aged individuals stand to gain most from the stimulation of annuity markets |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugsom:14015-eef&r=dge |
| By: | Stefano Bosi; David Desmarchelier; Lionel Ragot |
| Abstract: | Some recent empirical contributions have pointed out a significant negative impact of pollution on labor supply. These impacts have been largely ignored in the theoretical literature, which, instead, focused on the case of pollution effects on consumption demand. In this paper, we study the short and long-run effects of pollution in a Ramsey model where pollution and labor supply are nonseparable arguments in households’ preferences. We determine sufficient conditions for existence and uniqueness of a longterm equilibrium and we show how large (negative) effects of pollution on labor supply may promotes macroeconomic volatility (deterministic cycles near the steady state) through a flip bifurcation. |
| Keywords: | pollution, endogenous labor supply, Ramsey model. |
| JEL: | E32 O44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2014-34&r=dge |
| By: | Petr Sedlacek (Rheinische Friedrich-Wilhelms-Universität Bonn (University of Bonn), Wirtschaftswissenschaftlicher Fachbereich (Economics Department), Bonn Graduate School of Economics); Vincent Sterk (Centre for Macroeconomics (CFM)) |
| Abstract: | This paper shows that job creation of cohorts of U.S. firms is strongly infl uenced by aggregate conditions at the time of their entry. Using data from the Business Dynamics Statistics (BDS) we follow cohorts of young firms and document that their employment levels are very persistent and largely driven by the intensive margin (average firm size) rather than the extensive margin (number of firms). To differentiate changes in the composition of startup cohorts from post-entry choices and to evaluate aggregate effects, we estimate a general equilibrium firm dynamics model using BDS data. We find that even for older firms, the aggregate state at birth drives the vast majority of variations in employment across cohorts of the same age. The key force behind this result are fl uctuations in the composition of startup cohorts with respect to firms' potential to grow large. At the aggregate level, factors determined at the startup phase account for the large low-frequency fl uctuations observed in the employment rate. |
| Keywords: | Firm Dynamics, Heterogeneous Agents, Maximum Likelihood, DSGE |
| JEL: | E32 D22 L11 M13 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1403&r=dge |
| By: | Varang Wiriyawit |
| Abstract: | Extracting a trend component from nonstationary data is one of the first challenges in estimating a DSGE model. The misspecification of the component can distort structural parameter estimates and translate into a bias in policy-relevant statistic estimates. This paper investigates how important this bias is to estimated policy implications within a DSGE framework. The quantitative results suggest the bias in parameter estimates due to trend misspecification can result in significant inaccuracies in estimating statistics of interest. This then misleads policy conclusions. Particularly, a misspecified model is estimated using a deterministic-trend specification when the true process is a random-walk with drift. |
| JEL: | C51 C52 E37 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2014-615&r=dge |
| By: | Ionescu, Felicia (Board of Governors of the Federal Reserve System (U.S.)); Ionescu, Marius (Colgate University) |
| Abstract: | We analyze the interactions between two different forms of unsecured credit and their implications for default behavior of young U.S. households. One type of credit mimics credit cards in the United States and the default option resembles a bankruptcy filing under Chapter 7; the other type of credit mimics student loans in the United States and the default option resembles Chapter 13. In the credit card market a financial intermediary offers a menu of interest rates based on individual default risk, which account for borrowing and repayment behavior in both markets. In the student loan market, the government sets the interest rate and chooses a wage garnishment to pay for the cost associated with default. We prove the existence of a steady-state equilibrium and characterize the circumstances under which a household defaults on each of these loans. We demonstrate that the institutional differences between the two markets make borrowers prefer to default on student loans rather than on credit card debt. We find that the increase in student loan debt together with the expansion of the credit card market fully explains the increase in the default rate for student loans in recent normal years (2004-2007). Worse labor outcomes for young borrowers during the Great Recession (2008-2009) significantly amplified student loan default, whereas credit card market contraction during this period helped reduce this effect. At the same time, the accumulation of student loan debt did not affect much the default risk in the credit card market during normal times, but significantly increased it during the Great Recession. An income contingent repayment plan for student loans completely eliminates the default risk in the credit card market and induces important redistribution effects. This policy is beneficial (in a welfare improving sense) during the Great Recession but not during normal times. |
| Keywords: | Default; student loans; credit cards; Great Recession |
| Date: | 2014–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-14&r=dge |
| By: | Elton Beqiraj; Massimiliano Tancioni |
| Abstract: | Two labor market targeted …scal policies, a hiring subsidy and a wage subsidy for new hires of labor, are evaluated, and their macroeconomic e¤ects compared with those of standard …scal instruments. The analyses are based on an extension of a monetary, open economy, search and matching model in which a distinction between the wage negotiated by newly hired workers and incumbents is introduced. The model is estimated with Bayesian techniques using data for high unemployment countries of the EZ periphery (Greece, Ireland, Italy, Portugal and Spain). Posterior simulations show that, the labor market policies are not superior to standard fi…scal expansions in stimulating a timely response of economic activity, and their output and employment-enhanching effects are dominant only in the long term and at the Greece and Portugal estimates. The consideration of a liquidity trap environment marginally reinforces these results, showing that expansionary policy actions triggering a defl‡ation can be procyclical when the interest rate zero-lower-bound binds. |
| Keywords: | wage and hiring subsidies, newly hired workers, search and matching, fiÂ…scal multiplier, zero lower bound, Bayesian estimation. |
| JEL: | E62 H25 H30 J20 C11 |
| URL: | http://d.repec.org/n?u=RePEc:sap:wpaper:wp165&r=dge |
| By: | Giuseppe Moscariniy (Yale University, Economics Department); Fabien Postel-Vinay (University College London (UCL), Department of Economics; Centre for Macroeconomics (CFM)) |
| Abstract: | We study employment reallocation across heterogeneous employers through the lens of a dynamic job-ladder model, where more productive employers spend more hiring effort and are more likely to succeed in hiring because they offer more. As a consequence, an employer's size is a relevant proxy for productivity. We exploit newly available U.S. data from JOLTS on employment ows by size of the establishment. Our parsimonious job ladder model fits the facts quite well, and implies `true' vacancy postings by size that are more in line with gross fl ows and intuition than JOLTS' actual measures of job openings, previously criticized by other authors. Focusing on the U.S. experience in and around the Great Recession, our main finding is that the job ladder stopped working in the GR and has not yet fully resumed. |
| Keywords: | employment reallocation, job ladder |
| JEL: | E24 E27 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1304&r=dge |