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on Dynamic General Equilibrium |
| By: | Maria Teresa Punzi (Department of Economics, Vienna University of Economics and Business); Caterina Mendicino (Economics and Research Department, Bank of Portugal) |
| Abstract: | This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkages between current account deficits and financial vulnerabilities. We develop a two-country dynamic stochastic general equilibrium (DSGE) model with heterogeneous households and collateralised debt. The model predicts that external shocks are important in driving current account deficits that are coupled with run-ups in house prices and household debt. In this context, optimal policy features an interest-rate response to credit and a LTV ratio that countercyclically responds to house price dynamics. By allowing an interest-rate response to changes in financial variables, the monetary policy authority improves social welfare, because of the large welfare gains accrued to the savers. The additional use of a countercyclical LTV ratio that responds to house prices, increases the ability of borrowers to smooth consumption over the cycle and is Pareto improving. Domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy. |
| Keywords: | house prices, financial frictions, global imbalances, saving glut, dynamic loan-to value ratios, monetary policy, optimized simple rules |
| JEL: | C33 E51 F32 G21 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp180&r=dge |
| By: | Yuliya Rychalovska; Massimiliano Marcellino (EUI) |
| Abstract: | In this paper we build and estimate a two-region DSGE model of a small open economy within the European Monetary Union. We evaluate the properties of the estimated model and assess its forecasting performance (point and density) relative to reduced form models such as VARs. In addition, we study the empirical validity of the DSGE model restrictions (based on micro-foundations) by applying a DSGE-VAR approach. Finally, the estimated model is used to analyze the sources of macroeconomic fluctuations and examine the We allow for a sufficiently rich specification which enables us to include unemployment as well as open economy variables such as the real exchange rate into the estimation procedure, along with the standard macroeconomic and labor market indicators. The model contains a set of frictions and structural shocks typically used in the DSGE literature. We evaluate the properties of the estimated model and assess its forecasting performance relative to reduced form models such as VARs. In addition, we study the empirical validity of the DSGE model restrictions by applying a DSGE-VAR approach. Finally, the estimated model is used to analyze the sources of macroeconomic fluctuations and examine the responses of the economy to structural shocks. The model is built in the New Keynesian tradition and contains real and nominal rigidities such as habit formation in consumption, price and wage stickiness as well as rich stochastic structure. The framework also incorporates the theory of unemployment as in Gali et al. (2011), small open economy aspects and a nominal interest rate that is set exogenously by the area-wide monetary authority. The model is estimated using Bayesian techniques. We demonstrate that the estimated DSGE model is relatively well identified, has good data fit and reasonably estimated parameters. In addition, the model shows a competitive forecasting performance (in terms of both point and density) compared to reduced form models such as VARs. In this respect, our results are in line with the conclusions reached in previous studies that the new generation of DSGE models no longer faces the tension between rigor and fit. In particular, we illustrate that the DSGE model produces sizable one-step-ahead forecasting gains in terms of RMSE and the Score over the unrestricted VAR, especially for such variables as GDP, real exchange rate, unemployment and real wages. The predictions stay competitive at longer forecasting horizons. DSGE-VAR analysis demonstrates that the optimal weight on the DSGE restrictions is significant and the VAR(2) correction is not helpful in improving the DSGE model fit. At the same time, the DSGE-based prior significantly improves the short term forecast accuracy of the unrestricted VAR for output, and also determines a superior performance of the DSGE-VAR model in predicting exchange rate, unemployment and wages over all the forecast horizons considered here. When compared to an atheoretical Minnesota-style prior, the DSGE restrictions appear to be more useful in forecasting output and REER, whereas the opposite is true for employment. Application of the model to the analysis of the business cycle fluctuations demonstrates that "open economy" disturbances such as relative price, foreign demand and interest rate shocks explain a significant portion of the variation of output growth, inflation, real exchange rate and employment. Price and wage markup shocks are important determinants of inflation and real wages dynamics respectively. |
| Keywords: | Euro Area, Luxembourg, General equilibrium modeling, Forecasting and projection methods |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5302&r=dge |
| By: | Thibaut Lamadon (University College London) |
| Abstract: | This paper examines how employer and worker specific productivity shocks transmit to wage and employment in an economy with search frictions and firm commitment. I develop an equilibrium search model with worker and firm shocks and characterize the optimal contract offered by competing firms to attract and retain workers. In equilibrium risk-neutral firms offer risk-averse workers contingent contracts where payments are back-loaded in good times and front-loaded in bad ones: the combination of search frictions, productivity shocks and private worker actions results in partial insurance against firm and worker shocks. I estimate the model on matched employer-employee data from Sweden, using information about co-workers to separately identify firm specific and worker specific earnings shocks. Preliminary estimates suggest that firm level shocks are responsible for about 20% of permanent income fluctuations, the remaining being accounted for by individual level shocks (30% to 40%) and by job mobility (40% to 50%). The wage contract attenuates 80% of individual productivity shocks but passes through 30% of firm productivity fluctuations. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:243&r=dge |
| By: | Fabia Carvalho; Fabia A. de Carvalho; Silvio Michael de Azevedo Costa; Marcos Ribeiro de Castro |
| Abstract: | This paper builds a DSGE model in which future wage assignments are introduced as collateral for risky consumer and housing loans, in addition to standard BGG-type loans to entrepreneurs. Banks face matter-of-fact constraints in funding and lending markets, have liquidity targets, and are subject to a number of macroprudential rules, such as reserve requirements, capital requirements, and regulation on housing loan concessions. The main determinants of actual bank lending spreads are mapped into the model through the introduction of taxes on banking activity, monopolistic competition in a segment of the bank's conglomerate, credit risk, and regulatory and operational costs. The bank operates in the open market, and that is key to the transmission channel of reserve requirements. The model is carefully tailored to Brazil and reproduces the baseline understanding of the transmission channel of monetary policy and of reserve requirements. Macroprudential regulation in the form of capital requirements has important implications for the dynamics of real variables. DSGE modeling, with results analyzed trhough impulse responses. The first draft of the paper presents a calibration and IRFs. We plan to present in the conference a full-fledged estimated version of it, with variance decomposition analysis, historical decomposition of shocks, in addition to scenario studies. Preliminary results with the calibrated version of the model show that our modeling strategy is capable of reproducing the baseline understanding of the transmission channel of monetary policy and of reserve requirements. In addition, macroprudential regulation in the form of capital requirements has important implications for the dynamics of real variables. We also plan to study to effect of changes in risk weights in capital requirements, changes in the remuneration of reserve requirements, and also analyze the transmission of the last financial shock through the eyes of the model. |
| Keywords: | Brazil, Monetary issues, Optimization models |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5145&r=dge |
| By: | Michał Rubaszek; Marcin Kolasa |
| Abstract: | To investigate to what extent adding financial frictions can contribute to an improvement in the quality of DSGE model-based forecasts DSGE models with and without financial frictions. Comparison of point and density forecasts. The main finding is that accounting for financial frictions affecting firms tends to improve the quality of point forecasts while the opposite is true for the extension with household sector financial frictions. However, for all models point forecasts can be considered poor in the absolute sense and density forecasts are rather badly calibrated. We show that the main source of these problems is a significant and sizable bias in the forecasts for most of standard macroeconomic variables. |
| Keywords: | United States, General equilibrium modeling, Forecasting and projection methods |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5100&r=dge |
| By: | Rudi Steinbach; Stan du Plessis; Ben Smit |
| Abstract: | Determine the optimal response of a small open economy's central bank to financial shocks that lead to increases in credit spreads. Increasing credit spreads reduce the efficacy of monetary policy when the central bank is reducing the policy rate to accommodate a lowering in economic activity.Used a DSGE model that incorporates heterogeneous households and financial intermediaries. Financial shocks leads to an increase in non-performing loans, which in turn causes the financial intermediary to increase the spread over the policy rate at which it is willing to lend.The central bank should reduce the policy rate in response to rising credit spreads, however this response is more muted when compared to a closed economy facing a similar shock. |
| Keywords: | South Africa / Italy, Monetary issues, Macroeconometric modeling |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:006356:7194&r=dge |
| By: | Yasuo Hirose (Faculty of Economics, Keio University,) |
| Abstract: | Benhabib, Schmitt-Grohé, and Uribe (2001) argue for the existence of a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, shocks to households' preferences, investment adjustment costs, and external demand do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that the effect of sunspot shocks on Japan's business cycles is marginal and that macroeconomic stability during the period was a result of good luck. |
| Keywords: | Deflation, Zero interest rate, Japanese economy, Indeterminacy, Bayesian estimation |
| JEL: | E31 E32 E52 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utppwp:025&r=dge |
| By: | Kenza Benhima (University of Lausanne (HEC)); Celine Poilly (University of Lausanne); Philippe Bacchetta (University of Lausanne) |
| Abstract: | In the aftermath of the U.S. financial crisis, both a sharp drop in employment and a surge in corporate cash have been observed. In this paper, based on U.S. data, we document that the negative relationship between the corporate cash ratio and employment is systematic, both over time and across firms. We develop a dynamic general equilibrium model where heterogenous firms need cash in their production process. We analyze the dynamic impact of aggregate shocks and the cross-firm impact of idiosyncratic shocks. We show that liquidity and productivity shocks tend to generate a negative comovement between the cash ratio and employment. In contrast, standard credit shocks produce a positive relationship. A calibrated version of the model yields a negative comovement that is close to the data. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:256&r=dge |
| By: | Kartik Athreya (Federal Reserve Bank of Richmond) |
| Abstract: | In 2005, bankruptcy laws were reformed significantly, making personal bankruptcy substantially more costly to file than before. Shortly after, the US began to experience its most severe recession in seventy years. While personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment, perhaps as a consequence of the reform. Moreover, in the subsequent recovery, households have been widely viewed as "develeraging" (Mian and Sufi (2011), Krugman and Eggertson (2012)), an interpretation consistent with the largest reduction in the volume of unsecured debt in the past three decades. In this paper, we aim to measure the role jointly played by recent bankruptcy reforms and labor market risks during the Great Recession in accounting for the use of consumer credit and debt default. We use a setting that features high-frequency life-cycle consumption-savings decisions, defaultable debt, search frictions, and aggregate risk. Our results suggest that the 2005 bankruptcy reform likely prevented a substantial increase in bankruptcy filings, but had only limited effect on the observed path of delinquencies. Thus, the reform appears to have ´worked.¡ We also find that fluctuations in the job separation rate observed over the Great Recession did not significantly affect the dynamics of default; all of the work is done, instead, by the large decline in the job-finding rate. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:273&r=dge |
| By: | Giraitis, Liudas (Queen Mary, University of London); Kapetanios, George (Queen Mary, University of London); Theodoridis, Konstantinos (Bank of England); Yates, Tony (University of Bristol and Centre for Macroeconomics) |
| Abstract: | This paper uses kernel methods to estimate a seven variable time-varying (TV) vector autoregressive (VAR) model on the US data set constructed by Smets and Wouters. We use an indirect inference method to map from this TV VAR to time variation in implied dynamic stochastic general equilibrium (DSGE) parameters. We find that many parameters change substantially, particularly those defining nominal rigidities, habits and investment adjustment costs. In contrast to the ‘Great Moderation’ literature our monetary policy parameter estimates suggest that authorities tried to deliver a low and stable inflation from 1975 onwards. However, the severe adverse supply shocks in the 70s could have caused these policies to fail. |
| Keywords: | DSGE; structural change; kernel estimation; time-varying VAR; monetary policy shocks |
| JEL: | C14 C18 E52 E61 E66 |
| Date: | 2014–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0507&r=dge |
| By: | Fajar Oktiyanto; Harmanta; Nur M. Adhi Purwanto; Aditya Rachmanto |
| Abstract: | The experience from the recent global financial crisis on 2008/2009 showed that most macroeconomic instabilities came from the financial/banking sector. The condition of the financial system may affect monetary stability, through excessive pro-cyclicality in the financial system. Agung et al (2010) stated that pro-cyclicality level of financial sector in Indonesia is quite high. The evidence can be seen from the real credit which grew faster than GDP in the period of expansion, and vice versa. On the other hand, monetary policy may also affect the company's risk-taking behavior in financial markets, by affecting the company’s balance sheet as well as bank (credit portfolio, asset, etc.), which in turn will affect the stability of the financial system. Bernanke and Gertler (2001) stated that an aggressive monetary policy will not provide a significant advantage to regulate the movement of asset prices, due to the large volatility of financial variables. Hence, it is necessary to establish a combination of policy instruments to achieve price stability and financial stability. To formulate policies for price stability and financial market, we built a DSGE model that has the ability to simulate the effects of monetary and macroprudential policies in Indonesia. We incorporated a credit channel and financial intermediation mechanism in the model to capture pro-cyclicality in the financial sector, which will influence the dynamics of the business cycle, as suggested by Roger and Vleck (2011). The model is built on the basis of Gerali et al (2010) who have entered the banking sector with collateral constraint in the New Keynesian DSGE models a la Christiano et al (2005), and also adding a model of the financial accelerator approach a la Bernanke et al (1999) which has been modified by Zhang (2009). We used two approaches to model financial frictions in the financial sector: (i) collateral constraint, imposed on bank lending to households; and (ii) financial accelerator, imposed on lending to entrepreneurs. Collateral constraints mechanism in the household borrowing allows simulation of macroprudential policies such as the LTV ratio, which has been implemented in Indonesia for the last few years. On the other hand, the financial accelerator mechanism imposed on the entrepreneurs affected their decision to borrow from the bank to purchase their capital needs. The model that we developed is a small open economy DSGE model that has economic agents such as households (patient and impatient) conducting consumption, labor supply, savings to and borrowings from banks and paying taxes to the government. In addition there are entrepreneurs, intermediate good producers, capital good producers, housing producers and final good producers associated with the production of goods, the production of capital, as well as the final goods aggregator. This model also has a wide range of retailers, namely domestic retailers, importer retailers and exporter retailers that served to differentiate homogenous goods at no cost and sell them at a certain profit, with the opportunity to change the selling price following the usual mechanism from Calvo (1983). The condition of the financial system may affect monetary stability, through excessive pro-cyclicality in the financial system. The evidence can be seen from the real credit which grew faster than GDP in the period of expansion, and vice versa. On the other hand, monetary policy may also affect the company's risk-taking behavior in financial markets, by affecting the company’s balance sheet as well as bank (credit portfolio, asset, etc.), which in turn will affect the stability of the financial system. Hence, it is necessary to establish a combination of policy instruments to achieve price stability and financial stability. This model should describe the economic condition under monetary and macro prudential policy mix response if there are any shock happened. As the result, the model has detail treatment of banking sector according to Indonesia context. The transmission of macro-prudential policy shock is studied by analyzing the impulse responses to shock some variable, especially LTV. We find that macro-prudential policy plays an important role to dampen excessive economic and financial cycles in Indonesia. We also find that the results are better when macro-prudential instruments are exercised together with appropriate monetary policy responses. Therefore coordination between monetary policy and macro-prudential policy is critical In order to obtain optimum results in achieving macroeconomic stability and financial system stability. |
| Keywords: | Indonesia, General equilibrium modeling, Agent-based modeling |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:006356:6840&r=dge |
| By: | Akande, Emmanuel |
| Abstract: | This paper contributes to the existing Real Business Cycle (RBC) literature by introducing Marginal Efficiency of Investment (MEI) shocks into small open economic model. Investment shocks are the most important drivers of business cycle fluctuations in small open economy because the fluctuations in all the macroeconomic variables showed a significant response to MEI shocks than productivity shocks. The anticipation of pro-cyclical behavior of the external accounts when the model was augmented with the form of share of consumption in the household utility function, μ, and an appealing, but complex, concave adjustment cost function becomes a standpoint that differentiates this study from other investment shocks literatures. The pattern of the rise in investment in both shocks explains why investment shocks is so important in times of recession and it reveals the main source of fluctuations in a small open economy. |
| Keywords: | Real Business Cycle, Marginal Efficiency of Investment, productivity shocks, adjustment cost. |
| JEL: | E32 E37 F4 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52159&r=dge |
| By: | Ricardo Félix; Gabriela Castro; José Maria; Paulo Júlio |
| Abstract: | Reassess the size of the fiscal multiplier in times of crisis Non-Ricardian DSGE model with a detailed fiscal sector Multipliers tend to be larger in times of crisis |
| Keywords: | Small euro area economy, General equilibrium modeling, Public finance |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5307&r=dge |
| By: | Luo, Yulei |
| Abstract: | This paper provides a tractable continuous-time CARA-Gaussian framework to explore how the interactions of risk aversion and induced uncertainty due to informational frictions determine strategic consumption-portfolio rules, precautionary savings, and consumption dynamics in the presence of uninsurable labor income. Specifically, after solving the model explicitly, we explore the relative importance of the two types of induced uncertainty: (i) model uncertainty due to robustness and (ii) state uncertainty due to limited information-processing capacity as well as risk aversion in determining asset allocation, precautionary savings, and consumption dynamics. Finally, we discuss how the separation between risk aversion and intertemporal substitution affects strategic asset allocation and precautionary savings. |
| Keywords: | Robustness, Model Uncertainty, Rational Inattention, Uninsurable Labor Income, Strategic Asset Allocation, Precautionary Savings |
| JEL: | C6 C61 D8 D81 E2 |
| Date: | 2014–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58077&r=dge |
| By: | Randall Wright (U Wisconsin) |
| Abstract: | This paper integrates search-based models of marriage and money. We think about households as organizations, the way Coase thinks about firms, as alternatives to markets that become more attractive when transactions costs increase. In the model, individuals consume market- and home-produced goods, and home production is facilitated by marriage. Market frictions, including taxes, search and bargaining problems, can increase the propensity to marry. The inflation tax, in particular, encourages marriage iff being single is cash intensive. Micro data confirm that singles use cash more than married people. We then use macro data, over many countries and years, to see how marriage responds to inflation, taxation and other variables. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:237&r=dge |
| By: | Karl Farmer |
| Abstract: | The present sovereign debt crisis in the Economic and Monetary Union of the EU (EMU) is partly attributable to the pronounced increase in external imbalances across northern and southern euro zone countries during the years running up to 2007 (Lane and Milesi-Ferretti, 2011). While the behavior and extent of external imbalances during the pre-crisis period is empirically well documented (e.g. Lane and Pels 2012) it remains an open theoretical question how the evolution of the observed external imbalances can best be reproduced within an intertemporal general equilibrium model of the EMU. Fagan and Gaspar (2008) compare in a two-good, two-country Yaari (1965)-Blanchard (1985) overlapping generations (OLG) pure exchange model without government debt the pre-euro financial autarky steady state to euro-related financial integration between northern and southern euro countries (called core and periphery, respectively). They find that the evolution of intra-EMU external imbalances can be traced back to North-South differences in time preference. While the neglect of production and capital accumulation may be justified by the similarity of northern and southern GDP growth rates in the pre-crisis period the rather huge private capital movements from core to periphery over this period suggest a two-country overlapping generations model with production and private capital accumulation in order to check whether the observed EMU external imbalances can be attributed to differences in economic fundamentals within this model framework, too. In addition, we introduce government debt into our basic model in order to investigate whether in view of the pre-crisis time-stationarity in the debt to GDP ratios of both EMU core and periphery the observed external imbalances can be traced back to which economic fundamentals. Thus, there are two main objectives of the paper: First, to present stylized facts regarding the intra-EMU macroeconomic data running up to the financial crisis 2007 in order to motivate the model set-up. Secondly, to develop a two-zone OLG model with production, capital accumulation and government debt in order to figure out how EMU’s North-South external imbalances can be attributed to financial integration due to the common currency. To pursue the second objective, a one-good, two-country Diamond (1965)-Buiter (1981) OLG model with time preference and technological differences across countries (e.g. EMU’s North, South) and time-stationary debt to GDP ratios will be developed. It will be used (i) to see how the pre-euro real interest differential between EMU South (periphery) and EMU North (core) can be depicted in the proposed model and (ii) whether the observed external imbalances (net foreign asset positions) can be referred to the euro-related interest rate convergence between EMU core and periphery. Both countries in the model economy are interconnected through free international trade in commodities, real capital and bonds emitted by national governments. The objective of this highly stylized model is to figure out major economic mechanisms triggering the observed intra-EMU imbalances in the run-up towards the global financial crisis. This is clearly the first step to set up a dynamic applied general equilibrium model along the lines of Fagan and Gaspar (2008). The author finds that the pre-euro real interest differential can be attributed to a relatively high time preference, low total factor productivity and high capital production share in the periphery. Exactly these differences in economic fundamentals cause the pre-crisis evolution of the external imbalances among EMU core and periphery. |
| Keywords: | EMU, Finance, General equilibrium modeling |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5484&r=dge |
| By: | Lucas Bretschger (ETH Zurich, Switzerland); Alexandra Vinogradova (ETH Zurich, Switzerland) |
| Abstract: | Climate physics predicts that the intensity of natural disasters will increase in the future due to climate change. One of the biggest challenges for economic modeling is the inherent uncertainty of climate events, which crucially affects consumption, investment, and abatement decisions. We present a stochastic model of a growing economy where natural disasters are multiple and random, with damages driven by the economy's polluting activity. We provide a closed-form solution and show that the optimal path is characterized by a constant growth rate of consumption and the capital stock until a shock arrives, triggering a downward jump in both variables. Optimum mitigation policy consists of spending a constant fraction of output on emissions abatement. This fraction is an increasing function of the arrival rate, polluting intensity of output, and the damage intensity of emissions. A sharp response of the optimum growth rate and the abatement share to changes in the arrival rate and the damage intensity justifies more stringent climate policies as compared to the expectation-based scenario. We subsequently extend the baseline model by adding climate-induced fluctuations around the growth trend and stock-pollution effects, demonstrating robustness of our results. In a quantitative assessment of our model we show that the optimal abatement expenditure at the global level may represent 0.9% of output, which is equivalent to a tax of $71 per ton carbon. |
| Keywords: | Climate policy; uncertainty; natural disasters; endogenous growth. |
| JEL: | O10 Q52 Q54 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:14-202&r=dge |
| By: | Thuy Lan Nguyen (Columbia University); Wataru Miyamoto (Columbia University) |
| Abstract: | This paper proposes the use of data on expectations to identify the role of news shocks in business cycles. This approach exploits the fact that news shocks cause agents to adjust their expectations about the future even when current fundamentals are not affected, therefore, data on expectations are particularly informative about the role of news shocks. Using data on expectations, we estimate a dynamic, stochastic, general equilibrium model that incorporates news shocks for the U.S. between 1955Q1 and 2006Q4. We find that the contribution of news shocks to output is about half of that estimated without data on expectations. The precision of the estimated role of news shocks also greatly improves when data on expectations are used. Moreover, the contribution of news shocks to explaining short run fluctuations is negligible. These results arise because data on expectations show that changes in expectations are not large and do not resemble actual movements of output. Therefore, news shocks cannot be the main driver of business cycles. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:259&r=dge |
| By: | Masashige Hamano |
| Abstract: | This paper explores the role played by product variety and quality in a real business cycle model.Firms are heterogeneous in terms of their specific quality as well as productivity level. Firms which have costly technology enter in the period of high aggregated demand and produce high quality goods. The average quality level and the number of available varieties are procyclical as in the data. The model can replicate the observed inflationary bias in the conventional CPI due to a rise in the number of new product varieties and quality. |
| Keywords: | US, Business cycles, General equilibrium modeling |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:006356:6766&r=dge |
| By: | Kabukcuoglu, Ayse (Koc University) |
| Abstract: | I quantify the welfare effects of replacing the US capital income tax with higher labor income taxes under international financial integration using a two-country, heterogeneous-agent incomplete markets model calibrated to represent the US and the rest of the world. Short-run and long-run factor price dynamics are key: after the tax reform, interest rates rise less under financial openness than in autarky. Therefore, wealthy households gain less. Post-tax wages also fall less as a result of the faster capital accumulation, so the poor are hurt less. Hence, the distributional impacts of the reform are significantly dampened relative to autarky although a majority of households prefer the status quo. Aggregate welfare effect to the US is a permanent 0.2% consumption equivalent loss under financial openness which is roughly 15% of the welfare loss under autarky. |
| Keywords: | tax reform; welfare |
| JEL: | D52 E62 F41 |
| Date: | 2014–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:188&r=dge |
| By: | Hitoshi Tsujiyama (Goethe University Frankfurt); Jonathan Heathcote (Federal Reserve Bank of Minneapolis) |
| Abstract: | This paper offers a quantitative exploration of optimal income tax design in the Mirrlees tradition, and asks how nearly simple parametric tax functions can decentralize constrained efficient allocations. The environment features both observable and unobservable components of idiosyncratic labor productivity, and both public and private insurance. Given a social welfare function that rationalizes the amount of redistribution built into the current US tax code, we find that potential welfare gains from tax reform are very small. We also find that it is more important that the tax system features marginal tax rates that increase with income than that it feature universal lump-sum transfers. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:260&r=dge |
| By: | Iskandar Simorangkir; Harmanta; Nur M. Adhi Purwanto; Fajar Oktiyanto |
| Abstract: | A well-functioning financial system is necessary for an effective monetary policy transmission. Simultaneously, monetary policy can also influence financial system stability through its effect on financial condition and behavior of the financial market. Changes in policy rate will have an effect on how agents in financial markets perceived the future prospect of the economy and will influence their spending/investment decisions. Despite this, Blanchard et al (2010) argues that the policy rate is not an appropriate tool to deal with many financial system imbalances, such as excess leverage, excessive risk taking, or apparent deviations of asset prices from fundamentals. As an example, they stated that increasing policy rate to deal with excessively high asset price will result in undesirably higher output gap. They proposed that macroprudential policy such as cap on loan-to-value ratio to be employed to address these specific financial system imbalances. We develop a small open economy DSGE model with financial frictions and banking sector as in Gerali (2010). We modified the banking sector balance sheet from Gerali’s model to include risk free assets and reserves, in addition to bank’s loan to households and entrepreneur, as part of bank’s asset portfolio choices. This is in accordance to the current condition of Indonesian (aggregate) bank’s balance sheet which includes a significant amount of excess liquidity held in a form of risk free asset such as Bank Indonesia’s Certificates (SBI) and Government’s Bonds (SBN). The main focus of the research is to understand the transmission mechanism of loan to value (LTV) ratio requirement policy and how it will interact with monetary policy. Based on the model simulation, an increase in LTV ratio requirement for households’ lending will lead to an increase in consumption and housing asset accumulation of the constrained households. This will lead to a higher growth of aggregate demand and inflation. In order to increase households’ lending, the bank reduces the amount of risk free asset from its portfolio and will cause an increase in its loan to deposit ratio (LDR). In addition, allocating more assets with higher interest rate will also increase bank’s profit that will lead to an increase in its capital. A higher growth in aggregate demand will increase inflationary pressure and will prompt central bank to increase the policy rate. The same dynamics applied to an increase in entrepreneur’s LTV ratio requirement. Entrepreneurs will increase their consumption and investment because of the increase in funding they acquired from the bank. This will lead to an increase in GDP. Because the increase in GDP is mostly comes from the higher growth of investment, inflationary pressures is not as significant as in the previous case but central bank still need to respond by increasing policy rate. See above See above |
| Keywords: | Indonesia , Macroeconometric modeling, Finance |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5678&r=dge |
| By: | Hans Fehr; Manuel Kallweit; Fabian Kindermann |
| Abstract: | The present paper quantifies the importance of family structures for the analysis of social security. For this reason we introduce home production as well as stable and unstable families into the standard stochastic overlapping generation model and simulate with each model version a move from a unfunded towards a funded pension system in Germany. The simulation exercise computes intergenerational welfare changes and isolates aggregate efficiency effects by means of compensating transfers. Comparing the macroe-conomic and welfare consequences resulting from the elimination of social security in the standard and in two-earner family models indicates two major conclusions. First, the consideration of home production has significant effects on labor supply and eco-nomic efficiency. Second, the impact of family insurance is fairly weak and can hardly substitute for social security. See above See above |
| Keywords: | Germany, General equilibrium modeling, Public finance |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5280&r=dge |
| By: | Andrew Foerster; Juan Rubio-Ramírez; Daniel F. Waggoner; Tao Zha |
| Abstract: | Markov-switching DSGE (MSDSGE) modeling has become a growing body of literature on economic and policy issues related to structural shifts. This paper develops a general perturbation methodology for constructing high-order approximations to the solutions of MSDSGE models. Our new method, called "the partition perturbation method,'' partitions the Markov-switching parameter space to keep a maximum number of time-varying parameters from perturbation. For this method to work in practice, we show how to reduce the potentially intractable problem of solving MSDSGE models to the manageable problem of solving a system of quadratic polynomial equations. We propose to use the theory of Gröbner bases for solving such a quadratic system. This approach allows us to first obtain all the solutions and then determine how many of them are stable. We illustrate the tractability of our methodology through two examples. |
| JEL: | C6 E3 G1 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20390&r=dge |
| By: | Dey, Jaya |
| Abstract: | This paper uses a Bayesian approach to estimate a standard international real business cycle model augmented with preferences with zero wealth-effect, variable capacity utilization and investment adjustment costs. First, I find that the bulk of fluctuations in country-specific outputs, consumption, investments, and international relative prices are attributed to country-specific neutral technology, investment-specific technology and preference shocks. Second, my estimated model with economically meaningful shocks simultaneously accounts for the negative correlation between the real exchange rate and relative consumption, and the negative correlation between the terms of trade and relative output. Lastly, by using marginal likelihood comparison exercise, I find that the success of the model depends on preferences with zero wealth effects; other frictions and alternative asset market structures play a less important role. |
| Keywords: | Bayesian; investment-specific technology; real exchange rate |
| JEL: | C11 E32 F32 F41 |
| Date: | 2013–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57803&r=dge |
| By: | Timo Baas |
| Abstract: | In the last years, Baltic countries joined or prepare to join the European Monetary Union. Accession comes in a time, were trading share between these countries and the Eurozone are declining. From a theoretical point of view, the optimality of currency unions depends on bilateral trade between it's members. In this paper it is shown that countries might benefit from a currency union as an alternative to fixed exchange rates. Using a DSGE model of a small country and a currency union, it is shown that membership in the union is beneficial to a fixed exchange rate system without a common monetary policy in terms of output and price stability. This result is robust even if trading shares decline significantly.In this paper we compare different monetary policy rules in a two-country open-economy DSGE model with Calvo price setting. Membership in the currency union is always beneficial in terms of macroeconomic stability. The benefits of joining a monetary union, however, are increasing with a declining share of foreign goods in the consumption basket of domestic households. The decision of Baltic countries to join the monetary union, therefore, is a second best solution in an environment were there is a fear of floating. |
| Keywords: | Baltic countries, General equilibrium modeling, EU enlargement |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:006356:6916&r=dge |
| By: | Alexi Savov (New York University Stern School of Busi); Alan Moreira (Yale University) |
| Abstract: | We build a macroeconomic model of financial intermediation in which intermediaries issue equity without friction. In normal times, they maximize liquidity creation by levering up the collateral value of their assets, a process we call shadow banking. A rise in uncertainty causes investors to demand liquidity in bad states, which forces intermediaries to delever and substitute toward safe liabilities; shadow banking shuts down, prices and investment fall. The model produces slow economic recoveries, especially when intermediaries are highly-capitalized. It features collateral runs and flight to quality, and it provides a framework for analyzing unconventional monetary policy and regulatory reform proposals. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:254&r=dge |
| By: | Cooke, Dudley (University of Exeter) |
| Abstract: | I study optimal interest rate policy in a small open economy with consumer search in the product market. When there are search frictions, firms price-to-market, with implications for the design of monetary policy. Country-specific shocks generate deviations from the law of one price for traded goods which monetary policy acts to stabilize by influencing firm markups. However, stabilizing law of one price deviations results in greater fluctuations in output. |
| Keywords: | interest rates; monetary policy; price |
| JEL: | E31 E52 F41 |
| Date: | 2014–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:187&r=dge |
| By: | Marcelo Veracierto (Federal Reserve Bank of Chicago); Jonas Fisher (Federal Reserve Bank of Chicago); Morris Davis (University of Wisconsin-Madison) |
| Abstract: | Cities experience significant, near random walk productivity shocks, yet population is slow to adjust. In practice local population changes are dominated by variation in net migration, and we argue that understanding gross migration is essential to quantify how net migration may slow population adjustments. Housing is also a natural candidate for slowing population adjustments because it is dicult to move, costly to build quickly, and a large durable stock makes a city attractive to potential migrants. We quantify the influence of migration and housing on urban population dynamics using a dynamic general equilibrium model of cities which incorporates a new theory of gross migration motivated by patterns we uncover in a panel of US cities. After assigning values to the model's parameters with an exactly identified procedure, we demonstrate that its implied dynamic responses to productivity shocks of population, gross migration, employment, wages, home construction and house prices strongly resemble those we estimate with our panel data. The empirically validated model implies that costs of attracting workers to cities drive slow population adjustments. Housing plays a very limited role. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:324&r=dge |
| By: | Franck Portier (Toulouse School of Economics) |
| Abstract: | There is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations. The news view of business cycles offers a formalization of this perspective. In this paper we discuss mechanisms by which changes in agents' information, due to the arrival of news, can cause business cycle fluctuations driven by expectational change, and we review the empirical evidence aimed at evaluating its relevance. In particular, we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations, while at the same time we emphasize the many challenges that must be addressed before a proper assessment of its role in business cycles can be established. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:289&r=dge |
| By: | Dean Corbae (University of Wisconsin) |
| Abstract: | We propose a theory of unsecured consumer credit where: (i) borrowers have the legal option to default; (ii) defaulters are not exogenously excluded from future borrowing; (iii) there is free entry of lenders; and (iv) lenders cannot collude to punish defaulters. In our framework, limited credit or credit at higher interest rates following default arises from the lender's optimal response to limited information about the agent's type and earnings realizations. The lender learns from an individual's borrowing and repayment behavior about his type and encapsulates his reputation for not defaulting in a credit score. We take the theory to data choosing the parameters of the model to match key data moments such as the overall and subprime delinquency rates. We test the theory by showing that our underlying framework is broadly consistent with the way credit scores affect unsecured consumer credit market behavior. The framework can be used to shed light on household consumption smoothing with respect to transitory income shocks and to examine the welfare consequences of legal restrictions on the length of time adverse events can remain on one's credit record. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:274&r=dge |
| By: | Erwan Quintin (University of Wisconsin at Madison); Morris Davis (University of Wisconsin-Madison) |
| Abstract: | During the 2000-2011 housing boom and bust, changes to self-assessed house prices in 20 different metro areas are highly correlated with changes to the Case-Shiller-Weiss (CSW) house price indexes, but do not change percent-for-percent with the CSW indexes during the boom or bust. We argue this evidence is consistent with an environment in which homeowners imperfectly observe the value of their home and update their guess of home value using a Kalman filter. Using data on self-assessed house prices and the CSW indexes, we estimate the parameters of a simple model of imperfectly-observed house prices. In an out-of-sample forecast exercise, we show the model is nearly perfectly able to replicate the sequence of self-assessed house prices from 2006-2011 in many MSAs, from places experiencing a modest boom like Atlanta and Detroit to the “bubble†areas like Miami and Phoenix. We then specify an economic model of the optimal default decisions of homeowners when homeowners imperfectly observe the value of their home. We show that, relative to a standard model of default, homeowners delay their decision to default after a bad house price shock. We argue this phenomenon helps to explain default patterns in the United States during the 2007-2011 housing bust. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:246&r=dge |
| By: | Robert E. Wright; Jouko Kinnunen; Katerina Lisenkova; Marcel Merette |
| Abstract: | To model the economics impacts of population ageing in high-income countrie by estimating the scale of required technological change. Presentation of a over-lapping generations computable general equilibrium model. Population ageing is associated with low growth and large welfare losses. The scale of technological change needed to compensate for this is very large in historical terms. |
| Keywords: | Calibration is for Scotland. , General equilibrium modeling, Macroeconometric modeling |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:006356:6918&r=dge |
| By: | Kristinn Hermannsson; Patrizio Lecca |
| Abstract: | Recent work on human capital accumulation has tended to abstract from population change. This is a reasonable simplification when analysing economies with relatively static populations, such as high income countries. However, many low income countries are undergoing rapid population change, which significantly influences the impact of human capital policies. This is acerbated as the rate of expansions of education systems is limited due to funding constraints and ability to train skilled teaching staff. To analyse this issue we construct an overlapping generations (OLG) numerical simulation model to simulate the simultaneous impact of human capital accumulation and population change. We calibrate this for Malawi, a small sub-Saharan country, which has made significant progress in expanding its education system, but is also projected to experience rapid population growth. Furthermore, there is evidence to suggest that demographics are not invariant of education policies. We explore how expansion of education (in particular secondary education of women) could influence population growth and how this modifies the impact of human capital policies. In aggregate we expect expanding education to have a positive economic impact. However, ex ante it is more difficult to predict impact of population growth due to influence of fixed factors such as land. On a per capita basis we expect education to have a positive impact, but population growth to dilute the per capita human capital accumulation. We are interested in exploring where the pivotal point lies w.r.t. to the growth of GDP per capita how this compares to current projections for population and education growth in Malawi. |
| Keywords: | Malawi, General equilibrium modeling, Developing countries |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:006356:6823&r=dge |
| By: | Stijn Van Nieuwerburgh (NYU Stern School of Business); Hanno Lustig (Anderson School of Business); Bryan Kelly (University of Chicago) |
| Abstract: | We propose a network model of firm volatility in which the customers' growth rate shocks influence the growth rates of their suppliers, larger suppliers have more customers, and the strength of a customer-supplier link depends on the size of the customer firm. Even though all shocks are i.i.d., the network model produces firm-level volatility and size distribution dynamics that are consistent with the data. In the cross section, larger firms and firms with less concentrated customer networks display lower volatility. Over time, the volatilities of all firms co-move strongly, and their common factor is concentration of the economy-wide firm size distribution. Network effects are essential to explaining the joint evolution of the empirical firm size and firm volatility distributions. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:253&r=dge |
| By: | Bulat Mukhamediyev; Mukhamediyev Bulat |
| Abstract: | For oil producing countries it is important to share rationally oil revenues between current expenditure and savings. The purpose of this paper is to study what impact will have change of the oil revenues accumulation on the dynamics of macroeconomic indicators.Modeling of dynamic stochastic general equilibrium with oil producing sector of economy.Forecasted responses of model variables to internal and external shocks of the economy of Kazakhstan. The influences of changes in the share of oil revenues accumulation in the National Fund on forecasted responses of macroeconomic indicators were found. |
| Keywords: | Kazakhstan, General equilibrium modeling, Developing countries |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:006356:6890&r=dge |
| By: | Bulat Mukhamediyev; Bulat MUKHAMEDIYEV |
| Abstract: | Favorable period of 2000-2007 years with a high rates of GDP growth in Kazakhstan after the global economic crisis was replaced by a period of its moderate growth. According to estimates of monetary policy rules the National Bank of Kazakhstan concentrated focus on inflation targeting after the surge to 18.7 percent in 2008 and on stabilizing of the exchange rate. In this report an analysis of the different variants of monetary policy based on a small model of the dynamic stochastic general equilibrium was performed. The results show that the higher exchange rate leads to lower levels of inflation, and the weaker GDP fluctuations in response to shocks of oil prices. |
| Keywords: | Kazakhstan, General equilibrium modeling, Macroeconometric modeling |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5330&r=dge |
| By: | Kazuhiko Oyamada; Ken Itakura |
| Abstract: | Since the latter half of 1990s, it has been discussed that many developing countries are going to face serious population aging problem while these economies are still underdeveloped and not adequately prepared against aging yet in terms of institutional reform such as social security. As the global interdependence of national economies has been deepened, a socio-economic problem in one country comes to have significant influences on many other economies and its effect might spillover around the world. The main objectives of our study are to analyze: (1) patterns of interregional spillovers of demographic change; (2) effects of pension reforms in one country on the other countries; and (3) role of foreign aid to the developing region where fund for investment is insufficient compared to their labor supply because of the immature capital market, with special emphasis on trade and capital flows among regions. This study presents a basic analysis on interregional cooperative framework which may offset negative effects of population aging and make it possible to take advantage of the so-called "population dividends" that are derived from the population structure with a large size of working population relative to the number of dependent population. A country under faster aging process would become a capital exporter to other countries at relatively moderate aging stage. As capital export would undermine assets over the long run, it would be possible for the faster aging country to eventually become a capital importer. Using a numerical Overlapping Generations (OLG) model that includes five regions with different demographic structure (high-income countries, Japan, mainland China, other Asia, and other low-income countries), we conduct simulation analysis to examine effects of (a) pension reforms, such as increase of contribution rate, decrease of replacement rate, and raising of pension age, respectively implemented in high-income countries and/or Japan; (b) foreign aid from high-income countries and/or Japan to other Asia and/or low-income countries; and (c) complementary trade-related measures such as Free Trade Agreement (FTA) in Asian region, on the patterns of interregional trade, capital flows, regional savings and economic growth. The simulation results revealed that, as previous works suggested, interregional capital movements between regions may play a significant role to moderate the impact of population aging and pension reforms. When contribution rate is increased in a pay-as-you-go pension system, its effect becomes just like the case of a tax increase. Savings may decrease so that the capital accumulation slows down, and consumption also may shrink. Relatively higher interest rate because of the scarce capital stock may induce foreign capital inflows and relax the decrease of consumption through growth effects. Finally, removing distortions induced by trade barriers would promote interregional adjustment in resource and capital allocations. |
| Keywords: | Japan, mainland China, and other Asian countries, General equilibrium modeling, Agricultural issues |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5672&r=dge |
| By: | Robert E. Wright; Katerina Lisenkova; Marcel Merette |
| Abstract: | This paper provides empirical estimates of the impact of immigration on economic growth. A dynamic overlapping generations computable general equilibrium (OLG-CGE) model is used for this purpose. The basic structure of the model follows in the Auerbach and Kotlikoff tradition. However, the model takes into consideration directly age-specific mortality. This is analogous to “building in” a cohort-component population projection structure to the model, which allows more complex and more realistic demographic scenarios to be considered. The model is calibrated for Scotland. Scotland is an interesting case study since it is likely that both the population and the labour force will decrease in size considerably in the future. In addition, the population is expected to age rapidly over the coming decades. The analysis suggests that modest levels of net-migration, driven by higher levels of immigration, are associated with considerably higher levels of economic growth. See above See above |
| Keywords: | NA, General equilibrium modeling, Growth |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5607&r=dge |
| By: | Duc Pham-Hi |
| Abstract: | Shadow "banks" are unidentified entities operating in the financial sphere, in different countries. Therefore their lending and borrowing activities must be based on some rationally determined interest rate. We make the hypothesis that it is determined by a Reinforced Learning process and try to model this behaviour alongside a classic CCLM/DSGE model. This is a follow-up from the presentation made at EcoMod July 2012 Seville "A Markov random model of Interbank Dynamics with Filtering and Learning". We go farther in the implementation of the model. Starting from a DSGE equilibrium, forward simulations are made using Sequential Monte Carlo and interacting particle systems technique. Loopbacks are made with RL equations implemented in a dozen of heterogenous agents as "shadow bankers", each with own set of utility preferences and learning capacities. Tentatively, it appears that in a interbank liquidity shortage environment, the "shadow entities" will split up into 2 categories according to risk aversion and learning speed and their own size. I will upload a first version of the paper in February. |
| Keywords: | Global EU, Modeling: new developments, Agent-based modeling |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:006356:6920&r=dge |
| By: | Willi Semmler; Lars Grüne; Marleen Stieler |
| Abstract: | This paper presents a new approach to solve dynamic decision models in economics. The proposed procedure, called Nonlinear Model Predictive Control (NMPC), relies on the iterative solution of optimal control problems on finite time horizons and is well established in engineering applications for stabilization and tracking problems. Only quite recently, extensions to more general optimal control problems including those appearing in economic applications have been investigated. Like Dynamic Programming (DP), NMPC does not rely on linearization techniques but uses the full nonlinear model and in this sense provides a global solution to the problem. However, unlike DP, NMPC only computes one optimal trajectory at a time, thus avoids to grid the state space and for this reason the computational demand grows much more moderate than for DP. In this paper we explain the basic idea of NMPC together with some implementational details and illustrate its ability to solve dynamic decision problems in economics by means of numerical simulations for various examples, including stochastic problems, models with multiple equilibria and regime switches in the dynamics. See above See above |
| Keywords: | NA, Modeling: new developments, Modeling: new developments |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5782&r=dge |
| By: | Justine Nannyonjo; Wilson Asiimwe |
| Abstract: | The East African Community member states of Kenya, Uganda, Tanzania. Rwanda and Burundi have over the years, established closer economic links through a Free Trade Area, a Customs Union, and a Common Market. These efforts have led to a deeper regional integration and trade within the EAC and have contributed to East Africa’s overall fast growth. Given the progress with intra-regional trade, the objective of the EAC countries is establishment of the East African Monetary Union (EAMU), with the circulation of the single currency in 2021. The establishment of the EAMU has gained momentum with the signing of the EAMU Protocol in November 2013. Successful implementation of the proposed monetary union would yield several economic and social benefits including promotion of trade through the enhancement of the payments system for goods and services in the region; creation of a larger regional market and broadening of business and trade-related income earning opportunities for the sub-region; and promotion of competitiveness and efficiency in production leading to increased Gross Domestic Product (GDP). However, there are also costs linked to the unification, including loss of national autonomy in the monetary policy, possibility of increased inflation and unemployment, loss of exchange policy and fiscal independence (Schuberth and Wehinger, 1998; Bean, 1992; Calmfors, 2001). The magnitude of this loss depends on how well individual countries were conducting monetary policy prior to joining the currency union. But in order to reap the maximum benefits and minimize costs, there ought to be a sufficient degree of macro-economic convergence, and financial integration among the aspiring economies preceding the union. Thus the EAC countries have put in place macro convergence criteria to be met by the each country prior to entry into the monetary union. These have included three phases: first phase (2007-2010), second phase (2011-2014); which was revised in 2013 and to be achieved within period of eight years (2013-20). The revised performance convergence criteria which each of the EAC countries must achieve are the following macroeconomic status: (a) headline inflation of no more than 8%; (b) fiscal deficit, including grants of no more than 3% of GDP; (c) gross public debt of no more than 50% of GDP in Net Present Value terms; and (d) maintenance of official foreign reserves of at 4.5 months of imports. But how far the nations will progress in aligning their economies to the set bench marks remains a question given the discrepancies in institutional mechanisms, social and economic structures. The prospective impact of (i.e. macroeconomic, sectoral and welfare effects) of the macroeconomic convergence criteria on the economies have also not been ascertained. For example, what would be the impact of adjustment of fiscal policy to meet the thresholds in the convergence criteria on GDP, sectoral performance and house welfare? Which mixture of fiscal policy adjustment (i.e. what percentage change in capital and/or recurrent expenditure) would maximize benefits for the economies? Therefore, the above issues call for a careful assessment of the prospective impacts of the macroeconomic convergence criteria on the economies. Objectives of the study The study aims to assess the prospective impact of the macroeconomic convergence criteria on the Ugandan economy. The specific objectives are: i. To critically examine the prospects of Uganda achieving the macroeconomic convergence criteria. ii. To assess the prospective macroeconomic, sectoral and welfare effects of the macroeconomic convergence criteria on the Ugandan economy. iii. To draws policy implications for achieving the convergence criteria. This paper addresses the above objectives using a Dynamic CGE Model. The data is obtained from the 2009/10 Social Accounting Matrix. The model is composed of the behavior of households, investors, industries, government and exporters that are based on the theoretical structure of the ORANI-G model (Dixon et al., 1982). Dynamic equations are extracted from ORANIGRD model to produce a Recursive Dynamic (forecasting) model. The dynamic equations are used to derive the capital accumulation and investment allocation as well as real wage and employment adjustment mechanisms. Households are assumed to maximize utility whereas firms minimize costs subject to input prices. Domestic and imported commodities are assumed to be imperfect substitutes and are combined using a constant elasticity of substitution (CES). Production for domestic market and export is captured using the Constant Elasticity of Transformation (CET). Additional variables and behavioral and/or identity equations are included in this model to capture the additional data from the Social Accounting Matrix (SAM). Simulation design The convergence simulation hinges on the adjustment of the fiscal policy to meet the thresholds in the EAC macroeconomic convergence criteria. Given that the debt sustainability analysis (DSA) for FY 2013/14 reveals that Uganda external debt is highly sustainable, the simulation mainly focuses on meeting the thresholds on inflation (8 %) and fiscal deficit as a percentage to GDP (3 %). The simulation is developed in such a way that, fiscal policy is expanded until the EAC thresholds are met. Two simulations are developed including a) Simulation in which both government development and recurrent expenditures are equally shocked with the same percentage expansion, b) In simulation 2 we shock fiscal policy in proportions of 60:40, for development and recurrent expenditure. The paper analyzes the prospective macroeconomic, sectoral and welfare effects of the East African Community macroeconomic convergence criteria, on the Ugandan economy using a Dynamic CGE model. The results indicate that the impact of the convergence criteria is positive on the aggregate demand throughout the simulation period, mainly attributed to strong performance in government and private consumption. FY 2014/15 the consumer prices would increase by 2.84 percent higher than it would be without the EAC convergence criteria. This positive deviation would break in FY 2018/19 to -1.23% less than it would be without the EAC convergence. The key drivers for the consumer prices are for sectors whose investment follows government investment and have government as the biggest consumer of their products including social sectors. Achieving the convergence criteria would lead to a deterioration of the competiveness of the Ugandan exports in the medium term, but lead to improvement of Uganda’s competiveness in the export market in long run, as fiscal policy subsides and external debt forex inflows reduce. While achieving the convergence criteria targets, the growth in government revenue (mainly indirect taxes) would be outstripped by fiscal expansion and this leads to an increase in the fiscal deficit thus having negative implications for debt sustainability. As regards to sectoral performance, sectors whose investment is not mainly driven by profit but follow aggregate investment are those that would perform much better compared to the rest of the sectors. Sectors producing traded goods would be the most negatively affected, mainly due to their loss of competitiveness in the external market. Fiscal policy adjustments post a positive effect on household income throughout the simulation period, mainly due to an increase in increase in nominal wage and transfers to households. However, this improvement can only be sustained in the medium term but collapses in the long run as the EAC macroeconomic thresholds are reached. In the long-run debt accumulates and fiscal deficit percentage to GDP hits the threshold of 3%, fiscal policy is forced to contract to keep within the EAC Macroeconomic criteria. Similarly, household savings would improve in the medium term but deteriorate in the long term, due to the unsustainable household consumption patterns. This simulation reveals that to improve national savings, there is a need to enhance factor payments and employment as well as creating a good macroeconomic environment to enable profitable international transactions. The results justify the existence of the impossible macroeconomic trinity. That is, it’s not possible to have low fiscal deficit, low inflation and a sustainable high growth at the same time. For the economy to clear, one of these aggregates must be compromised to attain the two. For instance, if the high economic growth is to be attained, inflation and deficit need to be allowed to adjust upwards by expanding the fiscal space. However, GDP would grow faster if the fiscal space is focused on the government investment. This would improve technical and production efficiency in the economy as well as sustaining a low inflation as shown in Table 5 above. Since government investment has a mild impact on inflation, this would generate more fiscal space than when the fiscal policy in geared towards recurrent expenditure. In addition, the speed of expansion of the fiscal policy determines the nature of the sectoral impacts. If government spending rises quickly to exhaust the fiscal space created as seen above, aggregate demand outstrips the supply capacity for non traded goods. This generates a construction boom with increasing construction and falling quality. The results also postulate that faster fiscal policy expansion would have a negative impact on Uganda’s competiveness through appreciating the real exchange rate and speedy improvements in the terms of trade. The best economic results would be attained by a gradual fiscal policy expansion mainly focusing infrastructure (investment). |
| Keywords: | Uganda, General equilibrium modeling, Impact and scenario analysis |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:006356:7143&r=dge |
| By: | Katerina Lisenkova; Marcel Mérette |
| Abstract: | This paper uses an OLG CGE model for the UK to illustrate the long-term effect on migration on the macroeconomy. As an illustration we use current UK government's migration target to reduce net migration "from hundreds of thousands to tens of thousands". Achieving this target would require to reduce recent net migration numbers by a factor of 2. In our simulations we compare the impact of demographic shock based on the principal ONS population projections with the lower migration scenario, which assumes that migration rates are reduced by 50%. Our results show that such a significant reduction in net migration has strong negative effect on the economy. Both level of GDP and GDP per capita fall during the simulation period. Moreover this policy has significant negative impact on public finances. As a result of growing gap between government revenues and spending, public debt increases by 8 percentage points of GDP in case or lower migration. See above See above |
| Keywords: | UK, General equilibrium modeling, Impact and scenario analysis |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:6164&r=dge |