nep-dge New Economics Papers
on All new papers
Issue of 2014‒09‒08
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Stock Price Dynamics and the Business Cycle in an Estimated DSGE Model for South Africa By Michael Paetz; Rangan Gupta
  2. Financial Intermediation, House Prices and the Welfare Effects of the U.S. Great Recession By Dominique Menno; Tommaso Oliviero
  3. DSGE Model-Based Forecasting of Modeled and Non-Modeled Ination Variables in South Africa By Rangan Gupta; Patrick T. Kanda; Mampho P. Modise; Alessia Paccagnini
  4. Endogenous Fluctuations in an Endogenous Growth Model with Ination Targeting By Rangan Gupta; Lardo Stander
  5. Towards a “New” Inflation Targeting Framework: The Case of Uruguay By Martín González-Rozada; Martín Sola
  6. Conformism and Wealth Distribution By Kazuo MIno; Yasuhiro Nakamoto
  7. The Job Search Intensity Supply Curve: How Labor Market Conditions Affect Job Search Effort By Jeremy Schwartz
  8. International Capital Flows, External Assets and Output Volatility By Matthias Hoffmann; Michael Krause; Peter Tillmann
  9. The great housing boom of China By Chen, kaiji; Wen, Yi
  10. Access to Credit and the Size of the Formal Sector in Brazil By Pablo D`Erasmo
  11. Intensity-Based Permit Quotas and the Business Cycle: Does Flexibility Pay Off? By Olli-Pekka Kuuselaa; Gregory S. Amacher; Kwok Ping Tsang
  12. Central Bank Liquidity Management and “Unconventional” Monetary Policies By Javier García-Cicco; Enrique Kawamura
  13. A New Solution to the Equity Premium Puzzle and the Risk-Free Rate Puzzle: Theory and Evidence By Hideaki Tamura; Yoichi Matsubayashi
  14. Finn Kydland et les cycles d’affaires réels By Frederic Teulon

  1. By: Michael Paetz (Department of Economics, University of Hamburg); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper develops and estimates an open economy dynamic stochastic general equilibrium model of South Africa. We devote special attention to the impact of stock price wealth effects on output and the interest rate. For this reason we adopt a perpetual youth approach, which allows for a limited decision horizon. We estimate the model using Bayesian techniques and find that (i) about 9 percent of the volatility in production can be explained by financial shocks, and (ii) the SARB does not and should not react on stock price disturbances. Moreover, stock prices seem to be unaffected by shocks from the real economy.
    Keywords: DSGE models, wealth effects, open economy, South Africa
    JEL: D91 E21 E44 F41
    Date: 2014–08
  2. By: Dominique Menno; Tommaso Oliviero (CSEF, University of Naples Federico II.; CSEF, University of Naples)
    Abstract: This paper quantifies the welfare effects of the aggregate house price collapse during the U.S. Great Recession for leveraged and un-leveraged U.S. households. We calibrate a dynamic general equilibrium model to the U.S. economy and simulate the 2007-2009 Great Recession as a contemporaneous shock to interest rate spread and aggregate income that quantitatively account for the observed collapse in house prices. As a consequence of the loss in housing wealth, our estimates show that borrowers lost significantly more than savers in terms of welfare. The worsened conditions in the financial intermediation sector in the Great Recession forced borrowers to de-leverage, and generated a pure redistribution from savers to borrowers. This amplified the welfare losses of borrowers while caused a relative welfare gain for savers.
    Keywords: Housing Wealth, Heterogeneous Agents, Welfare, Leverage
    JEL: D31 D58 D90 E21 E30 E44
    Date: 2014–08–28
  3. By: Rangan Gupta; Patrick T. Kanda; Mampho P. Modise; Alessia Paccagnini
    Abstract: In ation forecasts are a key ingredient for monetary policymaking - especially in an in ation targeting country such as South Africa. Generally, a typical Dynamic Stochastic General Equilibrium (DSGE) only includes a core set of variables. As such, other variables,e.g. such as alternative measures of in ation that might be of interest to policymakers, do not feature in the model. Given this, we implement a closed-economy New Keynesian DSGE model-based procedure which includes variables that do not explicitly appear in the model. We estimate such a model using an in-sample covering 1971Q2 to 1999Q4, and generate recursive forecasts over 2000Q1-2011Q4. The hybrid DSGE performs extremely well in forecasting in ation variables (both core and non-modeled) in comparison with forecasts reported by other models such as AR(1).
    Keywords: DSGE model, in ation, core variables, non-core variables
    JEL: C11 C32 C53 E27 E47
    Date: 2014–08–29
  4. By: Rangan Gupta; Lardo Stander
    Abstract: This paper develops a monetary endogenous growth overlapping generations model characterized by production lags - specically lagged capital inputs - and an in ation targeting monetary authority, and analyses the growth dynamics that emerge from this framework. The growth process is endogenized by allowing productive government ex- penditure on infrastructure, complementing the lagged private capital input. Following the extant literature, money is introduced by impos- ing a cash reserve requirement on an otherwise competitive banking sector. Given this framework, we show that multiple equilibria emerge along dierent growth paths, with the low-growth (high-growth) equi- librium being unstable (stable) and locally determinate (locally inde- terminate). In addition, we show that convergent or divergent endoge- nous uctuations and even topological chaos could emerge around the high-growth equilibrium in the growth path where the monetary au- thority follows a high in ation targeting regime. Conversely, when the monetary authority follows a low in ation targeting regime, oscillations do not occur around either the low-growth or high-growth equilibrium.
    Keywords: endogenous uctuations, in ation targeting, chaos, production lags, indeterminacy.
    JEL: C62 E32 O42
    Date: 2014–08–29
  5. By: Martín González-Rozada; Martín Sola
    Abstract: Using a dynamic stochastic general equilibrium model with financial frictions, this paper evaluates the effects of a rule that incorporates not only the interest rate but also the legal reserve requirements as instruments of monetary policy. It is found that reserve requirements can be used to achieve the Central Bank’s inflation objectives. The use of this instrument, however, produces a real appreciation of the Uruguayan peso. When the Central Bank uses the monetary policy rate as an instrument, the effect of an increase in reserve requirements is to contribute to reducing the negative impact on consumption, investment and output. Nevertheless, the quantitative results in terms of inflation reduction are rather poor. The policy rate becomes more effective in reducing inflation when the reserve requirement instrument is solely directed at achieving financial stability. The paper’s main policy conclusion is that a well-targeted non- conventional policy instrument can help to effectively control inflation.
    JEL: C61 C68 E52 E58
    Date: 2014–02
  6. By: Kazuo MIno (Kyoto University); Yasuhiro Nakamoto (Kyusyu Sangyo University)
    Abstract: This paper explores the role of consumption externalities in a neoclassical growth model in which households have heterogeneous preferences. We fi?nd that the degree of conformism in consumption held by each household signifi?cantly affects the speed of convergence of the aggregate economy as well as the patterns of wealth distribution in the steady state equilibrium. In particular, a higher degree of consumption conformism accelerates the convergence speed of the economy towards the steady state. We also reveal that in an economy with a high degree of conformism, the pattern of initial distribution of wealth tends not to be sustained in the long run.
    Keywords: consumption externalities, heterogeneous agents, wealth distribution
    JEL: D31 E13 E21 O40
    Date: 2014–08
  7. By: Jeremy Schwartz (Loyoloa University Maryland)
    Abstract: During the Great Recession of 2007, unemployment reached nearly 10 percent and the ratio of unemployment to open positions (as measured by the Help Wanted OnLine Index) more than tripled. The weak labor market prompted an unprecedented extension in the length of time in which a claimant can collect unemployment insurance (UI) to 99 weeks, at an expense to date of $226.4 billion. While many claim that extending UI during a recession will reduce search intensity, the effect of weak labor market conditions on search remains a mystery. As a result, policymakers are in the dark as to whether UI extensions reduce already low search effort during recessions or perhaps decrease excessive search, which causes congestion in the labor market. At the same time, modelers of the labor market have little empirical justification for their assumptions on how search intensity changes over the business cycle. This paper develops a search model where the impact of macro labor market conditions on a worker’s search effort depends on whether these two factors are substitutes or complements in the job search process. Parameter estimates of the structural model using a sample of unemployment spells from the National Longitudinal Survey of Youth 1997 indicate that macro labor market conditions and individual search effort are complements and move together over the business cycle. The estimation also reveals that more risk-averse and less wealthy individuals exhibit less search effort.
    Keywords: Job search, search models, structural estimation, search methods
    JEL: D1 D9 E2 E3 J6
    Date: 2014–08
  8. By: Matthias Hoffmann (Deutsche Bundesbank); Michael Krause (Deutsche Bundesbank); Peter Tillmann (University of Gießen)
    Abstract: This paper proposes a new perspective on international capital flows and countries' long-run external asset position. Cross-sectional evidence for 84 developing countries shows that over the last three decades countries that have had on average higher volatility of output growth (1) accumulated higher external assets in the long-run and (2) experienced more procyclical capital outflows over the business cycle than those countries with a same growth rate but a more stable output path. To explain this finding we provide a theoretical mechanism within a stochastic real business cycle growth model in which higher uncertainty of the income stream increases the precautionary savings motive of households. They have a desire to save more when the variance of their expected income stream is higher. We show that in the model the combination of income risk and a precautionary savings motive will lead to procyclical capital outflows at business cycle frequency and a higher long-run external asset position.
    Keywords: Capital flows, net foreign assets, productivity growth, uncertainty, precautionary savings
    JEL: F32 F36 F43 F44
    Date: 2014
  9. By: Chen, kaiji (Economics Department, Emory University.); Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: This paper provides a theory to explain the paradoxical features of the great housing boom in China —the persistently faster-than-GDP housing price growth, exceptionally high capital returns, and excessive vacancy rates. The expectation that high capital returns driven mainly by resource reallocation are not sustainable in the long run can induce the very productive entrepreneurs to speculate in housing during economic transition. This creates a self-fulfilling growing housing bubble, which can create severe resource misallocation. A calibrated version of the theory accounts quantitatively for both the growth dynamics of house prices and other salient features of the recent Chinese experience.
    Keywords: Housing Bubble; Resource Misallocation; Chinese Economy; Development; Economic Transition.
    JEL: E22 E23 O11 O16 P23 P24 R31
    Date: 2014–08–22
  10. By: Pablo D`Erasmo
    Abstract: This paper studies the link between credit conditions and formalization in Brazil, as both credit and the rate of formalization have notably increased in the last decade. A firm dynamics model with endogenous formal and informal sectors is developed to quantitatively evaluate how much of the change in corporate credit and the size of the formal sector can be attributed to a reduction in the cost of financial intermediation. The model predicts that the observed reduction in intermediation costs generates an increase in the credit-to-output ratio and in the share of formal workers, in line with the data. It is found that -by affecting the corporate interest rate, the allocation of capital and the entry and exit rates- the change in credit conditions has important effects on firm size distribution and aggregate productivity.
    JEL: D24 E26 L11 O16 O17
    Date: 2013–04
  11. By: Olli-Pekka Kuuselaa; Gregory S. Amacher; Kwok Ping Tsang
    Abstract: Tradable permit markets for carbon dioxide (C02) emissions respond to short-run fluctuations in economic activity. To provide stability, both price and quantity interventions have been proposed. This paper focuses on the relative performance of fixed versus intensity allowances in the presence of both productivity and energy price uncertainty. Both instruments achieve the same steady-state emissions reduction target of 20 percent, which is similar to the current policy proposals, and the regulator then chooses the allowance policy that has the lowest expected abatement cost. A standard real business cycle (RBC) model is used to solve for the expected abatement cost under both policies. Expected cost outcomes are compared using data from the U. S. economy as the baseline scenario. Unlike previous studies, this paper’s results show that, under a reasonable model calibration, fixed allowances outperform intensity allowances by a cost difference of as much as 30 percent.
    JEL: E32 Q54 Q58
    Date: 2013–10
  12. By: Javier García-Cicco; Enrique Kawamura
    Abstract: This paper presents a small open economy model to analyze the role of central bank liquidity management in implementing “unconventional” monetary policies within an inflation targeting framework. In particular, the paper explicitly models the facilities that the central bank uses to manage liquidity in the economy, which creates a role for the central bank balance sheet in equilibrium. This permits the analysis of two “unconventional” policies: sterilized exchange-rate interventions and expanding the list of eligible collaterals accepted at the liquidity facilities operated by the central bank. These policies have been recently implemented by several central banks: the former as a way to counteract persistent appreciations in the domestic currency, and the latter as a response to the recent global financial crisis in 2008. As a case study, the paper provides a detailed account of the Chilean experience with these alternative tools, as well as a quantitative evaluation of the effects of some of these policies.
    JEL: E52 E58
    Date: 2014–02
  13. By: Hideaki Tamura (Graduate School of Economics, Kobe University); Yoichi Matsubayashi (Graduate School of Economics, Kobe University)
    Abstract: This paper develops a new method for solving both equity premium and risk free rate puzzles based on the standard utility function. The method for solving the equity premium puzzle in accordance with Mehra and Prescott (1985) needs to be simultaneously consistent with the method for solving the risk-free rate puzzle presented by Weil (1989). That is, the reasonable estimated values for the degree of relative risk aversion in the former solution and for the subjective discount rate in the latter solution need to plausibly fall within experiential bounds. This study indicates that a consistent solution is possible for the equity premium and risk-free rate puzzles even when there is a standard constant relative risk aversion (CRRA) type utility function. This solution is possible by formularizing the Euler equation for consumption, considering the precautionary saving effect.
    Keywords: equity premium puzzle, risk-free rate puzzle, uncertainty, Euler equation
    JEL: E21 E44 G12
    Date: 2014–08
  14. By: Frederic Teulon
    Abstract: Finn Kydland est un représentant de la « nouvelle macroéconomie classique ». Kydland a mené des recherches sur l’incohérence temporelle (time inconsistency). Il a reçu les prix Nobel d’économie 2004 pour des contributions originales relatives aux cycles des affaires et à la cohérence des politiques économiques. Kydland se fait connaître en publiant (avec Edward Prescott) en 1977 son fameux article intitulé « rules-vsdiscretion », puis un second article en 1982 sur les cycles réels..
    Keywords: Anticipations rationnelles, Chocs de productivité, Crédibilité, Cycles réels (RBC theory), Finn Kydland.
    Date: 2014–08–29

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