nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2014‒12‒03
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Macroeconomic Volatility and Trade in OLG Economies By Antoine Le Riche
  2. Income Redistribution, Consumer Credit,and Keeping up with the Riches By Mathias Klein; Christopher Krause
  3. Firing Costs and Labor Market Fluctuations: A Cross-Country Analysis By Richard Rogerson; Andrea Raffo; Lee Ohanian
  4. Energy and Capital in a New-Keynesian Framework By Verónica Acurio Vasconez; Gaël Giraud; Florent Mc Isaac; Ngoc Sang Pham
  5. Margin regulation and volatility By Brumm, Johannes; Kubler, Felix; Grill, Michael; Schmedders, Karl
  6. Bank Liquidity and Capital Regulation in General Equilibrium By Covas, Francisco; Driscoll, John C.
  7. Capital Requirements in a Quantitative Model of Banking Industry Dynamics By Pablo D'Erasmo
  8. Financial Risk and Unemployment By Ofer Setty; David Weiss; Zvi Eckstein
  9. The Effects of Government Spending in a Small Open Economy within a Monetary Union By Clancy, Daragh; Jacquinot, Pascal; Lozej, Matija
  10. Information, Misallocation and Aggregate Productivity By Venky Venkateswaran; Hugo A. Hopenhayn; Joel David
  11. Non-Defaultable Debt and Sovereign Risk By Juan Carlos Hatchondo; Leonardo Martinez; Yasin Kursat Onder
  12. Constrained Discretion and Central Bank Transparency By Francesco Bianchi; Leonardo Melosi
  13. Education Policies and Structural Transformation By Cavalcanti Ferreira, Pedro; Monge-Naranjo, Alexander; Torres de Mello Pereira, Luciene
  14. Sorting Between and Within Industries: A Testable Model of Assortative Matching By Abowd, John M.; Kramarz, Francis; Pérez-Duarte, Sébastien; Schmutte, Ian M.

  1. By: Antoine Le Riche (Aix-Marseille University (Aix-Marseille School of Economics), GREQAM, CNRS & EHESS)
    Abstract: This chapter analyzes the effect of international trade on the local stability properties of economies in a Heckscher-Ohlin free-trade equilibrium. We formulate a two-factor (capital and labor), two-good (consumption and investment), two-country overlapping generations model where countries only differ with respect to their discount rate. We consider a CES non increasing returns to scale technology in the consumption good sector and a Leontief constant returns to scale technology in the investment good sector. In the autarky equilibrium and the free-trade equilibrium, we show the existence of endogenous cycles with dynamic efficiency when the consumption good is capital intensive, the value of the elasticity of intertemporal substitution in consumption is intermediate and the degree of returns to scale is sufficiently high. Finally using a numerical simulation, we show that period-two cycles can occur in the free-trade equilibrium although one country is characterized by saddle-point stability in the autarky equilibrium.
    Keywords: Two-sector OLG model, two-country, local indeterminacy, Endogenous fluctuations, dynamic efficiency
    JEL: C62 E32 F11 F43 O41
    Date: 2014–11
  2. By: Mathias Klein; Christopher Krause
    Abstract: In this study, the relation between consumer credit and real economic activity during the Great Moderation is studied in a dynamic stochastic general equilibrium model. Our model economy is populated by two diff erent household types. Investors, who hold the economy’s capital stock, own the fi rms and supply credit, and workers, who supply labor and demand credit to fi nance consumption. Furthermore, workers seek to minimize the diff erence between investors’ and their own consumption level. Qualitatively, an income redistribution from labor to capital leads to consumer credit dynamics that are in line with the data. As a validation exercise, we simulate a threeshock version of the model and fi nd that our theoretical set-up is able to reproduce important business cycle correlations.
    Keywords: Income redistribution; consumer credit; relative consumption motive; business cycles
    JEL: E21 E32 E44
    Date: 2014–10
  3. By: Richard Rogerson (Princeton University); Andrea Raffo (Federal Reserve Board); Lee Ohanian (University of California Los Angeles)
    Abstract: We document large differences across OECD countries in fluctuations of the intensive and extensive margin of labor supply over the business cycle. Countries with larger fluctuations in employment relative to hours per worker tend to display larger fluctuations in total hours worked. These facts appear to be related to policies that impede the dismissal of workers. We then present a quantitative framework that features both margins of labor supply as well as costs to the adjustment of employment. Cross-country differences in dismissal costs can account for a large fraction of the patterns observed in the data.
    Date: 2014
  4. By: Verónica Acurio Vasconez (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Gaël Giraud (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Florent Mc Isaac (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Ngoc Sang Pham (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: The economic implications of oil price shocks have been extensively studied since the oil price shocks of the 1970s'. Despite this huge literature, no dynamic stochastic general equilibrium model is available that captures two well-known stylized facts: 1) the stagflationary impact of an oil price shock, together with 2) two possible reactions of real wages: either a decrease (as in the US) or an increase (as in Japan). We construct a New-Keynesian DSGE model, which takes the case of an oil-importing economy where oil cannot be stored and where fossil fuels are used in two different ways: One part of the imported energy is used as an additional input factor next to capital and labor in the intermediate production of manufactured goods, the remaining part of imported energy is consumed by households in addition to their consumption of the final good. Oil prices, capital prices and nominal government spendings are exogenous random processes. We show that, without capital accumulation, the stagflationary effect is accounted for in general, and provide conditions under which a rise (resp. a declinr) of real wages follows the oil price shock.
    Keywords: New-Keynesian model; DSGE; oil; capital accumulation; stagflation
    Date: 2012–12
  5. By: Brumm, Johannes; Kubler, Felix; Grill, Michael; Schmedders, Karl
    Abstract: In this paper we examine the quantitative effects of margin regulation on volatility in asset markets. We consider a general equilibrium infinite-horizon economy with heterogeneous agents and collateral constraints. There are two assets in the economy which can be used as collateral for short-term loans. For the first asset the margin requirement is exogenously regulated while the margin requirement for the second asset is determined endogenously. In our calibrated economy, the presence of collateral constraints leads to strong excess volatility. Thus, a regulation of margin requirements may have stabilizing effects. However, in line with the empirical evidence on margin regulation in U.S. stock markets, we show that changes in the regulation of one class of assets may have only small effects on these assets' return volatility if investors have access to another (unregulated) class of collateralizable assets to take up leverage. In contrast, a countercyclical margin regulation of all asset classes in the economy has a very strong dampening effect on asset return volatility. JEL Classification: D53, G01, G12, G18
    Keywords: collateral constraints, general equilibrium, heterogeneous agents, margin requirements, Regulation T
    Date: 2014–07
  6. By: Covas, Francisco (Board of Governors of the Federal Reserve System (U.S.)); Driscoll, John C. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We develop a nonlinear dynamic general equilibrium model with a banking sector and use it to study the macroeconomic impact of introducing a minimum liquidity standard for banks on top of existing capital adequacy requirements. The model generates a distribution of bank sizes arising from differences in banks' ability to generate revenue from loans and from occasionally binding capital and liquidity constraints. Under our baseline calibration, imposing a liquidity requirement would lead to a steady-state decrease of about 3 percent in the amount of loans made, an increase in banks' holdings of securities of at least 6 percent, a fall in the interest rate on securities of a few basis points, and a decline in output of about 0.3 percent. Our results are sensitive to the supply of safe assets: the larger the supply of such securities, the smaller the macroeconomic impact of introducing a minimum liquidity standard for banks, all else being equal. Finally, we show that relaxing the liquidity requirement under a situation of financial stress dampens the response of output to aggregate shocks.
    Keywords: Bank regulation; liquidity requirements; capital requirements; incomplete markets; idiosyncratic risk; macroprudential policy
    JEL: D52 E13 G21 G28
    Date: 2014–09–12
  7. By: Pablo D'Erasmo (University of Maryland / FRB Philadelphi)
    Abstract: We develop a model of banking industry dynamics to study the quantitative impact of capital requirements on bank risk taking, commercial bank failure, and market structure. We propose a market structure where big, dominant banks interact with small, competitive fringe banks. The paper extends our previous work by letting banks accumulate securities like treasury bills and to undertake short-term borrowing when there are cash flow shortfalls. A nontrivial size distribution of banks arises out of endogenous entry and exit, as well as banks' buffer stocks of securities. We find that a 50% rise in capital requirements leads to a 45% reduction in exit rates of small banks and a more concentrated industry. Aggregate loan supply falls by 8.71% and interest rates rise by 50 basis points. The lower exit rate causes the tax/output rate necessary to fund deposit insurance to drop in half. Higher interest rates, on the other hand, result in a higher default frequency as well as a lower level of intermediated output. We also use the model to study the effect of lowering the rate different sized banks are charged when borrowing on their lending behavior studied by Kashyap and Stein (2001).
    Date: 2014
  8. By: Ofer Setty (Tel Aviv University); David Weiss (Tel Aviv University); Zvi Eckstein (The Interdisciplinary Center Herzliya)
    Abstract: There is a strong correlation between the corporate interest rate spread and the unemployment rate.We make two contributions to the literature based on this observation. First, we model the mechanisms by which these financial conditions can affect unemployment in a DMP model with capital. Second, we quantify these mechanisms, disciplining our model with US data. Financial conditions affect unemployment in four ways. First, high interest rates lower profits. Second, higher interest rates make vacancy posting more costly. Third, higher default rates lower the expected future profits of firm owners. Finally, default can lead directly to a separation between the worker and firm. We quantify these channels following various strategies outlined in the literature. Preliminary results suggest the model is able to produce quantitatively significant fluctuations under all calibration strategies.
    Date: 2014
  9. By: Clancy, Daragh (Central Bank of Ireland); Jacquinot, Pascal (European Central Bank); Lozej, Matija (Bank of Slovenia)
    Abstract: Small open economies within a monetary union have a limited range of stabilisation tools, as area-wide nominal interest and exchange rates do not respond to country-specific shocks. Such limitations imply that imbalances can be difficult to resolve. We assess the role that government spending can play in mitigating this issue using a global DSGE model, with an extensive fiscal sector allowing for a rich set of transmission channels. We find that complementarities between government and private consumption can substantially increase spending multipliers. Government investment, by raising productive public capital, improves external competitiveness and counteracts external imbalances. An ex-ante budget-neutral switch of government expenditure towards investment has beneficial effects in the medium run, while short-run effects depend on the degree of co-movement between private and government consumption. Finally, spillovers from a fiscal stimulus in one region of a monetary union depend on trade linkages and can be sizeable.
    Keywords: Fiscal policy, Public capital, Imbalances, Trade.
    JEL: E22 E62 H54
    Date: 2014–09
  10. By: Venky Venkateswaran (NYU Stern School of Business); Hugo A. Hopenhayn (UCLA); Joel David (USC)
    Abstract: We propose a theory linking imperfect information to resource misallocation and hence to aggregate productivity and output. In our setup, firms learn from both private sources and imperfectly informative stock market prices. We devise a novel calibration strategy that uses a combination of firm-level production and stock market data to pin down the information structure in the economy. Applying this methodology to data from the US, China, and India reveals substantial losses in productivity and output due to informational frictions - even when only one factor, namely capital, is subject to the friction. Our estimates for these losses range from 5-19% for productivity and 8-28% for output in China and India, and are smaller, though still significant, in the US. Losses are substantially higher when labor decisions are also made under imperfect information. Private learning plays a significant role in mitigating uncertainty and improving aggregate outcomes; learning from financial markets contributes little, even in the US.
    Date: 2014
  11. By: Juan Carlos Hatchondo; Leonardo Martinez; Yasin Kursat Onder
    Abstract: We quantify gains from introducing non-defaultable debt as a limited additional financing option into a model of equilibrium sovereign risk. We find that, for an initial (defaultable) sovereign debt level equal to 66 percent of trend aggregate income and a sovereign spread of 2.9 percent, introducing the possibility of issuing non-defaultable debt for up to 10 percent of aggregate income reduces immediately the spread to 1.4 percent, and implies a welfare gain equivalent to a permanent consumption increase of 0.9 percent. The spread reduction would be only 0.1 (0.2) percentage points higher if the government uses nondefaultable debt to buy back (finance a “voluntary†debt exchange for) previously issued defaultable debt. Without restrictions to defaultable debt issuances in the future, the spread reduction achieved by the introduction of non-defaultable debt is short lived. We also show that allowing governments in default to increase non-defaultable debt is damaging at the time non-defaultable debt is introduced and inconsequential in the medium term. These findings shed light on different aspects of proposals to introduce common euro-area sovereign bonds that could be virtually non-defaultable.
    Keywords: Sovereign debt defaults;Sovereign risk;Debt buyback arrangements;Eurobond markets;Bond issues;Econometric models;sovereign default, sovereign debt, Eurobonds, red bonds, blue bonds, buyback, voluntary debt exchange
    Date: 2014–10–28
  12. By: Francesco Bianchi; Leonardo Melosi
    Abstract: We develop and estimate a general equilibrium model in which monetary policy can deviate from active inflation stabilization and agents face uncertainty about the nature of these deviations. When observing a deviation, agents conduct Bayesian learning to infer its likely duration. Under constrained discretion, only short deviations occur: Agents are confident about a prompt return to the active regime, macroeconomic uncertainty is low, welfare is high. However, if a deviation persists, agents' beliefs start drifting, uncertainty accelerates, and welfare declines. If the duration of the deviations is announced, uncertainty follows a reverse path. When estimated to match past U.S. experience, our model suggests that transparency lowers uncertainty and increases welfare.
    JEL: C11 D83 E52
    Date: 2014–10
  13. By: Cavalcanti Ferreira, Pedro (EPGE/FGV); Monge-Naranjo, Alexander (Federal Reserve Bank of St. Louis); Torres de Mello Pereira, Luciene (EPGE/FGV)
    Abstract: This article studies the impact of education and fertility in structural transformation and growth. In the model there are three sectors, agriculture, which uses only low-skill labor, manufacturing, that uses high-skill labor only and services, that uses both. Parents choose optimally the number of children and their skill. Educational policy has two dimensions, it may or may not allow child labor and it subsidizes education expenditures. The model is calibrated to South Korea and Brazil, and is able to reproduce some key stylized facts observed between 1960 and 2005 in these economies, such as the low (high) productivity of services in Brazil (South Korea) which is shown to be a function of human capital and very important in explaining its stagnation (growth) after 1980. We also analyze how different government policies towards education and child labor implemented in these countries affected individuals’ decisions toward education and the growth trajectory of each economy.
    Keywords: economic growth; structural transformation; education; fertility
    JEL: J13 J24 O40 O41 O47 O57
    Date: 2014–10–29
  14. By: Abowd, John M. (Cornell University); Kramarz, Francis (CREST (ENSAE)); Pérez-Duarte, Sébastien (European Central Bank); Schmutte, Ian M. (University of Georgia)
    Abstract: We test for sorting of workers between and within industrial sectors in a directed search model with coordination frictions. We fit the model to sector-specific vacancy and output data along with publicly-available statistics that characterize the distribution of worker and employer wage heterogeneity across sectors. Our empirical method is general and can be applied to a broad class of assignment models. The results indicate that industries are the loci of sorting-more productive workers are employed in more productive industries. The evidence confirms assortative matching can be present even when worker and employer components of wage heterogeneity are weakly correlated.
    Keywords: sorting, industries
    JEL: J30
    Date: 2014–08

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