|
on Dynamic General Equilibrium |
| By: | Marzie Taheri Sanjani |
| Abstract: | This paper estimates a New Keynesian DSGE model with an explicit financial intermediary sector. Having measures of financial stress, such as the spread between lending and borrowing, enables the model to capture the impact of the financial crisis in a more direct and efficient way. The model fits US post-war macroeconomic data well, and shows that financial shocks play a greater role in explaining the volatility of macroeconomic variables than marginal efficiency of investment (MEI) shocks. |
| Keywords: | Business cycles;Financial intermediaries;General equilibrium models;DSGE, Bayesian Estimation, Financial Frictions, Sources of Business Cycle |
| Date: | 2014–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/194&r=dge |
| By: | Matteo Ghilardi; Shanaka J. Peiris |
| Abstract: | This paper develops an open-economy DSGE model with an optimizing banking sector to assess the role of capital flows, macro-financial linkages, and macroprudential policies in emerging Asia. The key result is that macro-prudential measures can usefully complement monetary policy. Countercyclical macroprudential polices can help reduce macroeconomic volatility and enhance welfare. The results also demonstrate the importance of capital flows and financial stability for business cycle fluctuations as well as the role of supply side financial accelerator effects in the amplification and propagation of shocks. |
| Keywords: | Capital flows;Asia;Emerging markets;Business cycles;Macroprudential policies and financial stability;Financial intermediation;Monetary policy;Banking sector;Open economies;General equilibrium models;Financial Frictions, Capital Regulation, Monetary Policy |
| Date: | 2014–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/157&r=dge |
| By: | Nicolas Groshenny (School of Economics, University of Adelaide) |
| Abstract: | We investigate the macroeconomic consequences of fluctuations in the effectiveness of the labor-market matching process with a focus on the Great Recession. We conduct our analysis in the context of an estimated medium-scale DSGE model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency (or mismatch shock). We find that this shock is not important for unemployment fluctuations in normal times. However, it plays a somewhat larger role during the Great Recession when it contributes to raise the actual unemployment rate by around 1.3 percentage points and the natural rate by around 2 percentage points. The mismatch shock is the dominant driver of the natural rate of unemployment and explains part of the recent shift of the Beveridge curve. |
| Keywords: | Search and matching frictions; Unemployment; Natural rates. |
| JEL: | E32 C51 C52 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2014-07&r=dge |
| By: | Soojin Kim (Purdue University) |
| Abstract: | Two key determinants of optimal tax policies in open economies are the mobility of factors of production, capital and labor; and strategic interaction between governments in setting their policies. This paper develops a two-country, open-economy model with labor mobility and a global nancial market to study optimal taxation. Governments engage in tax competition in which they choose a labor income tax code and a capital income tax rate. A quantitative application of the model to the United Kingdom (UK) and Continental European countries (CE) shows that factor mobility and competition between governments are indeed crucial in the design of optimal policies. Incorporating labor mobility leads to a divergence in the optimal tax system: Unlike in an economy with only capital mobility, where both countries use similar capital income tax rates, the optimal capital income tax rate in the UK is lower than that in the CE when both capital and labor are mobile. This is due to the dierences in productivity between the two countries. In the calibrated economy, the UK, whose productivity is higher than that of the CE, attracts more labor through migration. Thus, the welfare-maximizing level of capital in the relatively small CE is lower than that in the UK. Moreover, I nd that capital income tax rates are higher with competition. With competition, both governments lower capital income tax rates, rendering the marginal benet of a lower tax rate to decrease. The steady-state welfare gain from implementing the Nash equilibrium policies is about 11 percent of consumption of the status quo economy. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:508&r=dge |
| By: | Baas, Timo (University of Duisburg-Essen); Belke, Ansgar (University of Duisburg-Essen) |
| Abstract: | Member countries of the European Monetary Union (EMU) initiated wide-ranging labor market reforms in the last decade. This process is ongoing as countries that are faced with serious labor market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. This fosters fears among observers about a beggar-thy-neighbor policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. Using a two-country, two-sector search and matching DSGE model, we analyze the impact of labor market reforms on the transmission of macroeconomic shocks in both, non-reforming and reforming countries. By analyzing the impact of reforms on foreign debt, we contribute to the debate on whether labor market reforms increase or reduce current account imbalances. |
| Keywords: | current account deficit, labor market reforms, DSGE models, search and matching labor market |
| JEL: | E24 E32 J64 F32 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8453&r=dge |
| By: | Kindermann, Fabian; Krueger, Dirk |
| Abstract: | In this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations. |
| Keywords: | Progressive Taxation,Top 1%,Social Insurance,Income Inequality |
| JEL: | E62 H21 H24 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:473&r=dge |
| By: | Robert Becker (Department of Economics, Indiana University - Indiana University); Stefano Bosi (EPEE - Université d'Evry-Val d'Essonne); Cuong Le Van (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, VCREME - VanXuan Center of Research in Economics, Management and Environment - VanXuan Center of Research in Economics, Management and Environment, IPAG Business School - Ipag Business School); Thomas Seegmuller (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)) |
| Abstract: | We study the existence of equilibrium and rational bubbles in a Ramsey model with heterogeneous agents, borrowing constraints and endogenous labor. Applying a Kakutani's fixed-point theorem, we prove the existence of equilibrium in a time-truncated bounded economy. A common argument shows this solution to be an equilibrium for any unbounded economy with the same fundamentals. Taking the limit of a sequence of truncated economies, we eventually obtain the existence of equilibrium in the Ramsey model. In the second part of the paper, we address the issue of rational bubbles and we prove that they never occur in a productive economy à la Ramsey. |
| Keywords: | Existence of equilibrium; bubbles; Ramsey model; heterogeneous agents; borrowing constraint; endogenous labor |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01020635&r=dge |
| By: | Mayer, Eric; Rüth, Sebastian; Scharler, Johann |
| Abstract: | Using a sign restrictions approach, we document that total factor productivity (TFP) moves counter-cyclically in the aftermath of supply and demand side shocks. To interpret our empirical results, we conduct counter-factual simulations, based on a New Keynesian DSGE model in which TFP fluctuates endogenously due to time-varying labor effort. The simulations show that the decline in the output gap, following an adverse shock, is dampened by the endogenously improving TFP as long as the nominal interest rate remains strictly positive during the downturn. If the economy hits the zero lower bound, the decline in the output gap is amplified when TFP improves endogenously. |
| Keywords: | TFP,labor effort,zero lower bound |
| JEL: | E24 E30 E32 E40 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wuewep:92&r=dge |
| By: | Lalaina Rakotonindrainy (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) |
| Abstract: | We consider a standard pure exchange overlapping generations economy. The demographic structure consists of a new cohort of agents at each period with an economic activity extended over two successive periods. Our model incorporates durable goods that may be stored from one period to a successive period through a linear technology. In this model, we intend to study the mechanism of transfer between generations, and we show that the existence of an equilibrium can be established by considering an equivalent economy "without" durable goods, where the agents economic activity is extended over three successive periods. |
| Keywords: | Overlapping generations model; durable goods; irreducibility; equilibrium; existence |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01021382&r=dge |
| By: | Afanasyeva, Elena; Güntner, Jochen |
| Abstract: | This paper investigates the risk channel of monetary policy on the asset side of banks' balance sheets. We use a factoraugmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed it in a New Keynesian dynamic stochastic general equilibrium (DSGE) model, and show that - consistent with our empirical findings - an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers. |
| Keywords: | Bank lending standards,Credit supply,Monetary policy,Risk channel |
| JEL: | E44 E52 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:85&r=dge |
| By: | Stefano Bosi (EPEE - Université d'Evry-Val d'Essonne); Cuong Le Van (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, VCREME - VanXuan Center of Research in Economics, Management and Environment - VanXuan Center of Research in Economics, Management and Environment, IPAG Business School - Business School); Ngoc-Sang Pham (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | We consider a general equilibrium model with heterogeneous agents, borrowing constraints, and exogenous labor supply. First, the existence of intertemporal equilibrium is proved even if the aggregate capitals are not uniformly bounded above and the production functions are not time invariant. Second, (i) we call by physical capital bubble a situation in which the fundamental value of physical capital is lower than its price, (ii) we say that the interest rates are low if the sum of interest rates is finite. We show that physical capital bubble is equivalent to a situation with low interest rates. Last, we prove that with linear technologies, every intertemporal equilibrium is efficient. Moreover, there is a room for both efficiency and bubble. |
| Keywords: | Intertemporal equilibrium; physical capital bubble; efficiency; infinite horizon |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01020888&r=dge |
| By: | Akinci, Ozge (Board of Governors of the Federal Reserve System (U.S.)); Queraltó, Albert (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | This paper proposes a macroeconomic model with financial intermediaries (banks), in which banks face occasionally binding leverage constraints and may endogenously affect the strength of their balance sheets by issuing new equity. The model can account for occasional financial crises as a result of the nonlinearity induced by the constraint. Banks' precautionary equity issuance makes financial crises infrequent events occurring along with "regular" business cycle fluctuations. We show that an episode of capital infl ows and rapid credit expansion, triggered by low country interest rates, leads banks to endogenously decrease the rate of equity issuance, contributing to an increase in the likelihood of a crisis. Macroprudential policies directed at strengthening banks' balance sheets, such as capital requirements, are shown to lower the probability of financial crises and to enhance welfare. |
| Keywords: | Financial intermediation; sudden stops; leverage constraints; occasionally binding constraints. |
| JEL: | E32 F41 F44 G15 |
| Date: | 2014–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1121&r=dge |
| By: | Gehrke, Britta |
| Abstract: | This paper analyzes fiscal policy under fiscal rules in a New Keynesian model with search and matching frictions and distortionary taxation. The model is estimated with US data including detailed information on fiscal instruments. Several findings stand out. First, fiscal rules enhance the positive effects of discretionary fiscal policy on output and unemployment if they influence the expected future path of interest rates. However, effects are smaller as suggested in the existing literature. Second, spending and consumption tax cuts have the largest multipliers. Third, multipliers for labor tax cuts are small. These results originate from the labor market friction and persist in an economy where the friction is more severe. Demand side disturbances explain the majority of labor market dynamics. |
| Keywords: | Fiscal policy,Fiscal rules,Unemployment,Search and matching |
| JEL: | E62 J20 H30 C11 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwqwdp:102014&r=dge |
| By: | Robert Kollmann |
| Abstract: | Standard macro models cannot explain why real exchange rates are volatile and disconnected from macro aggregates. Recent research argues that models with persistent growth rate shocks and recursive preferences can solve that puzzle. I show that this result is highly sensitive to the structure of financial markets. When just a bond is traded internationally, then long-run risk generates insufficient exchange rate volatility. A long-run risk model with recursive-preferences can generate realistic exchange rate volatility, if all agents efficiently share their consumption risk by trading in complete financial markets; however, this entails massive international wealth transfers, and excessive swings in net foreign asset positions. By contrast, a long-run risk, recursivepreferences model in which only a fraction of households trades in complete markets, while the remaining households lead hand-to-mouth lives, can generate realistic exchange rate and external balance volatility. |
| Keywords: | exchange rate, long-run risk, recursive preferences, complete financial markets, financial frictions, international risk sharing |
| JEL: | F31 F36 F41 F43 F44 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-70&r=dge |
| By: | Yuko Imura |
| Abstract: | Financial crises in emerging economies in the 1980s and 1990s often entailed abrupt declines in foreign capital inflows, improvements in trade balance, and large declines in output and total factor productivity (TFP). This paper develops a two-sector small open economy model wherein heterogeneous firms face collateralized credit constraints for investment loans. The model is calibrated using Mexican data, and explains the economic downturn and subsequent recoveries following financial crises. In response to a sudden tightening of credit availability, the model generates a large decline in external debt, an improvement in trade balance, and declines in output and TFP, consistent with the stylized facts of sudden stop episodes. Tighter borrowing constraints lead firms to reduce investment and production, which in turn results in some firms holding capital stock disproportionate to their productivity levels. This disrupts the optimal allocation of capital across firms, and generates an endogenous fall in measured TFP. Furthermore, the subsequent recovery is driven by the traded sector, since the credit crunch is more persistent among domestic financing sources relative to foreign financing sources. This is consistent with the experience of Mexico, where the relatively fast recovery from the 1994-95 crisis was driven mainly by the traded sector, which had access to international financial markets. |
| Keywords: | Business fluctuations and cycles; Credit and credit aggregates; Financial markets; International topics |
| JEL: | E22 E32 F41 G01 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-49&r=dge |
| By: | Davide Debortoli; Ricardo Nunes; Pierre Yared |
| Abstract: | This paper develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and cannot commit to fiscal policy. If the government can perfectly commit, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust to the introduction of lack of commitment. Under lack of commitment, large and tilted positions are very expensive to finance ex-ante since they exacerbate the problem of lack of commitment ex-post. In contrast, a flat maturity structure minimizes the cost of lack of commitment, though it also limits insurance and increases the volatility of fiscal policy distortions. We show that the optimal maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols. |
| JEL: | E62 H21 H63 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20632&r=dge |
| By: | Marconi G.; Grip A. de (GSBE) |
| Abstract: | In this paper, we develop a general equilibrium overlapping generations model which is based on the view that education makes workers more productive by increasing their ability to learn from work experience, rather than providing skills that directly increase productivity. This assumption is discussed and compared with the dominant Mincerian view on the education-productivity relationship. One important implication of the model is that the enrolment rate to education has a negative effect on the GDP in the medium term and a positive effect in the long term. This could be an explanation for the weak empirical relationship between education and economic growth that has been found in the empirical macroeconomic literature. Conversely, for a given enrolment rate, the quality of education, as measured by work |
| Keywords: | Human Capital; Skills; Occupational Choice; Labor Productivity; Macroeconomic Analyses of Economic Development; One, Two, and Multisector Growth Models; |
| JEL: | J24 O11 O41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2014032&r=dge |
| By: | Kühl, Michael |
| Abstract: | This paper compares the consequences of equity injections into banks with purchases of corporate and government bonds in a financial crisis situation using a New Keynesian model in which non-financial firms predominantly take non-market-based debt from banks instead of issuing securities. Our results show that equity injections into banks are more welfare enhancing than asset purchases following a financial shock located in the banking sector. Equity injections remove the frictions that have initiated the stress and, at the same time, relax borrowing conditions. Outright purchases also increase welfare but lower returns with negative effects on banks' profits, while the effect on asset prices to stabilize banks' balance sheets is of minor importance due to the dominance of non-market-based debt. Furthermore, we demonstrate that the origin of the financial shock matters crucially for the efficacy of measures. |
| Keywords: | DSGE Model,Financial Frictions,Financial Accelerator,Unconventional Policy Measures,Asset Purchase Programs,Capital Injections into Banks |
| JEL: | E44 E58 E61 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:192014&r=dge |
| By: | George Alessandria; Horag Choi; Kim Ruhl |
| Abstract: | We build a micro-founded two-country dynamic general equilibrium model in which trade responds more to a cut in tariffs in the long run than in the short run. The model introduces a time element to the fixed-variable cost trade-off in a heterogeneous producer trade model. Thus, the dynamics of aggregate trade adjustment arise from producer-level decisions to invest in lowering their future variable export costs. The model is calibrated to match salient features of new exporter growth and provides a new estimate of the exporting technology. At the micro level, we find that new exporters commonly incur substantial losses in the first three years in the export market and that export profits are backloaded. At the macro level, the slow export expansion at the producer level leads to sluggishness in the aggregate response of exports to a change in tariffs, with a long-run trade elasticity that is 2.9 times the short-run trade elasticity. We estimate the welfare gains from trade from a cut in tariffs, taking into account the transition period. While the intensity of trade expands slowly, consumption overshoots its new steady-state level, so the welfare gains are almost 15 times larger than the long-run change in consumption. Models without this dynamic export decision underestimate the gains to lowering tariffs, particularly when constrained to also match the gradual expansion of aggregate trade flows. |
| JEL: | E22 F12 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20663&r=dge |
| By: | Christopher Carroll (Johns Hopkins University); Jiri Slacalek (European Central Bank); Kiichi Tokuoka (Japanese Ministry of Finance); Matthew N. White (Department of Economics, University of Delaware) |
| Abstract: | We present a macroeconomic model calibrated to match both microeconomic and macroeconomic evidence on household income dynamics. When the model is modified in a way that permits it to match empirical measures of wealth inequality in the U.S., we show that its predictions (unlike those of competing models) are consistent with the substantial body of microeconomic evidence that suggests that the annual marginal propensity to consume (MPC) is much larger than the 0.02-0.04 range implied by commonly-used macroeconomic models. Our model also plausibly predicts that the aggregate MPC can differ greatly depending on how the shock is distributed across categories of households (e.g., low-wealth versus high-wealth households). |
| Keywords: | Microfoundations, Wealth Inequality, Marginal Propensity to Consume |
| JEL: | D12 D31 D91 E21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:14-15.&r=dge |
| By: | Maria Teresa Punzi (Department of Economics, Vienna University of Economics and Business); Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business) |
| Abstract: | We allow for heterogeneity in investors’ ability to borrow from collateral in a Kiyotaki- Moore style macro model. We calibrate the model to match the quintiles of the distribution of leverage ratios of US non-financial firms. We show that financial amplification of the model with heterogeneous investors can be orders of magnitude higher, because of more pronounced asset price reactions. |
| Keywords: | Collateral Constraints, Leverage, Heterogeneity, Financial Amplification |
| JEL: | E32 E44 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp189&r=dge |
| By: | Jose Maria Da-Rocha; Marina Mendes Tavares; Diego Restuccia |
| Abstract: | The large differences in income per capita across countries are mostly accounted for by differences in total factor productivity (TFP). What explains these differences in TFP across countries? Evidence suggests that the (mis)allocation of factors of production across heterogenous production units is an important factor. We study factor misallocation in a model with an endogenously determined distribution of establishment-level productivity. In this framework, policy distortions not only misallocate resources across a given set of productive units, but they also worsen the distribution of establishment-level productivity. We show that in our model, compared to the model with an exogenous distribution, the quantitative effect of policy distortions is substantially amplified. Whereas empirically-plausible policy distortions in our model generate TFP that is 14 percent that of a benchmark economy with no distortions, with an exogenous distribution the same policy distortions generate TFP that is 86 percent of the benchmark, a 6-fold amplification factor. |
| Keywords: | distortions, misallocation, investment, endogenous productivity, establishments. |
| JEL: | O1 O4 |
| Date: | 2014–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-523&r=dge |
| By: | Restuccia, Diego (University of Toronto); Vandenbroucke, Guillaume (Federal Reserve Bank of St. Louis) |
| Abstract: | Consider the following facts. In 1950, the richest countries attained an average of 8 years of schooling whereas the poorest countries 1.3 years, a large 6-fold difference. By 2005, the difference in schooling declined to 2-fold because schooling increased faster in poor than in rich countries. What explains educational attainment differences across countries and their evolution over time? We consider an otherwise standard model of schooling featuring non- homothetic preferences and a labor supply margin to assess the quantitative contribution of productivity and life expectancy in explaining educational attainment. A calibrated version of the model accounts for 90 percent of the difference in schooling levels in 1950 between rich and poor countries and 71 percent of the faster increase in schooling over time in poor relative to rich countries. These results suggest an alternative view of the determinants of low education in developing countries that is based on low productivity. |
| Keywords: | Schooling; productivity; life expectancy; labor supply. |
| JEL: | E24 J22 J24 O1 O4 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2014-048&r=dge |
| By: | Hafedh Bouakez; Michel Guillard; Jordan Roulleau-Pasdeloup |
| Abstract: | We study the effectiveness of public investment in stimulating an economy stuck in a liquidity trap. We do so in the context of a tractable new-Keynesian economy in which a fraction of government spending increases the stock of public capital subject to a time-to-build constraint. Public investment projects typically entail significant time-to-build delays, which often span several years from approval to completion. We show that this feature implies that the spending multiplier associated with public investment can be substantially large-nearly twice as large as the multiplier associated with public consumption-in a liquidity trap. Intuitively, when the time to build is sufficiently long, and to the extent that public capital raises the marginal productivity of private inputs, the resulting deflationary effect will occur after the economy has escaped from the liquidity trap. At the same time, the increase in households's expected wealth amplifies aggregate demand while the economy is still in the liquidity trap. Using a mediumscale model extended to allow for the accumulation of public capital, we quantify the multiplier associated with the spending component of the 2009's ARRA, which allocated roughly 40% of the authorized funds to public investment. We find a peak multiplier of 2.31. Our results also indicate that failing to account for the composition of the stimulus by overlooking its investment component would lead one to underestimate the spending multiplier by about 50%. |
| Keywords: | Public spending; Public investment; Time to build; Multiplier; Zero lower bound |
| JEL: | E4 E52 E62 H54 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:14.06&r=dge |
| By: | Michael B. Devereux; Changhua Yu |
| Abstract: | International financial integration helps to diversify risk but also may increase the trans- mission of crises across countries. We provide a quantitative analysis of this trade-off in a two-country general equilibrium model with endogenous portfolio choice and collateral con- straints. Collateral constraints bind occasionally, depending upon the state of the economy and levels of inherited debt. The analysis allows for different degrees of financial integration, moving from financial autarky to bond market integration and equity market integration. Fi- nancial integration leads to a significant increase in global leverage, doubles the probability of balance sheet crises for any one country, and dramatically increases the degree of 'contagion' across countries. Outside of crises, the impact of financial integration on macro aggregates is relatively small. But the impact of a crisis with integrated international financial markets is much less severe than that under financial market autarky. Thus, a trade-off emerges between the probability of crises and the severity of crises. Financial integration can raise or lower welfare, depending on the scale of macroeconomic risk. In particular, in a low risk environment, the increased leverage resulting from financial integration can reduce welfare of investors. |
| JEL: | D52 F36 F44 G11 G15 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20526&r=dge |
| By: | Liao, Wei; Santacreu, Ana Maria (Federal Reserve Bank of St. Louis) |
| Abstract: | Countries that trade more with each other tend to have more correlated business cycles. Yet, traditional international business cycle models predict a much weaker link between trade and business cycle comovement. We propose that fluctuations in the number of varieties embedded in trade flows may drive the observed comovement by increasing the correlation among trading partners’ total factor productivity (TFP). Our hypothesis is that business cycles should be more correlated between countries that trade a wider variety of goods. We find empirical support for this hypothesis. After decomposing trade into its extensive and intensive margins, we find that the extensive margin explains most of the trade–TFP and trade–output comovement. This result is striking because the extensive margin accounts for only a fourth of the variability in total trade. We then develop a two-country model with heterogeneous firms, endogenous entry, and fixed export costs, in which TFP correlation increases with trade in varieties. A numerical exercise shows that our proposed mechanism increases business cycle synchronization compared with the levels predicted by traditional models. |
| Keywords: | international business cycle comovement; TFP; extensive margin of trade. |
| JEL: | F12 F44 |
| Date: | 2014–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2014-043&r=dge |
| By: | Ali Yurukoglu (Stanford University); Claire Lim (Cornell University) |
| Abstract: | This paper studies time inconsistency, asymmetric information, and political ideology in natural monopoly regulation of electricity distribution companies. Empirically, more conservative political environments have higher regulated rates of return and worse operational efficiency as measured by electricity lost in distribution. Capital investment improves reliability in a cost effective manner. We estimate a dynamic game theoretic model of utility regulation featuring investment and asymmetric information. Under-investment due to time inconsistency is severe. Conservative regulators improve welfare losses due to time inconsistency, but worsen losses due to asymmetric information. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:530&r=dge |
| By: | Gomes, Sandra; Jacquinot, Pascal; Pisani, Massimiliano |
| Abstract: | We assess the effects on trade balance of a temporary fiscal devaluation enacted by Spain or Portugal by simulating EAGLE, a large-scale multi-country dynamic general equilibrium model of the euro area. Social contributions paid by firms are reduced by 1 percent of GDP for four years and are financed by increasing consumption tax. Our main results are the following. First, the Spanish trade balance improves by 0.5 percent of GDP, the (before-consumption tax) real exchange rate depreciates by 0.7 percent and the terms of trade deteriorate by 1 percent. Second, similar results are obtained in the case of Portugal. Third, the trade balance improves when the fiscal devaluation is enacted also in the rest of the euro area, albeit to a lower extent than in the case of unilateral (country-specific) implementation. Fourth, quantitative results crucially depend on the degree of substitutability between domestic and imported tradables. JEL Classification: F32, F47, H20 |
| Keywords: | dynamic general equilibrium modeling, fiscal devaluation, trade deficit |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141725&r=dge |