|
on Dynamic General Equilibrium |
|
Issue of 2014‒12‒19
twenty-six papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Mendicino, Caterina; Punzi, Maria Teresa |
| Abstract: | This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkage4s 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 dept. In this context, optimal policy features an interestrate response to credit and a LTV ration 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fmpwps:10&r=dge |
| By: | Berentsen, Aleksander; Waller, Christopher |
| Abstract: | We study optimal monetary stabilization policy in a DSGE model with microfounded money demand. A search externality creates ‘congestion’ which causes aggregate output to be inefficient. Due to the informational frictions that give rise to money, households are unable to perfectly insure themselves against aggregate shocks. This gives rise to a welfare improving role for monetary policy that works by adjusting the nominal interest rate in response to these shocks. Optimal policy is determined by choosing a set of state-contingent nominal interest rates to maximize the expected lifetime utility of the agents subject to the constraints of being an equilibrium. |
| Keywords: | monetary policy, optimal stabilization policy, search equilibrium, microfoundation of money |
| JEL: | E00 E40 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59745&r=dge |
| By: | Holter, Hans A.; Krueger, Dirk; Stepanchuk, Serhiy |
| Abstract: | How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity. |
| Keywords: | Progressive Taxation,Fiscal Policy,Laffer Curve,Government Debt |
| JEL: | E62 H20 H60 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:490&r=dge |
| By: | Restrepo-Echavarria, Paulina (Federal Reserve Bank of St. Louis) |
| Abstract: | Latin America has had striking changes in economic performance over time. Following the recession and debt crises of the early 1980’s, consumption declined for about ten years and consumption per-capita in the year 2004 was roughly the same as it was in 1980. This paper studies consumption stagnation in Latin America using a small open economy real business cycle model with endogenous borrowing limits, capitalistic production and domestic productivity and international interest rate shocks. I find that the model does an excellent job matching the observed behavior of per-capita consumption, and that the interaction of both productivity and international interest rate shocks with the borrowing limit is key. |
| Keywords: | Limited Commitment; per-capita consumption; total factor productivity; interest rate. |
| JEL: | C61 E21 F41 F43 |
| Date: | 2013–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2014-037&r=dge |
| By: | Radde, Sören |
| Abstract: | This paper argues that counter-cyclical liquidity hoarding by financial intermediaries may strongly amplify business cycles. It develops a dynamic stochastic general equilibrium model in which banks operate subject to agency problems and funding liquidity risk in their inter- mediation activity. Importantly, the amount of liquidity reserves held in the financial sector is determined endogenously: Balance sheet constraints force banks to trade off insurance against funding outflows with loan scale. A financial crisis, simulated as an abrupt decline in the collateral value of bank assets, triggers a flight to liquidity, which strongly amplifies the initial shock and induces credit crunch dynamics sharing key features with the Great Recession. The paper thus develops a new balance sheet channel of shock transmission that works through the composition of banks' asset portfolios. JEL Classification: E22, E32, E44 |
| Keywords: | bank capital channel, credit crunch, funding liquidity risk, liquidity hoarding, macro-finance |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141729&r=dge |
| By: | Harenberg, Daniel; Ludwig, Alexander |
| Abstract: | When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations and demonstrate that they interact over the life-cycle. The interactions appear even though the two risks are orthogonal and they amplify the welfare consequences of introducing social security. On the one hand, the interactions increase the welfare benefits from insurance. On the other hand, they can in- or decrease the welfare costs from crowding out of capital formation. This ambiguous effect on crowding out means that the net effect of these two channels is positive, hence the interactions of risks increase the total welfare benefits of social security. |
| Keywords: | social security,idiosyncratic risk,aggregate risk,welfare,insurance,crowding out |
| JEL: | C68 E27 E62 G12 H55 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:71&r=dge |
| By: | Fernando Leibovici; Michael E. Waugh |
| Abstract: | This paper studies the dynamics of international trade flows at business cycle frequencies. We show that introducing dynamic considerations into an otherwise standard model of trade can account for several puzzling features of trade flows at business cycle frequencies. Our insight is that because international trade is time-intensive, variation in the rate at which agents are willing to substitute across time affects how trade volumes respond to changes in output and prices. We formalize this idea and calibrate our model to match key features of U.S. data. We find that, in contrast to standard static models of international trade, our model is quantitatively consistent with salient features of U.S. cyclical import fluctuations. We also find that our model accounts for two-thirds of the peak-to-trough decline in imports during the 2008-2009 recession. |
| JEL: | E0 F0 F1 F4 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20498&r=dge |
| By: | Leo Kaas (Department of Economics, University of Konstanz, Germany); Patrick A. Pintus (Aix-Marseille School of Economics, University of Marseille, France); Simon Ray (Aix-Marseille School of Economics, University of Marseille, France) |
| Abstract: | The value of land in the balance sheet of French firms correlates positively with their hiring and investment flows. To explore the relationship between these variables, we develop a macroeconomic model with firms that are subject to both credit and labor market frictions. The value of collateral is driven by the forward-looking dynamics of the land price, which reacts endogenously to fundamental and non-fundamental (sunspot) shocks. We calibrate the model to French data and find that land price shocks give rise to significant amplification and hump-shaped responses of investment, vacancies and unemployment that are in line with the data. |
| Keywords: | Financial shocks; Labor market frictions |
| JEL: | E24 E32 E44 |
| Date: | 2014–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1418&r=dge |
| By: | Saint-Paul, Gilles (University of Toulouse I) |
| Abstract: | We study active labor market policies (ALMP) in a matching model. ALMPs are modelled as a subsidy to job search. Workers differ in their productivity, and search takes place along an extensive margin. An additional job seeker affects the quality of unemployed workers. As a result, the Hosios conditions are no longer valid. To replicate the optimum the worker share in bargaining must exceed the Hosios level, and one must impose a tax on job search activity. The coalition in favor of ALMP is also studied. |
| Keywords: | active labor market policy, matching models |
| JEL: | E24 J6 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8551&r=dge |
| By: | Jesús A. Bejarano; Luisa F. Charry |
| Abstract: | In this paper we set up a small open economy model with financial frictions, following Curdia and Woodford (2010)’s model. Unlike other results in the literature such as Curdia and Woodford (2010), McCulley and Ramin (2008) and Taylor (2008), we find that optimal monetary policy should not respond to changes in domestic interest rate spreads when the source of fluctuations are exogenous financial shocks. A novel result here is that the optimal size of policy responses to changes in the credit spread is large when the disturbance source are shocks to the foreign interest rate. Our results suggest that such a response is welfare enhancing. Classification JEL: E44, E50, E52, E58, F41. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:852&r=dge |
| By: | Yanlei Ma (Cornell University) |
| Abstract: | Over the past few decades, high income inequality and low output fluctuations have coincided with the rising domestic political polarization and policy gridlock in the United States. Motivated by the above fact, this paper analyzes the rigidity of tax policy in an economy with dynamic legislative bargaining and exogenous output fluctuations. First, by adopting the setup of bargaining with endogenous status quo, I account for the co-movement of economic inequality and policy gridlock. Second, by incorporating an economy-wide productivity shock, this model generates the feature that legislative stalemate occurs more frequently in times of reduced output volatility. Third, perhaps surprisingly, the model uncovers the property that equilibrium policy can be either 'present-oriented' or 'far-sighted'. In the 'far-sighted' equilibrium, the policy maker is willing to sacrifice present well-being for the sake of achieving increased bargaining power in the future. Finally, I also find policy gridlock could be alleviated by introducing additional flexibility into the tax system. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:547&r=dge |
| By: | Serdar Kabaca |
| Abstract: | This paper contributes to the literature by documenting labour income share fluctuations in emerging-market economies and proposing an explanation for them. Time-series data indicate that emerging markets differ from developed markets in terms of changes in the labour share over the business cycle. Labour share is more volatile in emerging markets and is procyclical, especially in countries facing countercyclical interest rates. In contrast, labour share in developed markets is more stable and slightly countercyclical. A frictionless small open-economy real business cycle model cannot account for these facts. I introduce working capital into this model, which generates liquidity need for labour payments. The main result is that the behaviour of the cost of borrowing can predict the right sign of the co-movement between labour share and output in both country groups, and can partly be responsible for the volatility of labour share. I also show that imperfect financial markets in the form of credit restrictions not only amplify the results for the variability of labour share but also help better explain some of the striking business cycle regularities in emerging markets, such as highly volatile consumption, strongly procyclical investment and countercyclical net exports. |
| Keywords: | Business fluctuations and cycles, Development economics, Interest rates, International topics, Labour markets |
| JEL: | E25 F41 E44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-47&r=dge |
| By: | Clancy, Daragh; Jacquinot, Pascal; Lozej, Matija |
| 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. JEL Classification: E22, E62, H54 |
| Keywords: | fiscal policy, imbalances, public capital, trade |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141727&r=dge |
| By: | Falk Mazelis; ; ; |
| Abstract: | We extend the monetary DSGE model by Gertler and Karadi (2011) with a non-bank financial intermediary to investigate the impact of monetary policy shocks on aggregate loan supply. We distinguish between bank and non-bank intermediaries based on the liquidity of their credit claims. While banks can endogenously create deposits to fund firm loans, non-banks have to raise deposits on the funding market to function as intermediaries. The funding market is modeled via search and matching by non-banks for available deposits of households. Because deposit creation responds to economy-wide productivity automatically, bank reaction to shocks corresponds to the balance sheet channel. Non-banks are constrained by the available deposits and their behavior is better explained by the lending channel. The two credit channels are affected differently following a monetary policy shock. As a result of these counteracting effects, an increasing non-bank sector leads to a reduced reaction of aggregate loan supply following a monetary policy shock, which is consistent with the data. An extension to deposit like-issuance by the non-bank sector will allow further studies of re-regulating the non-bank sector. |
| Keywords: | Shadow Banking, Monetary Transmission Mechanism, Credit Channel |
| JEL: | E32 E44 E51 G20 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2014-056&r=dge |
| By: | Loukas Karabarbounis (University of Chicago); Brent Neiman (University of Chicago); Jonathan Adams (University of Chicago) |
| Abstract: | The share of aggregate income paid as compensation to labor is frequently used as a proxy for income inequality. If capital holdings are very concentrated among high income individuals, increasing their share of GDP, all else equal, widens the gap with poorer workers. Indeed, two striking features over the last three decades of many advanced and developing economies are the declining labor shares in income and the rise in income inequality. The relationship between factor shares and inequality, however, is not so simple in a richer world with realistic features such as endogenous portfolio decisions and capital-skill complementarity. In such a world, total inequality will change with (i) the labor share, (ii) the amount of within-labor and within-capital income inequality, and (iii) the degree to which the highest wage earners are also those earning the highest capital incomes. Macroeconomic trends and shocks that impact any one of these three moments are likely to impact simultaneously all of them. We develop a framework where all these terms are jointly determined and estimate the model to clarify the roles of changing technology, policies, and factor proportions on labor shares and total income inequality around the globe. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:539&r=dge |
| By: | Fabre, Alice; Pallage, Stéphane; Zimmermann, Christian (Federal Reserve Bank of St. Louis) |
| Abstract: | In this paper we compare the welfare effects of unemployment insurance (UI) with an universal basic income (UBI) system in an economy with idiosyncratic shocks to employment. Both policies provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness. The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context. We work within a dynamic equilibrium model with savings calibrated to the United States for 1990 and 2011, and provide results that show that UI beats UBI for insurance purposes because it is better targeted towards those in need. |
| Keywords: | Universal basic income; Idiosyncratic shocks; Unemployment insurance; Heterogeneous agents; Moral hazard |
| JEL: | D7 E24 J65 |
| Date: | 2014–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2014-047&r=dge |
| By: | Noussair, Charles N. (University of Tilburg); Pfajfar, Damjan (Board of Governors of the Federal Reserve System (U.S.)); Zsiros, Janos (Cornell University) |
| Abstract: | We construct experimental economies, populated with human subjects, with a structure based on a nonlinear version of the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. We analyze the behavior of firms' pricing decisions in four different experimental economies. We consider how well the experimental data conform to a number of accepted empirical stylized facts. Pricing patterns mostly conform to these patterns. Most price changes are positive, and inflation is strongly correlated with average magnitude, but not the frequency, of price changes. Prices are affected negatively by the productivity shock and positively by the output gap. Lagged real interest rate has a negative effect on prices, unless human subjects choose the interest rate, or firms sell perfect substitutes in the output market. There is inertia in price setting, firms integrate wage increases into their prices, and there is evidence of adaptive behavior in price-setting in our laboratory economy. The hazard function for price changes, however, is upward-sloping, in contrast to most empirical studies. |
| Keywords: | Experimental economics; DSGE economy; pricing behavior; menu costs |
| JEL: | C91 C92 E31 E32 |
| Date: | 2014–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-93&r=dge |
| By: | Bandopadhyay, Titas Kumar |
| Abstract: | In this paper we extend the benchmark model of Diamond-Mortensen-Pissarides in a two-sector general equilibrium framework by introducing a frictionless segment of the labour market. The two sectors are the frictionless informal sector and the frictional formal sector where match friction is the root cause of unemployment. Here,both wages are flexible. Informal wage is determined by the marginal productivity rule of the worker and the formal wage is determined by the Nash-bargaining solution. We alsoexamine the effects of trade reforms and labour market reforms on equilibrium rate of unemployment and wage inequality in our stylitzed economy. We find that both these reforms reduce equilibrium rate of unemployment. However, trade reforms raise wage inequality but labour market reforms reduce it. These results provide a strong theoretical basis for labour market reform in a small open economy characterized by frictional labour market. |
| Keywords: | Economic reforms, Frictional unemployment, Wage inequality, Jobsearching, Job-matching, General equilibrium. |
| JEL: | J6 |
| Date: | 2014–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59819&r=dge |
| By: | Hubar, Sylwia; Koulovatianos, Christos; Li, Jian |
| Abstract: | US data and new stockholding data from fifteen European countries and China exhibit a common pattern: stockholding shares increase in household income and wealth. Yet, there is a multitude of numbers to match through models. Using a single utility function across households (parsimony), we suggest a strategy for fitting stockholding numbers, while replicating that saving rates increase in wealth, too. The key is introducing subsistence consumption to an Epstein-Zin-Weil utility function, creating endogenous risk-aversion differences across rich and poor. A closed-form solution for the model with insurable labor-income risk serves as calibration guide for numerical simulations with uninsurable labor-income risk. |
| Keywords: | Epstein-Zin-Weil recursive preferences,subsistence consumption,household-portfolio shares,business equity,wealth inequality |
| JEL: | G11 D91 D81 D14 D11 E21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:489&r=dge |
| By: | Caponi, Vincenzo (Ryerson University) |
| Abstract: | This paper contributes to the existing literature on public employment showing that the wage setting policy of the public sector can be an important determinant of private employment and unemployment. I look at the case of geographically homogeneous wages across regions with different private sector productivity, and show that public employment generates a crowding out effect against private employment. This effect is larger the larger is the public sector share of total employment. I present a two region two sector model based on Pissarides (2000) heterogeneous search and matching model where vacancies are posted by the private and the public sector as in Quadrini and Trigari (2007) and Gomes (2014). I calibrate the model to the Italian labor market and show that the uniform wage setting policy adopted by the central government, in the presence of productivity unbalance across regions, is responsible for up to 40% of the unemployment gap between the North and South. Policy experiments suggest that reducing the size of public employment reduces unemployment in lower productive regions while allowing for regional wage setting in the public sector almost eliminates the unemployment differential. |
| Keywords: | Italy, European unemployment, regional unemployment, public employment |
| JEL: | E24 J60 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8511&r=dge |
| By: | Katya Kartashova |
| Abstract: | This paper quantifies the effects of improving public equity markets on macroeconomic aggregates and welfare. I use an open-economy extension of Angeletos (2007), where entrepreneurs face idiosyncratic productivity risk in privately held firms. They can diversify by investing in publicly traded firms, but their operation is costly. These costs can vary across different economies. To quantify the effect of the differences and impose discipline, I parameterize the model using Ecuadorian and Chilean firm-level and aggregate data. Lower equity costs result in improvement of economic aggregates, but have differential welfare effects. Entrepreneurs suffer a loss, while workers gain. |
| Keywords: | Development economics, Financial Institutions, Financial markets |
| JEL: | E44 G11 O11 O16 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-41&r=dge |
| By: | Philipp Engler; Giovanni Ganelli; Juha Tervala; Simon Voigts |
| Abstract: | Using a DSGE model calibrated to the euro area, we analyze the international effects of a fiscal devaluation (FD) implemented as a revenue-neutral shift from employer's social contributions to the Value Added Tax. We find that a FD in ‘Southern European countries’ has a strong positive effect on output, but mild effects on the trade balance and the real exchange rate. Since the benefits of a FD are small relative to the divergence in competitiveness, it is best addressed through structural reforms. |
| Keywords: | Fiscal devaluation;Monetary unions;Euro Area;Southern Europe;Fiscal policy;Fiscal reforms;Value added taxes;General equilibrium models;Fiscal devaluation, fiscal policy, euro area, currency union, current account |
| Date: | 2014–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/201&r=dge |
| By: | Komura, Mizuki (Nagoya University); Ogawa, Hikaru (Nagoya University) |
| Abstract: | The effects of pension policies on fertility have been examined in the overlapping generations (OLG) model of unitary household in which no heterogeneity exists between the wife and the husband. This paper departs from the OLG model and focuses on the marital bargaining arising from the heterogeneity in a couple in a non-unitary model. Specifically, this paper examines how the pension policy affects the endogenous fertility of a bargaining couple who have different lifespans. The analysis finds out a new channel of pension policy on fertility decisions: an increase in pension size affects fertility not only via the changes in current and future income, but through a change in marital bargaining power. This channel leads a plausible argument that an increase in a pay-as-you-go (PAYG) pension further accelerates a decline in fertility through the empowerment of women. |
| Keywords: | pension, fertility, longevity, marital bargaining |
| JEL: | H55 J12 J13 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8479&r=dge |
| By: | David Margolis (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, IZA - Forschungsinstitut zur Zukunft der Arbeit (Institute for the Study of Labor) - Bonn Universität - University of Bonn); Lucas Navarro (ILADES - Universidad Alberto Hurtado); David A. Robalino (Social Protection and Labor Sector, Human Development Department - The World Bank) |
| Abstract: | This paper analyses the potential impacts of introducing unemployment insurance (UI) in middle income countries using the case of Malaysia, which today does not have such a system. The analysis is based on a job search model with unemployment and three employment sectors: formal and informal wage employment, and self employment. The parameters of the model are estimated to replicate the structure of the labor market in Malaysia in 2009 and the distribution of earnings for informal, formal and self employed workers. The results suggest that unemployment insurance would have only a modest negative effect on unemployment if benefits are not overly generous. The main effect would be a reallocation of labor from wage into self employment while increasing average wages in the formal and informal sectors. |
| Keywords: | Unemployment insurance, Informal sector, Self employment, Job search |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00714372&r=dge |
| By: | Debes, Sebastian; Gareis, Johannes; Mayer, Eric; Rüth, Sebastian |
| Abstract: | We investigate the role of consumer confidence in the transmission of monetary policy shocks from an empirical and theoretical perspective. Standard VAR based analysis suggests that an empirical measure of consumer confidence drops significantly after a monetary tightening and amplifies the impact of monetary policy on aggregate consumption. Using a behavioral DSGE model, we show that a consumer sentiment channel can account for the empirical findings. In an environment of heterogeneous expectations, which gives rise to the notion of consumer sentiment, innovations to the Federal Funds rate impact on consumer confidence and thereby the broader economy. |
| Keywords: | monetary policy,monetary transmission,consumer sentiment |
| JEL: | E32 E52 D83 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wuewep:91&r=dge |
| By: | Jess Benhabib; Feng Dong; Pengfei Wang |
| Abstract: | We develop a macroeconomic model with adverse selection. A continuum of households purchase goods from a continuum of anonymous producers. The quality of products can only be learned after trade. Adverse selection arises as low-quality goods deliver higher profits for producers but are less desirable for households. Higher aggregate demand induces more high-quality goods, raises average quality, and drives up household demand. We show that this demand externality can generate multiple equilibria or indeterminacy even when the steady state equilibrium is unique, making self-fulfilling expectation driven business cycles possible. Indeterminacy arising from adverse selection in credit markets is also constructed. |
| JEL: | E32 E44 G01 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20642&r=dge |