nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒01‒03
38 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. A compact open economy DSGE model for Switzerland By Barbara Rudolf; Mathias Zurlinden
  2. Monetary Policy, Incomplete Asset Markets, and Welfare in a Small Open Economy By Shigeto Kitano; Kenya Takaku
  3. Sovereign Default and Capital Accumulation By Park, JungJae
  4. Effects of Labor Taxes and Unemployment Compensation on Labor Supply in a Search Model with an Endogenous Labor Force By Been-Lon Chen; Chih-Fang Lai
  5. Optimal Life Cycle Unemployment Insurance By Michelacci, Claudio; Ruffo, Hernán
  6. Why is too much leverage bad for the economy? By Felix Kubler; John Geanakoplos
  7. Estimating a DSGE model with Limited Asset Market Participation for the Euro Area By Alice Albonico; Alessia Paccagnini; Patrizio Tirelli
  8. Time-Varying Employment Risks, Consumption Composition, and Fiscal Policy By Makoto Nirei; Sanjib Sarker; Kazufumi Yamana
  9. Collaterals and Growth Cycles with Heterogeneous Agents By Stefano Bosi; Mohanad Ismaël; Alain Venditti
  10. Universal Basic Income versus Unemployment Insurance By Alice Fabre; Stéphane Pallage; Christian Zimmermann
  11. Exchange Rates Dynamics with Long-Run Risk and Recursive Preferences By Kollmann, Robert
  12. The Impact of Uncertainty Shocks on the Job-Finding Rate and Separation Rate By Markus Riegler
  13. Monetary and macroprudential policy with multi-period loans By Michal Brzoza-Brzezina; Paolo Gelain; Marcin Kolasa
  14. 'Optimal Fiscal Management of Commodity Price Shocks' By Pierre-Richard Agénor
  15. Endogenous Liquidity and the Business Cycle By Saki Bigio
  16. Household Finance: Education, Permanent Income and Portfolio Choice By Guozhong Zhu
  17. On the Structural Interpretation of the Smets-Wouters “Risk Premium” Shock By Fisher, Jonas D. M.
  18. Growth and Mitigation Policies with Uncertain Climate Damage By Lucas Bretschger; Alexandra Vinogradova
  19. Optimal contracts, aggregate risk and the financial accelerator By Fuerst, Timothy; Carlstrom, Charles; Paustian, Matthias
  20. Price Dynamics with Customer Markets By Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
  21. FISCO: Modelo Fiscal para Colombia By Hernán Rincón; Diego Rodríguez; Jorge Toro; Santiago Téllez
  22. Heterogeneity in Decentralized Asset Markets By Julien Hugonnier; Benjamin Lester; Pierre-Olivier Weill
  23. Reforming the U.S. Social Security system accounting for employment uncertainty By Hugo Benítez-Silva; José Ignacio García-Pérez; Sergi Jiménez-Martín
  24. Taxing Top Earners: A Human Capital Perspective By Alejandro Bladel; Mark Huggett
  25. Monetarism rides again? US monetary policy in a world of Quantitative Easing By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  26. Government Debt Management: The Long and the Short of It By Faraglia, Elisa; Marcet, Albert; Oikonomou, Rigas; Scott, Andrew
  27. Long-Term Asset Price Volatility and Macroeconomic Fluctuations By Manuel Santos; Miguel Iraola
  28. Optimal Regulation in the Presence of Reputation Concerns By Atkeson, Andrew; Hellwig, Christian; Ordoñez, Guillermo
  29. Tax evasion and Prospect Theory in a OLG economy By Francesco Busato; Francesco Giuli; Enrico Marchetti
  30. The Wealth Distribution in Bewley Models with Investment Risk By Shenghao Zhu; Alberto Bisin; Jess Benhabib
  31. An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area By Chen, Xiaoshan; Kirsanova, Tatiana; Leith, Campbell
  32. Heterogeneity in Macroeconomics and the Minimal Econometric Interpretation for Model Comparison By Marco Cozzi
  33. Impulse response matching estimators for DSGE models By Guerron-Quintana, Pablo; Inoue, Atsushi; Kilian, Lutz
  34. Policy Variation, Labor Supply Elasticities, and a Structural Model of Retirement By Manoli, Dayanand; Mullen, Kathleen; Wagner, Mathis
  35. Efficiency Wage in the Frictional Labour Market- A Theoretical Analysis By Bandopadhyay, Titas Kumar
  36. Homeownership, Informality and the Transmission of Monetary Policy By Uras, R.B.; Elgin, C.
  37. Public Debt, Life Expectancy and the Environment By Nicolas CLOOTENS
  38. Equilibrium Sovereign Default with Exchange Rate Depreciation By Popov, Sergey V.; Wiczer, David

  1. By: Barbara Rudolf; Mathias Zurlinden
    Abstract: This study describes a compact dynamic stochastic general equilibrium (DSGE) model fitted for the Swiss economy with Bayesian techniques. The model features two economies (small home economy, large foreign economy), five types of agents (households, producers of tradables, producers of non-tradables, retailers, monetary authority), nominal and real frictions, and a number of shocks. The study gives details on the specification and the estimation of the model. The evaluation is based on impulse responses and variance decompositions, a DSGE-VAR to assess misspecifications, and results of forecasting experiments. The model is one of the tools used for policy analysis and forecasting at the Swiss National Bank.
    Keywords: DSGE model, open economy, Bayesian estimation, forecasting, monetary policy
    JEL: E30 E40 E50
    Date: 2014
  2. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of Business, Aichi Shukutoku University)
    Abstract: We develop a small open economy model with capital, sticky prices, and a simple form of financial frictions. We compare welfare levels under three alternative rules: a domestic inflation-based Taylor rule, a CPI inflation-based Taylor rule, and an exchange rate peg. We show that the superiority of an exchange rate peg over a domestic inflation-based Taylor rule becomes more pronounced under incomplete financial asset markets and more severe financial frictions.
    Keywords: Small open economy, DSGE, Welfare comparison, Incomplete financial market, Ramsey policy, Exchange rate regime
    JEL: E42 E44 E52 F31 F41 G15
    Date: 2014–12
  3. By: Park, JungJae
    Abstract: I introduce endogenous capital accumulation into an otherwise standard quantitative sovereign default model in the tradition of Eaton and Gersovitz (1981), and find that conditional on a level of debt, default incentives are U shaped in the capital stock: the economy with too small or too large amounts of capital is likely to default. In addition to an “excusable” motive for default in line with Grossman and Huyck (1989), our model also predicts an “opportunistic” motive for default in line with Kehoe and Levine (1993). The model predicts the “opportunistic” motive for default, because (1) capital is used as a consumption insurance vehicle during autarky after default, (2) installed capital within the border cannot be seized by foreign lenders, and (3) our model does not use an ad-hoc output cost of default which only penalizes default in high income states. The two different motives for default allow the calibrated model to generate defaults in “good” and “bad” times in simulation with a frequency of 38% and 62%, respectively. This is consistent with Tomz and Wright (2007)’s empirical finding that throughout history and across countries, around one third of sovereign defaults occurred in “good” times, when output is above trend, whereas most defaults occur in “bad” times. The model is calibrated to the business cycle moments of Argentina, and simulation results show that the model matches business cycle facts regarding emerging economies along other dimensions. Moreover, simulation results show that default in “good” times occurs (1) after the economy has accumulated a significantly large amount of capital and (2) when the economy faces a modestly good shock, both of which reduce the value of external borrowing but increase the value of staying in autarky. On the other hand, around defaults in “bad” times, the model economy displays typical “V” shape economic dynamics, with a collapse in absorption upon default, especially investment. Aggregating quarterly data from the model into annual frequency is found to overestimate the fraction of defaults in “good” times around twofold.
    Keywords: Sovereign default, capital accumulation, excusable default, opportunistic default, default in good times
    JEL: F34 F4 F41
    Date: 2011–12
  4. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chih-Fang Lai (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Labor taxes and unemployment compensation were blamed for causing relative declines in labor supply in the EU to the US in the past decades. We propose a model with an endogenous labor force and compare with the model with an exogenous labor force. Because of discouraging the labor force, labor taxes decrease employment in our model less than the model with an exogenous labor force, have ambiguous effects on hours, and decrease less labor supply in our model. Due to boosting the labor force, unemployment compensation increases employment in our model and decreases in the model with an exogenous labor force, but with opposite effects on hours, labor supply is ambiguous in both models. To understand the net effect on labor supply, we feed in the data of increases in labor taxes and unemployment compensation in the EU relative to the US. We find that the model with an exogenous labor force explain excessively of decreases in employment and labor supply, with increases in hours against the data. In contrast, our model explains reasonable decreases in labor supply, with sensible decreases in employment and in hours. Thus, with an endogenous labor force, our model explains relative declines in labor supply better than the model with an exogenous labor force.
    Keywords: search and matching, labor force participation, unemployment, hours worked, labor taxes, and unemployment benefits
    JEL: E24 H20 J22
    Date: 2014–11
  5. By: Michelacci, Claudio; Ruffo, Hernán
    Abstract: We argue that US welfare would rise if unemployment insurance were increased for younger and decreased for older workers. This is because the young tend to lack the means to smooth consumption during unemployment and want jobs to accumulate high-return human capital. So unemployment insurance is most valuable to them, while moral hazard is mild. By calibrating a life cycle model with unemployment risk and endogenous search effort, we find that allowing unemployment replacement rates to decline with age yields sizeable welfare gains to US workers.
    Keywords: insurance; search; unemployment
    JEL: E24 H21 J64 J65
    Date: 2014–09
  6. By: Felix Kubler (University of Zurich and SFI); John Geanakoplos (Yale University)
    Abstract: To illustrate the first mechanism we present a very simple example without collateral and default where restricting borrowing leads to a Pareto-improvement over the competitive equilib- rium allocation because financial markets are incomplete. Limiting borrowing naturally leads to a change in spot-prices that makes all agents better off. We then introduce collateral, default, endogenous margin requirements and production and we illustrate the second mechanism by showing that the endogenous margin requirements are suboptimal because they result in too much default. Finally we show how the two effects interact - forcing agents to leverage less leads to a Pareto-improvement because it reduces default and because it reduces borrowing.
    Date: 2014
  7. By: Alice Albonico; Alessia Paccagnini; Patrizio Tirelli
    Abstract: We estimate a medium scale DSGE model for the Euro Area to gain intuition on the importance of Limited Asset Market Participation (LAMP). Our results suggest that LAMP is sizeable (39% of households over the 1993-2012 sample) and important to understand EMU business cycle, especially, in the light of the recent financial crisis. In comparison with the representative households counterpart, the LAMP model is preferred on the grounds of both the Bayes factor and the average forecasting performance. Given the tighter credit standards we might expect in the near future, the high proportion of LAMP households is likely to remain an important feature of EMU. We also find that the LAMP model leads to conclusions about the main determinants of EMU business cycle that are substantially different from those obtained under the representative agent hypothesis. Given these results, the LAMP hypothesis should be part and parcel of empirical DSGE models of the Euro area.
    Keywords: DSGE, Limited Asset Market Participation, Bayesian Estimation, Euro Area, Business Cycle
    JEL: C11 C13 C32 E21 E32 E37
    Date: 2014–11
  8. By: Makoto Nirei (Institute of Innovation Research, Hitotsubashi University); Sanjib Sarker (Department of Economics, Utah State University); Kazufumi Yamana (Graduate School of Economics, Hitotsubashi University)
    Abstract: This study examines the response of aggregate consumption to active labor market policies that reduce unemployment. We develop a dynamic general equilibrium model with heterogeneous agents and uninsurable unemployment as well as policy regime shocks to quantify the consumption effects of policy. By implementing numerical experiments using the model, we demonstrate a positive effect on aggregate consumption even when the policy serves as a pure transfer from the employed to the unemployed. The positive effect on consumption results from the reduced precautionary savings of the households who indirectly benefit from the policy by a decreased unemployment hazard in future.
    Keywords: Time-varying idiosyncratic risk; unemployment risk; precautionary saving; regimeswitching fiscal policy; transfers
    JEL: E21 H53 J08
    Date: 2014–12
  9. By: Stefano Bosi (EPEE, University of Evry); Mohanad Ismaël (University of Birzeit); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)
    Abstract: We investigate the effects of collaterals and monetary policy on growth rate dynamics in a Ramsey economy where agents have heterogeneous discount factors. We focus on the existence of business-cycle fluctuations based on self-fulfilling prophecies and on the occurrence of deterministic cycles through bifurcations. We introduce liquidity constraints in segmented markets where impatient (poor) agents without collaterals have limited access to credit. We find that an expansionary monetary policy may promote economic growth while making endogenous fluctuations more likely. Conversely, a regulation reinforcing the role of collaterals and reducing the financial market imperfections may enhance the economic growth and stabilize the economy.
    Keywords: Collaterals, heterogeneous agents, balanced growth, Endogenous fluctuations, stabilization policies
    Date: 2014–02–17
  10. By: Alice Fabre (Aix Marseille School of Economics, CNRS & EHESS, France); Stéphane Pallage (ESG UQAM, CIRPEE and Département des Sciences Economiques, Université du Québec à Montréal, Canada); Christian Zimmermann (Federal Reserve Bank of St-Louis, IZA, CESifo, The Rimini Centre for Economic Analysis, Italy)
    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.
    Date: 2014–11
  11. By: Kollmann, Robert
    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 can be traded internationally, then long-run risk generates insufficient exchange rate volatility. A longrun risk model with recursive-preferences in which all agents trade in complete global financial markets can generate realistic exchange rate volatility; however, I show that this entails huge international wealth transfers, and excessive swings in net foreign asset positions. By contrast, a long-run risk, recursive-preferences model in which only a small fraction of households trades in complete markets, while the remaining households lead hand-to-mouth lives, generates realistic exchange rate and external balance volatility
    Keywords: complete financial markets; exchange rate; financial frictions; international risk sharing; long-run risk; recursive preferences
    JEL: F31 F36 F41 F43 F44
    Date: 2014–11
  12. By: Markus Riegler
    Abstract: Increases in uncertainty lead to increases in the unemployment rate. Using US data, I show empirically that this is due to both an increase in the separation rate and a decrease in the job-finding rate. By contrast, standard search and matching models predict an increase in the job finding rate in response to an increase in the cross-sectional dispersion of firmsâ productivity levels. To explain observed responses in labour market transition rates, I develop a search and matching model in which heterogeneous firms face a decreasing returns to scale technology, firms can hire multiple workers, and job flows (job creation and job destruction) do not necessarily coincide with worker flows (hires and separations). Costly job creation (in addition to the usual hiring cost) is key to obtaining a decrease in the job-finding rate after an increase in uncertainty. Standard numerical solution techniques cannot be used to obtain an accurate solution efficiently and I propose an alternative algorithm to overcome this problem.
    JEL: C63 E24 E32 J63 J64
    Date: 2014–11–21
  13. By: Michal Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Paolo Gelain (Norges Bank (Central Bank of Norway) and BI Norwegian Business School); Marcin Kolasa (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: We study the implications of multi-period loans for monetary and macroprudential policy, considering several realistic modifications - variable vs. fixed loan rates, non-negativity constraint on newly granted loans, and possibility for the collateral constraint to become slack - to an otherwise standard DSGE model with housing and financial intermediaries. Our general finding is that multiperiodicity affects the working of both policies, though in substantially different ways. We show that multiperiod contracts make the monetary policy less effective, but only under fixed rate mortgages, and do not generate significant asymmetry to its transmission. In contrast, the effects of macroprudential policy do not depend much on the type of interest payments, but exhibit strong asymmetries, with tightening having stronger effects than easening, especially for short and medium maturities.
    Keywords: Multi-period contracts, Monetary policy, Macroprudential policy
    JEL: E44 E51 E52
    Date: 2014–11–27
  14. By: Pierre-Richard Agénor
    Abstract: A dynamic stochastic general equilibrium model is used to study the optimal fiscal response to commodity price shocks in a small open low-income country. The model accounts for imperfect access to world capital markets and a variety of externalities associated with public infrastructure, including utility benefits, a direct complementarity effect with private investment, and reduced distribution costs. However, public capital is also subject to congestion and absorption constraints, with the latter affecting the efficiency of infrastructure investment. The model is parameterized and used to examine the transmission process of a temporary resource price shock under a benchmark case (cash transfers) and alternative fiscal rules, involving either higher public spending or accumulation in a sovereign fund. The optimal allocation rule between spending today and asset accumulation is determined so as to minimize a social loss function defined in terms of the volatility, relative to the benchmark case, of private consumption and either the nonresource primary fiscal balance or a more general index of macroeconomic stability, which accounts for the volatility of the real exchange rate. Sensitivity analysis is conducted with respect to various structural parameters and model specification.
    Date: 2014
  15. By: Saki Bigio (Columbia Business School)
    Abstract: I study an economy where asymmetric information about the quality of capital endogenously determines liquidity. Liquid funds are key to relaxing financial constraints on investment and employment. These funds are obtained by selling capital or using it as collateral. Liquidity is determined by balancing the costs of obtaining liquidity under asymmetric information against the benefits of relaxing financial constraints. Aggregate fluctuations follow increases in the dispersion of capital quality, which raise the cost of obtaining liquidity. An estimated version of the model can generate patterns for quantities and credit conditions similar to the Great Recession.
    Keywords: Liquidity, Asymmetric Information, Business Cycles
    JEL: D82 E32 E44 G01 G21
    Date: 2014–11
  16. By: Guozhong Zhu (Peking University)
    Abstract: This paper studies household financial choices: why are these decisions dependent on the education level of the household? A life cycle model is constructed to understand a rich set of facts about decisions of households with different levels of education attainment regarding stock market participation, the stock share in wealth, the stock adjustment rate and wealth-income ratio. Model parameters, including preferences, the cost of stock market participation and portfolio adjustment costs, are estimated to match the financial decisions of different education groups. Based on the estimated model, education matters through two channels: the mean of income and the discount factor.
    Date: 2014
  17. By: Fisher, Jonas D. M. (Federal Reserve Bank of Chicago)
    Abstract: This article shows that the "risk premium" shock in Smets and Wouters (2007) can be interpreted as a structural shock to the demand for safe and liquid assets such as short-term US Treasury securities. Several implications of this interpretation are discussed.
    Keywords: Smets-Wouters model; safe and liquid assets; money demand; risk premium; shock; New Keynesian model; DSGE; flight-to-quality; liquidity preference
    JEL: E00 E1 E3 E4 E5 G1
    Date: 2014–10–22
  18. By: Lucas Bretschger; Alexandra Vinogradova
    Abstract: Climate physics predicts that the intensity of natural disasters will increase in the future due to climate change. One of the biggest challenges for economic modeling is the inherent uncertainty of climate events, which crucially aects consumption, investment,and abatement decisions. We present a stochastic model of a growing economy where natural disasters are multiple and random, with damages driven by the economy's polluting activity. We provide a closed-form solution and show that the optimal path is characterized by a constant growth rate of consumption and the capital stock untila shock arrives, triggering a downward jump in both variables. Optimum mitigation policy consists of spending a constant fraction of output on emissions abatement. This fraction is an increasing function of the arrival rate, polluting intensity of output, and the damage intensity of emissions. A sharp response of the optimum growth rate and the abatement share to changes in the arrival rate and the damage intensity justies more stringent climate policies as compared to the expectation-based scenario. We subsequently extend the baseline model by adding climate-induced uctuations around the growth trend and stock-pollution eects, demonstrating robustness of our results. In a quantitative assessment of our model we show that the optimal abatement expenditure at the global level may represent 0.9% of output, which is equivalent to a tax of $71 per ton carbon.
    Keywords: Climate policy, uncertainty, natural disasters, endogenoous growth
    JEL: O10 Q52 Q54
    Date: 2014
  19. By: Fuerst, Timothy (University of Notre Dame and Federal Reserve Bank of Cleveland); Carlstrom, Charles (Federal Reserve Bank of Cleveland); Paustian, Matthias (Federal Reserve Board)
    Abstract: This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (BGG). The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared to the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator.
    Keywords: financial accelerator; optimal contracts; aggregate risk
    JEL: C32 E32
    Date: 2014–11–28
  20. By: Paciello, Luigi (Einaudi Institute for Economics and Finance); Pozzi, Andrea (Einaudi Institute for Economics and Finance); Trachter, Nicholas (Federal Reserve Bank of Richmond)
    Abstract: We study a tractable model of firm price setting with customer markets and empirically evaluate its predictions. Our framework captures the dynamics of customers in response to a change in the price, describes the behavior of optimal prices in the presence of customer acquisition and retention concerns, and delivers a general equilibrium model of price and customer dynamics. We exploit novel micro data on purchases from a panel of households from a large U.S. retailer to quantify the model and compare it to the counterfactual benchmark of the standard monopolistic competition setting. We show that a model with customer markets has markedly different implications in terms of the equilibrium price distribution, which better fit the available empirical evidence on retail prices. Moreover, the dynamic of the response of demand to shocks that affects price dispersion is also distinctive. Our results suggest that inertia in customer reallocation across firms increases the persistence in the response of demand to these shocks.
    JEL: E12 E30 L16
    Date: 2014–12–04
  21. By: Hernán Rincón; Diego Rodríguez; Jorge Toro; Santiago Téllez
    Abstract: El gobierno es un agente que influye sobre la actividad económica a lo largo del ciclo y afecta las variables reales y nominales de un país por medio de sus políticas de ingreso y de gasto. También es un determinante importante de la estabilidad macroeconómica, en cuanto que esta depende, entre otros, de la sostenibilidad de sus finanzas y de la contraciclicidad de sus políticas. El objetivo de este documento es construir un modelo fiscalmicrofundamentado de equilibrio general dinámico y estocástico DSGE-neokeynesiano para Colombia (FISCO), en donde el gobierno juega un papel preponderante en la economía. El modelo se construye, calibra, estima y evalúa teniendo en cuenta sus particularidades económicas e institucionales. El propósito es que sirva como herramienta de análisis de la política fiscal y su nexo con la economía y la política monetaria. Con el propósito de evaluar las predicciones del modelo FISCO se presentan algunas simulaciones y se estudian las dinámicas de las principales variables macroeconómicas ante choques positivos y transitorios a las tasas de tributación, al gasto de funcionamiento, al gasto de inversión, a la tasa de interés de política monetaria y a la renta petrolera del gobierno. Las cinco conclusiones principales de política económica que emergen del modelo y de sus simulaciones son las siguientes. Primera, la inflación es un asunto que compete a la política monetaria, como se sabe, pero también a la política fiscal. Segunda, los choques positivos a la política fiscal son contrarrestados en cierto grado por la política monetaria; por el contrario, choques a esta última son refrendados por la política fiscal. Tercera, el choque al gasto de funcionamiento del gobierno desplaza a la inversión privada. Lo contario sucede con el choque a la inversión. En este mismo sentido, el recorte al gasto de inversión impacta en mayor medida a la economía que el ajuste al de funcionamiento. Cuarta, el balance estructural del gobierno depende del tipo de choque de política que enfrenta la economía. Quinta, la regla fiscal cumple un rol estabilizador de las finanzas del gobierno y de la economía, como es su objetivo; sin embargo, puede convertirse a la vez en un agravante de la situación macroeconómica ante ciertos choques.
    Keywords: Modelo fiscal neokeynesiano DSGE, política fiscal y monetaria, canales y mecanismos de transmisión, regla fiscal estructural, estimación bayesiana, impactos macroeconómicos.
    JEL: D58 E2 E62 E63 C11 C13
    Date: 2014–12–03
  22. By: Julien Hugonnier; Benjamin Lester; Pierre-Olivier Weill
    Abstract: We study a search and bargaining model of an asset market, where investors’ heterogeneous valuations for the asset are drawn from an arbitrary distribution. Our solution technique renders the analysis fully tractable and allows us to provide a full characterization of the equilibrium, in closed form, both in and out of steady state. We use this characterization for two purposes. First, we establish that the model can naturally account for a number of stylized facts that have been documented in empirical studies of over-the-counter asset markets. In particular, we show that heterogeneity among market participants implies that assets are reallocated through “intermediation chains,” ultimately producing a core-periphery trading network and non-trivial distributions of prices and trading times. Second, we show that the model generates a number of novel results that underscore the importance of heterogeneity in decentralized markets. We highlight two: first, heterogeneity magnifies the price impact of search frictions; and second, search frictions have larger effects on price levels than on price dispersion. Hence, quantifying the price discount or premium created by search frictions based on observed price dispersion can be misleading.
    JEL: D0 D53 D83 G0 G12
    Date: 2014–12
  23. By: Hugo Benítez-Silva; José Ignacio García-Pérez; Sergi Jiménez-Martín
    Abstract: The discussion about the need for Social Security reforms has recently resurfaced, and is expected to continue to be part of the political agenda in the near future. Our paper is a step in the direction of providing a framework for policy analysis that accounts for employment uncertainty, something that has been relatively overlooked in terms of its link with retirement decisions. In this context, we explicitly consider the participation decision of older individuals along with their decision to claim Social Security retirement benefits, using a sequential decision structure. We have numerically solved and simulated a benchmark model of the inter-temporal decision problem that individuals face in the United States. Our results show that the model is able to explain with great accuracy the strikingly high proportion of individuals who claim benefits exactly at the Early Retirement Age. The model is also able to replicate the declining labor force participation at older ages. Additionally, we discuss a number of policy experiments that suggest that individuals claiming and labor supply decisions are responsive to measures likely to be on the table for policy makers when considering the reforms of the U.S. Social Security system.
    Keywords: employment uncertainty, retirement, life-cycle models, Social Security Reform
    JEL: J14 J26 J65
    Date: 2014–11
  24. By: Alejandro Bladel (Federal Reserve Bank of St. Louis); Mark Huggett (Georgetown University)
    Abstract: We assess the consequences of substantially increasing the marginal tax rate on U.S. top earners using a human capital model. We nd that (1) the peak of the model Laer curve occurs at a 52 percent top tax rate, (2) if human capital were exogenous, then the top of the Laer curve would occur at a 66 percent top tax rate and (3) applying the theory and methods that Diamond and Saez (2011) use to provide quantitative guidance for setting the top tax rate to model data produces a tax rate that substantially exceeds 52 percent.
    Keywords: human capital, marginal tax rate, Inequality, Laffer curve
    JEL: D91 E21 H20 J24
    Date: 2014–11
  25. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
    Abstract: This paper gives money a role in providing cheap collateral in a model of banking; this means that, besides the Taylor Rule, monetary policy can affect the risk-premium on bank lending to firms by varying the supply of M0 in open market operations, so that even when the zero bound prevails monetary policy is still effective; and fiscal policy under the zero bound still crowds out investment via the risk-premium. A simple rule for making M0 respond to credit conditions can substantially enhance the economy's stability. Both price-level and nominal GDP targeting rules for interest rates would combine with this to stabilise the economy further. With these rules for monetary control, aggressive and distortionary regulation of banks' balance sheets becomes redundant.
    Keywords: crises; DSGE model; financial frictions; fiscal multiplier; indirect inference; monetary policy; money supply; QE; zero bound
    JEL: C1 E3 E44 E52
    Date: 2014–11
  26. By: Faraglia, Elisa; Marcet, Albert; Oikonomou, Rigas; Scott, Andrew
    Abstract: Our aim is to provide insights into some basic facts of US government debt management by introducing simple financial frictions in a Ramsey model of fiscal policy. We find that the share of short bonds in total U.S. debt is large, persistent, and highly correlated with total debt. A well known literature argues that optimal debt management should behave very differently: long term debt provides fiscal insurance, hence short bonds should not be issued and the position on short debt is volatile and negatively correlated with total debt. We show that this result hinges on the assumption that governments buy back the entire stock of previously issued long bonds each year, which is very far from observed debt management. We document how the U.S. Treasury rarely has repurchased bonds before 10 years after issuance. When we impose in the model that the government does not buy back old bonds the puzzle disappears and the optimal bond portfolio matches the facts mentioned above. The reason is that issuing only long term debt under no buyback would lead to a lumpiness in debt service payments, short bonds help offset this by smoothing out interest payments and tax rates. The same reasoning helps explain why governments issue coupon-paying bonds. Solving dynamic stochastic models of optimal policy with a portfolio choice is computationally challenging. A separate contribution of this paper is to propose computational tools that enable this broad class of models to be solved. In particular we propose two significant extensions to the PEA class of computational methods which overcome problems due to the size of the model. These methods should be useful to many applications with portfolio problems and large state spaces.
    Keywords: Computational methods; Debt Management; Fiscal Policy; Incomplete Markets; Maturity Structure; Tax Smoothing
    JEL: C63 E43 E62 H63
    Date: 2014–12
  27. By: Manuel Santos (University of Miami); Miguel Iraola (University of Miami)
    Abstract: Price markups are highly correlated with stock market values, whereas other financial measures of profitability exhibit much less variability and are weakly correlated with stock values. We propose a variant of the neoclassical growth model to study the role of innovation, price markups, and leverage as main determinants of stock market volatility. The model confers a rather limited role to other macroeconomic forces such as TFP shocks, adjustment costs, interest rate policies, input costs, taxes, and labor and financial frictions. We develop some numerical methods to provide a variance decomposition of stock market values.
    Date: 2014
  28. By: Atkeson, Andrew; Hellwig, Christian; Ordoñez, Guillermo
    Abstract: In all markets, firms go through a process of creative destruction: entry, random growth and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, an extreme `"lemons problem" develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. We show that, if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production.
    Keywords: entry regulation; firm dynamics; quality investments; reputation concerns
    JEL: D83 L51
    Date: 2014–07
  29. By: Francesco Busato; Francesco Giuli; Enrico Marchetti
    Abstract: This paper presents a simple Overlapping Generation Model (OLG), aug-mented with Prospect Theory elements in the spirit of al-Nowaihi and Dhami (2007). Themodel tackle several open questions in the analysis of tax evasion and compliance decisions. In particular, the paper presents a new and complementary approach to address tax compliance decision in a OLG economy with behavioral components. Our main results are the following: there exists an equilibrium with a tax evasion level which can be coherent with the empirical estimates for the US economy; for our calibrations we ¯nd that the relationship between the tax rate and the evasion rate is a positive one (i.e., the model offers a solution to the Yitzhaki puzzle); we can highlight the role played in the context of tax evasion by an essential component of Prospect Theory, the framing effect, which was precluded to simple individual choice models.
    Keywords: Tax evasion, OLG models, Prospect theory
    JEL: E21 D03 D81
    Date: 2014–11
  30. By: Shenghao Zhu (National University of Singapore); Alberto Bisin (New York University); Jess Benhabib (NYU)
    Abstract: We study the wealth distribution in Bewley economies with idiosyncratic capital income risk (entrepreneurial risk). We find, under rather general conditions, a unique ergodic distribution of wealth which displays fat tails (a Pareto distribution in the right tail).
    Date: 2014
  31. By: Chen, Xiaoshan; Kirsanova, Tatiana; Leith, Campbell
    Abstract: We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both ‘good luck' and ‘good policy' played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates.
    Keywords: Great Recession; Financial Crisis; Zero Lower Bound; Discretion; Commitment; Great Moderation; Optimal Monetary Policy; Interest Rate Rules; Bayesian Estimation
    Date: 2014–11
  32. By: Marco Cozzi (Queen's University)
    Abstract: This paper formally compares the fit of various versions of the incomplete markets model with aggregate uncertainty, relying on a simple Bayesian empirical framework. The models differ in the degree of households' heterogeneity, with a focus on the role of preferences. For every specification, empirically motivated priors for the parameters are postulated to obtain the models' predictive distributions, which are interpreted as being the distributions of population moments. These are in turn contrasted with the posterior distributions of the same moments obtained from an atheoretical (Bayesian) econometric model. It is shown that aggregate data on consumption and income contain valuable information to determine which models are more likely to have generated the data. In particular, despite its generality, a model with both risk aversion and discount factor heterogeneity displays a very low marginal likelihood, and should not be employed for the design of macroeconomic policies and welfare analysis. It is also found that the other models display similar posterior odds, with the Bayes factors ranging between 1 and 3. Finally, it is shown that practitioners in the field should carefully calibrate the values of the unemployment rate in booms and expansions, as they heavily affect the autocorrelation of aggregate consumption and the correlation between consumption and income. This finding suggests that the magnitude of welfare effects computations is likely to be influenced considerably by these two parameters.
    Keywords: Incomplete Markets, Heterogeneous Agents, Unemployment Risk, Business Cycles, Calibration, Bayesian Methods, Minimal Econometric Intepretation, Model Comparison
    JEL: E21 C68 C63 E32 D52 D58
    Date: 2014–11
  33. By: Guerron-Quintana, Pablo; Inoue, Atsushi; Kilian, Lutz
    Abstract: One of the leading methods of estimating the structural parameters of DSGE mod- els is the VAR-based impulse response matching estimator. The existing asympotic theory for this estimator does not cover situations in which the number of impulse response parameters exceeds the number of VAR model parameters. Situations in which this order condition is violated arise routinely in applied work. We establish the consistency of the impulse response matching estimator in this situation, we derive its asymptotic distribution, and we show how this distribution can be approximated by bootstrap methods. Our methods of inference remain asymptotically valid when the order condition is satisfied, regardless of whether the usual rank condition for the application of the delta method holds. Our analysis sheds new light on the choice of the weighting matrix and covers both weakly and strongly identified DSGE model parameters. We also show that under our assumptions special care is needed to en- sure the asymptotic validity of Bayesian methods of inference. A simulation study suggests that the frequentist and Bayesian point and interval estimators we propose are reasonably accurate in finite samples. We also show that using these methods may affect the substantive conclusions in empirical work.
    Keywords: structural estimation,DSGE,VAR,impulse response,nonstandard asymptotics,bootstrap,weak identification,robust inference
    JEL: C32 C52 E30 E50
    Date: 2014
  34. By: Manoli, Dayanand (University of Texas at Austin); Mullen, Kathleen (RAND); Wagner, Mathis (Boston College)
    Abstract: This paper exploits a combination of policy variation from multiple pension reforms in Austria and administrative data from the Austrian Social Security Database. Using the policy changes for identification, we estimate social security wealth and accrual elasticities in individuals' retirement decisions. Next, we use these elasticities to estimate a dynamic programming model of retirement decisions. Finally, we use the estimated model to examine the labor supply and welfare consequences of potential social security reforms.
    Keywords: policy variation, retirement, labor supply elasticities
    JEL: J26 H55
    Date: 2014–11
  35. By: Bandopadhyay, Titas Kumar
    Abstract: In this paper we introduce efficiency wage relation in the benchmark model of DMP where worker’s efficiency depends on the wage rate and the labour market tightness. We also examine the parametric effects on the Nash-wage rate, market tightness and on the equilibrium unemployment rate. Our results show that all the results obtained in this paper are identical to those obtained in the original DMP model.
    Keywords: Efficiency wage, job destruction
    JEL: J2 J20 J24
    Date: 2014–11–22
  36. By: Uras, R.B. (Tilburg University, Center For Economic Research); Elgin, C.
    Abstract: Cross-country aggregate data exhibits a strong (positive) relationship between the size of the informal employment and aggregate homeownership rates. We investigate this empirical observation using a cash-in-advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates. Specifically, we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short-term cash usage and avoid periodic rental payments when (i) informality is associated with constrained business investment finance, and (ii) inflation expectations are high. Our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets.
    Keywords: Cash-In-Advance,; Informality; Cross-Country Data;; Monetary Transmission.
    JEL: E26 E41 E44
    Date: 2014
  37. By: Nicolas CLOOTENS
    Keywords: , Environment, Life expectancy, Overlappint generations, Poverty trap, Public Debt
    Date: 2014
  38. By: Popov, Sergey V. (Queen's University Belfast); Wiczer, David (Federal Reserve Bank of St. Louis)
    Abstract: This study proposes and quantitatively assesses a terms-of-trade penalty for defaulting: defaulters must exchange more of their own goods for imports, which causes an adjustment to the equilibrium exchange rate. This penalty can take the place of an ad hoc fall in output: Facing only this penalty and temporary exclusion from debt markets, countries are willing to maintain borrowing obligations up to a realistic level of debt. The terms-of-trade penalty is consistent with the observed relationship between sovereign default and a country's trade flows and prices. The defaulter's currency depreciates while trade volume falls drastically. We demonstrate that a default episode can imply up to a 30% real depreciation, which matches observed crisis events in developing countries.
    Keywords: endogenous default; exchange rate; trade balance.
    JEL: F11 F17 F34
    Date: 2014–11–24

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