|
on Dynamic General Equilibrium |
|
Issue of 2015‒01‒31
thirty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Federico di Pace (University of St Andrews ); Stefania Villa (KU Leuven & University of Foggia ) |
| Abstract: | We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, the endogenous mechanisms of the model – factor complementarity, deep habits and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, factor-biased productivity innovations are important exogenous sources of labour market dynamics. Third, demand-side innovations induce markup fluctuations consistent with the deep habits mechanism. |
| Keywords: | CES, Deep Habits, Search and Matching, Bayesian estimation |
| JEL: | E24 E25 E32 J64 |
| Date: | 2014–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1411&r=dge |
| By: | Thorsten Drautzburg (Federal Reserve Bank of Philadelphia ) |
| Abstract: | DSGE models are used for analyzing policy and the sources of business cycles. A competing approach uses VARs that are partially identified using, for example, narrative shock measures and are often viewed as imposing fewer restrictions on the data. Narrative shocks are identified non-structurally through information external to particular models. This uses non-structural narrative shock measures to inform the structural estimation of DSGE models. Since fiscal policy has received much recent attention but the foundations of the fiscal side of DSGE models are less well studied than their monetary building block, fiscal DSGE models are a particularly promising application. Preliminary results from a standard medium-scale DSGE model support this argument: Structurally identified monetary shocks line up well with narrative measures, whereas government spending shocks do not. Extending the model to include distortionary taxes and more general fiscal policy processes, I find that model implied labor tax shocks line up well with narrative tax shocks. Including different narrative shock measures affects parameter identification and implied measures such as fiscal multipliers. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:791&r=dge |
| By: | Morten O. Ravn (Department of Economics University College London (UCL) ; Centre for Macroeconomics (CFM) ; Centre for Economic Policy Research (CEPR) ); Vincent Sterk (Department of Economics University College London (UCL) ; Centre for Macroeconomics (CFM) ) |
| Abstract: | We study a model in which households are subject to uninsurable idiosyncratic employment shocks, firms set prices subject to nominal rigidities, and the labor market is characterized by matching frictions and by downward in flexible wages. We introduce heterogeneity in search efficiency that arises either upon job loss or during an unemployment spell. Higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive amongst employed households. Lower goods demand produces a decline in job vacancies and the ensuing drop in the job finding rate in turn triggers higher precautionary saving setting in motion an amplification mechanism. The amplification mechanism is absent from standard macroeconomic models and depends on the combination of incomplete financial markets and frictional goods and labor markets. The model can account for key features of the Great Recession in response to the observed changes in the job separation rate and an increase in search efficiency heterogeneity estimated from the matching function. |
| Keywords: | job uncertainty, unemployment, incomplete markets |
| JEL: | E21 E24 E31 E32 E52 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1501&r=dge |
| By: | Junior Maih (Norges Bank (Central Bank of Norway)and Centre for Applied Macro and Petroleum economics, BI Norwegian Business School ) |
| Abstract: | In an environment where economic structures break, variances change, distributions shift, conventional policies weaken and past events tend to reoccur, economic agents have to form expectations over different regimes. This makes the regime-switching dynamic stochastic general equilibrium (RS-DSGE) model the natural framework for analyzing the dynamics of macroeconomic variables. We present effcient solution methods for solving this class of models, allowing for the transition probabilities to be endogenous and for agents to react to anticipated events. The solution algorithms derived use a perturbation strategy which, unlike what has been proposed in the literature, does not rely on the partitioning of the switching parameters. These algorithms are all implemented in RISE, a exible object-oriented toolbox that can easily integrate alternative solution methods. We show that our algorithms replicate various examples found in the literature. Among those is a switching RBC model for which we present a third-order perturbation solution. |
| Keywords: | DSGE, Markov switching, Sylvester equation, Newton algorithm, Pertubation, Matrix polynominal |
| JEL: | C6 E3 G1 |
| Date: | 2015–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2015_01&r=dge |
| By: | Tim Hursey (University of Pennsylvania ); Alexander Wolman (Federal Reserve Bank of Richmond ); Andreas Hornstein (Federal Reserve Bank of Richmond ) |
| Abstract: | Short-term interest rates in the United States have been near their lower bound since late 2008. Treasury rates out to a two-year maturity have been close to zero since mid-2011, and over this same period, inflation has been declining. This combination of low interest rates and declining inflation has lead some observers to point to the "perils of Taylor rules," for example, Bullard (2010), when a monetary policy that actively targets a positive inflation rate leads to an outcome with much lower inflation, and possibly even deflation. The possibility of equilibria with persistent deviations of inflation from the target set by the policy maker has been investigated for model economies without state variables. Quantitative representations of the U.S. economy as embodied by DSGE models include as an essential element capital accumulation. In this paper we study the possibility for persistent low inflation outcomes for a monetary model with capital. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:733&r=dge |
| By: | Stephen Morris (UC San Diego ) |
| Abstract: | I reveal identification failures in a well-known dynamic stochastic general equilibrium (DSGE) model, and study the statistical implications of common identifying restrictions. First, I provide a fully analytical methodology for determining all observationally equivalent values of the structural parameters in any parameter space. I show that either parameter admissibility or sign restrictions may yield global identification for some parameter realizations, but not for others. Second, I derive a "plug-in" maximum likelihood estimator, which requires no numerical search. I use this tool to demonstrate that the idiosyncratic identifying restriction directly impinges on both the location and distribution of the small-sample MLE, and compute correctly sized confidence intervals. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:738&r=dge |
| By: | Ander Perez (Universitat Pompeu Fabra ); Andrea Caggese (Pompeu Fabra University ) |
| Abstract: | This paper develops a model with both financial and labor market frictions, and jointly analyzes the precautionary behavior of firms and households. Financial frictions generate costly bankruptcy risk for firms and limited insurance against unemployment risk for workers. We solve and simulate a calibrated version of the model and show that the precautionary decisions of households and firms interact with each other to significantly amplify the effect of financial factors on aggregate output and unemployment, even in the absence of price and wage rigidity. This result can be interpreted as a negative demand externality. Firms fire workers to maximize profits, but do not internalize the negative effect of the increase in unemployment on households. Households consume less to increase precautionary saving, but do not internalize the negative impact of their decision on firms' profits and default risk. The importance of this externality is quantitatively large. We calibrate an economy with moderate default risk in firms and a very small risk aversion and precautionary behavior of households, obtaining an equilibrium unemployment level of 6.5%. Increasing risk aversion to more realistic levels increases equilibrium unemployment up to 11.1%. The same increase in risk aversion applied to an economy with more severe firm financing frictions increases unemployment from 7.7% to 21.6%. Finally, we conduct policy experiments and analyze to what extent firing costs and unemployment benefits reduce the impact of this negative externality. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:772&r=dge |
| By: | Céspedes, Nikita (Banco Central de Reserva del Perú ) |
| Abstract: | Conditional Cash Transfer (CCT) program is one of the most important anti-poverty policies worldwide. In this document, I study the economic effects of this program by using a stylized dynamic general equilibrium model. I look at the program’s impact on output, human capital, poverty and income inequality. I also study its welfare implications and its effects on the intergenerational transmission of poverty. The quantitative analysis reveals that a long-term implementation of this anti-poverty program helps to reduce the intergenerational transmission of poverty. In aggregate terms the welfare gain is small, but varies across agents; the winners are those who are in the lower tail of the income distribution and the losers are those located in the upper tail. Finally, this program increases the human capital of households and, through this channel, induces a consistent reduction of both poverty and income inequality. |
| Keywords: | Poverty, Welfare, Cash Transfer, General Equilibrium, Inequality, Overlapping Generations |
| JEL: | D52 D58 D62 D64 I30 I32 I38 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2014-015&r=dge |
| By: | Masaya Sakuragawa |
| Abstract: | This paper analyzes the boom-bust cycle driven by rational bubbles in an overlapping-generations economy that is subject to borrowing constraints. At the heart of the analysis is the interplay among savings, investment, and the interest rate. Bubbles are more likely to crowd investment in, the stronger is the intertemporal substitution in consumption, and the more severe is the borrowing constraint. This model contradicts with Abel et al (1989)¡¯s condition in both dimensions of dynamic efficiency and the occurrence of bubbles. We characterize the global dynamics of a stochastically bubbly economy, where emergent bubbles are followed by the investment boom, but the bursting of bubbles results in the recession. The recession is serious relative to the boom, with biased holding of bubbles. |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e55&r=dge |
| By: | Tetsuo Ono (Graduate School of Economics, Osaka University ) |
| Abstract: | This study presents a two-period overlapping-generations model featuring en- dogenous growth and intergenerational conflict over fiscal policy. In particular, we characterize a Markov-perfect political equilibrium of the voting game between gen- erations, and show the following results. First, population aging incentivizes the government to invest more in capital for future public spending, and thus produces a positive effect on economic growth. Second, when the government finances its spending by issuing bonds, an introduction of a balanced budget rule results in a higher growth rate. Third, to obtain a normative implication of the political equi- librium, we compare it to an allocation chosen by a benevolent planner who takes care of all future generations. Here, we show that the political equilibrium attains a lower growth rate than that in the planner's allocation. |
| Keywords: | Economic Growth; Government Debt; Overlapping Generations; Pop- ulation Aging; Voting |
| JEL: | D72 D91 H63 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1423r&r=dge |
| By: | Pablo A. Guerron-Quintana ; Ryo Jinnai |
| Abstract: | We study the impact that the liquidity crunch in 2008-2009 had on the U.S. economy's growth trend. To this end, we propose a model featuring endogenous growth ¨¢ la Romer and a liquidity friction ¨¢ la Kiyotaki-Moore. A key finding in our study is that liquidity declined around the demise of Lehman Brothers, which lead to the severe contraction in the economy. This liquidity shock was a tail event. Improving conditions in financial markets were crucial in the subsequent recovery. Had conditions remained at their worst level in 2008, output would have been 20 percent below its actual level in 2011. |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e66&r=dge |
| By: | Pieter Gautier ; Jose L Moraga-Gonzalez ; Ronald Wolthoff |
| Abstract: | Many labor market policies affect the marginal benefits and costs of job search. The impact and desirability of such policies depend on the distribution of search costs. In this paper, we provide an equilibrium framework for identifying the distribution of search costs and we apply it to the Dutch labor market. In our model, the wage distribution, job search intensities, and firm entry are simultaneously determined in market equilibrium. Given the distribution of search intensities (which we directly observe), we calibrate the search cost distribution and the flow value of non-market time; these values are then used to derive the socially optimal firm entry rates and distribution of job search intensities. From a social point of view, some unemployed workers search too little due to a hold-up problem, while other unemployed workers search too much due to coordination frictions and rentseeking behavior. Our results indicate that jointly increasing unemployment benefits and the sanctions for unemployed workers who do not search at all can be welfare-improving. |
| Keywords: | job search; search cost heterogeneity; labor market frictions; wage dispersion; welfare |
| JEL: | J64 J31 J21 E24 C14 |
| Date: | 2015–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-527&r=dge |
| By: | Giorgio Primiceri (Northwestern University ); Andrea Tambalotti (Federal Reserve Bank of New York ); Alejandro Justiniano (Federal Reerve Chicago ) |
| Abstract: | We present a model of housing with collateral constraints on both on borrowers and lenders. The constraint on the borrowers corresponds to the usual collateral requirement on the purchase of new houses that has been extensively studied in the literature. The contribution of our analysis is to study constraints on the supply of credit, modeled as limitations in the share of mortgages that lenders can hold in their portfolios. These limits are motivated by risk weighted capital requirements on commercial banks, as well as minimum asset quality restrictions on large institutional investors. The analysis begins with a simple stylized model to understand the implications of transitioning to higher levels of credit supply. To quantify the macroeconomic effects of credit supply expansions we embed borrower and lender constraints into a rich dynamic model, calibrated using evidence on the expansion of off-balance sheet vehicles and market-based funding by financial intermediaries, as well as micro (Survey of Consumer Finances) and macro data (Flow of Funds, NIPA). Our results suggest that the housing boom which preceded the Great Recession was due to a progressive loosening of lending constraints in the residential mortgage market. This view is consistent with a number of empirical observations, such as the rapid increase in house prices and household debt, the stability of debt relative to collateral values, and the fall in mortgage rates. These empirical facts are difficult to reconcile with the popular view that attributes the housing boom to a loosening of borrowing constraints associated with lower collateral requirements. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:766&r=dge |
| By: | Gottardi, Piero (European University Institute ); Kajii, Atsushi (Kyoto University ); Nakajima, Tomoyuki (Federal Reserve Bank of Atlanta ) |
| Abstract: | We consider an economy where individuals face uninsurable risks to their human capital accumulation and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that in the presence of such risks it is beneficial to tax both labor and capital income and to have positive government debt. |
| JEL: | D52 D60 D90 E20 E62 H21 O40 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2014-24&r=dge |
| By: | Vladimir Asriyan |
| Abstract: | Balance sheet recessions result from concentration of macroeconomic risks on the balance sheets of leveraged agents. In this paper, I argue that information dispersion about the future states of the economy combined with trading frictions in financial markets can explain why such concentration of risk may be privately but not socially optimal. I show that borrowers face a tradeoff between the insurance benefits of financing with macro contingent contracts and the illiquidity premia they need to pay creditors for holding such contracts. In aggregate, as borrowers sacrifice contingency in order to provide liquidity, the severity of macroeconomic fluctuations becomes endogenously linked to the magnitudes of information dispersion and trading frictions. In this setting, I study the policy implications of the theory and I find that subsidizing contingencies in private contracts is welfare improving; in particular, policies that solely target borrowers' leverage are sub-optimal. |
| Keywords: | balance sheet recessions, contingent contracts, liquidity, informational frictions, trading frictions, financial regulation |
| JEL: | E32 E44 G01 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:806&r=dge |
| By: | Eisei Ohtaki |
| Abstract: | This article considers an overlapping generations model with nominal idiosyncratic shocks. Such shocks are described as if they are exogenous nominal taxes/subsidies and cause nondegenerate ex-post distributions of money. We then show that the optimal money growth rate exists and is greater than one. |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e57&r=dge |
| By: | Liang Wang (University of Hawaii at Manoa ) |
| Abstract: | This paper studies the welfare cost of inflation in a frictional monetary economy with endogenous price dispersion, which is generated by sellers posting prices and buyers costly searching for low prices. We identify three channels through which inflation affects welfare. The interaction of real balance channel and price posting channel generates a welfare cost, at 10% annual inflation, equal to 3.23% of steady state consumption; if either channel is shut down, the welfare cost decreases to less than 0.15%. Search channel reduces welfare cost by more than 50%. The aggregate effect of inflation on welfare is nonmonotonic. |
| Keywords: | Nash Bargaining, Competitive Search, Indivisibility, Multiplicity, Uniqueness |
| JEL: | D51 E40 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201428&r=dge |
| By: | Shuhei Takahashi (Institute of Economic Research, Kyoto University ) |
| Abstract: | Idiosyncratic earnings risk shows cyclical variation. In order to analyze its implication with respect to labor market dynamics, this paper develops an incomplete asset markets model in which individuals make consumption-saving and employment choices each period in the presence of time-varying person-specific wage risk. I measure the model's risk variation using wage data in the Panel Study of Income Dynamics. When including variation in both idiosyncratic wage risk and aggregate total factor productivity, the model produces a weakly negative correlation between total hours worked and average labor productivity close to the U.S. data. In contrast, in the absence of wage risk fluctuations, the model generates a counterfactually strong positive correlation. |
| Keywords: | Idiosyncratic wage risk, uncertainty shocks, hours-productivity correlation |
| JEL: | D31 E31 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:912&r=dge |
| By: | Kieran Walsh (Yale ) |
| Abstract: | What are the determinants and economic consequences of cross-border asset positions? I develop a new quantitative portfolio choice model and apply it to emerging market international finance. The model allows for partial default and accommodates trade in a rich set of assets. The latter means I am able to draw distinctions both between debt and equity finance and between gross and net debt. The main contribution is in developing portfolio choice techniques to analyze capital flows and default in an international finance context. I calibrate the pricing kernel of the model to match properties of U.S. stock returns and yield curves. I then analyze optimal emerging market portfolio and default behavior in response to realistic international financial fluctuations. My calibrated model jointly captures four empirical regularities that have been difficult to produce in the quantitative international finance literature: (1) Gross capital inflow and outflow are pro-cyclical. My model generates this as well as pro-cyclicality in equity liabilities and short-term debt. This is important because recent empirical work emphasizes that the level and composition of gross capital flows are at least as important as current accounts in understanding risk and predicting crises. (2) Most external defaults are partial. (3) Levels of gross external debt in excess of 50% of GNI are common. (4) Usually, borrowers default in bad economic times. Additionally, I provide novel characterizations for stochastic, infinite horizon portfolio problems with partial default. These results allow me to rapidly compute the consumption/portfolio problem solution, even with many assets and default, and they yield two key propositions: (i) for any degree of growth persistence, default increases as market conditions deteriorate, consistent with Regularity (4), and (ii) debt increases with the maturity length of bonds. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:789&r=dge |
| By: | Amélie BARBIER-GAUCHARD ; Thierry BETTI ; Giuseppe DIANA (LaRGE Research Center, Université de Strasbourg ) |
| Abstract: | Using a two-country DSGE model, we analyze the spillover effects of fiscal policy in a monetary union. Based on a non-Walrasian labor market and a detailed fiscal sector, our analysis focuses on the relative cross-border effects of different kinds of fiscal instruments (expenditure side and revenue side). We show that different fiscal instruments produce quite different qualitative effects on the foreign economy. For instance, a public consumption expansion or a cut in social protection tax triggers a decrease in foreign GDP and an increase in foreign unemployment. On the contrary, an increase in transfers to households or a decrease in VAT leads to an increase in foreign GDP and a decrease in foreign unemployment. Moreover, we demonstrate that the choice of the fiscal instrument strongly affects the size of the spillover effects, meaning that different fiscal instruments also produce different quantitative effects on the foreign economy. |
| Keywords: | Fiscal policy, spillover effects, new-Keynesian model, labor market, unemployment |
| JEL: | E62 F41 F42 J20 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2015-01&r=dge |
| By: | Guillermo Escudé (Central Bank of Argentina ) |
| Abstract: | A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the "impossible trinity" or "trilemma", in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escudé (2012), which focused on interest rate and XR policies, since it introduces the third vertex of the "trinity" in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE´s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies correspond to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or "possible trinity" is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions. |
| Keywords: | DSGE models, Small Open Economy, monetary and exchange rate policy, capital controls, optimal policy |
| JEL: | E58 O24 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:201462&r=dge |
| By: | Giacomo Carboni ; Christoffer Kok (European Central Bank ); Matthieu Darrak Paries |
| Abstract: | The financial crisis highlighted the importance of systemic risks and of policies that can be employed to prevent and mitigate them. Several recent initiatives aim at establishing institutional frameworks for macro-prudential policy. As this process advances further, substantial uncertainties remain regarding the transmission channels of macro-prudential instruments as well as the interactions with other policy functions, and monetary policy in particular. This paper provides an overview and some illustrative model simulations using an estimated DSGE model for the euro area of the macroeconomic interdependence between macro-prudential instruments and monetary policy. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:bfi_2013-005&r=dge |
| By: | Michael Peters (London School of Economics ); Ufuk Akcigit (University of Pennsylvania ) |
| Abstract: | As recently shown by Hsieh and Klenow (2012), rm dynamics dier substantially across countries. While firms in the US experience substantial growth during their life-cycle, firms in developing countries, especially in India, barely expand. We present a tractable microfounded endogenous growth model to explain these differences. At the heart of the theory are two sources of heterogeneity across countries. First, we explicitly allow firms to register as formal firms or stay in the informal sector. While informality comes with the benefit of not being subject to taxes and regulation, informal firms are subject to government audits and the risk of being shut down. This lowers the marginal return of technology adoption and informal firms have an incentive to stay small. Second, we incorporate the recent state-of-the-art advances from Bloom and Van Reenen (2010) that managerial practices differ across countries and incorporate managers as a necessary input to run multi-product establishments. Better managers will induce a steeper life-cycle profile as it allows firms to scale up easily and to expand into new product lines. While the model has rich implications for firms' life-cycle, it still has a tractable analytic solution, which we can easily confront with the micro-evidence and calibrate successfully to the data of Hsieh and Klenow (2012). |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:762&r=dge |
| By: | Shuhei Aoki ; Makoto Nirei |
| Abstract: | This paper presents a tractable dynamic general equilibrium model of income and firm-size distributions. The size and value of firms result from idiosyncratic, firm-level productivity shocks. CEOs can invest in their own firms¡¯ risky stocks or in risk-free assets, implying that the CEO's asset and income also depend on firm-level productivity shocks. We analytically show that this model generates the Pareto distribution of top income earners and Zipf¡¯s law of firms in the steady state. Using the model, we evaluate how changes in tax rates can account for the recent evolution of top incomes in the U.S. The model matches the decline in the Pareto exponent of income distribution and the trend of the top 1% income share in the U.S. in recent decades. In the model, the lower marginal income tax for CEOs strengthens their incentive to increase the share of their firms¡¯ risky stocks in their own asset portfolios. This leads to both higher dispersion and concentration of income in the top income group. Length: 54 pages |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e74&r=dge |
| By: | Costas Azariadis (Washington University and Federal Reserve Bank of St. Louis ) |
| Abstract: | This essay evaluates two central bank policy tools, capital requirements and lending of last resort, designed to avert financial panics in the context of endowment economics with complete markets and limited borrower commitment. Credit panics are self-fulfilling shocks to expected credit conditions which cause transitions from an optimal but fragile steady state to a suboptimal state with zero unsecured credit. The main findings are: (i) Countercyclical reserve policies protect the optimum equilibrium against modest shocks but are powerless against large shocks. (ii) If we ignore private information and central banks inefficiencies, this class of models bears out Bagehot’s 1873 claim in Lombard Street: panics are averted if central banks stand ready to lend at a rate somewhat above the one associated with the optimal state. |
| Keywords: | bank panics; last resort; capital requirements; credit conditions |
| JEL: | E52 E58 E44 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:spaper:23&r=dge |
| By: | Era Dabla-Norris ; Yan Ji ; Robert M. Townsend ; D. Filiz Unsal |
| Abstract: | We develop a micro-founded general equilibrium model with heterogeneous agents to identify pertinent constraints to financial inclusion. We evaluate quantitatively the policy impacts of relaxing each of these constraints separately, and in combination, on GDP and inequality. We focus on three dimensions of financial inclusion: access (determined by the size of participation costs), depth (determined by the size of collateral constraints resulting from limited commitment), and intermediation efficiency (determined by the size of interest rate spreads and default possibilities due to costly monitoring). We take the model to firm-level data from the World Bank Enterprise Survey and World Development Indicators for six countries at varying degrees of economic development – three low income countries (Uganda, Kenya, Mozambique), and three emerging market countries (Malaysia, the Philippines, and Egypt). The results suggest that alleviating different financial frictions have a differential impact across countries, with country-specific characteristics playing a central role in determining the linkages and trade-offs among inclusion, GDP, inequality, and the distribution of gains and losses. |
| JEL: | C54 E23 E44 E69 O11 O16 O57 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20821&r=dge |
| By: | Hills, Timothy S. (Board of Governors of the Federal Reserve System (U.S.) ); Nakata, Taisuke (Board of Governors of the Federal Reserve System (U.S.) ) |
| Abstract: | The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends. This in turn dampens the expansionary effects of the government spending during the recession via expectations. In our baseline calibration, the output multiplier at the ZLB is 2.5 when the weight on the lagged shadow rate is zero, and 1.1 when the weight is 0.9. |
| Keywords: | Fiscal policy; government spending multipliers; interest rate smoothing; liquidity trap; zero lower bound |
| JEL: | E32 E52 E61 E62 E63 |
| Date: | 2014–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-107&r=dge |
| By: | Mandelman, Federico S. (Federal Reserve Bank of Atlanta ); Zlate, Andrei (Federal Reserve Bank of Boston ) |
| Abstract: | During the last three decades, jobs in the middle of the skill distribution disappeared, and employment expanded for high- and low-skill occupations. Real wages did not follow the same pattern. Although earnings for the high-skill occupations increased robustly, wages for both low- and middle-skill workers remained subdued. We attribute this outcome to the rise in offshoring and low-skilled immigration, and we develop a three-country stochastic growth model to rationalize this outcome. In the model, the increase in offshoring negatively affects the middle-skill occupations but benefits the high-skill ones, which in turn boosts aggregate productivity. As the income of high-skill occupations rises, so does the demand for services provided by low-skill workers. However, low-skill wages remain depressed as a result of the surge in unskilled immigration. Native workers react to immigration by upgrading the skill content of their labor tasks as they invest in training. |
| Keywords: | labor market polarization; task upgrading; offshoring; labor migration; heterogeneous agents; international business cycles |
| JEL: | F16 F41 |
| Date: | 2014–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2014-28&r=dge |
| By: | Maurizio Iacopetta (OFCE ) |
| Abstract: | An algorithm for computing Dynamic Nash Equilibria (DNE) in an extended ver- sion of Kiyotaki and Wright (1989) (hereafter KW) is proposed. The algorithm com- putes the equilibrium pro.le of (pure) strategies and the evolution of the distribution of three types of assets across three types of individuals. It has two features that together make it applicable in a wide range of macroeco- nomic experiments: (i) it works for any feasible initial distribution of assets; (ii) it allows for multiple switches of trading strategies along the transitional dynamics. The algorithm is used to study the relationship between liquidity, production, and inequality in income and in welfare, in economies where assets fetch di¤erent returns and agents have heterogeneous skills and preferences. One experiment shows a case of reversal of fortune. An economy endowed with a low-return asset takes over a similar economy endowed with a high-return asset because, in the former economy, a group of agents abandon a rent-seeking trading behavior and increase their income by trading and producing more intensively. A second experiment shows that a reduction of market frictions leads both to higher income and lower inequality. Other experiments evaluate the propagation mechanism of shocks that hit the assets.returns. A key result is that trade and liquidity tend to squeeze income inequality. |
| Keywords: | Trading strategies; Liquidity; Matching; Decentralized markets |
| JEL: | C61 C63 E41 E27 D63 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/2029nqlehl81soi17i2hktujh9&r=dge |
| By: | Sami Alpanda ; Serdar Kabaca |
| Abstract: | This paper evaluates the international spillover effects of large-scale asset purchases(LSAPs) using a two-country dynamic stochastic general-equilibrium model with nominal and real rigidities, and portfolio balance effects. Portfolio balance effects arise from imperfect substitution between short- and long-term bond portfolios in each country, as well as between domestic and foreign bonds within these portfolios. We show that LSAPs lower both domestic and foreign long-term yields, and stimulate economic activity in both countries. International spillover effects become larger as the steady-state share of long-term U.S. bond holdings increases in the rest-of-the-world portfolio, as the elasticity of substitution between short- and long-term bonds decreases, or as the elasticity of substitution between domestic and foreign bonds increases. We also find that U.S. asset purchases that generate the same output effect as U.S. conventional monetary policy have larger international spillover effects. This is because portfolio balance effects appear to be stronger under unconventional policy, and foreigners’ U.S. bond holdings are heavily weighted toward long-term bonds. |
| Keywords: | International topics; Transmission of monetary policy; Economic models |
| JEL: | E52 F41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-2&r=dge |
| By: | Guido Menzio (Department of Economics, University of Pennsylvania ); Nicholas Trachter (Federal Reserve Bank of Richmond ) |
| Abstract: | We develop a search-theoretic model of the product market that generates price dispersion across and within stores. Buyers differ with respect to their ability to shop around, both at different stores and at different times. The fact that some buyers can shop from only one seller while others can shop from multiple sellers causes price dispersion across stores. The fact that the buyers who can shop from multiple sellers are more likely to be able to shop at inconvenient times induces causes price dispersion within stores. Specifically, it causes sellers to post different prices for the same good at different times in order to discriminate between different types of buyers. |
| Keywords: | Search, Price dispersion, Price discrimination, Bargain hunting |
| JEL: | D43 |
| Date: | 2015–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:15-003&r=dge |