|
on Dynamic General Equilibrium |
|
Issue of 2015‒02‒05
forty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Yuelin Liu (School of Economics, Australian School of Business, the University of New South Wales) |
| Abstract: | This paper develops a New Keynesian model with search frictions in which generated frictional unemployment is consistent with the time series of involuntary unemployment collected by the U.S. Bureau of Labor Statistics. Thus, it can shed light on the relevant impact of labor market frictions and policy interventions on the observed unemployment about which policy makers and the public are concerned. The data-consistent unemployment is achieved in the model via introduction of partial consumption insurance and an endogenous labor force participation channel. In particular, I find that allowing for endogenous labor force participation greatly improves the model fit for U.S. data. It appears that the price markup shock and matching efficiency shock are the two key driving forces of unemployment fluctuations. Monetary policy that stabilizes the participation gap can be welfare improving. |
| Keywords: | New Keynesian DSGE, Involuntary unemployment, Endogenous labor force participation, Search and matching, Bayesian inference |
| JEL: | C11 E24 E31 E32 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2014-41&r=dge |
| By: | James Cloyne |
| Abstract: | The size and sign of the government spending multiplier crucially depends on how the spending is financed and how consumers respond to implied future tax increases. I investigate this issue in an estimated New Keynesian DSGE model with distortionary labor and capital taxes and, importantly, with preferences that allow the wealth effect on labor supply to vary. Specifically I assess whether the model can explain the empirical evidence for the United States and examine the transmission mechanism, for realistic policy rules. I show that the model can match the positive empirical response of key variables including output, consumption and the real wage. I find that the role of the wealth effect on labor supply is small and that while tax rates rise following a spending shock these increases are modest, with debt rising. Deficit financed spending increases are therefore expansionary, but this is due to sticky prices rather than the wealth effect channel. |
| Keywords: | fiscal policy; government spending shocks; spending multiplier; busyness cycles |
| JEL: | E20 E32 E62 H20 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:58024&r=dge |
| By: | Konstantinos Angelopoulos; Wei Jiang; James Malley |
| Abstract: | This paper evaluates the effects of policy interventions on sectoral labour markets and the aggregate economy in a business cycle model with search and matching frictions. We extend the canonical model by including capital-skill complementarity in production, labour markets with skilled and unskilled workers and on-the-job-learning (OJL) within and across skill types. We first find that, the model does a good job at matching the cyclical properties of sectoral employment and the wage-skill premium. We next find that vacancy subsidies for skilled and unskilled jobs lead to output multipliers which are greater than unity with OJL and less than unity without OJL. In contrast, the positive output effects from cutting skilled and unskilled income taxes are close to zero. Finally, we find that the sectoral and aggregate effects of vacancy subsidies do not depend on whether they are financed via public debt or distorting taxes. |
| Keywords: | fiscal multipliers; sectoral labour markets; search and matching |
| JEL: | E24 E32 J63 J64 J68 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1502&r=dge |
| By: | Marzie Taheri Sanjani |
| Abstract: | This paper investigates financial frictions in US postwar data to understand the interaction between the real business cycle and the credit market. A Bayesian estimation technique is used to estimate a large Vector Autoregression and New Keynesian models demonstrating how financial shocks can have a large and sluggish impact on the economy. I identify the default risk and the maturity mismatch channels of monetary policy transmission; I further employ a generalized-IRF to establish countercyclicality of risk spreads; and I show that the maturity mismatch shocks produce a stronger impact than the default risk shocks. |
| Keywords: | Business cycles;Financial markets;Monetary policy;Monetary transmission mechanism;Shock identification;Econometric models;Financial Frictions, Bayesian VAR, External Financing Premium, Liquidity risk, Default risk, Financial shocks, Generalized IRF, DSGE |
| Date: | 2014–12–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/238&r=dge |
| By: | Temel Taskin (Central Bank of the Republic of Turkey); Bulent Guler (Indiana University - Bloomington); Yavuz Arslan (The Central Bank of the Republic of Turkey) |
| Abstract: | In this paper, we incorporate a price search decision into a life cycle model and differentiate consumption from expenditure. Consumers with low wealth and bad income shocks search more for cheaper prices and pay less, which makes their consumption higher than in a model without search option. A plausibly calibrated version of our model predicts that the cross-sectional variance of consumption is about 17% smaller than the cross-sectional variance of expenditure throughout the life cycle. Price search has an alternative productive activity role for lower-income people to increase their consumption levels. We discuss other implications of price search over the life cycle as well. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:819&r=dge |
| By: | Tito Boeri; Pietro Garibaldi; Espen R. Moen |
| Abstract: | The Great Recession has indicated that firms' leverage and access to finance are important for hiring and firing decisions. It is now empirically established that bank lending is correlated to employment losses when credit conditions deteriorate. We provide further evidence of this drawing on a new dataset that we assembled on employment adjustment and financial positions of European firms. Yet, in the Diamond Mortensen Pissarides (DMP) model there is no role for finance. All projects that display positive net present values are realized and financial markets are assumed to be perfect. What if financial markets are not perfect? Does a different access to finance influence the firm's hiring and firing decisions? The paper uses the concept of limited pledgeability proposed by Holmstrom and Tirole to integrate financial imperfections and labor market imperfections. A negative shock wipes out the firm's physical capital and leads to job destruction unless internal cash was accumulated by firms. If firms hold liquid assets they may thus protect their search capital, defined as the cost of attracting and hiring workers. The paper explores the trade-off between size and precautionary cash holdings in both partial and general equilibrium. We find that if labor market frictions disappear, so does the motive for firms to hold liquidity. This suggests a fundamental complementarity between labor market frictions and holding of liquid assets by firms. |
| Keywords: | Pledgeability; war chest; leverage; liquidity; labor and finance |
| JEL: | J64 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:60610&r=dge |
| By: | Matteo Iacoviello (Federal Reserve Board) |
| Abstract: | We describe how to adapt a first-order perturbation approach and apply it in a piecewise fashion to handle occasionally binding constraints in dynamic models. Our examples include a real business cycle model with a constraint on the level of investment, a New Keynesian model subject to the zero lower bound on nominal interest rates, and a model of optimal consumption choice in the presence of liquidity constraints. In each case, we compare the piecewise linear perturbation solution with a high-quality numerical solution that can be taken to be virtually exact. The piecewise linear perturbation method can adequately capture key properties of the models we consider. A key advantage of this method is its applicability to models with a large number of state variables. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:801&r=dge |
| By: | Bacchetta, Philippe; Benhima, Kenza; Poilly, Céline |
| Abstract: | In the aftermath of the U.S. financial crisis, both a sharp drop in employment and a surge in corporate cash have been observed. In this paper, based on U.S. data, we document that the negative relationship between the corporate cash ratio and employment is systematic, both over time and across firms. We develop a dynamic general equilibrium model where heterogenous firms need cash in their production process and where financial shocks are made of both credit and liquidity shocks. We show that external liquidity shocks generate a negative comovement between the cash ratio and employment. We analyze the dynamic impact of aggregate shocks and the cross-firm impact of idiosyncratic shocks. With a calibrated version of the model, the model yields a negative comovement that is close to the data. |
| Keywords: | financial shocks; liquidity; working capital |
| JEL: | E24 E44 G32 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10309&r=dge |
| By: | Rui Li (University of Massachusetts Boston); Dana Kiku (University of Ilinois); Hengjie Ai (University of Minnesota) |
| Abstract: | We present a general equilibrium-mechanism design model with two-sided limited commitment that accounts for the observed heterogeneity in firms’ investment, payout and CEO-compensation policies. In the model, shareholders cannot commit to holding negative net present value projects, and managers cannot commit to compensation plans that yield life-time utility lower than their outside options. Firms operate identical constant return to scale technologies with i.i.d. productivity growth. Consistent with the data, the model endogenously generates a power law in firm size and a power law in CEO compensation. We also show that the model is able to quantitatively explain the observed negative relationship between firms' investment rates and size, the positive relationship between firms' size and their dividend and CEO payout, as well as variation of firms' investment and payout policies across both size and age. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:855&r=dge |
| By: | Marco Airaudo; Salvatore Nisticò; Luis-Felipe Zanna |
| Abstract: | We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New-Keynesian DSGE model populated by Blanchard-Yaari non-Ricardian households. The constant turnover between long-time stock holders and asset-poor newcomers generates a financial wealth channel where the wedge between current and expected future aggregate consumption is affected by the market value of financial wealth, making stock prices non-redundant for the business cycle. We find that if the financial wealth channel is sufficiently strong, responding to stock prices enlarges the policy space for which the rational expectations equilibrium is both determinate and learnable (in the E-stability sense of Evans and Honkapohja, 2001). In particular, the Taylor principle ceases to be necessary and also mildly passive policy responses to inflation lead to determinacy and E-stability. Our results appear to be more prominent in economies characterized by a lower elasticity of substitution across differentiated products and/or more rigid labor markets. |
| Date: | 2015–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/16&r=dge |
| By: | Noah Williams (University of Wisconsin); Rui Li (University of Massachusetts Boston) |
| Abstract: | In this paper, we investigate the design of optimal unemployment insurance in an environment with moral hazard and cyclical fluctuations. The optimal unemployment insurance contract balances the insurance motive to provide consumption for the unemployed with the provision of incentives to search for a job. This balance is affected by aggregate conditions, as recessions are characterized by reductions in job finding rates. We show how benefits should vary with aggregate conditions in an optimal contract. In a special case of the model, the optimal contract can be solved in closed form. We show how this contract can be implemented in a rather simple way: by allowing unemployed workers to borrow and save in a risk-free bond, providing flow payments which are constant over an unemployment spell but vary with the aggregate state, and giving additional lump sum payments (or charges) upon finding a job or when the aggregate state switches. We then consider a calibrated version of the model and study the quantitative impact of changing from the current unemployment system to the optimal one. In a recession, the optimal system reduces unemployment rates by roughly 2.5 percentage points and shortens the duration of unemployment by roughly 50%. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:804&r=dge |
| By: | Marco Cozzi (Queen's University); Giulio Fella (Queen Mary) |
| Abstract: | This paper is a quantitative, equilibrium study of the insurance role of severance pay when workers face displacement risk and markets are incomplete. A key feature of our model is that, in line with an established empirical literature, job displacement entails a persistent fall in earnings upon reemployment due to the loss of job-specific human capital. The model is solved numerically and calibrated to the US economy. In contrast to previous studies that have analyzed severance payments in the absence of persistent earning losses, we find that the welfare gains from the insurance against job displacement afforded by severance pay are sizable. These gains are higher if, as in most OECD countries, severance pay increases with tenure. The result is a consequence of the higher persistence of earnings losses for workers with a larger stock of job-specific human capital at the time of displacement. |
| Keywords: | Severance Payments, Incomplete Markets, Welfare |
| JEL: | E24 D52 D58 J65 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1338&r=dge |
| By: | Sebastián Cea-Echenique (Paris School of Economics - Centre d'Economie de la Sorbonne); Juan Pablo Torres-Martínez (Department of Economics - Faculty of Economics and Business - University of Chile) |
| Abstract: | We build a general equilibrium model with endogenous borrowing constraints compatible with credit segmentation. There are personalized trading restrictions connecting prices with both portfolio constraints and consumption possibilities, a setting which has not thoroughly been addressed by the literature. Our approach is general enough to be compatible with incomplete market economies where there exist wealth-dependent and/or investment-dependent credit access, borrowing constraints precluding bankruptcy, or assets backed by physical collateral. To prove equilibrium existence, we assume that transfers implementable in segmented markets can be super-replicated by investments in non-segmented markets. We prove that equilibrium exists because of this super-replication property, which is satisfied if either (i) all individuals have access to borrow at a risk-free rate; or (ii) financial contracts make real promises in terms of non-perishable commodities; or (iii) promises are backed by physical collateral. |
| Keywords: | Incomplete Markets, General Equilibrium, Endogenous Trading Constraints. |
| JEL: | D52 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14095&r=dge |
| By: | Lien Laureys |
| Abstract: | When workers are exposed to human capital depreciation during periods of unemployment, hiring affects the unemployment pool’s composition in terms of skills, and hence the economy’s production potential. Introducing human capital depreciation during unemployment into an otherwise standard New Keynesian model with search frictions in the labour market leads to the finding that the flexibleprice allocation is no longer constrained-efficient even when the standard Hosios (1990) condition holds. This is because it generates a composition externality in job creation: firms ignore how their hiring decisions affect the extent to which the unemployed workers’ skills erode, and hence the output that can be produced by new matches. Consequently, it might be desirable from a social point of view for monetary policy to deviate from strict inflation targeting. Although optimal price inflation is no longer zero, strict inflation targeting is shown to stay close to the optimal policy. |
| JEL: | N0 R14 J01 F3 G3 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:58006&r=dge |
| By: | pablo guerron-quintana (Federal Reserve Bank of Philadelphia); Grey Gordon (Indiana University) |
| Abstract: | Bonds are an important source of funding for municipalities. As financing for big budget construction projects or surprise shortfalls in tax revenue, bonds help smooth tax burden across time. There is good reason for this smoothing: if residents feel their tax burden is excessive, they can migrate. The ability of residents to migrate significantly hampers the ability of local governments to raise taxes, and, in the extreme, can lead to default. We document the relationship between bonds, default, and migration in the data. We then construct an islands model that captures these facts while allowing for endogenous migration, taxation, debt issuance, and default. [TO BE DONE:] We assess the short run, long run, and welfare costs of default in our model and explore macro-prudential policies that can mitigate these costs. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:868&r=dge |
| By: | Andolfatto, David (Federal Reserve Bank of St. Louis); Williamson, Stephen D. (Federal Reserve Bank of St. Louis) |
| Abstract: | We construct a model in which all consolidated government debt is used in transactions, with money being more widely acceptable. When asset market constraints bind, the model can deliver low real interest rates and positive rates of inflation at the zero lower bound. Optimal monetary policy in the face of a financial crisis shock implies a positive nominal interest rate. The model reveals some novel perils of Taylor rules. |
| JEL: | E4 E5 |
| Date: | 2015–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2015-002&r=dge |
| By: | Eddie Gerba |
| Abstract: | We establish a set of US stylized facts on prices, quantities and balance sheets, assess the consistency of the current generation of financial DSGE models to these, and provide guidance on the challenges ahead. We mainly find four aspects which future financial friction models should take into account. The first is the profound shift in household financing structure, both on the asset and liability side, which has meant that they have been left vulnerable. Second, the balance sheet of firms has become increasingly leveraged and coupled with more volatile and procyclical equity prices has meant that the balance sheet of firms has become increasingly procyclical and volatile since the 1990’s. The current generation of FA models do capture some aspects of this but produce excessively smooth results. Third, it would be of interest for policy makers to find the optimal level/percentage of foreign ownership of the Federal debt at which the debt portfolio is diversified, but the future government budget constraint and its stabilisation capacity is not put in danger by over-exposure to international shocks. Lastly, models might be extended to include a regime-switching mechanism and explore the effects on model dynamics and model stability when the economy goes from a low volatility-low correlation state to a high volatility-high correlation state. A wider implication of our findings is that accumulation of stocks might alter agents risk preferences, production technologies, or beliefs to such a degree that the optimization problem that those agents face has transformed over time. The economy is effectively in a different state of nature, and agents may face different constraints. Future macroeconomic models need to take a different strategy to modeling the long-run ratios, since these have increased over the long-run, and this has had an effect on both the frequency and the amplitude of the business cycles. |
| Keywords: | balance sheet; financial market; credit; business cycle; financial friction models; future challenges |
| JEL: | C68 E3 E44 E51 |
| Date: | 2014–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:56407&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:upf:upfgen:1463&r=dge |
| By: | Smith, Andrew Lee (Federal Reserve Bank of Kansas City); Keating, John W.; Kelly, Logan J.; Valcarcel, Victor J. |
| Abstract: | In late 2008, deteriorating economic conditions led the Federal Reserve to lower the federal funds rate to near zero and inject massive liquidity into the financial system through novel facilities. The combination of conventional and unconventional measures complicates the challenging task of characterizing the effects of monetary policy. We develop a novel method of identifying these effects that maintains the classic assumptions that a central bank reacts to output and the price level contemporaneously and may only affect these variables with a lag. A New-Keynesian DSGE model augmented with a representative financial structure motivates our empirical specification. The equilibrium model provides theoretical support for our choice of different series to replace variables that were popular in models of monetary policy but became problematic in the aftermath of the 2008 financial crisis. One of our most important innovations is to utilize the Divisia M4 index of money as the policy indicator variable. The model is bolstered by its ability to produce plausible responses to a monetary policy shock in samples that include or exclude the recent crisis period. |
| Keywords: | Monetary policy rules; Dynamic Stochastic General Equilibrium (DSGE) models; money; output puzzle; price puzzle; liquidity puzzle; financial crisis; Divisia; Identification assumptions; Structural Vector Autoregressions (SVARs) |
| JEL: | E3 E4 E5 |
| Date: | 2014–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp14-11&r=dge |
| By: | Petr Sedlacek; Vincent Sterk |
| Abstract: | This paper shows that job creation of cohorts of U.S. firms is strongly influenced by aggregate conditions at the time of their entry. Using data from the Business Dynamics Statistics (BDS) we follow cohorts of young firms and document that their employment levels are very persistent and largely driven by the intensive margin (average firm size) rather than the extensive margin (number of firms). To differentiate changes in the composition of startup cohorts from post-entry choices and to evaluate aggregate effects, we estimate a general equilibrium firm dynamics model using BDS data. We find that even for older firms, the aggregate state at birth drives the vast majority of variations in employment across cohorts of the same age. The key force behind this result are fluctuations in the composition of startup cohorts with respect to firms' potential to grow large. At the aggregate level, factors determined at the startup phase account for the large low-frequency fluctuations observed in the employment rate. |
| Keywords: | firm dynamics; heterogeneous agents; maximum likelihood; DSGE |
| JEL: | E32 L11 M13 |
| Date: | 2014–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:58223&r=dge |
| By: | Bingbing Dong (University of Virginia) |
| Abstract: | This paper examines the role of money in understanding the behavior of asset prices and whether and how monetary policy should react to asset prices such as stock prices and equity premiums. To do so, I introduce money via the form of transaction cost into a production economy with limited stock market participation where agents with lower inter-temporal elasticity of substitution (IES), called non-stockholders, have no access to stock market. In addition to facilitating transactions of consumption goods, money also redistributes wealth by countercyclically transferring resources from stockholders to non-stockholders, the main role of non-state contingent bonds. The benchmark model resolves quantitatively the risk premium puzzle and the risk-free return puzzle, matches macroeconomic behavior such as volatilities of output, consumption and investment, and is in line with empirically documented facts about money growth, inflation and asset prices in literature. This model is then used to evaluate alternative policies for money growth rates. I find that monetary policies are welfare improving for both stockholders and non-stockholders if they reduce equity premiums in the economy. These policies include a lower expected money growth, a pro-cyclical money growth rate, and growth rates of money being positively reacting to equity prices or equity premiums, all of which enhance the precautionary saving role of money. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:881&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:201429&r=dge |
| By: | Eddie Gerba |
| Abstract: | Following recent studies by the Bank of England that the low financial market confidence and low expectations about private sector profits over the next three years has lead to unusually low price-to-book ratios, we incorporate a stock market mechanism in a general equilibrium framework. More specifically, we introduce an endogenous wedge between market and book value of capital, and make investment a function of it in a standard financial accelerator model. The price wedge is driven by an information set containing expectations about the future state of the economy. The result is that the impulse responses to exogenous disturbances are on average two to three times more volatile than in the benchmark financial accelerator model. More- over, the model improves the matching of firm variables and financial rates to US data compared to the standard financial accelerator model. We also derive a model based quadratic loss function and measure the extent to which monetary policy can feed a bubble by further loosening the credit market frictions that entrepreneurs face. A policy that explicitly targets stock market developments can be shown to improve welfare in terms of minimizing the consumption losses of consumers, even when we account for incomplete information of central bankers regarding the current state of the economy. |
| Keywords: | asset price cycles; financial friction model; monetary policy; asset price targeting |
| JEL: | E44 E52 G32 |
| Date: | 2013–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:56396&r=dge |
| By: | Leonardo Melosi (Federal Reserve Bank of Chicago) |
| Abstract: | We develop a DSGE model in which the policy rate signals to price setters the central bank's view about macroeconomic developments. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters' inflation expectations. The estimated model with signaling effects delivers large and persistent real effects of monetary disturbances, even though the average duration of price contracts is fairly short. While the signaling effects do not substantially alter the transmission of technology shocks, they bring about deflationary pressures in the aftermath of positive demand shocks. In the 1970s, the Federal Reserve's disinflation policy, which was characterized by gradual increases in the policy rate, was counterproductive because it ended up signaling inflationary shocks. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:830&r=dge |
| By: | Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti |
| Abstract: | The housing boom that preceded the Great Recession was due to an increase in credit supply driven by looser lending constraints in the mortgage market. This view on the fundamental drivers of the boom is consistent with four empirical observations: the unprecedented rise in home prices and household debt, the stability of debt relative to house values, and the fall in mortgage rates. These facts are difficult to reconcile with the popular view that attributes the housing boom to looser borrowing constraints associated with lower collateral requirements. In fact, a slackening of collateral constraints at the peak of the lending cycle triggers a fall in home prices in our framework, providing a novel perspective on the possible origins of the bust. |
| JEL: | E32 E44 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20874&r=dge |
| By: | Mariano Kulish (School of Economics, Australian School of Business, the University of New South Wales); James Morley (School of Economics, Australian School of Business, the University of New South Wales); Tim Robinson (Melbourne Institute of Applied Economics and Social Research, University of Melbourne) |
| Abstract: | Motivated by the use of forward guidance, we propose a method to estimate DSGE models in which the central bank holds the policy rate fixed for an extended period. Private agents’ beliefs about how long the fixed-rate regime will last influences, among other observable variables, current output, inflation and interest rates of longer maturities. We estimate the shadow policy rate and construct counterfactual scenarios to quantify the severity of the zero lower bound constraint. Using the Smets and Wouters (2007) model, we find that the expected duration of the zero interest rate policy has been around 2 years, that the shadow rate has been around -3 per cent and that the zero lower bound has imposed a significant output loss. |
| Keywords: | zero lower bound, forward guidance |
| JEL: | E52 E58 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2014-32a&r=dge |
| By: | Peng, Yuchao; Yan, Lili |
| Abstract: | This paper builds a banking DSGE model based on endogenous loan to value ratios, taking the different relationship between different types of enterprises and banks into account. Due to the political connections between the bank and enterprises, loan to value ratio for favored enterprises (e.g. state-owned enterprises) is endogenously higher than that for non-favored enterprises (e.g. private enterprises), which is called discriminatory credit constraint in this paper. Compared to non-discriminatory credit constraint, we find that discriminatory credit constraint can further amplify the impact of negative technology shocks on output, and reduce the effectiveness of expansionary monetary policy. Empirical evidence from China industrial firms’ data supports our conclusion. |
| Keywords: | Discriminatory Credit Constraint, Political Connections, Financial Accelerator |
| JEL: | E32 E52 G21 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61439&r=dge |
| By: | Willis, Jonathan L. (Federal Reserve Bank of Kansas City); Ruhl, Kim J. |
| Abstract: | Models in which heterogeneous plants face sunk export entry costs are standard tools in the international trade literature. How well do these models account for the observed dynamics of new exporters? We document that new exporters initially export small amounts and — conditional on continuing in the export market — grow gradually over several years. New exporters are most likely to exit the export market in their first few years. We construct a dynamic discrete choice model of exporting and find that the standard model cannot replicate the behavior of new exporters: New exporters grow too large too quickly and live too long. We assess the quantitative importance of accounting for new exporter dynamics by extending the model to account for these facts. In this model, the present value of exporting falls relative to the baseline model. As a result, the entry costs needed to account for the data are three times smaller than in the baseline model |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp14-10&r=dge |
| By: | Laura Turner (University of Toronto); Kevin Devereux (University of Toronto) |
| Abstract: | Much attention has been paid to the high divorce rate, but less recognized is the frequency of remarriage. To the extent that marriage provides consumption insurance, this prompts re-examination of the gains to marriage in terms of risk sharing. This paper shows that existing models of marriage with risk sharing and limited commitment cannot explain the rate and speed at which divorcees remarry. Introducing on-the-marriage search allows simulations to match the rates seen in the data. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:815&r=dge |
| By: | Domenico Giannone; Francesca Monti; Lucrezia Reichlin |
| Abstract: | This paper shows how and when it is possible to obtain a mapping from a quarterly DSGE model to amonthly specification thatmaintains the same economic restrictions and has real coefficients. We use this technique to derive the monthly counterpart of the Gali et al (2011) model. We then augment it with auxiliary macro indicators which, because of their timeliness, can be used to obtain a now-cast of the structural model. We show empirical results for the quarterly growth rate of GDP, the monthly unemployment rate and the welfare relevant output gap defined in Gali, Smets andWouters (2011). Results show that the augmented monthly model does best for now-casting. |
| Keywords: | DSGE models; forecasting; temporal aggregation; mixed frequency data; large datasets |
| JEL: | C33 C53 E30 |
| Date: | 2014–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:57998&r=dge |
| By: | Canzoneri, Matthew B; Collard, Fabrice; Dellas, Harris; Diba, Behzad |
| Abstract: | The Great Recession, and the fiscal response to it, has revived interest in the size of fiscal multipliers. Standard business cycle models have difficulties generating multipliers greater than one. And they also cannot produce any significant state-dependence in the size of the multipliers over the business cycle. In this paper we employ a variant of the Curdia-Woodford model of costly financial intermediation and show that fiscal multipliers can be strongly state dependent in a countercyclical manner. In particular, a fiscal expansion during a recession may lead to multiplier values exceeding two, while a similar expansion during an economic boom would produce multipliers falling short of unity. This pattern obtains if the spread (the financial friction) is more sensitive to fiscal policy during recessions than during expansions, a feature that is present in the data. Our results are consistent with recent empirical work documenting the state contingency of multipliers. |
| Keywords: | cyclicality; financial frictions; government spending multipliers |
| JEL: | E32 E62 H3 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10353&r=dge |
| By: | Jean-Marc Bonnisseau (Centre d'Economie de la Sorbonne - Paris School of Economics); Lalaina Rakotonindrainy (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | We consider a pure exchange overlapping generations economy with finitely many commodities and consumers per period having possibly non-complete non transitive preferences. We provide a geometric and direct proof of the Balasko-Shell characterization of Pareto optimal allocation. To avoid some smoothness assumption, we replace the assumption on the curvature of the indifference surface by geometric properties of preferred sets. In particular, we use the notion of prox-regularity, introduced in variational analysis by Rockafellar and Poliquin. We provide preliminary results and explain how the multi-consumer case can be simplified by considering aggregate feasible Pareto improving transfer. We provide the proof and we show which assumptions are used for the "if" part and for the "only if" part of the criterion. |
| Keywords: | Overlapping generations model, preference set, normal cone, equilibrium, Pareto optimality. |
| JEL: | C62 D50 D62 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:15003&r=dge |
| By: | Tzuo Hann Law (University of Pennsylvania); Iourii Manovskii (University of Pennsylvania); Marcus Hagedorn (University of Oslo) |
| Abstract: | Does the market allocate the right workers to the right jobs? Since observable (to economists) variables account for only a small fraction of the wage variance in the data, to answer this question it is essential to study assortative matching between employers and employees based on their unobserved characteristics. This paper enables this line of research. We show theoretically that all parameters of the classic model of sorting based on absolute advantage in Becker (1973) with search frictions can be identied using only matched employer-employee data on wages and labor market transitions. In particular, these data are sufficient to assess whether matching between workers and firms is assortative, whether sorting is positive or negative, and to measure the potential effect on output from moving any given worker to any given employer in the economy. We provide computational algorithms that implement our identication strategy given the limitations of the available data sets. Finally, we extend our identication and implementation strategies to the commonly used class of models of sorting based on comparative advantage and provide a test that discriminates between these models. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:896&r=dge |
| By: | Brant Abbott (Yale University); Giovanni Gallipoli (UBC) |
| Abstract: | We develop and estimate an equilibrium model of intergenerational earnings persistence based on skill complementarity in production. We show that when a worker's productivity is relatively independent of co-workers' skills (i.e., skills are substitutable) parental investments in a child's human capital have a stronger impact on the child's future earnings. This leads to higher earnings' persistence across generations. Observed patterns of geographic variation in intergenerational income persistence, both across countries and within the US, appear to be consistent with this hypothesis. We show that differences in skill substitutability may account for up to 1/5 of cross-country variation in intergenerational earnings persistence. We also find that public policies which equalize skills are more desirable in places where skills are more complementary in production. Thus cross-country differences in production arrangements provide a rationale for the observed concurrence of proactive government policies and increased economic mobility. When accounting for this indirect effect, the model explains an even larger share of cross-country differences in mobility, up to 1/3 of the total. As a by-product of this analysis we provide the first set of estimates of skill substitutability in different industries. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:860&r=dge |
| By: | Temple, Jonathan; Ying, Huikang |
| Abstract: | We examine whether structural transformation leads to a Kuznets curve. We present a dynamic general equilibrium model with heterogeneous workers, occupational self-selection and selective migration, and calibrate the model to survey data for Malawi. We show that structural transformation raises living standards unevenly. As development proceeds, the movement of workers from agriculture is associated with rising wage inequality, rather than a Kuznets curve. The increase in sectoral wage inequality is pronounced for agriculture. At the same time, structural transformation is associated with major reductions in rural poverty, and eventually in urban poverty. |
| Keywords: | inequality; Kuznets curve; Roy model; structural transformation |
| JEL: | D31 O15 O41 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10297&r=dge |
| By: | Stijn Van Nieuwerburgh (NYU Stern School of Business); Hanno Lustig (Anderson School of Business); Bryan Kelly (University of Chicago); Bernard Herskovic (New York University) |
| Abstract: | We show that firms' idiosyncratic volatility in returns and cash flows obeys a strong factor structure. We find that the stocks of firms with large, negative common idiosyncratic volatility (CIV) factor betas earn high average returns. The CIV beta quintile spread is 6.4% per year. To explain this spread, we develop a heterogeneous investor model with incomplete markets in which the idiosyncratic volatility of investor consumption growth inherits the factor structure of firm cash flow growth. In our model, the CIV factor is a priced state variable, because an increase in volatility represents a worsening of the investment opportunity set for the average investor. The calibrated model is able to match the high degree of comovement in idiosyncratic volatilities, the CIV beta spread, along with a host of asset price moments. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:810&r=dge |
| By: | Peter Rupert (University of California, Santa Barbara); Giulio Zanella (University of Bologna); Marek Kapicka (University of California Santa Barbara) |
| Abstract: | Property crime is today more widespread in Europe than in the United States, while the opposite was true during the 1970s and 1980s. In this paper we study the determinants of crime in a dynamic general equilibrium model with uninsured idiosyncratic shocks. We focus on Germany, and compute the contribution of various factors to the total change. We find that the most important factor explaining the reversal are changes in the probability of apprehension and prison duration for the United States, and demographic changes for Germany. Changes in labor tax rates and transfers are unimportant for the United States. For Germany they have non-negligible effects, but they go in opposite directions and tend to offset each other. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:847&r=dge |
| By: | Merlin, Giovanni Tondin; Kuhl Teles, Vladimir |
| Abstract: | We studied the effects of changes in banking spreads on distributions of income, wealth and consumption as well as the welfare of the economy. This analysis was based on a model of heterogeneous agents with incomplete markets and occupational choice, in which the informality of firms and workers is a relevant transmission channel. The main finding is that reductions in spreads for firms increase the proportion of entrepreneurs and formal workers in the economy, thereby decreasing the size of the informal sector. The effects on inequality, however, are ambiguous and depend on wage dynamics and government transfers. Reductions in spreads for individuals lead to a reduction in inequality indicators at the expense of consumption and aggregate welfare. By calibrating the model to Brazil for the 2003-2012 period, it is possible to find results in line with the recent drop in informality and the wage gap between formal and informal workers |
| Date: | 2014–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:374&r=dge |
| By: | Amanda Jakobsson (Singapore Management University) |
| Abstract: | I present a dynamic general equilibrium model with heterogeneous firms that can innovate, learn how to export and then go on to become multinational firms. Entering the foreign market is a dynamic process where firms first learn how to export and then can learn how to adapt production to a low-wage location. In the model, innovation and international technology transfer are affected by both exporting and FDI which offers new insights about the effects of policy changes such as trade liberalization and intellectual property rights reform on consumer welfare. In particular, I disentangle the effects of such policy changes on reallocation of labor resources within regions: across activities (production, innovation, export-learning and adaption), across high-productivity and low-productivity firms, and within firms. I obtain higher rates of export-learning and FDI for high-productivity firms than for low-productivity firms. As a result, exporters are on average more productive than non-exporters, and multinational firms are on average more productive than exporters. In equilibrium, there are still some low-productivity exporters, some low-productivity multinational firms and some high-productivity non-exporters. Low-productivity firms export and engage in FDI but they are just not as successful in these activities as high-productivity firms. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:831&r=dge |
| By: | Ngai, Liwa Rachel; Sheedy, Kevin D. |
| Abstract: | Using data on house sales and inventories of unsold houses, this paper shows that changes in sales volume are largely explained by changes in the frequency at which houses are put up for sale rather than changes in the length of time taken to sell them. Thus the decision to move house is key to understanding the volume of sales. This paper builds a model where homeowners chose when to move house, which can be seen as an investment in housing match quality. Since moving house is an investment with upfront costs and potentially long-lasting benefits, the model predicts that the aggregate moving rate depends on macroeconomic variables such as interest rates. The endogeneity of moving also means that those who move come from the bottom of the existing match quality distribution, which gives rise to a cleansing effect and leads to overshooting of housing-market variables. |
| Keywords: | endogenous moving; housing market; match quality investment; search and matching |
| JEL: | D83 E22 R21 R31 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10346&r=dge |
| By: | Alessandra Fogli; Fabrizio Perri |
| Abstract: | Does macroeconomic volatility/uncertainty affects accumulation of net foreign assets? In OECD economies over the period 1970-2012, changes in country specific aggregate volatility are, after controlling for a wide array of factors, significantly positively associated with net foreign asset position. An increase in volatility (measured as the standard deviation of GDP growth) of 0.5% over period of 10 years is associated with an increase in the net foreign assets of around 8% of GDP. A standard open economy model with time varying aggregate uncertainty can quantitatively account for this relationship. The key mechanism is precautionary motive: more uncertainty induces residents to save more, and higher savings are in part channeled into foreign assets. We conclude that both data and theory suggest uncertainty/volatility is an important determinant of the medium/long run evolution of external imbalances in developed countries. |
| JEL: | F32 F34 F41 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20872&r=dge |