nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒02‒16
38 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Optimal Dynamic Carbon Taxation in a Life-Cycle Model with Distortionary Fiscal Policy By Rausch, Sebastian; Abrell, Jan
  2. Labor Market Reform and the Cost of Business Cycles By Krebs, Tom; Scheffel, Martin
  3. Aging, the Great Moderation and Business-Cycle Volatility in a Life-Cycle Model By Rohrbacher, Stefan; Heer, Burkhard; Scharrer, Christian
  4. Life-Cycle Asset Allocation with Ambiguity Aversion and Learning By Kim Peijnenburg
  5. Constrained Inefficiency and Optimal Taxation with Uninsurable Risks By Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
  6. Searching for the source of macroeconomic integration across advanced economies By Uluc Aysun
  7. Employment, hours and optimal monetary policy By Dossche, Maarten; Lewis, Vivien; Poilly, Céline
  8. News about Aggregate Demand and the Business Cycle By Weder, Mark; Sirbu, Anca; Guo, Jang Ting
  9. Public versus Private Provision of Liquidity: Is There a Trade-Off? By Winter, Christoph; Röhrs, Sigrid
  10. The short- and long-run effects of fiscal consolidation in dynamic general equilibrium By Wolters, Maik; Schwarzmüller, Tim
  11. The Czech Housing Market Through the Lens of a DSGE Model Containing Collateral-Constrained Households By Jan Bruha; Jaromir Tonner
  12. Equilibrium Price Dispersion with Sequential Search By Nicholas Trachter; Guido Menzio
  13. Resource Misallocation and Aggregate Productivity under Progressive Taxation By Jang-Ting Guo; Yutaro Izumi; Yi-Chan Tsai
  14. Small sample performance of indirect inference on DSGE models By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael
  15. Inequality and the Marriage Gap By Nawid Siassi
  16. Identification of DSGE Models - A Comparison of Methods and the Effect of Second Order Approximation By Mutschler, Willi
  17. Product Diversity, Demand Structures and Optimal Taxation By Winkler, Roland; Lewis, Vivien
  18. Credit supply and the housing boom By Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
  19. Fiscal Cost of Demographic Transition in Japan By KITAO Sagiri
  20. Aging and deflation from a fiscal perspective By Katagiri, Mitsuru; Konishi, Hideki; Ueda, Kozo
  21. Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality: A Structural Framework for Policy By Era Dabla-Norris; Yan Ji; Robert Townsend; D. Filiz Unsal
  22. The labor market effect of demographic change: Alleviation for financing social security By Friese, Max
  23. Macroeconomic policy coordination in the global economy: VAR and BVAR-DSGE analyses By Keshab Bhattarai; Sushanta K. Mallick
  24. Multinational Firms and Business Cycle Transmission By Menno, Dominik
  25. Corporate Policies with Temporary and Permanent Shocks By Décamps, Jean-Paul; Gryglewicz, S.; Morellec, E.; Villeneuve, Stéphane
  26. Education Policy, Occupation-Mismatch and the Skill Premium By Francesc Obiols-Homs; Virginia Sánchez-Marcos
  27. Increasing returns in matching and labour market dynamics: Comments on indeterminacy and search theory By Guerrazzi, Marco
  28. Bank Risk Taking, Credit Booms and Monetary Policy By Afanasyeva, Elena; Guentner, Jochen
  29. Inequality and the Marriage Gap By Siassi, Nawid
  30. Explaining the Spread of Temporary Jobs and its Impact on Labor Turnover By Pierre Cahuc; Olivier Charlot; Franck Malherbet
  31. Menu Costs, Aggregate Fluctuations and Large Shocks By Adam Reiff; Peter Karadi
  32. Equilibrium Price Dispersion Across and Within Stores By Menzio, Guido; Trachter, Nicholas
  33. Over-aging - Are present human populations too old? By Stelter, Robert
  34. Bargaining and Wage Rigidity in a Matching Model for the US By Malcomson, James; Mavroeidis, Sophocles
  35. Housing markets and current account dynamics By Gete, Pedro
  36. Fiscal Devaluation in a Monetary Union By Engler, Philipp; Tervala, Juha; Ganelli, Giovanni; Voigts, Simon
  37. The Environmental and Economic Effects of a New Carbon Tax in Portugal:A Dynamic General Equilibrium Model Assessment By Alfredo Marvão Pereira; Rui M. Pereira
  38. Human Capital and Optimal Redistribution By Koeniger, Winfried

  1. By: Rausch, Sebastian; Abrell, Jan
    Abstract: We quantitatively characterize optimal carbon, capital, and labor income taxes in an economy-climate integrated assessment model that features overlapping generations and distortionary fiscal policy. First, we show that the optimal carbon tax significantly differs from the Pigouvian carbon levy in a first-best setting with overlapping generations in which fully rational households optimize over finite lifetimes. The key driving force behind this result is the life-cycle structure of the our model, in conjunction with endogenously chosen labor supply. We also show that the assumed labor supply elasticity is important for the size of deviation of the optimal carbon tax from the Pigouvian tax, but not the existence of the deviation from Pigouvian pricing. Second, interacting life-cycle household behavior with distortionary fiscal policy is shown to further drive a wedge between the second-best optimal carbon tax and a Pigouvian carbon levy.
    JEL: E13 H21 H24
    Date: 2014
  2. By: Krebs, Tom; Scheffel, Martin
    Abstract: This paper studies the effect of labor market reform on the welfare cost of business cycles. Motivated by the German labor market reforms of 2003-2005, the so-called Hartz reforms, the paper focuses on two labor market institutions: the unemployment insurance system determining search incentives and the system of job placement services affecting matching efficiency. The paper develops a tractable search model with idiosyncratic labor market risk and risk-averse workers, and derives a closed-form solution for the welfare cost of business cycles as a function of the various parameters of interest. An improvement in job placement services leads to a reduction in the welfare cost of business cycles, but a change in unemployment benefit generosity has in general an ambiguous effect. A quantitative analysis based on a calibrated version of the model suggests that the German labor market reforms of 2003-2005 reduced the non-cyclical unemployment rate by 3 percentage points and reduced the welfare cost of business cycles by 30 percent.
    JEL: E20 J20 E30
    Date: 2014
  3. By: Rohrbacher, Stefan; Heer, Burkhard; Scharrer, Christian
    Abstract: According to empirical studies, the life cycle of labor supply volatility exhibits a U-shaped pattern. This may lead to the conclusion that demographic change induces a drop in output volatility. We present an overlapping generations model that replicates the empirically observed pattern and study the impact of demographic transition on output volatility. We find that the change in age-composition itself has only a marginal influence on output volatility as the mitigating effect of lower labor supply volatility is compensated by higher labor supply. Instead, the driving force behind the Great Moderation in our model is the downward shift of the age-specific labor supply volatility curve.
    JEL: J10 E32 C68
    Date: 2014
  4. By: Kim Peijnenburg (Bocconi University)
    Abstract: I show that ambiguity (Knightian uncertainty) and learning about the equity premium can simultane- ously explain the low fraction of financial wealth allocated to stocks over the life cycle as well as the stock market participation puzzle. I assume that individuals are ambiguous about the size of the equity premium and are averse with respect to this ambiguity, which results in a lower optimal allocation to stocks over the life cycle. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity aversion leads to higher saving rates.
    Date: 2014
  5. By: Piero Gottardi (European University Institute and Universita Ca' Foscari, Venice); Atsushi Kajii (Kyoto University and Singapore Management University); Tomoyuki Nakajima (Kyoto University and CIGS)
    Abstract: When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and distribution effects. This allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks, the degree of heterogeneity among consumers' income as well as on the way in which the tax revenue is used to provide lump sum transfers to consumers. When shocks affect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However in other cases a negative tax on capital is welfare improving.
    Keywords: optimal linear taxes, incomplete markets, constrained efficiency
    JEL: D52 H21
    Date: 2015–02
  6. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: This paper estimates a two-country open economy DSGE model by using U.S. and Euro Area data. The baseline model, where the two regions are linked only through the trade of goods and risk-free bonds, fails to replicate the high cross-regional macro-economic correlation in the data. I search for the determinants of this correlation by recon?guring the model?s shock processes in two ways. First, I include shocks that symmetrically a¤ect each region. Second I allow for the transmission of shocks between the two regions. While both of these changes considerably improve the model?s per-formance along the international dimension, common shocks appear to be the main drivers of cross-regional correlation. Under both speci?cations, comovements of variables are mostly determined by demand and ?nancial shocks. Productivity, cost-push and exchange rate shocks, by contrast, play a limited role.
    Keywords: Macroeconomic integration, DSGE, Bayesian estimation, U.S., Euro Area
    JEL: E32 F41 F42 F44
    Date: 2015–01
  7. By: Dossche, Maarten; Lewis, Vivien; Poilly, Céline
    Abstract: We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex 'wage curve' linking wages to hours. Since the steady-state real marginal wage is low, wages respond little to hours. As a result, firms overuse the hours margin at the expense of hiring, which makes hours too volatile. The Ramsey planner uses inflation as a instrument to dampen inefficient hours fluctuations.
    Keywords: employment,hours,wage curve,optimal monetary policy
    JEL: E30 E50 E60
    Date: 2015
  8. By: Weder, Mark; Sirbu, Anca; Guo, Jang Ting
    Abstract: We show that an otherwise standard one-sector real business cycle model with variable capital utilization and mild increasing returns-to-scale is able to generate qualitatively as well as quantitatively realistic aggregate fluctuations driven by news shocks to two formulations of future consumption demand or government spending on goods and services. In sharp contrast to many studies in the existing expectations-driven business cycle literature, this result does not rely on non-separable preferences or investment adjustment costs. When the economy is subject to anticipated total factor productivity or investment-specific technology shocks, the relative strength of the intertemporal substitution effect needs to be enhanced for our model to exhibit positive macroeconomic co-movement and business cycle statistics that are consistent with the data.
    JEL: E32 E30 E20
    Date: 2014
  9. By: Winter, Christoph; Röhrs, Sigrid
    Abstract: Many researchers have recommended to increase public debt in the aftermath of the fi nancial crisis in order to relax borrowing constraints for private households. This advice is based on the common assumption that borrowing conditions of private agents are exogenous to public policy. We study the impact of government debt on the provision of private credit in an economy in which borrowing limits arise because of limited contract enforceability and are thus determined as equilibrium outcomes. As such, they also depend on public policy, in particular on the amount of public debt. Using an incomplete markets economy in which households are subject to uninsurable earnings shocks, we show that an increase in government debt crowds out the supply of private credit. We also fi nd that government debt has signi ficantly different implications for aggregate welfare and economic activity in general if borrowing constraints are endogenous.
    JEL: E20 E60 E44
    Date: 2014
  10. By: Wolters, Maik; Schwarzmüller, Tim
    Abstract: We provide a systematic analysis of fiscal consolidation in a dynamic general equilibrium model with a detailed government sector and a share of credit-constrained households. We simulate permanent cuts in government consumption, government investment, and transfer payments as well as permanent increases in the labor, capital and consumption tax rate. We find that ordering these consolidation strategies by multiplier size or their welfare consequences leads to very different rankings. With respect to welfare gains cuts in government consumption rank highest because they yield the largest increase in private consumption in the short- and long-run. This however comes at the cost of large temporary reductions in output. Cutting transfers has the largest positive effects on output, yet the welfare consequences rank lowest since labor input does not decrease so that there is no increase in leisure. Cuts in government investment and capital tax increases have detrimental effects on output in the short- and long-run. From a welfare perspective they do not rank lowest because the slow convergence of the system to the final steady state leads to substantial discounting of the implied long-run drop in consumption. To explain these different outcomes we analyze the short- and long-run transmission channels of the different consolidation instruments. Furthermore, we study how the transmission of fiscal consolidation changes in the case of a binding zero lower bound on nominal interest rates.
    JEL: E62 E63 H61
    Date: 2014
  11. By: Jan Bruha; Jaromir Tonner
    Abstract: We incorporate a housing market with liquidity-constrained households into the Czech National Bank's core forecasting model (g3) to analyze the relationship between housing market and aggregate fluctuations in a small open economy framework. We discuss the historical shock decomposition of house prices and interpret the results in the light of recent empirical work. For a wide range of model calibrations, the interaction between the housing market and the aggregate economy is weak and so the monetary policy implications of house price fluctuations for the Czech Republic are not strong. We interpret this – in line with recent empirical evidence – as an indication that the wealth effects stemming from house ownership are not significant in the Czech Republic. Nevertheless, we show that the collateral mechanism significantly improves the forecasting properties of the extended model, especially for private consumption. This indicates the importance of the collateral effect, which can be caused by assets other than houses.
    Keywords: Aggregate consumption, DSGE models, housing market
    JEL: E32 E37 R31
    Date: 2014–12
  12. By: Nicholas Trachter (Federal Reserve Bank of Richmond); Guido Menzio (University of Pennsylvania)
    Abstract: We propose a novel theory of equilibrium price dispersion in product markets with search frictions. As in Diamond (1971), buyers search for sellers sequentially. In contrast to Diamond (1971), buyers do not meet all sellers with the same probability. Specifically, a fraction of the buyers’ meetings leads to one particular large seller, while the remaining fraction of the meetings leads to one of a continuum of small sellers. We prove that the unique equilibrium of this model is such that sellers post a non-degenerate distribution of prices and buyers capture a positive fraction of the gains from trade. The fraction of gains from trade accruing to the buyers is hump-shaped with respect to the market power of the large seller. However, for any degree of market power of the large seller, the fraction of gains from trade accruing to the buyers converges to one when search frictions vanish, and converges to zero when search frictions become arbitrarily large.
    Date: 2014
  13. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Yutaro Izumi (Northwestern University); Yi-Chan Tsai (National Taiwan University)
    Abstract: This paper quantitatively examines the long-run macroeconomic effects of resource misallocation in an otherwise standard one-sector neoclassical growth model with heterogeneous firms being subject to progressive taxation as well as endogenous entry and exit decisions. Under a progressive fiscal policy rule, capital and labor inputs move from more productive firms to less productive establishments as the latter face a lower or negative tax rate. We find that since low-productivity firms use an inefficiently high level of productive resources when there are no entry and exit decisions, the overall production and aggregate productivity will fall as the tax progressivity rises. By contrast, more progressive taxation may raise the economy's total output and aggregate productivity when endogenous entry and exit decisions are allowed and the household's labor supply is postulated to be fixed. Our analysis therefore shows that the quantitative implications of progressive taxation are sensitive to the variability of hours worked and the presence of entry regulations.
    Keywords: Resource Misallocation, Aggregate Productivity, Progressive Taxation, Idiosyncratic Distortions.
    JEL: E6 H21 H25 O4
    Date: 2015–02
  14. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School)
    Abstract: Using Monte Carlo experiments, we examine the performance of indirect inference tests of DSGE models in small samples, using various models in widespread use. We compare these with tests based on direct inference (using the Likelihood Ratio). We find that both tests have power so that a substantially false model will tend to be rejected by both; but that the power of the indirect inference test is by far the greater, necessitating re-estimation to ensure that the model is tested in its fullest sense. We also find that the small-sample bias with indirect estimation is around half of that with maximum likelihood estimation.
    Keywords: Bootstrap; DSGE; Indirect Inference; Likelihood Ratio; New Classical; New Keynesian; Wald statistic
    JEL: C12 C32 C52 E1
    Date: 2015–01
  15. By: Nawid Siassi (University of Konstanz)
    Abstract: Marriage is one of the most important determinants of economic prosperity, yet most existing theories of inequality ignore the role of the family. This paper documents that the cross-sectional distributions of earnings and wealth display a high degree of concentration, even when disaggregated into single and married households. At the same time, there is a large marriage gap: married people earn on average 27 percent more income, and they hold 34 percent more net worth. To account for these empirical facts, I develop a stochastic OLG model with female and male agents, who (i) are randomly selected into single or married households at the beginning of their economic lives; (ii) face uninsurable labor market risk henceforth; (iii) and make Pareto-efficient decisions if married. In a calibrated version of the model, I show that matching patterns by educational attainment, an effective tax bonus for married couples and directed bequests are key to explaining the marriage gap in earnings and wealth. A policy experiment of moving from joint tax filing for married couples to separate filing yields output and welfare gains.
    Date: 2014
  16. By: Mutschler, Willi
    Abstract: Several formal methods have been proposed to check identification in DSGE models via (i) the autocovariogram (Iskrev 2010), (ii) the spectral density (Komunjer and Ng 2011; Qu and Tkachenko 2012), or (iii) Bayesian indicators (Koop et al 2012). Even though all methods seem similar, there has been no study of the advantages and drawbacks of implementing the different methods. The contribution of this paper is threefold: First, we derive all criteria in the same framework following Schmitt-Groh and Uribe (2004). While Iskrev (2010) already uses analytical derivatives, Komunjer and Ng (2011) and Qu and Tkachenko (2012) rely on numerical methods. For a rigorous comparison we thus show how to implement analytical derivatives into all criteria. We argue in favor of using analytical derivatives, whenever feasible, due to its robustness and greater speed than relying on numerical procedures. Second, we apply all methods on DSGE models that are known to have lack of identification. Our findings suggest that most of the times the methods come to the same conclusion, however, the issue of numerical errors due to nonlinearities and very large matrices may lead to unreliable or contradictory conclusions. The example models show that by evaluating different criteria we also gain inside into the dynamic structure of the DSGE model. We argue that in order to thoroughly analyze identification, one has to be aware of the advantages and drawbacks of the different methods. Third, we extend the methods to higher approximations given the pruned-state-space representation studied by Andreasen, Fern ndez-Villaverde and Rubio Ram rez (2014). It is argued that this can improve overall identification of a DSGE model via imposing additional restrictions on the mean and variance. In this way we are able to identify previously unidentified models.
    JEL: C10 E10 C50
    Date: 2014
  17. By: Winkler, Roland; Lewis, Vivien
    Abstract: This paper studies optimal taxation in a general equilibrium macro model with endogenous entry. We compare the constant elasticity of substitution (CES) model to three alternative demand structures: oligopolistic competition in prices, oligopolistic competition in quantities, and translog preferences. Our economy is characterized by two distortions: a labor distortion due to the misalignment of markups on goods and leisure, and an entry distortion due to the misalignment of the consumer surplus effect and the profit destruction effect of entry. The two distortions interact in determining the wedge between the market-driven and optimal level of product diversity. We show how optimal labor and entry taxes depend upon the prevailing demand structure, the nature and size of entry costs, and the degree of substitutability between goods.
    JEL: E22 E61 H21
    Date: 2014
  18. By: Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea (Federal Reserve Bank of New York)
    Abstract: The housing boom that preceded the Great Recession was the result of 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, the surge in household debt, the stability of debt relative to home 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.
    Keywords: housing and credit boom; house prices; collateral constraints; leverage restrictions
    JEL: E32 E44
    Date: 2015–02–01
  19. By: KITAO Sagiri
    Abstract: This paper quantifies the fiscal cost of the demographic transition that Japan is projected to experience over the next several decades, in a life-cycle model with endogenous saving, consumption, and labor supply in both intensive and extensive margins. Retirement waves of baby-boom generations, combined with a rise in longevity and low fertility rates, will raise the old-age dependency ratio to 85% by 2050, the highest among major developed countries. The demographic shift will generate a significant budget imbalance as the government faces rising costs for public pension and health and long-term care insurance. In the long run, the labor income tax rate needs to rise by 13.5% or the consumption tax rate by 14.3% to balance the budget, assuming no other change in policies. The transition, however, involves more significant adjustments, and we simulate alternative pension reforms that can mitigate fiscal pressures.
    Date: 2015–02
  20. By: Katagiri, Mitsuru (Bank of Japan); Konishi, Hideki (Waseda University); Ueda, Kozo (Waseda University)
    Abstract: Negative correlations between inflation and demographic aging were observed across developed nations recently. To understand the phenomenon from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model. In the model, successive short-lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments. The model sheds new light on the traditional debate about the burden of national debt. Because of price adjustments, the accumulation of government debt does not become a burden on future generations. Our analysis reveals that the effects of aging depend on its causes. Aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Numerical simulation shows that aging over the past 40 years in Japan generated deflation of about 0.6 percentage points annually.
    JEL: D72 E30 E62 E63 H60
    Date: 2014–11–01
  21. By: Era Dabla-Norris; Yan Ji; Robert 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 a firm-level data from the World Bank Enterprise Survey 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 tradeoffs between inclusion, GDP, inequality, and the distribution of gains and losses.
    Keywords: Financial services;Income inequality;Gross domestic product;Income distribution;Low-income developing countries;Emerging markets;General equilibrium models;Financial inclusion, inequality, income distribution, hetergenous agents.
    Date: 2015–01–27
  22. By: Friese, Max
    Abstract: The paper shows the effect of demographic change on per capita burden of financing a PAYG social security system in the standard OLG model with frictional labor markets. Rising longevity and decreasing fertility both induce a rise in the employment level via increased capital accumulation and job openings. Simulations of the theoretical model show that this labor market effect indirectly crowds out part of the initial demographic shock's direct impact on per capita financing burden. This holds true for the generation at the period of impact as well as for the following generations.
    Keywords: OLG,demographic change,frictional labor market,PAYG social security,per capita burden of financing social security
    JEL: E24 H55 J64
    Date: 2015
  23. By: Keshab Bhattarai (University of Hull Business School, UK; The Rimini Centre for Economic Analysis, Italy); Sushanta K. Mallick (Queen Mary, University of London, UK)
    Abstract: Impulse response and variance decomposition estimations are similar in traditional VAR (1) and BVAR-DSGE models but the later model can provide theoretical and structural reasons behind those estimations. In the context of growth competition and spill over effects of policies, it is important to quantify such positive or complementary from negative or competitive impacts so that appropriate actions could be taken for policy coordination. Cooperative mechanism should be structured based on these analysis and evaluation of likely scenarios in coming years. Analysis of business cycle results from the VAR and BVAR-DSGE models illustrate the degree of interactions and interdependence in the global economy in the short to medium runs.
    Date: 2015–01
  24. By: Menno, Dominik
    Abstract: This paper studies the effect of foreign direct investment (FDI) on the transmission of international business cycles. I document for the G7 countries between 1991 and 2006 that increases in bilateral FDI linkages are associated with more synchronized investment cycles. I also find that the relation between FDI integration and synchronization of gross domestic product (GDP) is \-- yet positive \-- statistically insignificant after controlling for time fixed effects. I then study a model of international business cycles with an essential role for FDI and shocks to multinational activity. In the model, more FDI openness unambiguously increases investment synchronization while the effect on GDP synchronization is ambivalent. Due to mismeasurement of intangible capital in national accounts, the actual elasticity of output synchronization with respect to FDI integration is underestimated. The effects measured in the data are quantitatively consistent with the model predictions. Finally, I show that more FDI increases households' welfare by reducing aggregate risk on the production side; this effect,however, is partially mitigated by multinational specific shocks.
    JEL: E32 F23 F44
    Date: 2014
  25. By: Décamps, Jean-Paul; Gryglewicz, S.; Morellec, E.; Villeneuve, Stéphane
    Abstract: We develop a dynamic model of investment, cash holdings, financing, and risk management policies in which firms face financing frictions and are subject to permanent and temporary cash ow shocks. In this model, target cash holdings depend on the long-term prospects of the firm, implying that the payout policy of the firm, its financing policy, and its cashow sensitivity of cash display a more realistic behavior than in prior models with financing frictions. In addition, risk management policies are richer and depend on the nature of cash ow shocks and potential collateral constraints. Lastly, the timing of investment and the firms initial asset mix both reect financing frictions and the joint effects of permanent and temporary shocks.
    Keywords: Corporate policies; permanent vs. temporary shocks; financing frictions.
    JEL: F32 G31 G35
    Date: 2015–01
  26. By: Francesc Obiols-Homs; Virginia Sánchez-Marcos
    Abstract: A relatively low tertiary education wage premium and a large occupational mismatch are two salient features of the Spanish labor market that distinguish it with respect to the labor markets in other developed countries. In this paper we provide an equilibrium model of the labor market with frictions in which workers are heterogeneous in terms of ability and education. We specifically model an education policy as delivering either a particular selection of individuals into the tertiary education system or a higher ability of individuals, or both. Our model economy is calibrated to mimic several of the Spanish labor market statistics together with key aspects of the achievement levels from the Programme for International Student Assessment (PISA) and the Programme for the International Assessment of Adult Competencies (PIIAC). We then explore the implications of alternative education policies on mismatch and tertiary education wage premium. We find that under an education policy able to produce ability levels of tertiary educated workers comparable to the average of the OECD countries a 40% lower fraction of mismatched workers and a 10% higher tertiary education wage premium would be observed in Spain.
    Keywords: occupational-mismatch, tertiary education wage premium, ability
    JEL: J21 J24
    Date: 2015–01
  27. By: Guerrazzi, Marco
    Abstract: In this note I discuss the condition for indeterminacy in the context of search models with increasing returns in the matching technology. Building on the theoretical framework set forth by Giammarioli (2003), I argue that increasing returns with respect to vacancies at the aggregate level is only a necessary requirement for indeterminate equilibrium paths. Specifically, I show that sunspot equilibria can actually be obtained by imposing an additional condition between the private and the social elasticity of the matching function with respect to unemployment.
    Keywords: Search theory; Matching function; Indeterminacy; General equilibrium.
    JEL: E10 E24 J64
    Date: 2015–02–06
  28. By: Afanasyeva, Elena; Guentner, Jochen
    Abstract: This paper investigates the risk-taking channel of monetary policy on the asset side of banks' balance sheets. We use a factor-augmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, e.g. their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract, embed it in a dynamic general equilibrium model, and show that - consistent with our empirical finding - a monetary easing implies an expansion of bank lending for a given amount of borrower collateral. The model also predicts a delayed increase in borrowers' default risk.
    JEL: E44 E52 E32
    Date: 2014
  29. By: Siassi, Nawid
    Abstract: Marriage is one of the most important determinants of economic prosperity, yet most existing theories of inequality ignore the role of the family. This paper documents that the cross-sectional distributions of earnings and wealth display a high degree of concentration, even when disaggregated into single and married households. At the same time, there is a large marriage gap: married people earn on average 27 percent more income, and they hold 34 percent more net worth. To account for these empirical facts, I develop a theory based on an otherwise standard incomplete-markets OLG model with ex-ante identical agents, who (i) are randomly selected into single or married households at the beginning of their economic lives; (ii) face uninsurable labor market risk henceforth; (iii) and make Pareto-efficient decisions if married. In a calibrated version of the model, I show that positive assortative matching, an effective tax bonus for married couples and directed bequests are key to explaining the marriage gap in earnings and wealth. A policy experiment of moving from joint tax filing for married couples to separate filing yields output and welfare gains.
    JEL: D31 E21 D91
    Date: 2014
  30. By: Pierre Cahuc; Olivier Charlot; Franck Malherbet (CREST and Ecole Polytechnique)
    Abstract: This paper provides a simple model which explains the choice between permanent and temporary jobs. This model, which incorporates important features of actual employment protection legislations neglected by the economic literature so far, reproduces the main stylized facts about entries into permanent and temporary jobs observed in Continental European countries. We show that the stringency of legal constraints on the termination of permanent jobs has a strong positive impact on the turnover of temporary jobs. We also find that job protection has very small effects on total employment but induces large substitution of temporary jobs for permanent jobs which significantly reduces aggregate production
    Date: 2014
  31. By: Adam Reiff (National Bank of Hungary); Peter Karadi (European Central Bank)
    Abstract: In menu cost models, real effects of aggregate nominal shocks are sensitive to unobserved characteristics of price setting. The standard way to calibrate key pricing parameters is to match the cross-sectional distribution of price changes. We argue that this unconditional distribution contains insufficient information for a clean identification. In particular, it is consistent with parameterizations with contradictory aggregate implications: one generating sizeable real effects, the other effective money neutrality. We argue, instead, that price change observations conditional on aggregate shocks can be sufficiently informative. To show this, we utilize new micro level evidence on price responses to large value-added tax shocks. We present a new menu cost model with idiosyncratic shocks and show that our model successfully predicts the magnitude of the observed price responses, outperforming alternative pricing models. The new model generates small real effects of monetary policy shocks implying that imposing the menu cost assumption alone fails to explain robust time-series evidence finding the opposite.
    Date: 2014
  32. By: Menzio, Guido (University of Pennsylvania); Trachter, Nicholas (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 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.
    JEL: D43
    Date: 2015–01–15
  33. By: Stelter, Robert
    Abstract: This paper investigates the problem of an ``optimum population'' with respect to the age structure. Within a 3-period OLG model, with endogenous fertility and longevity, the optimal age structure, identified by number-dampened total utilitarianism, is generally failed in the laissez-faire economy. The individual decisions on the number of offspring as well as on health expenditures are biased. Tendencies concerning the distortions of the age structures are identified by decentralizing the first-best solution. A calibration of the model for 84 countries emphasizes that mean age in ``Golden Age'' always exceeds the observed, especially due to a very low fertility. Introducing a preference for the population stock increases the number of children. As optimal mean age shrinks, an over-aging of the laissez-faire economy becomes likely. To decentralize the optimal age structure, children are either taxed or subsided, whereas health expenditures are taxed.
    JEL: H20 I10 J18
    Date: 2014
  34. By: Malcomson, James (University of Oxford); Mavroeidis, Sophocles (University of Oxford)
    Abstract: The Mortensen and Pissarides (1994) matching model with all wages negotiated each period is shown inconsistent with macroeconomic wage dynamics in the US. This applies even when heterogeneous match productivities, time to build vacancies and credible bargaining are incorporated. Wage rigidity consistent with micro evidence that wages of job changers are more flexible than those of job stayers allows the model to capture these dynamics and is not inconsistent with parameter calibrations in the literature. Such wage rigidity affects only the timing of wage payments over the duration of matches, so conclusions about characteristics based on calibrations continue to apply.
    Keywords: matching frictions, wage bargaining, wage rigidity
    JEL: E2 J3 J6
    Date: 2015–01
  35. By: Gete, Pedro (Georgetown University)
    Abstract: I document a strong negative correlation, both across and within countries, between housing and current account dynamics. I use two methodologies to analyze three potential drivers of housing markets. First, in a quantitative two-country model, I input the dynamics of population, loan-to-value and housing price expectations that have been observed in the OECD economies since the mid 1990s. The model generates housing and current account dynamics very similar to the data. Second, I derive sign restrictions to identify the previous shocks in a vector autoregression. The results confirrm the importance of housing demand shocks in driving both housing and current account dynamics.
    JEL: E32 F32 F44 G28 R21
    Date: 2015–01–01
  36. By: Engler, Philipp; Tervala, Juha; Ganelli, Giovanni; Voigts, Simon
    Abstract: Between 1999 and the onset of the economic crisis in 2008 real exchange rates in Greece, Ireland, Italy, Portugal and Spain appreciated relative to the rest of the euro area. This divergence in competitiveness was reflected in the emergence of current account imbalances. Given that exchange rate devaluations are no longer available in a monetary union, one potential way to address such imbalances is through a fiscal devaluation. We use a DSGE model calibrated to the euro area to investigate the impact of a fiscal devaluation, modeled as a revenue-neutral shift from employers social contributions to the Value Added Tax. We find that a fiscal devaluation carried out in Southern European countries has a strong positive effect on output, but a mild effect on the trade balance of these countries. In addition, the negative effect on Central-Northern countries output is weak.
    JEL: E32 E62 F32
    Date: 2014
  37. By: Alfredo Marvão Pereira (Department of Economics, The College of William and Mary); Rui M. Pereira (Department of Economics, The College of William and Mary)
    Abstract: We consider the environmental, economic, and budgetary effects of a new carbon tax indexed to the carbon price in the EU-ETS market in the context of a dynamic general equilibrium model of the Portuguese economy. We show that the careful recycling of the carbon tax revenues to finance reductions in the personal income tax, in the social security taxes and increases in investment tax credits, in particular when these changes are connected to energy efficiency promoting activities, allows for the carbon tax reform to yield three dividends – reduction in emissions, improvement in economic conditions, and improvements in the budgetary position. By doing so we show that it is possible to design a carbon tax reform that is politically feasible as it satisfies the main constraints of the domestic economy – the quest for growth and for fiscal consolidation – and can accommodate the legitimate interests and needs of different social players–the focus on environmental goals by environmental groups, the concerns with households distributional issues by consumer advocacy groups, and with international competitiveness by business groups.
    Keywords: Carbon Taxation, Economic Performance, Budgetary Consolidation, Three Dividends, Portugal.
    JEL: D58 H63 O44
    Date: 2015–02–05
  38. By: Koeniger, Winfried
    Abstract: We show that more human capital improves incentives in a standard optimal taxation problem: common assumptions about preferences and technology imply that the disutility of labor decreases less strongly in unobserved ability if agents have more human capital. Human capital thus reduces the informational rents of high ability types and relaxes the incentive constraints. Since parents do not take the effect of human capital on incentives into account when choosing how much to invest into their children, there is a rationale for education subsidies.
    JEL: E24 H21 J24
    Date: 2014

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