|
on Dynamic General Equilibrium |
|
Issue of 2015‒02‒22
forty-two papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Steffen Ahrens; Nooshin Nejati; Philipp L. Pfeiffer |
| Abstract: | This paper studies the role of labor market institutions in business cycle fluctuations. We develop a DSGE model with search and matching frictions and incorporate a US unemployment insurance experience rating system. Layoff taxes based on experience rating finance the cost of unemployment benefits and create considerable employment adjustment costs. Our framework helps realign the search and matching model with the empirical properties of its most salient variables. The model reproduces the negative correlation between vacancies and unemployment, i.e., the Beveridge curve. Simulations show that the model generates more cyclical volatility in its key variable - the ratio of job vacancies to unemployment (labor market tightness). Moreover, layoff taxes reduce the excess sensitivity of job destruction found in Krause and Lubik (2007) and strengthen the negative correlation of job creation and job destruction. Thus, the model matches key labor market data while incorporating an important feature of the US labor market |
| Keywords: | search and matching, experience rating, unemployment insurance, Beveridge curve |
| JEL: | E24 J64 J65 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1988&r=dge |
| By: | Anh Nguyen |
| Abstract: | The paper investigates the impacts of the volatility of monetary policy on the economy in a DSGE model with financial frictions a la Bernanke, Gertler, and Gilchrist (1999). The model is estimated by the particle filter maximum likelihood estimator for the U.S. economy. Our results first show that a positive monetary volatility shock causes a contraction in economic activity: output, consumption, investment, hours, and real wages fall. Second, we argue that financial frictions amplify the effects of the shock via the financial accelerator mechanism. Third, we document that the size of the effects of the shock is relatively small mostly because of the counteracting response of monetary policy to the shock. Therefore, the impacts would be substantial if monetary policy was restrained to respond to changes in current conditions in the economy. |
| Keywords: | DSGE models, financial accelerator, Taylor rule, monetary policy, stochastic volatility, particle filter, higher-order approximations, policy uncertainty |
| JEL: | E32 E44 E52 C13 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:75949436&r=dge |
| By: | Alexander Ludwig (CMR, University of Cologne); Daniel Harenberg (ETH Zürich) |
| Abstract: | We ask whether a PAYG financed social security system is welfare improving in an economy with idiosyncratic and aggregate risk. We argue that interactions between the two risks are important for this question. One is a direct interaction in form of a countercyclical variance of idiosyncratic income risk. The other indirectly emerges over a household's life-cycle because retirement savings contain the history of idiosyncratic and aggregate shocks. We show that this leads to risk interactions even when risks are statistically independent. In our quantitative analysis, we find that introducing social security with a contribution rate of two percent leads to welfare gains of 2.2% of life-time consumption in expectation, despite substantial crowding out of capital. This welfare gain stands in contrast to the welfare losses documented in the previous literature which studies one risk in isolation. We show that jointly modeling both risks is crucial: 60% of the welfare benefits from insurance result from the interactions of risks. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:936&r=dge |
| By: | Cristian Bartolucci; Ignacio Monzon |
| Abstract: | We present a partnership model where heterogeneous agents bargain over the gains from trade and search on the match. Frictions allow agents to extract higher rents from more productive partners, generating an endogenous preference for high types. More productive agents upgrade their partners faster, therefore the equilibrium match distribution features positive assortative matching. Frictions are commonly understood to hamper sorting. Instead, we show how frictions generate positive sorting even with a submodular production function. Our results challenge the interpretation of positive assortative matching as evidence of complementarity. |
| Keywords: | Assortative matching; Search frictions; On-the-match search; Bargaining |
| JEL: | C78 D83 J63 J64 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:385&r=dge |
| By: | Omer Acikgoz (Yeshiva University) |
| Abstract: | Aiyagari (1995) showed that long-run optimal fiscal policy features a positive tax rate on capital income in Bewley-type economies with heterogeneous agents and incomplete markets. However, determining the magnitude of the optimal capital income tax rate was considered to be prohibitively difficult due to the need to compute the optimal tax rates along the transition path. This paper shows that, in this class of models, long-run optimal fiscal policy and the corresponding allocation can be studied independently of the initial conditions and the transition path. Numerical methods based on this finding are used on a model calibrated to the U.S. economy. I find that the observed average capital income tax rate in the U.S. is too high, the average labor income tax rate and the debt-to-GDP ratio are too low, compared to the long-run optimal levels. The implications of these findings for existing literature on the optimal quantity of debt and constrained efficiency are also adressed. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:990&r=dge |
| By: | Niemann, Stefan; Pichler, Paul |
| Abstract: | We study the sustainability of public debt in a closed production economy where a benevolent government chooses fiscal policies, including haircuts on its outstanding debt, in a discretionary manner. Government bonds are held by domestic agents to smooth consumption over time and because they provide collateral and liquidity services. We characterize a recursive equilibrium where public debt amounts to a sizeable fraction of output in steady state and is nevertheless fully serviced by the government. In a calibrated economy, steady state debt amounts to around 84% of output, the government's default threshold is at around 94% of output, and the haircut on outstanding debt at this threshold is around 40%. Both reputational costs of default and contemporaneous costs due to lost collateral and liquidity are essential to generate these empirically plausible predictions. |
| JEL: | E44 E62 H63 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100617&r=dge |
| By: | Grimme, Christian; Siemsen, Thomas |
| Abstract: | Did the increase in counterparty risk perception in the interbank market since autumn 2007 contribute to the severe contraction of the US economy? To address this question we introduce interbank market uncertainty in a DSGE model with frictional financial intermediation. Interbank uncertainty is modeled as exogenous change in the dispersion of beliefs about the fraction of interbank loans expected to be repaid. In our model higher uncertainty in wholesale banking leads to reductions in interbank lending activities as banks become more funding constraint. This induces a deleveraging process which reduces loans to firms and investment severely. |
| JEL: | E32 E37 E17 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100498&r=dge |
| By: | Grodecka, Anna |
| Abstract: | One of the roots of the recent global financial crisis has been seen in the design of subprime mortgage contract leading to high sensitivity of such type of loans to house price changes. The market of subprime loans, especially in the last years preceding the crisis, has been highly financed by securitization. The paper investigates how borrowers with subprime characteristics influence the transmission mechanism of business cycles in the economy and whether the securitization of subprime loans has a positive effect on the economy. The formal setup is a DSGE model with different types of borrowers and banks acting as financial intermediaries, in which households and entrepreneurs borrow against housing collateral. The economy is subject to four shocks: monetary, inflationary, preference and technology. It is shown that alone the existence of subprime borrowers does not make the economy more responsive to different shocks at the aggregate level (it has only redistributional effects) and that under certain circumstances the securitization of subprime loans (in form of residential mortgage backed securities) may lead to amplification of the business cycles. |
| JEL: | E32 E44 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100456&r=dge |
| By: | Simon Mongey (NYU); Gianluca Violante (NYU); Alessandro Gavazza (London School of Economics) |
| Abstract: | When compared to the early 2000's, the post financial crisis US labor market has produced a persistently higher unemployment rate relative to the level of vacancies posted by firms. In this paper we provide a quantitative general equilibrium model that explains one possible cause for this change and is consistent with a number of cross-sectional firm level facts that have as yet been unexplored in the literature. We posit a simple mechanism by which financial constraints reduce firm entry and growth of young firms. In good times these firms grow quickly and fill vacancies faster than older, slower growing firms. Vacancies posted following the recession are therefore filled more slowly, shifting the Beveridge curve outwards. This mechanism acts through (i) financial frictions, (ii) the time series change in the distribution of firms, (iii) the cross-sectional relationship between vacancy filling rates and firm growth rates, both of which we document empirically and replicate quantitatively. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1014&r=dge |
| By: | Rüth, Sebastian; Mayer, Eric; Scharler, Johann |
| Abstract: | We show that TFP reacts counter-cyclically to macroeconomic shocks, which we identify by imposing sign restrictions. Counterfactual simulations, based on a New Keynesian DSGE model, show that firms manage to employ labor more efficiently during downturns, which leads to a muted drop in the output gap as long as the recession is not deep enough to make the zero lower bound on the nominal interest rate binding. If the economy hits the zero lower bound, the reductions in both, employment and output gap, are stronger when we allow TFP to depend on the state of the business cycle. |
| JEL: | E32 E40 E50 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100549&r=dge |
| By: | James Bullard; Jacek Suda (Banque de France); Aarti Singh (University of Sydney); Costas Azariadis (Washington University in St Louis) |
| Abstract: | We study a theory in which households borrow during the first half of a 241-period life cycle as part of a DSGE. Households confront a persistent regime-switching process on aggregate labor productivity growth. When the economy switches to the high growth regime, there is more borrowing based on expectations of higher future income. When the economy switches back to the low growth regime, some households will have borrowed "too much" given contemporaneous income levels–the hallmark of debt overhang. A powerful central bank can intervene in private credit markets to influence real yields. If the central bank does intervene to keep real rates lower, consumption will be reallocated relative to a laissez faire case. The reallocation will generally be away from those households saving for retirement and possibly away from those households that are heavy users of money to smooth income fluctuations. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:948&r=dge |
| By: | Ramon Marimon (European University Institute); Gaetano Gaballo (Banque de France) |
| Abstract: | We analyze an economy where banks are uncertain about firms' investment opportunities and, as a result, credit tightness can result in excessive risk-taking. In the competitive credit market, banks announce credit contracts and firms apply to them, as in a directed search model. We show that high-risk Self-Confirming Equilibria, with misperceptions, coexist with a low-risk Rational Expectations Equilibrium, in this competitive search economy. Lowering the Central Bank policy rate may not be effective, while a credit-easing policy can be an effective experiment, breaking the high-risk (low-credit) Self-Confirming Equilibrium. We emphasize the differences with a model of Self-Fulfilling credit freezes and the social value of experimentation. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1077&r=dge |
| By: | Krause, Michael; Hoffmann, Mathias; Tillmann, Peter |
| Abstract: | This paper proposes a new perspective on international capital flows and countries' long-run external asset position. Cross-sectional evidence for 84 developing countries shows that over the last three decades countries that have had on average higher volatility of output growth: (1) accumulated higher external assets in the long-run and (2) experienced more procyclical capital outflows over the business cycle than those countries with a same growth rate but a more stable output path. We explain this finding with a stochastic real business cycle growth model in which higher uncertainty of expected income increases households' precautionary savings. In the model, the combination of income risk and the precautionary savings motive leads to procyclical capital outflows at business cycle frequency and a higher long-run external asset position. |
| JEL: | F32 D83 F44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100508&r=dge |
| By: | Sacht, Stephen |
| Abstract: | In this paper we analyze a hybrid small-scale New-Keynesian model with an arbitrary frequency of the agents synchronized decision making. We study the impact of various demand and supply shocks on the dynamics of the model variables. We show that the corresponding impulse-response functions of high-frequency versions of the model can qualitatively as well as quantitatively be fairly dissimilar from their quarterly counterparts. This can be explained by the decrease in the effectiveness of monetary policy responses to these shocks and the overall increase of inertia in the model variables. In particular, different kinds of frequency-dependent persistence effects occur, which dampen the pass-through of output gap movements into inflation rate dynamics as the period length decreases. The main conclusion is that DSGE modelling may be more sensitive to its choice of the agents decision interval. |
| JEL: | C63 C68 E52 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100372&r=dge |
| By: | Lan, Hong; Meyer-Gohde, Alexander |
| Abstract: | We analyze the theoretical moments of a nonlinear approximation to real business cycle model with stochastic volatility and recursive preferences. We nd that the conditional heteroskedasticity of stochastic volatility operationalizes a time-varying risk adjustment channel that induces variability in conditional asset pricing measures and assigns a substantial portion of the variance of macroeconomic variables to variations in precautionary behavior, both while leaving its ability to match key macroeconomic and asset pricing facts untouched. We calculate the theoretical moments directly and decomposes these moments into contributions from shifts in the distribution of future shocks (i.e., risk) and from realized shocks and differing orders of approximation, enabling us to identify the common channel through which stochastic volatility in isolation operates and through which conditional asset pricing measures vary over time. Under frictional investment and varying capital utilization, output drops in response to an increase in risk, but the contributions to the variance of macroeconomic variables from risk becomes negligible. |
| JEL: | C63 E32 G12 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100523&r=dge |
| By: | Köhne, Sebastian; Abraham, Arpad; Pavoni, Nicola |
| Abstract: | Several frictions restrict the government s ability to tax assets. First of all, it is very costly to monitor trades on international asset markets. Moreover, agents can resort to non-observable low-return assets such as cash, gold or foreign currencies if taxes on observable assets become too high. This paper shows that limitations in asset observability have important consequences for the taxation of labor income. Using a dynamic moral hazard model of social insurance, we find that optimal labor income taxes typically become less progressive when assets are imperfectly observed. We evaluate the effect quantitatively in a model calibrated to U.S. data. |
| JEL: | H21 E21 D82 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100406&r=dge |
| By: | Kumhof, Michael; Benes, Jaromir |
| Abstract: | At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy. |
| JEL: | E44 E52 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100303&r=dge |
| By: | Mark Weder (School of Economics, University of Adelaide) |
| Abstract: | Recent empirical evidence suggests that product creation is pro-cyclical and it occurs largely within existing firms. Motivated by these findings, the current paper investigates the role of intra-firm product scope choice in a general equilibrium economy with oligopolistic producers. We show that the multi-product nature of firms makes the economy significantly more susceptible to sunspot equilibria. The estimated indeterminate model generates artificial business cycles that closely resemble empirically observed fluctuations. |
| Keywords: | Indeterminacy, sunspot equilibria, multi-product firms, business cycles, Bayesian estimation. |
| JEL: | E32 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2015-03&r=dge |
| By: | Haan, Peter; Prowse, Victoria |
| Abstract: | We specify and estimate a dynamic structural life-cycle model of labor supply, retirement and savings decisions of single-adult and couple households. Drawing on our model, we study the interplay between family labor supply and public insurance mechanisms. By including family labor supply, we recognize that the incentive effects and optimal design of public insurance programs may be impacted by a household's ability to adjust either one spouse's or both spouses' labor supply in response to wage and employment shocks. The analysis sheds new light on the optimal trade-off between insurance and incentives. In particular we show that family labor supply has quantitatively important implications for the optimal design of public insurance programs. |
| JEL: | J22 C35 H31 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100625&r=dge |
| By: | Mazelis, Falk |
| Abstract: | This paper studies the role of uncertainty in the corporate cash hoarding puzzle. The baseline model is a stochastic neoclassical growth model featuring idiosyncratic and uninsurable technology shocks and a cash-in-advance constraint on new investments on the individual firm level. Individual agents' choices regarding cash holdings are analyzed and the effects of the introduction of a financial sector explored. The resulting aggregate cash holdings of households are non-optimal compared to the complete markets solution and aggregate excess cash increases with uncertainty. Aggregate consumption is also higher, but the added volatility of consumption decreases lifetime utility. Since cash holdings are usually managed by the financial sector, the results suggest a link between firm level risk and the behavior of the banking system. |
| JEL: | C63 E21 E41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100575&r=dge |
| By: | Roberta Cardani; Alessia Paccagnini; Stefania Villa |
| Abstract: | This paper examines the forecasting performance of DSGE models with and without banking intermediation for the US economy. Over the forecast period 2001-2013, the model augmented with a banking sector leads to an improvement of point and density forecasts for inflation and the short term interest rate, while the better forecast for output depends on the forecasting horizon/period. To interpret this finding it is crucial to take into account parameters instabilities showed by a recursive-window estimation. Moreover, rolling estimates of point forecasts show that a banking sector helps improving the forecasting performance of output and inflation in the recent period. |
| Keywords: | Bayesian estimation, Forecasting, Banking sector |
| JEL: | C11 C13 C32 E37 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:292&r=dge |
| By: | Robert A. Becker (Indiana University); Kirill Borissov (European University St. Petersburg, Russia); Ram Sewak Dubey (Montclair State University) |
| Abstract: | This paper considers a one-sector economic growth model known in the literature as Ramsey Model. Unlike the extreme form of borrowing constraint observed in the classical version of the model, recently surveyed in Becker (2006) and limited form of borrowing constraint examined in Borissov and Dubey (2014), we allow liberal bor- rowing by the households and prove the existence of a perfect foresight equilibrium. Unlike the possibility of non-convergent equilibrium capital stock sequences in the model with no borrowing and like the equilibrium outcomes in the model with lim- ited borrowing, we show that independent of the production technology employed by the firms, the capital stock sequence converges to the steady state stock and from some time onward all impatient households are in the maximum borrowing state, whereas the most patient household owns entire capital stock and the debts of all other house- holds. With progressively more liberal borrowing regime, the steady state wealth of the impatient households becomes more and more negative. |
| Keywords: | Convergence, Existence, Growth, Heterogeneous agent, Liberal borrowing, Turnpike property |
| JEL: | C61 D61 D90 O41 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2015003&r=dge |
| By: | Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael R. |
| 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: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10382&r=dge |
| By: | Raul Santaeulalia-Llopis (Washington University in St. Louis); Juan Sanchez (Federal Reserve Bank of St. Louis); Alexander Monge (Penn State University) |
| Abstract: | In this paper, we use an extended version of the neoclassical multi-country growth model to explore the efficiency in the allocation of physical capital across countries. In our framework, the observed marginal product of capital (MPK) can differ across countries because of two different factors: (a) differences in the countries' production functions, specifically output shares of mobile factors; and (b) differences in the distortions (wedges) in the use of capital across countries. We use the model to evaluate the importance of these two factors in accounting for the cross-country dispersion in the implied MPKs over the last 40 years and assess how efficiently capital is and has been allocated. Our findings indicate that in the last two decades the world has decidedly moved in the direction of efficiency. Moreover, we find that a realigment of capital to countries with higher TFP and capital-output shares accounts for a large fraction of the gains in efficiency. However, we find that even today, distortions (factor b) are still quantitatively significant and that the global output gains are would be significant if those distortions were eliminated. The gains are even larger in policy counterfactuals with capital accumulation. We also find a large degree of heterogeneity. For example, we find significant output loses for countries which heavily distort international trade and for countries with weak financial markets. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1049&r=dge |
| By: | Raphael Schoenle (Brandeis University); Raphael Auer (Swiss National Bank) |
| Abstract: | We introduce Armington's (1969) notion of "origin differentiation" into a micro-founded model of pricing to market and examine how this affects the joint dynamics of prices and quantities in an international real business cycle framework. We find that the model, when calibrated using parameters that we structurally estimate from micro data on U.S. domestic and import prices, can match both movements in international relative prices and quantities as observed in the data. The mechanism that drives our results is that a moderate degree of substitutability between origins, combined with a high degree of substitutability between varieties from the same origin implies substantial variability in the markups of importers and limited spillovers into domestic prices, while at the same time it is consistent with a muted quantity response to such pronounced movements in relative prices. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1059&r=dge |
| By: | Ananth Ramanarayanan (University of Western Ontario) |
| Abstract: | Sovereign debt defaults are accompanied by debt restructurings that alter the quantity as well as the maturity structure of a country's external debt. In a debt restructuring, the burden of repayment for a defaulting borrower can be reduced either by reducing the face value of debt or extending its maturity. Existing work on sovereign debt renegotiation focuses only on reduction of face value, while leaving the maturity structure constant. This paper builds a model of sovereign borrowing and renegotiation in which both the level of restructured debt and its maturity are outcomes of post-default renegotiation. A sovereign borrower borrows in international financial markets from competitive, risk-neutral lenders, and may default on debt at any time. After a default, the sovereign borrower and lenders bargain to choose both a new face value of debt and a new maturity structure. The paper quantitatively analyzes how the optimal restructuring agreement varies with the borrower's income in default, and how the presence of renegotiation of maturity affects borrowing and default incentives ex ante. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1019&r=dge |
| By: | Ricardo Nunes (Federal Reserve Board); Jinill Kim (Korea University); Jesper Linde (Federal Reserve Board); Davide Debortoli (Universitat Pompeu Fabra) |
| Abstract: | Yes. Using the workhorse Smets and Wouters (2007) model of the U.S. economy, we find that the role of the output gap should be equal to or even more important than that of inflation when designing a simple loss function to represenst household welfare. Moreover, we document that a loss function with nominal wage inflation and the hours gap provides an even better approximation of the true welfare function than a standard objective based on inflation and the output gap. Our results hold up when we introduce interest rate smoothing in the objective to capture the observed gradualism in policy behavior and to ensure that the probability of the federal funds rate hitting the zero lower bound is negligible. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1043&r=dge |
| By: | Mecikovsky, Ariel Matias; Meier, Matthias |
| Abstract: | Using quarterly worker flow data of U.S. establishments, we find that an unexpected increase in uncertainty reduces hirings and quits, while it raises layoffs. This finding suggests that the real option effect of uncertainty is less important for employment decisions. Hence plants do not freeze in response to uncertainty shocks. To explain our findings, we propose a multi-worker plant search and matching model with decreasing returns to scale and financial frictions. As a result of unexpected uncertainty increase, plants reduce their employment size in order to decrease the default risk that arises from higher uncertainty in the economy. |
| JEL: | J23 J63 D81 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100541&r=dge |
| By: | Mike Waugh (New York University); Laura Veldkamp (NYU Stern); Isaac Baley (New York University) |
| Abstract: | This paper studies the effect of reductions in information asymmetry - information globalization - on international risk sharing and trade flows. Information frictions are often invoked to explain low levels of international trade beyond those that measured trade frictions (tariffs, transportation costs, etc.) can explain. Using a relatively standard two-country general equilibrium model with asymmetric information about aggregate productivity, we find that more precise information about foreign productivity shocks reduces trade and international risk sharing. In other words, information frictions behave in the exact opposite manner as a standard trade cost. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1097&r=dge |
| By: | Dirk Niepelt (Study Center Gerzensee; U Bern); Harris Dellas (University of Bern) |
| Abstract: | The recent sovereign debt crisis has rekindled the debate on the role of austerity. By austerity, we mean consumption levels below those desired and supported by a country's repayment capacity. We shed light on the function, properties, and optimal size of austerity by developing a model that augments the standard sovereign debt model with incomplete information and credit rationing. We establish: First, some austerity is always inevitable. Second, intermediate levels of new loans produce less austerity than either low or high levels. And third, while the relationship between growth and austerity is ambiguous, in equilibrium the relationship is positive. Our analysis can accommodate features such as, signalling for gaining credibility, spending multipliers etc., emphasized in the austerity debates. But it suggests that they do not play a key role for understanding austerity. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:970&r=dge |
| By: | Hajime Tomura (Graduate School of Economics, University of Tokyo) |
| Abstract: | This paper compares fiat money and a Lucas' tree in an overlap- ping generations model. A Lucas' tree with a positive dividend has a unique competitive equilibrium price. Moreover, the price converges to the monetary equilibrium value of fiat money as the dividend goes to zero in the limit. Thus, the value of liquidity represented by a ra- tional bubble is part of the fundamental price of a standard interest- bearing asset. A Lucas' tree has multiple equilibrium prices if the dividend vanishes permanently with some probability. This case may be applicable to public debt, but not to stock or urban real estate. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utppwp:045&r=dge |
| By: | Burkhard Heer, Burkhard; Maußner, Alfred; Süssmuth, Bernd |
| Abstract: | We document the empirical fact that asset prices in the consumption-goods and investment-goods sector behave almost identically in the US economy. In order to derive the cyclical behavior of the equity returns in these two sectors, we onsider a standard two-sector real-business cycle model with habit formation and sector-specific adjustment costs of capital. The model is able to replicate the equity premium and the Sharpe values observed empirically. In addition, we are able to match the empirical fact that equity returns in the two sectors are not correlated with output. |
| JEL: | E32 G12 C68 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100319&r=dge |
| By: | Samuel Wills |
| Abstract: | This paper studies how capital-scarce countries should manage volatile resource income. Existing literature recommends that capital-scarce countries invest domestically, but that volatile resource income should be saved in a foreign sovereign wealth fund. I reconcile these by combining a stochastic model of precautionary savings with a deterministic model of a capital-scarce resource exporter. I show that capital-scarce countries should still establish a Volatility Fund, but it should be relaively smaller than in capital-abundant countries. The fund should be built before anticipated windfalls, partially invested domestically, and used as a source of income rather than a buffer against temporary shocks. To do so I develop a parsimonious framework that nests a variety of existing results as special cases, which are presented in seven principles. The first three apply to capital-abundant countries: i) Smooth consumption using a Future Generations Fund; (ii) Build a Volatility Fund quickly, then leave it alone; iii) Invest to stabilise the real exchange rate. The remaining four apply to capital-scare countries; iv) Finance consumption and investment with oil; v) Use a temporary Parking Fund to improve absorption, vi) Invest part of the Volatility Fund domestically; and vii) Support private investment. |
| Keywords: | Natural resources, oil, volatility, precautionary saving, capital scarcity, anticipation |
| JEL: | D81 D91 E21 F34 H63 O13 Q32 Q33 |
| Date: | 2015–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:oxcarre-research-paper-154&r=dge |
| By: | Napel, Stefan |
| Abstract: | Can fiscal policy raise utility for all in dynamic economies with unobservable agent heterogeneity, when missing credit and insurance markets affect incentives to invest in human capital? If so, should the state provide transfers to the poor in the form of cash or in kind? In an occupational choice model, we show (a) every competitive equilib- rium is interim-Pareto dominated by a policy providing education subsidies financed by income taxes, and (b) transfers conditional on educational investments similarly dom- inate unconditional transfers. The policies also result in macroeconomic improvements (higher per capita income and upward mobility, lower wage dispersion). |
| JEL: | C72 C73 D82 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100496&r=dge |
| By: | Niehof, Britta; Hayo, Bernd |
| Abstract: | We develop a dynamic stochastic full equilibrium New Keynesian model of two open economies based on stochastic differential equations to analyse the interdependence between monetary policy and financial markets in the context of the recent financial crisis. The effect of bubbles on stock and housing markets and their transmission to the domestic real economy and the contagious effects on foreign markets are studied. We simulate adjustment paths for the economies under two monetary policy rules: an open-economy Taylor rule and a modified Taylor rule, which takes into account stabilisation of financial markets as a monetary policy objective. We find that for the price of a strong hike in inflation a severe economic recession can be avoided under the modified rule. Using Bayesian estimation techniques, we calibrate the model to the case of the United States and Canada and find that the resulting |
| JEL: | C02 E44 F41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100410&r=dge |
| By: | Ozu, Atsushi; Kasuga, Norihiro |
| Abstract: | The market for cloud computing is expected to rapidly expand and change the nature of ICT across all sectors; cloud computing transforms ICT from a tool dependent upon investment and physical ownership to one that can easily make use of outside resources. In this paper, the impact of the diffusion of cloud computing on Japanese macroeconomics was estimated and analyzed utilizing a DSGE (Dynamic Stochastic General Equilibrium) model-based simulation. Its academic contributions would be summarized as follows: (1) Assuming an endogenous market structure, a model that incorporates the effects of ICT capital and the ICT investment adjustment cost was built; (2) With that model, a DSGE simulation was conducted on a system comprised of a single sector of cloud computing and then the impact of the cloud computing diffusion on Japanese macroeconomics was estimated based on the relationship between that system and the whole Japanese economy; and (3) According to the simulation results, the diffusion of cloud computing use has a 0.10% GDP boosting effect for a fast adoption case scenario (one year to steady state) and a 0.059% GDP boosting effect for a slow adoption case scenario (five years to steady state). |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:itsb14:106885&r=dge |
| By: | Qi Zeng (University of Melbourne); Hae Won (Henny) Jung (University of Melbourne) |
| Abstract: | firm continuously. We obtain a closed-form solution that characterizes the firm's ownership structure, managerial contract and equity return. As a benchmark case, we consider the first-best case with observable managerial effort in which the equilibrium solution arises solely from optimal risk sharing incentives. Through both the analytical and numerical characterizations of the model, we find that (i) The presence of moral hazard leads to a larger equity stake in the firm held by the large shareholder; (ii) Both the expected stock return and stock return volatility are lower under moral hazard because of risk sharing effects of managerial incentives; (iii) The risk aversion parameters of the manager and investors have different effects on the equilibrium outcome; (iv) The interactions among pay-performance sensitivity, large shareholder ownership, and expected stock return/stock return volatility can be positive or negative. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:911&r=dge |
| By: | Chris Redl |
| Abstract: | I study the implications of learning by doing in production for optimal monetary policy using a basic New Keynesian model. Learning-by-doing is modeled as a stock of skills that accumulates based on past employment. The presence of this learning-by-doing externality breaks the ’divine coincidence’ result, that by stabilising inflation the output gap will automatically be closed, for a variety of shocks that are important in explaining the buseiness cycle. In this context, the policy maker must consider the impact on future productivity of any trade-off between output and inflation today. The appropriate inflation-output trade off is between inflation today and the present value of deviations in the output gap. The approach to optimal monetary policy follows Woodford (2010) permitting a study of variations in key parameters and steady states which is uncommon in the literature that relies on a quadratic approximation to the utility function. Exploiting this variation I find that learning induces a small increase in the importance of the output gap under a cost-push shock for the (more realistic case) of a distorted steady state. The welfare costs of business cycles are shown to be significantly larger even under the optimal policy. |
| Keywords: | Monetary policy, Labor Productivity, Inflation |
| JEL: | E52 J24 E31 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:490&r=dge |
| By: | Stähler, Nikolai; Gadatsch, Niklas; Hauzenberger, Klemens |
| Abstract: | In this paper, we use the estimated three-region DSGE model GEAR, which pictures Germany, the Euro Area and the Rest of the world and which is used by the Deutsche Bundesbank for policy analysis, to analyze how discretionary fiscal policy in Germany and the rest of EMU affected GDP growth and unemployment during the crisis. Not surprisingly, stimulus programmes positively affected domestic GDP growth rates while consolidation measures had a negative impact. The contribution of fiscal policy on domestic GDP growth was only small, however, amounting to a maximum of 1.6% for Germany and 0.8% for the rest of the Euro Area in terms of annualized quarter-on quarter growth rates. The main driver for the evolution of GDP were rest of the world and risk premia shocks, followed by domestic non-fiscal shocks, amongst them the technology shock being the most important one. Spillovers of fiscal policy shocks are negligibly small, which holds for spillovers of fiscal shocks in Germany to the rest of the Euro Area and vice versa. This latter finding is confirmed by an impulse-response analysis and by calculating the corresponding multipliers. Hence, relating these findings to current discussions, our analysis suggests that domestic fiscal policy has little effects on the other regions' GDP within EMU and can, therefore, contribute only little to solving the imbalances problem. |
| JEL: | E62 E32 H20 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc14:100460&r=dge |
| By: | Hendricks, Lutz; Leukhina, Oksana |
| Abstract: | This paper is motivated by the fact that nearly half of U.S. college students drop out without earning a bachelor's degree. Its objective is to quantify how much uncertainty college entrants face about their graduation outcomes. To do so, we develop a quantitative model of college choice. The innovation is to model in detail how students progress towards a college degree. The model is calibrated using transcript and financial data. We find that more than half of college entrants can predict whether they will graduate with at least 80% probability. As a result, stylized policies that insure students against the financial risks associated with uncertain graduation have little value for the majority of college entrants. |
| Keywords: | Education,College dropout risk |
| JEL: | E24 J24 I21 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:502&r=dge |
| By: | Todd Keister (Rutgers University); Vijay Narasiman (Harvard University) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:13-73&r=dge |
| By: | Mordecai Kurz; Maurizio Motolese (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Giulia Piccillo; Howei Wu |
| Abstract: | We study the impact of diverse beliefs on conduct of monetary policy. Individual belief is modeled by a state variable that defines an individual’s perceived laws of motion. We use a New Keynesian Model that is solved with a quadratic approximation hence individual decisions are quadratic functions. Aggregation renders the belief distribution an aggregate state variable. Although the model has standard technology and policy shocks, diverse expectations change materially standard results about a smooth trade-off between inflation volatility and output volatility. Our main results are summed up as follows: (i) The policy space contains a curve of singularity which is a collection of policy parameters that divides the space into two sub-regions. Some trade-off between output and inflation volatilities exists within each region and some across regions. (ii) The singularity causes volatility of variables to be non monotone in policy parameters. Policymakers cannot assume a more aggressive policy will change outcomes in a predictable manner. (iii) When beliefs are diverse a central bank must also consider the volatility of individual consumption and the related volatility of financial markets. We show aggressive anti-inflation policy increases consumption volatility and aggressive output stabilization policy entails rising inflation volatility. Efficient central bank policy must therefore be moderate. (iv) High optimism about the future typically lowers aggregate output and increases inflation. This “stagflation” effect is stronger the stickier prices are. Policy response is muted since the effects of higher inflation and lower output on interest rates partially cancel each other. Effective policy requires targeting exuberance directly or its effects in asset markets. Central banks already do so with short term interventions. (v) The observed high serial correlation of 0.80 in policy shocks contributes greatly to market volatility and we show that a reduction in persistence of central bank’s deviations from a fixed rule will contribute to stability. (vi) Belief dispersion is measured by cross sectional standard deviation of individual beliefs. An increased belief diversity is found to make policy coordination harder and results in lower aggregate output and lower rate of inflation. Bank policy can lower belief dispersion by being more transparent. |
| Keywords: | New Keynesian Model; heterogenous beliefs; market state of belief; Rational Beliefs; monetary policy rule |
| JEL: | C53 D8 D84 E27 E42 E52 G12 G14 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def022&r=dge |