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on Dynamic General Equilibrium |
| By: | Steven Laufer (Federal Reserve Board); Ahu Gemici (Royal Holloway, University of London); Christopher Flinn (New York University) |
| Abstract: | incentives to invest in both types of capital. We use the NLSY97 to estimate the model. X-XXX |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1237&r=dge |
| By: | Núria Quella (SUNY - Stony Brook University); Silvio Rendon (Stony Brook University) |
| Abstract: | In this paper we explain how easier home financing and higher homeownership rates increase unemployment rates. To this purpose we build a model of job search with liquid wealth accumulation and consumption of housing, that can be rented, bought on credit, or sold. In our model, more relaxed house credit conditions increase workers' reservation wages, making them more selective in their job search. More selective job searches deteriorate employment transitions: job finding and job-to-job transitions rates decline while job loss rates increase, causing the overall unemployment rate to rise. We estimate this model structurally using NLSY data from 1978 until 2005. We find that more relaxed housing lending conditions, particularly lower downpayment requirements, increase unemployment rates by 6 percent points. We also find that declining labor demand decreases homeownership rates by 14 percent points. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1222&r=dge |
| By: | Kraft, Holger; Munk, Claus; Wagner, Sebastian |
| Abstract: | We set up and solve a rich life-cycle model of household decisions involving consumption of both perishable goods and housing services, stochastic and unspanned labor income, stochastic house prices, home renting and owning, stock investments, and portfolio constraints. The model features habit formation for housing consumption, which leads to optimal decisions closer in line with empirical observations. Our model can explain (i) that stock investments are low or zero for many young agents and then gradually increasing over life, (ii) that the housing expenditure share is age- and wealth-dependent, (iii) that perishable consumption is more sensitive to wealth and income shocks than housing consumption, and (iv) that non-housing consumption is hump-shaped over life. |
| Keywords: | habit formation,life-cycle household decisions,housing expenditure share,consumption hump,stock market participation,renting vs. owning home,human capital |
| JEL: | G10 D14 D91 E21 R21 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:85&r=dge |
| By: | Jensen, Henrik; Ravn, Søren Hove; Santoro, Emiliano |
| Abstract: | In the last decades, capital markets across the industrialized world have undergone massive deregulation, involving increases in the loan-to-value (LTV) ratios of households and firms. We study the business-cycle implications of this phenomenon in a dynamic general equilibrium model with multiple credit-constrained agents. Starting from low LTV ratios, a progressive relaxation of credit constraints leads to both higher macroeconomic volatility and stronger comovement between debt and real variables. This pattern reverses at LTV ratios not far from those currently observed in many advanced economies, since credit constraints become non-binding more often. As expansionary shocks may make credit constraints non-binding, while contractionary shocks cannot, recessions become deeper than expansions. The non-monotonic relationship between credit market conditions and macroeconomic fluctuations poses a serious challenge for regulatory and macroprudential policies. |
| Keywords: | business cycles; capital-market liberalization; capital-market regulation; occasionally non-binding contract constraints |
| JEL: | E32 E44 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10462&r=dge |
| By: | Berg, Tim Oliver |
| Abstract: | In this paper I assess the ability of Bayesian vector autoregressions (BVARs) and dynamic stochastic general equilibrium (DSGE) models of different size to forecast comovements of major macroeconomic series in the euro area. Both approaches are compared to unrestricted VARs in terms of multivariate point and density forecast accuracy measures as well as event probabilities. The evidence suggests that BVARs and DSGE models produce accurate multivariate forecasts even for larger datasets. I also detect that BVARs are well calibrated for most events, while DSGE models are poorly calibrated for some. In sum, I conclude that both are useful tools to achieve parameter dimension reduction. |
| Keywords: | BVARs, DSGE Models, Multivariate Forecasting, Large Dataset, Simulation Methods, Euro Area |
| JEL: | C11 C52 C53 E37 |
| Date: | 2015–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62405&r=dge |
| By: | Luigi Bocola (University of Pennsylvania) |
| Abstract: | This paper examines the aggregate implications of sovereign credit risk in a business cycle model in which banks are exposed to risky government debt. An increase in the probability of a future sovereign default leads to a reduction in credit to firms because of two channels. First, it lowers the value of government debt on the balance sheet of banks, tightening their funding constraints and leaving them with fewer resources to lend to firms. Second, it raises the required premia demanded by banks for lending to firms because this activity has become riskier: if the sovereign default occurs, the economy falls in a major recession and claims to the productive sector pay out little. I estimate the nonlinear model with Italian data using Bayesian techniques. I find that sovereign credit risk led to a rise in the financing premia of firms that peaked 100 basis points, and cumulative output losses of 4.75% by the end of 2011. Both channels were quantitatively important drivers of the propagation of sovereign credit risk to the real economy. I then use the model to evaluate the effects of subsidized long term loans to banks, calibrated to the ECB's Longer Term Refinancing Operations. The presence of a significant risk channel at the policy enactment explains the limited stimulative effects of these interventions. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1286&r=dge |
| By: | Etienne Lalé |
| Abstract: | We study the effects of front-loading the payment of unemployment benefits in an equilibrium matching framework with precautionary savings. Front-loading the benefit system trades off fewer means to smooth consumption at long unemployment durations for improved insurance upon job loss. In the United States where jobless spells are typically frequent but short, we find that front-loading the benefit system yields significant welfare gains for new benefit recipients. The gains are lower in the aggregate, but are not completely offset by general equilibrium effects. Comparison with a search effort model shows that the welfare figures are not specific to matching frictions. |
| Keywords: | Unemployment Insurance, Precautionary Savings, Labor-Market Frictions, Welfare Effect. |
| JEL: | E21 I38 J63 J65 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:15/651&r=dge |
| By: | Nie, Jun (Federal Reserve Bank of Kansas City); Luo, Yulei; Wang, Gaowang; Young, Eric R. |
| Abstract: | This paper derives the general equilibrium effects of rational inattention (or RI; Sims 2003,2010) in a model of incomplete income insurance (Huggett 1993, Wang 2003). We show that,under the assumption of CARA utility with Gaussian shocks, the permanent income hypothesis (PIH) arises in steady state equilibrium due to a balancing of precautionary savings and impatience. We then explore how RI affects the equilibrium joint dynamics of consumption, income and wealth, and find that elastic attention can make the model fit the data better. We finally show that the welfare costs of incomplete information are even smaller due to general equilibrium adjustments in interest rates. |
| Keywords: | Rational inattention; Permanent income hypothesis; General equilibrium; Consumption and income volatility. |
| JEL: | C61 D83 E21 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp14-14&r=dge |
| By: | Gregor Jarosch (University of Chicago) |
| Abstract: | Job loss translates into large and persistent earnings reductions. Using a large administrative dataset from Germany, I document that this reflects both a reduced employment rate and reduced wages, with the recovery in wages being particularly slow. To account for these facts, I build a search model of the labor market in which workers climb an earnings ladder along multiple dimensions. They search for increasingly productive and secure jobs, accumulate general human capital, and extract rents through renegotiation. The estimated model generates earnings and wage reductions from job loss as large and persistent as in the data. 28% of the wage losses from job loss reflect the loss of productive employers, whereas skill loss and the loss of negotiation rents contribute 52% and 20%, respectively. Finally, I show that the setup generates a novel rationale for unemployment benefits since workers overvalue job security. The size of the wedge is directly depends on the earnings losses from job loss, thus highlighting the importance of generating empirically plausible earnings losses in a model of unemployment. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1248&r=dge |
| By: | Eijffinger, Sylvester C W; Kobielarz, Michal L.; Uras, Rasim Burak |
| Abstract: | The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is related to the bail-out guarantee provided by a monetary union, which endogenously varies with the number of member countries in sovereign debt trouble. We incorporate this theoretical foundation in an otherwise standard small open economy DSGE model and explain (i) the convergence of interest rates on sovereign bonds following the European monetary integration in late 1990s, and (ii) - following the heightened default risk of Greece - the sudden surge in interest rates in countries with relatively sound economic and financial fundamentals. We calibrate the model to match the behavior of the Portuguese economy over the period of 1998 to 2012. |
| Keywords: | bail-out; contagion; interest rate spreads; sovereign debt crisis |
| JEL: | F33 F34 F36 F41 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10459&r=dge |
| By: | Brecht Boone; Freddy Heylen (-) |
| Abstract: | We develop and parameterize an overlapping generations model that explains hours worked, education, and unemployment within one coherent framework. We extend previous work in this tradition by introducing individuals with heterogeneous ability and a unionized labour market for lower ability workers. Unemployment is due to above market-clearing wages for these workers. Our calibrated model's predictions match the facts remarkably well in a sample of continental European, Nordic and Anglo-Saxon countries. We then use the model to explain the cross-country variation in unemployment. A Shapley decomposition reveals an almost equal role for differences in fiscal policy variables and in union preferences. Both account for about half of the explained variation in unemployment rates. While it is the above market-clearing wage chosen by the unions that directly leads to unemployment, the fiscal policy variables determine most of its magnitude. As to specific fiscal variables, differences in unemployment benefit generosity play a much more important role than tax differences. Controlling for fiscal variables and union preferences, any differences in the taste for leisure of the households have no role to play in determining cross-country variation in unemployment. |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:15/899&r=dge |
| By: | Bundick, Brent (Federal Reserve Bank of Kansas City); Basu, Susanto |
| Abstract: | Can increased uncertainty about the future cause a contraction in output and its components? This paper examines the role of uncertainty shocks in a one-sector, representative-agent,dynamic, stochastic general-equilibrium model. When prices are flexible, uncertainty shocks are not capable of producing business-cycle comovements among key macroeconomic variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate fluctuations that are consistent with business cycles. Monetary policy usually plays a key role in o setting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then monetary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative e ects on the economy. We calibrate the size of uncertainty shocks using uctuations in the VIX and nd that increased uncertainty about the future may indeed have played a signi cant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the financial press. |
| Keywords: | Uncertainty Shocks; Monetary Policy; Sticky-Price Models; Epstein-Zin Preferences; Zero Lower Bound on Nominal Interest Rates |
| JEL: | E32 E52 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp14-15&r=dge |
| By: | Basu, Susanto; Bundick, Brent (Federal Reserve Bank of Kansas City) |
| Abstract: | At the zero lower bound, the central bank's inability to offset shocks endogenously generates volatility. In this setting, an increase in uncertainty about future shocks causes significant contractions in the economy and may lead to non-existence of an equilibrium. The form of the monetary policy rule is crucial for avoiding catastrophic outcomes. State-contingent optimal monetary and fiscal policies can attenuate this endogenous volatility by stabilizing the distribution of future outcomes. Fluctuations in uncertainty and the zero lower bound help our model match the unconditional and stochastic volatility in the recent macroeconomic data. |
| Keywords: | Endogenous volatility; Zero lower bound; Optimal stabilization policy |
| JEL: | E32 E52 |
| Date: | 2015–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp15-01&r=dge |
| By: | Leonardo Martinez (International Monetary Fund); Juan Hatchondo (Indiana University); Burhanettin Kuruscu (University of Toronto); Bulent Guler (Indiana University - Bloomington) |
| Abstract: | We extend the standard Eaton and Gersovitz (1981) sovereign default model to study bailout policies. In our setup a country that concentrates a significant fraction of bond holders decide on a period by period basis whether to bailout a debtor government. The combination of bailout policies and decentralized lending decisions give rise to a pecuniary externality. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1278&r=dge |
| By: | Ayse Imrohoroglu (USC) |
| Abstract: | In 1978, California passed one of the most significant tax changes initiated by voters in the United States. Proposition 13, stipulated rolling back property assessments for tax purposes to 1975 market value levels, and restricted future property tax increases. In this paper, we study the implications of Proposition 13 on house prices, housing choices, turnover over the life cycle, and welfare of the households in an economy populated with overlapping generations of agents who derive utility from consumption of goods and housing. We find that Proposition 13 distorts housing choices by lowering turnover and smoothing housing consumption over the life cycle. We study the transition dynamics of moving from an economy featuring Proposition 13 to alternative revenue-neutral regimes with proportional real estate taxes. We find that different revenue-neutral regimes generate very different levels of support. While most middle-aged and older households prefer the status-quo with Proposition 13, younger agents may support the elimination of Propostion 13 as long as the reform does not lead to an increase in house prices. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1250&r=dge |
| By: | Urvi Neelakantan (Federal Reserve Bank of Richmond); Felicia Ionescu (Federal Reserve Board); Kartik Athreya (Federal Reserve Bank of Richmond) |
| Abstract: | In this paper we aim to understand the evolution of household portfolios, defined broadly enough to include both human and financial wealth positions, over the life-cycle. A key feature of our approach is to include lumpy initial investments (formal education) and subsequent “on the job†training à la Ben-Porath (1967), where both are risky. To our knowledge we are the first to study human and financial investment decisions in such a setting. An important payoff of our approach is a unified view of household wealth over the life cycle. Quantitatively, a key finding is that our model is able to account for limited stock market participation with no appeal whatsoever to transactions costs. Instead, “corner solutions†to stock purchases emerge naturally from the optimality of front loading investment in human capital. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1242&r=dge |
| By: | Heathcote, Jonathan (Federal Reserve Bank of Minneapolis); Perri, Fabrizio (Federal Reserve Bank of Minneapolis) |
| Abstract: | Periods of low household wealth in United States macroeconomic history have also been periods of high business cycle volatility. This paper develops a simple model that can exhibit self-fulfilling fluctuations in the expected path for unemployment. The novel feature is that the scope for sunspot-driven volatility depends on the level of household wealth. When wealth is high, consumer demand is largely insensitive to unemployment expectations and the economy is robust to confidence crises. When wealth is low, a stronger precautionary motive makes demand more sensitive to unemployment expectations, and the economy becomes vulnerable to confidence-driven fluctuations. In this case, there is a potential role for public policies to stabilize demand. Microeconomic evidence is consistent with the key model mechanism: during the Great Recession, consumers with relatively low wealth, ceteris paribus, cut expenditures more sharply. |
| Keywords: | Business cycles; Aggregate demand; Precautionary saving; Multiple equilibria |
| JEL: | E12 E21 |
| Date: | 2015–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:508&r=dge |
| By: | Gauti Eggertsson (Brown University); Bulat Gafarov (Pennsylvania State University); Saroj Bhatarai (Pennsylvania State University) |
| Abstract: | We present a signalling theory of quantitative easing in which open market operations that change the duration of outstanding nominal government debt a§ect the incentives of the central bank in determining the real interest rate. In a time consistent (Markov-perfect) equilibrium of a sticky-price model with coordinated monetary and fiscal policy, we show that shortening the duration of outstanding government debt provides an incentive to the central bank to keep short-term real interest rates low in future in order to avoid capital losses. In a liquidity trap situation then, where the current short-term nominal interest rate is up against the zero lower bound, quantitative easing can be effective to fight deflation and a negative output gap as it leads to lower real long-term interest rates by lowering future expected real short-term interest rates. We show illustrative numerical examples that suggest that the benefits of quantitative easing in a liquidity trap can be large in a way that is not fully captured by some recent empirical studies |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1292&r=dge |
| By: | Laura Pilossoph (Federal Reserve Bank of New York); Gregor Jarosch (University of Chicago) |
| Abstract: | We develop an equilibrium search model of the labor market in which firms cannot observe worker quality prior to interviewing. Upon meeting an applicant, firms can interview workers at a cost to learn their type. Less productive workers are more likely to be turned away after an interview so that, on average, they are also unemployed for longer. In equilibrium, firms use the information contained in unemployment duration to screen workers before deciding whether or not to interview them. Thus, our model rationalizes new evidence on negative duration dependence in callback rates from Kroft et al. (2013a). We argue that the estimated duration dependence in callback rates helps to identify the degree of unobserved heterogeneity employers face in hiring process in our model. Since we can condition on unobservables within the model, we can decompose duration dependence in the job finding rate into its underlying sources: composition bias due to unobserved heterogeneity, and true duration dependence arising from employer screening. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1256&r=dge |
| By: | Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis) |
| Abstract: | Most economic models used by central banks prior to the recent financial crisis omitted two fundamental elements: financial markets and liquidity measures. Those models therefore failed to foresee the crisis or understand the policy reaction that followed. In contrast to more orthodox models, we develop a theory in which credit markets and measures of liquidity are central. Our model emphasizes the role of collateral constraints on credit lines and the role of money in transactions, and it can be used to study the effects of alternative monetary policies during and after a financial crisis. A key insight from our approach is that a credit crisis characterized by tightened collateral constraints can cause a bout of deflation that exacerbates the constraints and reduces investment, productivity, employment and economic output. Policymakers can curb deflation and soften the recession by issuing more bonds and money, exactly as U.S. fiscal and monetary officials did in 2008. But our model also reveals an important trade-off in the aftermath of the crisis. Additional liquidity injections necessary to maintain low inflation will partially crowd out private investment and thereby slow economic recovery. The cost of curbing the recession’s depth is thus to extend its duration. |
| Date: | 2015–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmep:15-2&r=dge |
| By: | Foerster, Andrew T. (Federal Reserve Bank of Kansas City); Mustre-del-Rio, Jose (Federal Reserve Bank of Kansas City) |
| Keywords: | Search; Matching; Inflation; Sticky Prices |
| JEL: | E10 E30 E50 J60 |
| Date: | 2014–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp14-17&r=dge |
| By: | Ben Lockwood (University of Warwick); Erez Yerushalmi (University of Warwick) |
| Abstract: | This paper considers the optimal taxation of transactions services in a dynamic general equilibrium setting, where households use both cash and costly transactions services provided by banks to purchase consumption goods. With a full set of all tax instruments, the optimal tax structure is indeterminate. However, all optimal tax structures distort the relative costs of payment media, by raising the relative cost of deposits to cash. In the simplest optimal tax structure, the Friedman rule holds i.e. cash should be untaxed, and the rate of tax on transactions services can be higher or lower than the consumption tax. When parameters are calibrated to US data, simulations suggest that the transactions services tax should be considerably lower. This is because a transactions tax has a "double distortion": it distorts the choice between payment media, and indirectly taxes consumption. This contrasts with the special case of the cashless economy, when the first distortion is absent: in this case, it is optimal to tax transactions services at the same rate as consumption. |
| Keywords: | financial intermediation services, tax design, banks, monitoring,payment services |
| JEL: | G21 H21 H25 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:btx:wpaper:1423&r=dge |
| By: | Sandra Lizarazo (Universidad Carlos III de Madrid); Horacio Sapriza (Federal Reserve Board); Javier Bianchi (University of Wisconsin) |
| Abstract: | This paper studies the link between banking crises, sovereign default and govern- ment guarantees. A banking crisis can lead to a domestic credit crunch, which can be mitigated by government guarantees. However, the provision of bailout guaran- tees exposes the government to potentially severe losses from a banking sector failure and a sharp rise in public debt, causing sovereign default risk, and thus sovereign spreads, to increase substantially. As a result, the value of government guarantees deteriorates, deepening the crisis in the financial sector. The recent bailout in Ireland clearly illustrates the relevance of such risk transmission mechanism. An additional important contribution of our paper is to determine under which circumstances it is desirable for the government to provide bailout guarantees to the financial sector of the economy. A calibrated version of our model can mimic some of the interaction dynamics between financial sector risks and sovereign risks observed in Ireland during the crisis. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1297&r=dge |
| By: | Carlos Carvalho (PUC-Rio); Fernanda Nechio (Federal Reserve Bank of San Francisco) |
| Abstract: | We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide factor markets (as in Chari et al. 2000) or firm-specific factor markets (as in Woodford 2005). Sectoral specificity induces within-sector strategic substitutability and across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two models, depending on the distribution of price rigidity across sectors. Under the empirical distribution for the U.S., our model behaves similarly to an economy with firm-specific factors in the short-run, and later on approaches the dynamics of the model with economy-wide factor markets. This is consistent with the idea that factor price equalization might take place gradually over time, so that firm-specificity might be a reasonable short-run approximation, whereas economy-wide markets might be a better description of how factors of production are allocated in the longer run. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1241&r=dge |
| By: | Thomas Sargent (New York University); Mikhail Golosov (Princeton University); David Evans (New York University); anmol bhandari (New York University) |
| Abstract: | This paper characterizes tax and debt dynamics in Ramsey plans for incomplete markets economies that generalize an Aiyagari et al. (2002) economy by allowing a single asset traded by the government to be risky. Long run debt and tax dynamics can be attracted not only to the first-best continuation allocations discovered by Aiyagari et al. for quasi-linear preferences, but instead to a continuation allocation associated with a level of (marginal-utility-scaled) government debt that would prevail in a Lucas-Stokey economy that starts from a particular initial level of government debt. The paper formulates, analyzes, and numerically solves Bellman equations for two value functions for a Ramsey planner, one for t ≥ 1, the other for t = 0. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1276&r=dge |
| By: | Victoria Osuna; J. Ignacio García-Pérez |
| Abstract: | This paper evaluates the effectiveness of short-time work (STW) schemes for preserving jobs and reducing the segmentation between stable and unstable jobs observed in dual labour markets. For this purpose, we develop and simulate an equilibrium search and matching model considering the situation of the Spanish 2012 labour market reform as a benchmark. Our steady-state results show that the availability of STW schemes does not necessarily reduce unemployment and job destruction. The effectiveness of this measure depends on the degree of subsidization of payroll taxes it may entail: with a 33% subsidy, we find that STW is quite beneficial for the Spanish economy because it reduces both unemployment and labour market segmentation. We also perform a cost-benefit analysis that shows that there is scope for Pareto improvements when STW is subsidized. Again, the STW scenario with a 33% subsidy on payroll taxes seems the most beneficial because more than 57% of workers improve. These workers also experience a significant increase in annual income that could be used to compensate the losers from this policy change and the State for the fiscal balance deterioration. This reform saves the highest number of jobs and has the lowest deadweight costs. |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaeee:eee2015-06&r=dge |
| By: | Angeletos, George-Marios; Collard, Fabrice; Dellas, Harris |
| Abstract: | We enrich workhorse macroeconomic models with a mechanism that proxies strategic uncertainty and that manifests itself as waves of optimism and pessimism about the short-term economic outlook. We interpret this mechanism as variation in "confidence" and show that it helps account for many salient features of the data; it drives a significant fraction of the volatility in estimated models that allow for multiple structural shocks; it captures a type of fluctuations in "aggregate demand" that does not rest on nominal rigidities; and it calls into question existing interpretations of the observed recessions. We complement these findings with evidence that most of the business cycle in the data is captured by an empirical factor which is unlike certain structural forces that are popular in the literature but similar to the one we formalize here. |
| Keywords: | aggregate demand; business cycles; confidence; coordination failure; DSGE models; higher-order beliefs; strategic uncertainty |
| JEL: | E32 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10463&r=dge |
| By: | Emma Hooper (_Aix-Marseille University (Aix-Marseille School of Economics), CNRS, & EHESS) |
| Abstract: | We study the optimal growth path of a natural resource rich country, which can borrow from international financial markets. More precisely, we explore to what extent international borrowing can overcome resource scarcity in a small open economy, in order to have sustainable growth. First, this paper presents a benchmark model with a constant interest rate. We then introduce technical progress to see if the economy's growth can be sustainable in the long-run. Secondly, we analyse the case of a debt elastic interest rate, with a constant price of natural resources and then with increasing prices. The main finding of this paper is that borrowing on international capital markets does not permit sustainable growth for a country with exhaustible natural resources, when the interest rate is constant. Nevertheless, when we endogenize the interest rate the consumption growth rate can be positive before declining. |
| Keywords: | Exhaustible natural resources, exogenous growth, financial markets |
| JEL: | E20 O40 Q32 E44 |
| Date: | 2015–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:15.10&r=dge |
| By: | Kevin Sheedy (London School of Economics); Rachel Ngai (London School of Economics) |
| Abstract: | The majority of transactions in housing market involve moving from one house to another. This process entails a listing (putting up for sale) of an existing house and the eventual purchase of another house. Existing models of the housing market have focused solely on buying and selling decisions, taking moving from the current house as exogenous. This paper builds a model to analyse moving house and presents two empirical observations to show the importance of understanding moving decisions. The model generates new dynamics relative to the case of exogenous moving where movers would simply be a random sample of homeowners. Endogenous moving means that those who move come from the bottom of the match quality distribution, which gives rise to a cleansing effect and leads to overshooting of housing-market variables. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1203&r=dge |
| By: | Nicola Pavoni (Bocconi University); Christopher Sleet (Carnegie Mellon University); Matthias Messner (Bocconi University) |
| Abstract: | We bring together the theories of duality and dynamic programming. We show that the dual of a separable dynamic optimization problem can be recursively decomposed. We provide a dual version of the principle of optimality and give conditions under which the dual Bellman operator is a contraction with the optimal dual value function its unique fixed point. We relate primal and dual problems, address computational issues and give examples. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1267&r=dge |
| By: | Seonghoon Cho (Yonsei University) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:14-34&r=dge |
| By: | Foellmi, Reto; Hanslin, Sandra; Kohler, Andreas |
| Abstract: | This paper presents a dynamic North-South general- equilibrium model where households have non-homothetic preferences. Innovation takes place in a rich North while firms in a poor South imitate products manufactured in North. Introducing non-homothetic preferences delivers a complete international product cycle as described by Vernon (1966), where the different stages of the product cycle are not only determined by supply side factors but also by the distribution of income between North and South. We ask how changes in Southern labor productivity, South's population size and inequality across regions affects the international product cycle. In line with presented stylized facts about the product cycle we predict a negative correlation between adoption time and per capita incomes. |
| Keywords: | inequality; international trade; product cycles |
| JEL: | F1 O3 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10452&r=dge |
| By: | Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy) |
| Abstract: | We assess the short- and medium-term macroeconomic effects of competition-friendly reforms in the service sector when the monetary policy rate is stuck at the zero lower bound (ZLB) in a monetary union. We calibrate a large-scale multi-country multi-sector dynamic general equilibrium model to one region within the euro area, the rest of the euro area and the rest of the world. We find first, that unilateral reforms by a single country do not affect the number of periods for which the ZLB holds and have mild medium-term expansionary effects on GDP. Second, reforms simultaneously implemented in the entire euro area can favor an earlier exit from the ZLB if they have sufficiently inflationary effects, which happens when the gradual increase in the supply of goods and services is matched by a sufficiently large increase in investment, associated with higher expected levels of output. Reforms have expansionary effects because of their positive wealth effect, which more than counterbalances the recessionary substitution effect associated with higher real interest rates. If investment cannot immediately react to the reforms, then the latter has a deflationary impact and the duration of the ZLB is not reduced. |
| Keywords: | competition, markups, monetary policy, zero lower bound |
| JEL: | C51 E31 E52 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1002_15&r=dge |
| By: | Martin Szydlowski (University of Minnesota) |
| Abstract: | I study the optimal choice of investment projects in a continuous-time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project selection which depends on both a project's NPV as well as its risk-return ratio. The cutoff shifts dynamically depending on the past history of shocks, the current firm size, and the agent's continuation value. When the ratio of continuation value to firm size is large, investment projects are chosen more efficiently, and project choice depends more on the NPV and less on the risk-return ratio. The optimal contract can be implemented with an equity stake, bonus payments, as well as a personal account. Interestingly, when the contract features equity only, the project selection criterion resembles a hurdle rate. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1240&r=dge |