nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒03‒22
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control By Funke, Michael; Mihaylovski, Petar; Zhu, Haibin
  2. Entry, Exit and the Shape of Aggregate Fluctuations in a General Equilibrium Model with Capital Heterogeneity By Julia Thomas; Berardino Palazzo; Aubhik Khan; Gian Luca Clementi
  3. Credit Shocks in an Economy with Heterogeneous Firms and Default By Tatsuro Senga; Julia Thomas; Aubhik Khan
  4. Advertising and Aggregate Consumption: A Bayesian DSGE Assessment By Benedetto Molinari; Francesco Turino
  5. Bank and Sovereign Risk Interdependence in the Euro Area By Kollintzas, Tryphon; Tsoukalas, Konstantinos
  6. Sovereign Debt, Bail-Outs and Contagion in a Monetary Union By Eijffinger, S.C.W.; Kobielarz, M.L.; Uras, R.B.
  7. Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model By Juliane M. Begenau
  8. Consumption and Portfolio Choice over the Life Cycle under Extremely Leptokurtic Distribution of Earnings Changes By Serdar Ozkan; Fatih Karahan
  9. Training Programs, Skills, and Human Capital: A Life-Cycle Approach By Gueorgui Kambourov; Florian Hoffmann
  10. Modelling an Immigration Shock By Boldrin, Michelle; Montes, Ana
  11. A Generalized Model of Stock-Flow Matching By William Hawkins; Carlos Carrillo-Tudela
  12. Fertility, Social Mobility and Long Run Inequality: Barro-Becker Families in a Bewley World By Marla Ripoll; Juan Cordoba
  13. Providing Efficient Incentives to Work: Retirement Ages and the Pension System. By Maxim Troshkin; Ali Shourideh
  14. A Simple Model of Price Dispersion and Price Rigidity By Randall Wright; Guido Menzio; Kenneth Burdett
  15. Bank Equity and Macroprudential Policy By Keqing Liu
  16. The Fundamental Surplus in Matching Models By Ljungqvist, Lars; Sargent, Thomas J
  17. Noisy News in Business Cycles By Luca Gambetti
  18. Managerial Delegation and Aggregate Productivity By Jan Grobovsek
  19. Empirical Properties of Inflation Expectations and the Zero Lower Bound By Mirko Wiederholt
  20. The price vs quantity debate: climate policy and the role of business cycles By Anna Grodecka; Karlygash Kuralbayeva
  21. Can International Macroeconomic Models Explain Low-Frequency Movements of Real Exchange Rates? By Pau Rabanal; Juan F. Rubio-Ramírez
  22. Informality, Saving and Wealth Inequality By Catalina Granda; Franz Hamann
  23. Productivity and Potential Output Before, During, and After the Great Recession By John Fernald
  24. Inequality, Recessions and Recoveries By Fabrizio Perri
  25. Dynamic Effect of a Change in the Exchange Rate System: From a Fixed Regime to a Basket-Peg or a Floating Regime By Yoshino, Naoyuki; Kaji, Sahoko; Asonuma, Tamon
  26. Methodology Does Matter: About Implicit Assumptions in Applied Formal Modelling. The case of Dynamic Stochastic General Equilibrium Models vs Agent-Based Models By Gräbner, Claudius

  1. By: Funke, Michael (BOFIT); Mihaylovski, Petar (BOFIT); Zhu, Haibin (BOFIT)
    Abstract: The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.
    Keywords: DSGE model; monetary policy; financial market reform; shadow banking; China
    JEL: E32 E42 E52 E58
    Date: 2015–03–09
  2. By: Julia Thomas (The Ohio State University); Berardino Palazzo (Boston University, School of management); Aubhik Khan (Ohio State University); Gian Luca Clementi (Stern School of Business)
    Abstract: We study the cyclical implications of endogenous firm-level entry and exit decisions in a dynamic, stochastic general equilibrium model wherein firms face persistent shocks to both aggregate and individual productivity. The model we explore is in the spirit of Hopenhayn (1992). Firms' decisions regarding entry into production and their subsequent continuation are affected not only by their expected productivities, but also by the presence of convex and nonconvex capital adjustment costs, and thus their existing stocks. Thus, we can explore how age, size and selection reshape macroeconomic fluctuations in an equilibrium environment with realistic firm life-cycle dynamics and investment patterns. <P> Examining standard business cycle moments and impulse responses, we find that changes in entry and exit rates and the age-size composition of firms amplify responses over a typical business cycle driven by a disturbance to aggregate productivity and, to a lesser extent, protract them. Both results stem from an endogenous drag on TFP induced by a missing generation effect, whereby an usually small number of entrants fails to replace an increased number of exitors; this effect is most injurious several years out as the reduced cohorts of young firms approach maturity. Declines in the number of firms, and most notably in the numbers of young firms, were dramatic over the U.S. 2007-9 recession. In an exercise designed to emulate that unusual episode, we consider a second shock that more directly affects entry and the exit decisions of younger firms. We find that it sharpens the missing generation effect, delivering far more anemic recovery.
    Date: 2014
  3. By: Tatsuro Senga (The Ohio State University); Julia Thomas (The Ohio State University); Aubhik Khan (Ohio State University)
    Abstract: We consider business cycles driven by exogenous changes in total factor productivity and by credit shocks. The latter are financial shocks that worsen borrowers cash on hand and reduce the fraction of collateral lenders can seize in the event of default. Our nonlinear loan rate schedules drive countercyclical default risk and exit. Because a negative productivity shock raises default probabilities, it leads to a modest reduction in the number of firms and a deterioration in the allocation of capital that amplifies the effect of the shock. The recession following a negative credit shock is qualitatively different from that following a productivity shock. A rise in default alongside a substantial fall in entry causes a large decline in the number of firms. Measured TFP falls for several periods, as does employment, investment and GDP. The recovery following a credit shock is gradual given slow recoveries in TFP, aggregate capital, and the measure of firms.
    Date: 2014
  4. By: Benedetto Molinari (Universidad Pablo de Olavide); Francesco Turino (Universitat d'Alacant)
    Abstract: Aggregate data reveal that advertising in the U.S. absorbs approximately 2% of GDP and has a well defined pattern over the business cycle, being strongly procyclical and highly volatile. Because the purpose of brand advertising is to foster sales, we ask whether such spending has an appreciable effect on the pattern of aggregate consumption and, through this avenue, on economic activity. This question is addressed by developing a dynamic general equilibrium model in which households' preferences for differentiated goods depend on the intensity of brand advertising, which is endogenously determined by profit-maximizing firms. Once the model is estimated to match the U.S. economy, it argues that the presence of advertising in the long run raises aggregate consumption and hours worked, eventually fostering economic activity. We also find that advertising has a relevant impact on fluctuations in consumption, investment and markup over the business cycle. All of the abovementioned effects are proven to epend crucially on the degree of competitiveness of advertising at the firm level.
    Keywords: Residual Wage Inequality, Wage Polarization, Price and Composition Effects, Routinization hypothesis, Skill Biased Technical Change, Occupational Tasks, Job Polarization.
    JEL: E32 D11 J22 M37
    Date: 2015–03
  5. By: Kollintzas, Tryphon; Tsoukalas, Konstantinos
    Abstract: We develop a dynamic stochastic general equilibrium model to study bank risk and sovereign risk interdependence in the Euro Area. We find that an increase in capital investment risk shock, results in a considerably deeper recession when sovereign risk is also present. This result has three policy implications. First, Euro Area policies dealing with failing banks aggravated the recession. Second, although there has been a supranational effort with the creation of the EFSF/ESM to provide loans to sovereigns, as long as there is no direct mechanism for financial sector rescues, Euro Area policies continue to exacerbate the recession. Third, in favor of austerity measures used in the EA, we find that government spending multipliers are smaller in the presence of sovereign risk.
    Keywords: bank rescues; cyclicality; DSGE model; government spending multiplier; investment risk; sovereign risk
    JEL: E32 E44 E52 E58 E62 E63 G21 H3
    Date: 2015–03
  6. By: Eijffinger, S.C.W. (Tilburg University, Center For Economic Research); Kobielarz, M.L. (Tilburg University, Center For Economic Research); Uras, R.B. (Tilburg University, Center For Economic Research)
    Abstract: 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<br/>economy over the period of 1998 to 2012.
    Keywords: EMU; sovereign debt crisis; contagion; bail-out; interest rate spread
    JEL: F33 F34 F36 F41
    Date: 2015
  7. By: Juliane M. Begenau (Harvard Business School, Finance Unit)
    Abstract: This paper develops a quantitative dynamic general equilibrium model in which households' preferences for safe and liquid assets constitute a violation of Modigliani and Miller. I show that the scarcity of these coveted assets created by increased bank capital requirements can reduce overall bank funding costs and increase bank lending. I quantify this mechanism in a two-sector business cycle model featuring a banking sector that provides liquidity and has excessive risk-taking incentives. Under reasonable parametrizations, the marginal benefit of higher capital requirements related to this channel significantly exceeds the marginal cost, indicating that US capital requirements have been sub-optimally low.
    Keywords: Capital Requirements, Bank Lending, Safe Assets, Macro-Finance
    JEL: E32 E41 E51 G21 G28
    Date: 2015–03
  8. By: Serdar Ozkan (Federal Reserve Board); Fatih Karahan (Federal Reserve Bank of New York)
    Abstract: Guvenen, Karahan, Ozkan, and Song (2014) sheds new light on the nature of idiosyncratic idiosyncratic income risk. They document the following facts: First, earnings changes display extreme leptokurtosis, meaning that compared to a normal distribution (with the same standard deviation), most earnings changes are very close to zero but few changes are extremely large. Second, there is enormous dispersion in the variance of earnings shocks across individuals: the top 10% most volatile individuals have an average standard deviation of shocks that is 6 times larger than the least volatile 10%. Third, individuals face a negatively skewed distribution of income shocks (with the left tail of the distribution being longer than the right tail). Furthermore, the distribution of earnings shocks varies systematically across different income and age groups along these dimensions. Lastly, the persistence of earnings shocks varies with i) the magnitude of the shock (small ones being more persistent than large shocks), ii) the sign of the shock (positive shocks being more persistent than negative ones), and iii) the percentile of the individual in the income distribution, with positive shocks being almost permanent (transitory) for income poor (rich) households, and negative shocks being almost completely transitory (permanent) for them. All of these features of the data have interesting implications for the consumption savings decisions of households as well as the portfolio allocation between risky and riskless as well as between liquid and illiquid assets. To study the implications of these features of individual earnings dynamics for the consumption decisions of households as well as for their portfolio allocation, we develop and estimate an incomplete markets life cycle model of portfolio choice.Abstract We proceed in two steps. As many of the facts described above are inconsistent with the vast majority of income processes in the literature, we start by providing an alternative. We estimate a parsimonious income process and show that it can match many features of the data. We then use the model to study if some of these features can help us explain several puzzles about the portfolio allocation of households.
    Date: 2014
  9. By: Gueorgui Kambourov (University of Toronto); Florian Hoffmann (University of British Columbia)
    Abstract: We argue that standard models with one-dimensional skills and human capital cannot explain these distinct patterns. Instead we develop a model in which human capital is occupation-specific, but in which non-routine occupations require upfront occupation-specific human capital built-up. Furthermore, accumulation of human capital in non-routine occupations requires different skills than in routine occupations. Training programs and their government-sponsored general educational component help building human capital up-front and developing skills for processing complex task. We show that our model can explain the rich set of facts about labor market dynamics found in the data.
    Date: 2014
  10. By: Boldrin, Michelle; Montes, Ana (Fundamentos del Análisis Económico)
    Abstract: In this paper we model an overlapping generation economy affected by an unexpected immigration shock and figure out how household would insure against "immigration risk" efficiently. We use the model to study the impact of immigration in (i) the welfare of different generations (ii) the distributions of income among factors of production (iii) the optimal design of the interegenartional welfare state. In particular we construct a system of public education and public pensions that mimics the efficient complete market allocation. We also show the impact of immigration shock in a small open economy.In this case the external capital flows can act as sbustitutes for the miising private insurance markets.Our analysis delivers a set of predictions that we find useful to understand some aspects of the Spanish experience between 1996 and 20007.
    Keywords: Seguridad Social, Capital Humano, Modelos de generaciones solapadas, Risk sharing, Inmigración
    JEL: D12 R23
    Date: 2013–10
  11. By: William Hawkins (Yeshiva University); Carlos Carrillo-Tudela (University of Essex)
    Abstract: We develop a model of stock-flow matching in the labor market which allows for rich heterogeneity of match quality. The economy consists of many labor markets, and workers and jobs continually flow into each labor market. Within a labor market, potential worker-job matches differ in quality. Accordingly, a worker newly arrived in a labor market may not find any acceptable matches; if so, she becomes part of the stock of unemployed workers and must wait for the arrival of a new vacancy in the flow which offers her a sufficiently high quality match. When labor market conditions change, the set of acceptable matches changes in response. Our model is consistent with several stylized facts about the labor market, such as the importance of flows, as well as stocks, for matching rates, as well as with duration dependence in unemployment. It is tractable enough to be used in business cycle analysis. Finally, it provides a natural explanation for shifts in matching efficiency.
    Date: 2014
  12. By: Marla Ripoll (University of Pittsburgh); Juan Cordoba (Iowa State University)
    Abstract: This paper studies fertility decisions in an Aiyagari-Huggett economy extended to include endogenous fertility. The challenge is to explain both why fertility decreases with income, and why there is intergenerational persistence of inequality. The model features non-isoelastic altruism, diminishing marginal cost of children, and discrete number of children. We show that in such economy income rich but also asset rich individuals have less number of children. Key to the result is that the elasticity of intergenerational substitution is larger than one. We study the implications for long run inequality.
    Date: 2014
  13. By: Maxim Troshkin (Cornell University); Ali Shourideh (University of Pennsylavnia)
    Abstract: This paper provides a theoretical and quantitative analysis of efficient pension systems as integral parts of the overall tax code. We study lifecycle environments with active intensive and extensive labor margins. First, we analytically characterize Pareto efficient policies when the main tension is between redistribution and provision of incentives: while it may be more efficient to have highly productive individuals work more and retire older, earlier retirement may be needed to give them incentives to fully realize their productivity when they work. We show that, under plausible conditions, efficient retirement ages increase with productivity. We also show that this pattern is implemented by pensions that not only depend on the age of retirement but are designed to be actuarially unfair. Second, using individual earnings and retirement data for the U.S. as well as intensive and extensive labor elasticities, we calibrate policy models to simulate robust implications: it is efficient for individuals with higher lifetime earning to retire (i) older than they do in the data (at 69.5 vs. at 62.8 in the data, for the most productive workers) and (ii) older than their less productive peers (at 69.5 for the most productive workers vs. at 62.2 for the least productive ones), in sharp contrast to the pattern observed in the U.S. data. Finally, we compute welfare gains of between 1 and 5 percent and total output gains of up to 1 percent from implementing efficient work and retirement age patterns. We argue that distorting the retirement age decision offers a powerful novel policy instrument, capable of overcompensating output losses from standard distortionary redistributive policies.
    Date: 2014
  14. By: Randall Wright (U Wisconsin); Guido Menzio (University of Pennsylvania); Kenneth Burdett (UPenn)
    Abstract: There are two facts about the world that we take as given: First the "law of one price" is false – one can find many different prices for what appears to be, beyond reasonable doubt, the same good. Second, prices are set in nominal terms and appear, beyond reasonable doubt, to be sticky – some sellers keep their prices rigid when the aggregate price level increases. We shown these phenomena emerge naturally together in a search model. In contrast to theories that assume nominal price rigidities, when they are endogenous, they cannot be exploited by monetary policy, even though money is not neutral. The object of this study is to explain the above in a tractable model of money and search.
    Date: 2014
  15. By: Keqing Liu (Department of Economics, University of Exeter)
    Abstract: We investigate a new macroprudential policy in a DSGE model with fi?nancial frictions. As Gertler, Kiyotaki and Queralto (2012), we propose to subsidize bank equities. However, our tax rate is different from their policy. The tax rate in our macroprudential policy is proportional to capital ratio gap while it is proportional to the shadow price of bank deposit in Gertler et al. (2012). Our policy has two advantages: Firstly, because bank?s balance sheet structure is observable target for central bank, our policy is more applicable for practical policy design. Secondly, our policy makes individual banks choose to raise more capital. While it tightens the moral hazard constraint, the policy could raise the future value of investment and it shows the modi?fied policy is welfare dominant.
    Keywords: Macroprudential policy, Bank equity, Capital ratio, DSGE model
    JEL: C61 E61 G28
    Date: 2015
  16. By: Ljungqvist, Lars; Sargent, Thomas J
    Abstract: To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, or by positing government mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job's output that the invisible hand can allocate to vacancy creation. This single common channel unites analyses of business cycle and welfare state dynamics.
    Keywords: business cycle; fundamental surplus; market tightness; matching model; unemployment; volatility; welfare state
    JEL: E24 E32 J08
    Date: 2015–03
  17. By: Luca Gambetti (Universitat Autonoma de Barcelona)
    Abstract: We investigate the role of "noise" shocks as a source of business cycle fluctuations. To do so we set up a simple model of imperfect information and derive restrictions for identifying the noise shock in a VAR model. The novelty of our approach is that identification is reached by means of dynamic rotations of the reduced form residuals. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment and account for about a third of their prediction error variance at business cycle horizons.
    Date: 2014
  18. By: Jan Grobovsek (University of Edinburgh)
    Abstract: This paper proposes a novel mechanism to answer why firms in low income countries are badly managed, and quantifies the resulting productivity loss. First, I present empirical evidence on a significant positive correlation between the share of managerial workers and contract enforcement across countries. Second, I construct a tractable model that captures benefits to managerial delegation in large organizations. The model also features an agency problem between the owner of a firm and its middle management. Ineffective contract enforcement, allowing middle managers to steal from the firm, constrains firm size by limiting the efficient delegation of managerial authority. Third, I use a calibrated version of the model to measure the effect of lowering contract enforcement. Compared to the benchmark of US contract enforcement, no enforcement decreases the aggregate share of managerial workers by about 10 percentage points, typical of countries with income levels of about one-tenth of the US. The associated loss in aggregate labor productivity is roughly 18 percentage points. Auxiliary statistics on the mean firm size, self-employment and productivity dispersion offer additional empirical validation of these results.
    Date: 2014
  19. By: Mirko Wiederholt (Goethe University Frankfurt)
    Abstract: Survey data on expectations shows that households have heterogeneous inflation expectations and their inflation expectations respond sluggishly to realized shocks to future inflation. By contrast, in models with a zero bound on the nominal interest rate currently used for monetary and fiscal policy analysis, households' inflation expectations are not heterogeneous and not sticky. This paper solves a New Keynesian model with a zero lower bound in which households have dispersed information. Households' inflation expectations are heterogeneous and sticky. The main properties of the model are: (1) the deflationary spiral in bad states of the world is less severe than under perfect information, (2) central bank communication (without a change in current or future policy) affects consumption and the sign of this effect depends on whether the zero lower bound is binding, i.e., an announcement that increases consumption when the zero lower bound is not binding reduces consumption when the zero lower bound is binding, (3) a commitment to future inflation can reduce consumption, (4) the government spending multiplier can be negative, and (5) shocks to uncertainty can have first-order effects.
    Date: 2014
  20. By: Anna Grodecka; Karlygash Kuralbayeva
    Abstract: What is the optimal instrument design and choice for a regulator attempting to control emissions by private agents in face of uncertainty arising from business cycles? In applying Weitzman’s result [Prices vs. quantities, Review of Economic Studies, 41 (1974), 477-491] to the problem of greenhouse gas emissions, the price-quantity literature has shown that, under uncertainty about abatement costs, price instruments (carbon taxes) are preferred to quantity restrictions (caps on emission), since the damages from climate change are relatively flat. On the other hand, another recent piece of academic literature has highlighted the importance of adjusting carbon taxes to business cycle fluctuations in a procyclical manner. In this paper, we analyze the optimal design and the relative performance of price versus quantity instruments in the face of uncertainty stemming from business cycles. Our theoretical framework is a general equilibrium real business cycle model with a climate change externality and distortionary fiscal policy. First, we find that in an infinitely flexible control environment, the carbon tax fluctuates very little and is approximately constant, whilst emissions fluctuate a great deal in response to a productivity shock. Second, we find that a fixed price instrument is advantageous over a fixed quantity instrument due to the cyclical behavior of abatement costs, which tend to increase during expansions and decline during economic downturns. Our results suggest that the carbon tax is approximately constant over business cycles due to “flat” damages in the short-run and thus procyclical behavior as suggested by other studies cannot be justified merely on the grounds of targeting the climate externality.
    Date: 2015–01
  21. By: Pau Rabanal; Juan F. Rubio-Ramírez
    Abstract: Real exchange rates exhibit important low-frequency fluctuations. This makes the analysis of real exchange rates at all frequencies a more sound exercise than the typical business cycle one, which compares actual and simulated data after the Hodrick- Prescott filter is applied to both. A simple two-country, two-good, international real business cycle model can explain the volatility of the real exchange rate when all frequencies are studied. The puzzle is that the model generates too much persistence of the real exchange rate instead of too little, as the business cycle analysis asserts. We show that the introduction of input adjustment costs in production, cointegrated productivity shocks across countries, and lower home bias allows us to reconcile theory and this feature of the data.
    Date: 2015–04
  22. By: Catalina Granda (Universidad de Antioquia); Franz Hamann (Banco de la República de Colombia)
    Abstract: The informal sector is an extensive phenomenon in developing countries. While some of its implications have drawn considerable attention in the literature, one relatively unexplored aspect has to do with the saving patterns of workers and firms and how these might influence aggregate savings and wealth inequality. In this paper, we aim to fill that gap by examining both entrepreneurs' and workers' choices regarding whether to perform informally and regarding asset accumulation. Specifically, we build an occupational choice model wherein saving is primarily motivated by precautionary considerations. The model features labor and capital market segmentation, and is calibrated to replicate the saving rates, wealth inequality and composition of occupations across the formal and informal sectors of Colombia. Computational experiments further allow us to analyze the effects of highly debated formalization policies on wealth redistribution and promotion of saving and entrepreneurship. Alternative frameworks are finally considered. Classification JEL: E21, E26, O17
    Keywords: informality, wealth inequality, saving, occupational choice models.
    Date: 2015–03
  23. By: John Fernald (Federal Reserve Bank of San Francisco)
    Abstract: U.S. labor and total-factor productivity growth slowed after the early- to mid-2000s in aggregate, industry, and regional data. The broad-based nature of the slowdown, and its timing, rules out simple stories related to housing and finance before the recession, or to effects of the recession itself, but is consistent with some models of the effects of information technology. A calibrated growth model suggests trend productivity growth is only slightly faster than its 1973-1995 pace. One implication is that about ¾ of the shortfall of actual output from pre-recession estimates of trend reflects a reduction in the level of potential.
    Date: 2014
  24. By: Fabrizio Perri (University of Minnesota)
    Abstract: The paper shows that inequality in private income among US households is, in the aftermath of the Great Recession, at its postwar highs, both at the bottom and at the top of the distribution. The increase in inequality at the bottom seems to be tightly linked to the historically high level of long term unemployment, which depresses the income of the bottom part of the distribution. The paper also shows that, exactly during the Great Recession, the redistributive scope of government policies (tax and transfers) has increased to historical highs, again both at the bottom and at the top of the distribution, so disparities in disposable income have not grown much over the past 10 years. <P> More specific to the recession recovery cycle, we compare the Great Recession and its aftermath with the recession of 1980-82 and its aftermath and found that the distributional impact of the recent recession has been much smaller, precisely because of stronger role played by redistributive policies. Five years after the start of the 1980-82 recession, incomes at the top of the distribution were growing, and incomes at the bottom were falling, so society was much more unequal that it was at the start of the recession. Five years after the onset of the Great Recession, most segments of the disposable income distribution are still well below the pre-recession level; the society is poorer, but only marginally more unequal, due to redistribution. <P> This generalized stagnation is apparent also in the distribution of expenditures, which have been falling uniformly across the entire distribution. In the final part of the paper we have followed households through time to ask whether redistribution can also shield individual households from adverse shocks to private resources. The answer to the question is no. As the Great Recession has progressed there has been more redistribution, but at the same time households have lost the ability of self insure against shocks, and shocks to their disposable resources have affected their expenditures.
    Date: 2014
  25. By: Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Asonuma, Tamon (Asian Development Bank Institute)
    Abstract: This paper theoretically evaluates the dynamic effects of a shift in an exchange rate system from a fixed regime to a basket peg, or to a floating regime, and obtains transition paths for the shift based on a dynamic stochastic general equilibrium model of a small open economy. We apply quantitative analysis using data from the People's Republic of China and Thailand and find that a small open country would be better off shifting to a basket peg or to a floating regime than maintaining a dollar-peg regime with capital controls over the long run. Furthermore, due to the welfare losses associated with volatility in nominal interest rates, the longer the transition period, the larger the benefits of shifting suddenly to a basket-peg regime from a dollar-peg regime than proceeding gradually. Regarding sudden shifts to desired regimes, the welfare gains are higher under a shift to a basket peg if the exchange rate fluctuates significantly. Finally, shifting to a managed-floating regime is less attractive than moving to a basket peg, as the interventions necessary to maintain the exchange rate for certain periods result in higher losses and the authority lacks monetary policy autonomy.
    Keywords: basket peg; floating regime; exchange rate transition; peoples republic of china; thailand; monetary policy; Finance
    JEL: F33 F41 F42
    Date: 2015–03–09
  26. By: Gräbner, Claudius
    Abstract: This article uses the functional decomposition approach to modeling Mäki (2009b) to discuss the importance of methodological considerations before choosing a modeling framework in applied research. It considers the case of agent-based models and dynamic stochastic general equilibrium models to illustrate the implicit epistemological and ontological statements related to the choice of the corresponding modeling framework and highlights the important role of the purpose and audience of a model. Special focus is put on the limited capacity for model exploration of equilibrium models and their difficulty to model mechanisms explicitly. To model mechanisms that have interaction effects with other mechanisms is identified as a particular challenge that sometimes makes the explanation of phenomena by isolating the underlying mechanisms a difficult task. Therefore I argue for a more extensive use of agent-based models as they provide a formal tool to address this challenge. The overall conclusion is that a plurality of models is required: single models are simply pushed to their limits if one wishes to identify the right degree of isolation required to understand reality.
    Keywords: Functional decomposition approach, general equilibrium, agent-based models, methodology, epistemology, ontology, formal modeling, isolation
    JEL: B41 C6 C63
    Date: 2015–03–19

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