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on Dynamic General Equilibrium |
| By: | Chatterjee, Satyajit (Federal Reserve Bank of Philadelphia); Eyigungor, Burcu (Federal Reserve Bank of Philadelphia) |
| Abstract: | We present a model of long-duration collateralized debt with risk of default. Applied to the housing market, it can match the homeownership rate, the average foreclosure rate, and the lower tail of the distribution of home-equity ratios across homeowners prior to the recent crisis. We stress the role of favorable tax treatment of housing in matching these facts. We then use the model to account for the foreclosure crisis in terms of three shocks: overbuilding, financial frictions, and foreclosure delays. The financial friction shock accounts for much of the decline in house prices, while the foreclosure delays account for most of the rise in foreclosures. The scale of the foreclosure crisis might have been smaller if mortgage interest payments were not tax deductible. Temporarily higher inflation might have lowered the foreclosure rate as well. |
| Keywords: | Leverage; Foreclosures; Mortgage crisis |
| JEL: | E21 E32 E44 G21 H24 |
| Date: | 2015–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:15-13&r=dge |
| By: | Alexander Meyer-Gohde; Daniel Neuhoff; ; |
| Abstract: | The Reversible Jump Markov Chain Monte Carlo (RJMCMC) method can enhance Bayesian DSGE estimation by sampling from a posterior distribution spanning potentially nonnested models with parameter spaces of different dimensionality. We use the method to jointly sample from an ARMA process of unknown order along with the associated parameters. We apply the method to the technology process in a canonical neoclassical growth model using post war US GDP data and find that the posterior decisively rejects the standard AR(1) assumption in favor of higher order processes. While the posterior contains significant uncertainty regarding the exact order, it concentrates posterior density on hump-shaped impulse responses. A negative response of hours to a positive technology shock is within the posterior credible set when noninvertible MA representations are admitted. |
| Keywords: | Bayesian analysis; Dynamic stochastic general equilibrium model; Model evaluation; ARMA; Reversible Jump Markov Chain Monte Carlo |
| JEL: | C11 C32 C51 C52 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2015-014&r=dge |
| By: | Frédéric Dufourt (Aix-Marseille UniversitÈ (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS and Institut Universitaire de France); Kazuo Nishimura (RIEB, Kobe University & KIER, Kyoto University); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC) |
| Abstract: | We analyze local indeterminacy and sunspot-driven fluctuations in the standard two-sector model with additively separable preferences. We provide a detailed theoretical analysis enabling us to derive relevant bifurcation loci and to characterize the steady-state local stability properties as a function of various structural parameters influencing the degree of increasing returns to scale, the amount of intertemporal substitution in consumption, and the elasticity of the aggregate labor supply curve. On the theoretical side, we prove the existence of both a flip and a Hopf bifurcation locus in the corresponding parameter space. We also show that local indeterminacy can be obtained under any labor supply elasticity or under an arbitrarily low elasticity of intertemporal substitution in consumption. On the empirical side, we find that indeterminacy and sunspot fluctuations are robust features of two-sector models, prevailing for most empirically plausible calibrations for these parameters. |
| Keywords: | Indeterminacy, sunspots, two-sector model, sector-specific externalities, real business cycles |
| JEL: | C62 E32 O41 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1515&r=dge |
| By: | Lorenzo Burlon (Bank of Italy) |
| Abstract: | We study how aggregate volatility is influenced by the propagation of idiosyncratic shocks across firms through the network of ownership relations. We use detailed data on cross-holdings as well as the relevant balance sheet information for almost the entire universe of Italian limited liability firms over the period 2005-2013. We first document that the ownership network matters for the correlation of firms' sales. Then, we construct a model where firms are linked through ownership relations and have limited access to credit markets. We characterize the aspects of the network structure that are important for the dynamics of the economy. A calibration to the key features of the Italian economy shows that the volatility implied by the model may account for a sizeable percentage of actual GDP fluctuations. Lastly, we conduct a counterfactual exercise to isolate the role played by the network structure itself in the propagation of idiosyncratic shocks at the aggregate level. |
| Keywords: | ownership networks, firms, financial frictions, business cycles |
| JEL: | E32 C68 D58 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1004_15&r=dge |
| By: | Singleton, Carl; Schaefer, Daniel |
| Abstract: | We apply well-known results of the econometric learning literature to a standard RBC model with unemployment. The unique REE is always expectationally stable with decreasing gain learning, and this result is robust to over-parametrisation of the econometric model relative to the minimum state variable form used by agents (Strong E-stability). And so, from this perspective, the assumption of rational expectations in the Mortensen-Pissarides is not unreasonable. Using a parametrisation with UK data, simulations suggest that the implied rate of convergence to the rational expectations equilibrium (REE) with least squares learning is however slow. The cyclical response of unemployment to structural shocks is muted under learning, and a parametrisation which guarantees root-t convergence is generally not consistent with attempts to match the observed volatility of labour market data using the standard model. |
| Keywords: | Real business cycle, unemployment, adaptive learning, expectational stability |
| JEL: | D83 E24 E32 J64 |
| Date: | 2015–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63162&r=dge |
| By: | Matthew N. White (Department of Economics, University of Delaware) |
| Abstract: | The method of endogenous gridpoints (ENDG) significantly speeds up the solution to dynamic stochastic optimization problems with continuous state and control variables by avoiding repeated computations of expected outcomes while searching for optimal policy functions. While the method has been used in specific settings with one endogenous state dimension and one control, it has never been characterized for use in n-dimensional models. Using a general theoretical framework for dynamic stochastic optimization problems, I formalize the method of endogenous gridpoints and present conditions for the class of models that can be solved using ENDG. The framework is applied to several example models to show the breadth of problems for which endogenous gridpoints can be used. Further, I provide an interpolation technique for non-rectilinear grids that allows ENDG to be used in n-dimensional problems in an intuitive and computationally educient way. Relative to the traditional approach, the method of endogenous gridpoints with non-linear grid interpolation" solves a benchmark 2D model 7.0 to 7.8 times faster than the traditional solution method. |
| Keywords: | Dynamic models, numerical solution, endogenous gridpoint method, non-linear grid interpolation, endogenous human capital, durable goods |
| JEL: | C61 C63 E21 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:15-03&r=dge |
| By: | Andri Chassamboulli (University of Cyprus); Giovanni Peri (UC Davis) |
| Abstract: | A controversial issue in the US is how to reduce the number of illegal immigrants and what effect this would have on the US economy. To answer this question we set up a two-country model with search in labor markets and featuring legal and illegal immigrants among the low skilled. We calibrate it to the US and Mexican economies during the period 2000-2010. As immigrants, especially illegal ones, have a worse outside option than natives their wages are lower. Hence their presence reduces the labor cost of employers who, as a consequence, create more jobs per unemployed when there are more immigrants. Because of such effect our model shows that increasing deportation rates and tightening border control weakens the low-skilled labor markets, increasing unemployment of native low skilled. Legalization, instead decreases the unemployment rate of low-skilled natives and it increases income per native. |
| Keywords: | job creation, search costs, illegal immigrants, border controls, deportations, legalization, unemployment, wages |
| JEL: | F22 J61 J64 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:crm:wpaper:1506&r=dge |