nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒04‒11
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Heterogeneity in Wage Setting Behavior in a New-Keynesian Model By Eijffinger, S.C.W.; Grajales Olarte, A.; Uras, R.B.
  2. Employment and Hours over the Business Cycle in a Model with Search Frictions By Kudoh, Noritaka; Miyamoto, Hiroaki; Sasaki, Masaru
  3. A structural investigation of the Chinese economy with a hybrid monetary policy rule By Ran Li; Jiao Wang
  4. Capital Regulation in a Macroeconomic Model with Three Layers of Default By Laurent Clerc; Alexis Derviz; Caterina Mendicino; Stephane Moyen; Kalin Nikolov; Livio Stracca; Javier Suarez; Alexandro Vardulakis
  5. A 5-sector DSGE model of Russia By Sergey Ivashchenko
  6. Misspecification and Expectations Correction in New Keynesian DSGE Models By Giovanni Angelini; Luca Fanelli Fanelli
  7. DSGE models for developing economies: an application to Morocco By Lahcen, Mohammed Ait
  8. Unpleasant debt dynamics: Can fiscal consolidations raise debt ratios? By Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria
  9. A dynamic quantitative macroeconomic model of bank runs By Mattana, Elena; Panetti, Ettore
  10. Output externalities on total factor productivity By DAVILA, Julio
  11. Fertility Shocks and Equilibrium Marriage-Rate Dynamics: Lessons from World War 1 in France By Knowles, John; Vandenbroucke, Guillaume
  12. Labour Informality, Selective Migration, and Productivity in General Equilibrium By Huikang Ying
  13. An Assignment Model of Knowledge Diffusion and Income Inequality By Luttmer, Erzo G. J.
  14. Migration Choice under Risk and Liquidity Constraints By Kleemans, Marieke

  1. By: Eijffinger, S.C.W. (Tilburg University, Center For Economic Research); Grajales Olarte, A. (Tilburg University, Center For Economic Research); Uras, R.B. (Tilburg University, Center For Economic Research)
    Abstract: In this paper we estimate a New-Keynesian DSGE model with heterogeneity in price and wage setting behavior. In a recent study, Coibion and Gorodnichenko (2011) develop a DSGE model, in which firms follow four different types of price setting schemes: sticky prices, sticky information, rule of thumb, or flexible prices. We enrich Coibion and Gorodnichenko (2011) framework by incorporating heterogeneity in nominal wage setting behavior among households. We solve this DSGE model and estimate it using Bayesian techniques<br/>for the United States economy for the period of 1955-2014. Our results confirm the previous findings in the literature regarding the importance of nominal rigidity in wages to better match the macroeconomic data. More importantly, we identify qualitative as well as quantitative business cycle features allowed by the heterogeneity in wage rigidity, such as the persistence in price and the wage inflation, which a standard New Keynesian model with only Calvo-type wage rigidity fails to achieve. We also show that modelling wage rigidity heterogeneity - as oppose to standard-Calvo-wages - amplifies the macroeconomic output fluctuations resulting from a technology shock whereas it mitigates the output fluctuations following a monetary tightening.
    Keywords: Heterogeneity; price; wage and information stickiness; Bayesian estimation
    JEL: C11 E24 E31 E32 E52
    Date: 2015
  2. By: Kudoh, Noritaka (Hokkaido University); Miyamoto, Hiroaki (University of Tokyo); Sasaki, Masaru (Osaka University)
    Abstract: This paper studies a labor market search-matching model with multi-worker firms to investigate how firms utilize the extensive and intensive margins over the business cycle. The earnings function derived from the Stole-Zwiebel bargaining acts as an adjustment cost function for employment and hours. We calibrate the model to match the Japanese labor market, in which the intensive margin accounts for 79% of the variations in total working hours. The model replicates the observed cyclical behavior of hours of work, but fails to generate employment volatility of realistic magnitude. Additional penalties for longer hours of work do not resolve this issue. Wage rigidity and persistent shocks are promising lines of further investigations.
    Keywords: business cycles, hours of work, search, multi-worker firms
    JEL: E32 J20 J64
    Date: 2015–03
  3. By: Ran Li; Jiao Wang
    Abstract: In this paper, we aim to understand how monetary policy is conducted in China and what the main sources of fluctuations in China’s business cycle are. To this end, we extend a standard New Keynesian dynamic stochastic general equilibrium model with financial frictions and investment-specific technology shocks. We incorporate a hybrid form of monetary policy rule and employ a Bayesian estimation strategy using Chinese data. We find that the People’s Bank of China conducts monetary policy by adjusting the policy rate in response to inflation, output growth as well as real money growth. We also find that neutral technology shocks are the main drivers of the fluctuations in output and consumption while the investment-specific technology shock is the primary source of the variation in investment. This paper offers a new way of examining the rule of China’s monetary policy and indicates a structural break of the neutral technology development that may have caused the slowing down of GDP growth since 2010.
    Keywords: Monetary policy, business fluctuation, Bayesian estimation, dynamic stochastic general equilibrium model, China
    JEL: E32 E43 E52
    Date: 2015–04
  4. By: Laurent Clerc; Alexis Derviz; Caterina Mendicino; Stephane Moyen; Kalin Nikolov; Livio Stracca; Javier Suarez; Alexandro Vardulakis
    Abstract: We develop a dynamic general equilibrium model for the positive and normativeanalysis of macroprudential policies. Optimizing financial intermediaries allocate theirscarce net worth together with funds raised from saving households across two lendingactivities, mortgage and corporate lending. For all borrowers (households, firms, andbanks) external financing takes the form of debt which is subject to default risk. This“3D model” shows the interplay between three interconnected net worth channels thatcause financial amplification and the distortions due to deposit insurance. We apply itto the analysis of capital regulation.
    JEL: E3 E44 G01 G21
    Date: 2015
  5. By: Sergey Ivashchenko
    Abstract: We build a dynamic stochastic general equilibrium model with five sectors (1 - mining; 2 - manufacturing; 3 - electricity, gas and water; 4 - trade, transport and communication; 5 - other). The model is estimated on 29 time-series of Russia statistical data. We analyse the out-of-sample forecasting prowess of the model and derive implications for economic policy.
    Keywords: DSGE, industries, out of sample forecasts
    JEL: E23 E27 E32 E37 E60
    Date: 2015–03–06
  6. By: Giovanni Angelini; Luca Fanelli Fanelli
    Abstract: This paper focuses on the dynamic misspecification that characterizes the class of small-scale New-Keynesian models and provides a `natural' remedy for the typical difficulties these models have in accounting for the rich contemporaneous and dynamic correlation structure of the data, generally faced with ad hoc shock specifications. We suggest using the `best fitting' statistical model for the data as a device through which it is possible to adapt the econometric specification of the New-Keynesian model. The statistical model may feature an autocorrelation structure that is more involved than the autocorrelation structure implied by the structural model's reduced form solution under rational expectations, and it is treated as the actual agents' expectations generating mechanism. A pseudo-structural form is built from the baseline system of Euler equations by forcing the state vector of the system to have the same dimension as the state vector characterizing the statistical model. We provide an empirical illustration based on U.S. quarterly data and a small-scale monetary New Keynesian model.
    Keywords: Dynamic stochastic general equilibrium model, Expectations, Kalman filter, New Keynesian models, State space model.
    Date: 2015
  7. By: Lahcen, Mohammed Ait
    Abstract: In this thesis we try to understand the impact of some macroeconomic features of developing economies, in particular the existence of a large informal sector, on the reaction of these economies to different shocks. In order to achieve this objective, we derive a simple New Keynesian Small Open Economy DSGE model featuring multiple sectors with monopolistic competition, nominal rigidities in prices, a fixed exchange regime and the introduction of a simple medium-sized informal sector. We estimate the model with Bayesian estimation using quarterly data from Morocco. The model does a good job in capturing the unconditional second moments of the data. It is also able to replicate well some of the historical data series. Estimation results suggest a relatively weaker role of price rigidities in the non-tradables sector. It also suggests a much more aggressive reaction of the central bank to inflationary pressures with a relatively higher weight given to fluctuations in inflation compared with fluctuations in output and the real exchange rate. The study of the Bayesian impulse-response functions confirm the shock absorbing role of the informal sector for productivity shocks and pleads towards excluding imported inflation from the inflation target. However, no evidence is found of a shock absorbing role of the informal sector in the case of interest rate or foreign demand shocks.
    Keywords: DSGE, developing economies, informality, small open economy, new-keynesian
    JEL: E26 E31 E32 E37 E52 E58
    Date: 2014–08–29
  8. By: Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria
    Abstract: Using PESSOA, a medium-scale DSGE model for a small euro-area economy, we evaluate how scal adjustments impact short- and medium-term debt dynamics and output for alternative policy options, and budgetary and economic conditions. Fiscal djustments may increase the public debt-to-GDP ratio in the short run, even forconsolidations carried out in normal times in economies characterized by moderateindebtedness levels. Financial turmoils and hikes in the nationwide risk premia, coupledwith high indebtedness levels and sti scal measures, boost the output costs ofscal consolidations and severely aect their eectiveness in bringing the public debtto-GDP ratio down in the short term. In the medium run credible scal adjustments entail a decline in the public debt ratio, though at potentially very large output losseswhen carried out under unfavorable budgetary and economic conditions.
    JEL: E12 E30 E62 H60
    Date: 2015
  9. By: Mattana, Elena (Université catholique de Louvain, CORE, Belgium); Panetti, Ettore (Banco de Portugal, Economics and Research Department)
    Abstract: We study the macroeconomic effects of systemic bank runs in a neoclassical model with a microfounded banking system. In every period, the banks provide insurance against some idiosyncratic liquidity shocks, but the possibility of sunspot-driven bank runs distorts the equilibrium allocation. In a quantitative exercise, we find that the banks, when the probability of a run is sufficiently low, choose a contract that is not run-proof, and satisfy an equal service constraint. In equilibrium, a shock to the probability of a run leads to a maximum drop in GDP of 5.6 percent, and a maximum welfare loss of 0.17 percent.To what extent do income taxation systems decrease poverty? We raise this question under the assumption that well beings is defined in line with the ethics of responsibility. It requires considering that not all inequalities are unjust. Here, we do consider that inequalities stemming from labor time differences are not unjust. To compare households of different sizes, we introduce a labor time equivalence scale. We apply the resulting method to the Belgian tax system
    Keywords: financial intermediation, bank runs, welfare costs, calibration
    JEL: E21 E44 G01 G20
    Date: 2014–09–30
  10. By: DAVILA, Julio (Université catholique de Louvain, CORE, Belgium)
    Abstract: The impact that output has on future total factor productivity —i.e. the dynamic complementarities shown to be empirically relevant in Cooper and Johri (1997)— is not internalized by competitive agents. As a result, the allocation that a planner would choose cannot be reached as a competitive equilibrium outcome (neither for infinitely-lived agents nor for overlapping generations): the market return to savings and wage rate are too low. The planner’s allocation can nonetheless be implemented by a fiscal policy subsidizing as needed the returns to savings and the wage rate. The exact policy differs depending on whether just past investment or total output influences productivity: in the first case only capital returns need to be subsidized, while in the second case labor income needs to be subsidized too. The policy is balanced period-by-period by means of a lump-sum tax.
    Date: 2014–11–05
  11. By: Knowles, John (Federal Reserve Bank of St. Louis); Vandenbroucke, Guillaume (Federal Reserve Bank of St. Louis)
    Abstract: Low sex ratios are often equated with unfavorable marriage prospects for women, but in France after World War 1, the marriage probability of single females rose 50%, despite a massive drop in the male/female ratio. We conjecture that the war-time birth-rate bust induced an abnormal postwar abundance of singles with relatively high marriage propensities. We compute the equilibrium response, in a life-cycle matching model, of marriage hazards to war-time fertility and male-mortality shocks. Our results implicate two powerful forces: an abnormal abundance of marriageable men, and increased gains from marriage due to post-war pro-natalism.
    Keywords: Family Economics; Household Formation; Marriage; Fertility.
    JEL: D10 E13 J12 J13 O11
    Date: 2015–03–01
  12. By: Huikang Ying
    Abstract: This paper studies the interactions between urban labour informality and selective migration, and explores the consequences of productivity changes at both sectoral and individual levels. It proposes a general equilibrium model with heterogeneous workers to characterize the sizable agriculture sector and urban informality in developing economies, and discusses implications for wages and inequality. The model links the size of the urban informal sector to the distributions of individual productivity endowments. The finding suggests that improving average individual skills is an efficient way to alleviate urban underemployment. Equilibrium responses also indicate that changes in labour markets have only modest effects on wages and inequality.
    Keywords: Rural-urban migration, informal sector, productivity changes, wage inequality
    JEL: J24 O15 O17
    Date: 2015–02–04
  13. By: Luttmer, Erzo G. J. (Federal Reserve Bank of Minneapolis)
    Abstract: Randomness in individual discovery disperses productivities, whereas learning from others keeps productivities together. Long-run growth and persistent earnings inequality emerge when these two mechanisms for knowledge accumulation are combined. This paper considers an economy in which those with more useful knowledge can teach others, with competitive markets assigning students to teachers. In equilibrium, students with an ability to learn quickly are assigned to teachers with the most productive knowledge. This sorting on ability implies large differences in earnings distributions conditional on ability, as shown using explicit formulas for the tail behavior of these distributions.
    Keywords: Knowledge diffusion; Growth; Income inequality
    JEL: J20 O10 O30 O40
    Date: 2015–03–27
  14. By: Kleemans, Marieke
    Abstract: This paper develops and tests a migration choice model that incorporates two prominent migration strategies used by households facing risk and liquidity constraints. On the one hand, migration can be used as an ex-post risk-coping strategy after sudden negative income shocks. On the other hand, migration can be seen an as investment, but liquidity constraints may prevent households from paying up-front migration costs, in which case positive income shocks may increase migration. These diverging migratory responses to shocks are modeled within a dynamic migration choice framework that I test using a 20-year panel of internal migration decisions by 38,914 individuals in Indonesia. I document evidence that migration increases after contemporaneous negative income shocks as well as after an accumulation of preceding positive shocks. Consistent with the model, I find that migration after negative shocks is more often characterized by temporary moves to rural destinations and is more likely to be used by those with low levels of wealth, while investment migration is more likely to involve urban destinations, occur over longer distances, and be longer in duration. Structural estimation of the model reveals that migration costs are higher for those with lower levels of wealth and education, and suggests that the two migration strategies act as substitutes, meaning that those who migrate to cope with a negative shock are less likely to invest in migration. I use the structural estimates to simulate policy experiments of providing credit and subsidizing migration, and I explore the impact of increased weather shock intensity in order to better understand the possible impact of climate change on migration.
    Keywords: Internal Migration, Risk-Coping, Liquidity Constraints, Dynamic Choice, Community/Rural/Urban Development, Environmental Economics and Policy, International Development, Labor and Human Capital, Risk and Uncertainty, D14, D91, J61, O12, R23,
    Date: 2015

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