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on Dynamic General Equilibrium |
| By: | Gadatsch, Niklas |
| Abstract: | This paper develops a small open economy model to investigate the impact of rising sovereign bond market spreads on the real economy. One key element of the model is a "sovereign risk channel" through which tensions in the sovereign bond market tend to spill over into private credit markets. The model is estimated with Bayesian methods and data for "high-spread" countries in the euro area. It turns out that spread shocks during the Euro crisis had a negative effect on real GDP growth in these countries, up to 0.8 percentage points (PP) Portugal and Ireland, 0.3 PP in Italy and 0.2 PP in Spain. |
| Keywords: | Small open economy,Business cycles,Sovereign risk premium,DSGE modeling |
| JEL: | E32 E43 F41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:svrwwp:012015&r=dge |
| By: | Leo Kaas (Department of Economics, University of Konstanz, Germany); Philipp Kircher (Department of Economics, University of Edinburgh, United Kingdom) |
| Abstract: | We develop and analyze a labor market model in which heterogeneous firms operate under decreasing returns and compete for labor by posting long-term contracts. Firms achieve faster growth by offering higher lifetime wages, which allows them to fill vacancies with higher probability, consistent with recent empirical findings. The model also captures several other regularities about firm size, job flows and pay, and generates sluggish aggregate dynamics of labor market variables. In contrast to existing bargaining models with large firms, efficiency obtains and the model allows a tractable characterization over the business cycle |
| Keywords: | Labor market search, multi-worker firms, job creation and job destruction |
| JEL: | E24 J64 L11 |
| Date: | 2015–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1509&r=dge |
| By: | Menzie D. Chinn; Yi Zhang |
| Abstract: | Relying upon a standard New Keynesian DSGE, we propose an explanation for two empirical findings in the international finance literature. First, the unbiasedness hypothesis – the proposition that expost exchange rate depreciation matches interest differentials – is rejected much more strongly at short horizons than at long. Second, even at long horizons, the unbiasedness hypothesis tends to be rejected when one of the currencies has experienced a long period of low interest rates, such as in Japan and Switzerland. Using a calibrated New Keynesian dynamic stochastic general equilibrium model, we show how a monetary policy rule can induce the negative (positive) correlation between depreciation and interest differentials at short (long) horizons. The tendency to reject unbiasedness for Japan and Switzerland even at long horizons we attribute to the interaction of the monetary reaction function and the zero lower bound. |
| JEL: | E12 F21 F31 F41 F47 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21159&r=dge |
| By: | Julia Le Blanc (Deutsche Bundesbank, Frankfurt a. Main, Germany); Almuth Scholl (Department of Economics, University of Konstanz, Germany) |
| Abstract: | We employ a life-cycle model with income risk to analyze how tax-deferred individual accounts affect households’ savings for retirement. We consider voluntary accounts as opposed to mandatory accounts with minimum contribution rates. We contrast add-on accounts with carve-out accounts that partly replace social security contributions. Quantitative results suggest that making add-on accounts mandatory has adverse welfare effects across income groups. Carve-out accounts generate positive welfare across all income groups but gains are lower for low income earners. Default investment rules in individual accounts have a modest impact on welfare. |
| Keywords: | individual retirement accounts, household portfolio choice, consumption and saving over the life-cycle |
| JEL: | E21 H55 G11 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1510&r=dge |
| By: | Robert Stelter (UNIVERSITY OF ROSTOCK, Institute for Economics, Chair for Business Cycles and Growth and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | This paper investigates the problem of an "optimum population" concerning age structures in a 3-period OLG-model with endogenous fertility and longevity. The first-best solution for a number-dampened total social welfare function, including Millian and Benthamite utilitarianism as two extreme cases, identifies the optimal age structure, generally failed in laissez-faire economies. As individuals don't internalize effects of longevity on life-cycle income, they overinvest in health. Additionally, they choose a non-optimal number of offspring. A calibration exercise for 80 countries emphasizes that an over-aging of populations crucially depends on social preferences and observed age structures. Interestingly, we find that in contrast to taxes on health expenditures, taxes or subsidies on children to decentralize the first-best solution are sensitive to social preferences. |
| Keywords: | endogenous fertility; adult mortality; optimal age structure; over-aging; optimal taxation |
| JEL: | H20 I10 J18 |
| Date: | 2015–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2015009&r=dge |
| By: | Jung, Kuk Mo; Pyun, Ju Hyun |
| Abstract: | The massive stocks of foreign exchange reserves, mostly held in the form of U.S. T-Bonds by emerging economies, are still an important puzzle. Why do emerging economies continue to willingly loan to the United States despite the low rates of return? We propose that a dynamic general equilibrium model incorporating international capital markets, characterized by a non-centralized trading mechanism and U.S. T-Bonds as facilitators of trade, can provide an answer to this question. Declining financial frictions in these over-the-counter (OTC) markets would generate rising liquidity premiums on U.S. T-Bonds. Meanwhile, the higher liquidity properties of the U.S. T-Bonds would induce recipients of foreign investments, namely emerging economies, to hold more liquidity, that is U.S. T-Bonds, in equilibrium. The prediction of our model is confirmed by an empirical simultaneous equations approach considering an endogenous relationship between OTC capital inflows and reserves holdings. |
| Keywords: | international reserves, over-the-counter markets, liquidity, simultaneous equations |
| JEL: | E44 E58 F21 F31 F36 F41 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64235&r=dge |
| By: | Nekoei, Arash (IIES, Stockholm University); Weber, Andrea (University of Mannheim) |
| Abstract: | Contrary to standard search model predictions, prior studies failed to estimate a positive effect of unemployment insurance (UI) on reemployment wages. This paper estimates a positive UI wage effect exploiting an age-based regression discontinuity in Austrian administrative data. A search model incorporating duration dependence determines the UI wage effect as the balance between two offsetting forces: UI causes agents to seek higher-wage jobs, but also reduces wages by lengthening unemployment. This implies a negative relationship between the UI unemployment duration and wage effects, which holds empirically both in our sample and across studies, reconciling disparate wage-effect estimates. Empirically, UI raises wages by improving reemployment firms' quality and attenuating wage drops. |
| Keywords: | unemployment insurance, job-search, wages |
| JEL: | H5 J3 J6 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9034&r=dge |
| By: | Müller, Andreas; Storesletten, Kjetil; Zilibotti, Fabrizio |
| Abstract: | Motivated the European debt crisis, we construct a tractable theory of sovereign debt and structural reforms under limited commitment. The government of a sovereign country which has fallen into a recession of an uncertain duration issues one-period debt and can renege on its obligations by suffering a stochastic default cost. When faced with a credible default threat, creditors can make a take-it-or-leave-it debt haircut offer to the sovereign. The risk of renegotiation is reflected in the price at which debt is sold. The sovereign government can also do structural policy reforms that speed up recovery from the recession. We characterize the competitive equilibrium and compare it with the constrained efficient allocation. The equilibrium features increasing debt, falling consumption, and a non-monotone reform effort during the recession. In contrast, the constrained optimum yields step-wise increasing consumption and step-wise decreasing reform effort. Markets for state-contingent debt alone do not restore efficiency. The constrained optimum can be implemented by a flexible assistance program enforced by an international institution that monitors the reform effort. The terms of the program are improved every time the country poses a credible threat to leave the program unilaterally without repaying the outstanding loans. |
| Keywords: | austerity programs; debt overhang; default; European debt crisis; fiscal policy; Great Recession; Greece; International Monetary Fund; limited commitment; moral hazard; renegotiation; risk premia; sovereign debt; structural reforms |
| JEL: | E62 F33 F34 F53 H12 H63 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10588&r=dge |
| By: | Roberto Marfè |
| Abstract: | Intuition and leading equilibrium models are at odds with the empirical evidence that expected returns are weakly related to volatility at the market level. This paper proposes a closed-form general equilibrium model, which connects the investors’ expectations of fundamentals with those of market returns, as documented by survey data. Forecasts suggest that investors feature pro-cyclical optimism and, then, overestimate the persistence of aggregate risk. The forward-looking component of stock volatility offset the transient risk and leads to a weak risk-return relation, in line with survey data about market returns. The model mechanism is robust to many features of financial markets. |
| Keywords: | risk-return trade off, survey expectations, general equilibrium, optimism, asset pricing puzzles, heterogeneous preferences, closed-form expression |
| JEL: | D51 D53 D83 G11 G12 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:408&r=dge |