nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒06‒05
seventeen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Mismatch Shocks and Unemployment During the Great Recession By Francesco Furlanetto; Nicolas Groshenny
  2. Monetary and macroprudential policy with foreign currency loans By Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
  3. Quelle méthodologie pour une étude des modèles DSGE ? Suggestions à partir d'un état des lieux des recherches sur la modélisation By Francesco Sergi
  4. Intertemporal equilibrium with financial asset and physical capital By Cuong Le Van; Ngoc-Sang Pham
  5. Policy mandates for macro-prudential and monetary policies in a new Keynesian framework By Levine, Paul; Lima, Diana
  6. Corporate Debt Structure and the Financial Crisis By De Fiore, Fiorella; Uhlig, Harald
  7. Financal frictions and policy cooperation: a case with monopolistic banking and staggered loan contracts By Fujiwara, Ippei; Teranishi, Yuki
  8. Optimal Monetary Policy at the Zero Lower Bound By Azariadis, Costas; Bullard, James B.; Singh, Aarti; Suda, Jacek
  9. Housing market dynamics: Any news? By Gomes, Sandra; Mendicino, Caterina
  10. Efficiency with Endogenous Information Choice By Luis Gonzalo Llosa; Venky Venkateswaran
  11. The Effects of Oil Price Shocks in a New-Keynesian Framework with Capital Accumulation By Verónica Acurio Vásconez; Gaël Giraud; Florent Mc Isaac; Ngoc-Sang Pham
  12. Grandparents Matter: Perspectives on Intergenerational Altruism. An Experiment on Family Dynamic Spillovers in Public Goods Games. By Marianna Baggio; Luigi Mittone
  13. Interest rates, money, and banks in an estimated euro area model By Christoffel, Kai; Schabert, Andreas
  14. Price dynamics, financial fragility and aggregate volatility By Antoine Mandel; Simone Landini; Mauro Gallegati; Herbert Gintis
  15. Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? By Bacchetta, Philippe; Perazzi, Elena; van Wincoop, Eric
  16. Amortization Requirements and Household Indebtedness: An Application to Swedish- Style Mortgages By Hull, Isaiah
  17. A note on the characterization of optimal allocations in OLG economies with multiple goods By Jean-Marc Bonnisseau; Lalaina Rakotonindrainy

  1. By: Francesco Furlanetto; Nicolas Groshenny
    Abstract: We investigate the macroeconomic consequences of fluctuations in the effectiveness of the labor-market matching process with a focus on the Great Recession. We conduct our analysis in the context of an estimated medium-scale DSGE model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency (or mismatch shock). We find that this shock is not important for unemployment fluctuations in normal times. However, it plays a somewhat larger role during the Great Recession when it contributes to raise the actual unemployment rate by around 1.3 percentage points and the natural rate by around 2 percentage points. The mismatch shock is the dominant driver of the natural rate of unemployment and explains part of the recent shift of the Beveridge curve.
    Keywords: Search and matching frictions, Unemployment, Natural rates.
    JEL: E32 C51 C52
    Date: 2015–06
  2. By: Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
    Abstract: In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents' welfare. To this end we construct a small open economy model with housing loans denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that FCLs negatively affect the transmission of monetary policy. In contrast, their impact on the effectiveness of macroprudential policy is much weaker but positive. We also demonstrate that FCLs increase welfare when domestic interest rate shocks prevail and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a short term slowdown. JEL Classification: E32, E44, E58
    Keywords: DSGE models with banking sector, foreign currency loans, monetary and macroprudential policy
    Date: 2015–04
  3. By: Francesco Sergi (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: The purpose of the paper is to provide a methodological framework for a critical analysis of a specific class of macroeconomic models, namely the dynamic stochastic general equilibrium models (DSGE). We suggest some epistemological reflections to explore the underlying methodology and history of the DSGE models. To do this, we decided to rely on a literature review on the contributions about the notion of model and modelling in philosophy, history and sociology of sciences. Our approach tries to define, in an interdisciplinary way, a consistent methodology for dealing with a specific object. The review of this large literature has been organized around two complementary definitions of the object (“model” as concept, for the philosophy and history of sciences and “modelling” as a scientific practice, for the sociology of science) and around three fundamental questions (what is a model? how to build a model? what is the purpose of a model?). Starting from this review, we discuss the main elements which are consistent with an analysis of DSGE models, focusing in particular on intra- and interdisciplinary interactions, on the mechanisms of policy expertise and on the mediation between theories and data.
    Abstract: L'objectif du papier est de définir un cadre méthodologique pour une analyse critique d'une classe particulière de modèles macroéconomiques, les modèles d'équilibre général dynamique et stochastique (dynamic stochastic general equilibrium, DSGE). Il s'agit de mettre en évidence des pistes de réflexion épistémologique qui permettent de sonder la méthodologie et l'histoire sous-jacentes aux modèles DSGE. Pour atteindre cet objectif, nous nous appuyons sur une revue de littérature sur les modèles et la modélisation en philosophie, histoire et sociologie des sciences. Cette démarche qui essaie de déterminer, de façon interdisciplinaire une méthodologie apte à traiter un objet particulier. Le panorama du vaste corpus existant a été organisé autour de deux définitions complémentaires de l'objet (le « modèle » en tant que concept pour la philosophie et l'histoire des sciences, et la « modélisation » en tant que pratique scientifique pour la sociologie des sciences) et de trois problématiques structurantes (qu'est-ce qu'un modèle ? comment construit-on un modéle ? quelle est la fonction d'un modèle ?). A partir de cet état des lieux, nous discutons ensuite les axes de recherche pertinents pour une étude des DSGE, en se focalisant notamment sur l'interaction inter- et intradisciplinaire, sur les mécanismes de l'expertise et la logique de médiation entre théorie et données.
    Date: 2014–09
  4. By: Cuong Le Van (IPAG - Business School, VCREME - VanXuan Center of Research in Economics, Management and Environment - VanXuan Center of Research in Economics, Management and Environment, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Ngoc-Sang Pham (EPEE - Centre d'Etudes des Politiques Economiques - Université d'Evry-Val d'Essonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: We build an infinite-horizon dynamic deterministic general equilibrium model with imperfect markets (because of borrowing constraints), in which heterogeneous agents invest in capital or/and financial asset, and consume. There is a representative firm who maximizes its profit. Firstly, the existence of intertemporal equilibrium is proved even if aggregate capital is not uniformly bounded. Secondly, we study the interaction between the financial market and the productive sector. We also explore the nature of physical capital bubble and financial asset bubble as well.
    Date: 2014–08
  5. By: Levine, Paul; Lima, Diana
    Abstract: In the aftermath of the financial crisis, the role of monetary policy and macro-prudential regulation in promoting financial stability is under discussion. The old debate concerning whether monetary policy should respond to credit and asset price bubbles was revived, whereas macro-prudential regulation is being assessed as an alternative macroeconomic tool to deal with financial imbalances. The paper explores both sides of the debate in a New Keynesian framework with financial frictions by comparing the welfare and stabilisation impacts of distinct policy regimes. First, we investigate whether there is a welfare benefit from monetary policy leaning against financial instability. We show that monetary policy rules of this type perform better than conventional monetary rules. Second, by introducing macro-prudential regulation in the model, results from optimal policy analysis suggest also that there are welfare gains, even in the case in which monetary and macro-prudential authorities are independent and react to their own policy goal. JEL Classification: E30, E50, G28
    Keywords: DSGE, financial frictions, macro-prudential policy, monetary policy
    Date: 2015–04
  6. By: De Fiore, Fiorella; Uhlig, Harald
    Abstract: We present a DSGE model where firms optimally choose among alternative instruments of external finance. The model is used to explain the evolving composition of corporate debt during the financial crisis of 2008-09, namely the observed shift from bank finance to bond finance, at a time when the cost of market debt rose above the cost of bank loans. We show that the flexibility offered by banks on the terms of their loans and firms’ ability to substitute among alternative instruments of debt finance are important to shield the economy from adverse real effects of a financial crisis. JEL Classification: E32, E44, C68, G23
    Keywords: corporate debt, financial crisis, firms heterogeneity, risk shocks
    Date: 2015–02
  7. By: Fujiwara, Ippei (Keio University and Australian National University); Teranishi, Yuki (Keio University)
    Abstract: Do financial frictions call for policy cooperation? This paper investigates the implications of simple financial frictions, monopolistic banking together with staggered loan contracts, for monetary policy in open economies in the linear quadratic (LQ) framework. Welfare analysis shows that policy cooperation improves social welfare in the presence of such financial frictions. There also exist long-run gains from cooperation in addition to these by jointly stabilizing inefficient fluctuations over the business cycle, that are usually found in models with price rigidities. The Ramsey optimal steady states differ between cooperation and noncooperation. Such gains from cooperation arise irrespective of the existence of international lending or borrowing.
    JEL: E50 F41
    Date: 2015–04–01
  8. By: Azariadis, Costas (Federal Reserve Bank of St. Louis); Bullard, James B. (Federal Reserve Bank of St. Louis); Singh, Aarti (University of Sydney); Suda, Jacek (Narodowy Bank Polski)
    Abstract: We study optimal monetary policy at the zero lower bound. The macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). A second, small group of households only uses cash and cannot participate in the credit market. The monetary authority supplies currency to cash-using households in a way that changes the price level to provide for optimal risk-sharing in the private credit market and thus to overcome the NSCNC friction. For sufficiently large and persistent negative shocks the zero lower bound on nominal interest rates may threaten to bind. The monetary authority may credibly promise to increase the price level in this situation to maintain a smoothly functioning (complete) credit market. The optimal monetary policy in this model can be broadly viewed as a version of nominal GDP targeting.
    Keywords: Zero lower bound; forward guidance; quantitative easing; optimal monetary policy; life cycle economies; heterogeneous households; credit market participation; nominal GDP targeting.
    JEL: E4 E5
    Date: 2015–05–27
  9. By: Gomes, Sandra; Mendicino, Caterina
    Abstract: This paper explores the link between agent expectations and housing market dynamics. We focus on shifts in the fundamental driving forces of the economy that are anticipated by rational forward-looking agents, i.e. news shocks. Using Bayesian methods and U.S. data, we find that news-shock-driven-cycles account for a sizable fraction of the variability in house prices and other macroeconomic variables over the business cycle and have also contributed to run-ups in house prices over the last three decades. By exploring the link between news shocks and agent expectations, we show that house price growth was positively related to inflation expectations during the boom of the late 1970’s but negatively related to interest rate expectations during the mid-2000’s housing boom. JEL Classification: C50, E32, E44
    Keywords: Bayesian estimation, financial frictions, housing market, local identification, news shocks, survey expectations
    Date: 2015–04
  10. By: Luis Gonzalo Llosa; Venky Venkateswaran
    Abstract: We study the efficiency of equilibrium in a business cycle model where monopolistically competitive firms acquire costly information about aggregate fundamentals before making pricing and input decisions. We show that market power reduces the private value of information relative to its social value, causing too little investment in learning and inefficient cyclical fluctuations. Importantly, this is true even in an environment where the ex-post response to information is socially optimal. A leading example of this dichotomy between ex-post and ex-ante efficiency is an environment where firms choose labor input under uncertainty about aggregate productivity. When firms set nominal prices, on the other hand, their actions exhibit a inefficiently high sensitivity to private signals. The combination of this inefficiency in information use and market power makes the overall direction of the inefficiency in information acquisition ambiguous. Finally, we show that the standard full information policy response to market power-related distortions can reduce welfare under endogenous uncertainty. These results hold for different types of shocks (real and nominal) and for a general class of information acquisition technologies.
    Keywords: Incomplete information, Costly information, Externalities, Business cycles, Optimal policy
    JEL: D62 D82 E31 E32 E62
    Date: 2015–05
  11. By: Verónica Acurio Vásconez (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Gaël Giraud (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Florent Mc Isaac (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Ngoc-Sang Pham (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: The economic implications of oil price shocks have been extensively studied since the 1970s'. Despite this huge literature, no dynamic stochastic general equilibrium model was available that captures two well-known stylized facts: 1) the stagflationary impact of an oil price shock, together with 2) the influence of the energy productivity of capital on the depth and length of this impact. We build, estimate and simulate a New-Keynesian model with capital accumulation, which takes the case of an economy where oil is imported from abroad, and where these stylized facts can be accounted for. Moreover, the Bayesian estimation of the model on the US economy (1984-2007) suggests that the output elasticity of oil might have been above 10%, stressing the role of oil use in US growth at this time. Finally, our simulations confirm that an increase in energy efficiency significantly attenuates the effects of an oil shock —a possible explanation of why the third oil shock (1999-2008) did not have the same macro-economic impact as the first two ones.
    Abstract: Les conséquences économiques des chocs pétroliers ont été très étudiés depuis les années 1970. En dépit d'une abondante littérature, aucun modèle d'équilibre général dynamique stochastique n'était à ce jour disponible, qui captura les deux faits stylisés bien connus suivants : 1) l'impact stagflationniste d'un choc sur le prix du pétrole et 2) l'influence de la productivité énergétique du capital sur la profondeur et la longueur du dit impact. Nous construisons, estimons et simulons un modèle Néo-keynésien avec accumulation du capital, adapté à une économie importatrice de pétrole, où ces faits stylisés peuvent être retrouvés. De plus, l'estimation bayésienne du modèle sur les données des Etats-Unis (1984-2007) suggère que l'élasticité d'output du pétrole pourrait être supérieure à 10%, soulignant le rôle du pétrole dans la croissance des Etats-Unis sur cette période. Enfin, nos simulations confirment qu'une augmentation de l'efficacité énergétique atténue de manière significative les effets du choc —ce qui livre une explication possible au fait que le troisième choc pétrolier (1999-2008) n'a pas eu le même impact macro-économique que les deux premiers.
    Date: 2014–12
  12. By: Marianna Baggio; Luigi Mittone
    Abstract: The development and use of long-lived public goods involves more than one demographic generation, leaving the classic literature on voluntary provisions partially unfit to explain complex phenomena such as welfare systems, climate policies and major infrastructure projects. This paper proposes a model that explains how equilibrium is reached in a context where a public good is produced by one generation of individuals and the following generation reaps the benefits of it. Within this model the case of intergenerational public goods production is explained using a spillover rule, where a percentage of the public good produced in time t by experimental parents will integrate the endowment of their artifactual children in t+1. A cascade mechanism allows also for the rebirth of three generations of players, mimicking the biological and anthropological mechanisms of gene transmission and intergenerational altruism. Experimental evidence shows that subjects who are reminded of their lineage membership tend to contribute more compared to those who are not included in a dynastic model. More importantly, results show that the real dynastic background of individuals is a prominent influence in the levels of investment in public goods.
    Keywords: public goods, generations, intergenerational spillovers, intergenerational altruism, OLG.
    Date: 2015
  13. By: Christoffel, Kai; Schabert, Andreas
    Abstract: This paper examines monetary transmission and macroeconomic shocks in a medium scale macroeconomic model with costly banking estimated for euro area data. In addition to data on measures of real activity and prices, we include data on bank loans, loan rates, and reserves for the estimation of the model with Bayesian techniques. We find that loans and holdings of reserves affect banking costs to a small but significant extent. Furthermore, shocks to reserve holdings are found to contribute more to variations in the policy rate, inflation and output than shocks to the feedback rule for the policy rate. Hence, holdings of central bank money, which is typically neglected in the literature, plays a substantial role for macroeconomics dynamics. The analysis further shows that exogenous shifts in banking costs hardly play a role for fluctuations in real activity and prices, even during the recent financial crisis. JEL Classification: C54, E52, E32
    Keywords: Bayesian estimation, central bank money supply, costly banking, financial shocks
    Date: 2015–05
  14. By: Antoine Mandel (Axe Economie mathématique et jeux - CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Simone Landini (Socioeconomic Research Institute of Piedmont - Socioeconomic Research Institute of Piedmont); Mauro Gallegati (Universita' Politecnica delle Marche Dipartimento di Economia piazzale Martelli 8 60121 Ancona Italy - Universita' Politecnica delle Marche Dipartimento di Economia piazzale Martelli 8 60121 Ancona Italy); Herbert Gintis (Central European University - CEU - Central European University, Santa Fe Institute - Santa Fe Institute)
    Abstract: Within a general equilibrium framework a la Long and Plosser (1983), we investigate the dynamics emerging from the interactions of households and firms that are adaptive price setters and financially constrained. Adaptive price-setting behavior induces micro founded out-of-equilibrium dynamics along which agents become heterogeneous in terms of prices and wealth. The stringency of the financial constraints determine the regime into which the model settles: either an equilibrium one or a disequilibrium one conductive to financial fragility and aggregate volatility. In this setting , we investigate how the structure of the production network a↵ects the emergence of aggregate volatility from micro-level price and financial shocks, hence providing a dynamical counterpart to recent results of Acemoglu and al (2012).
    Date: 2015–02–21
  15. By: Bacchetta, Philippe; Perazzi, Elena; van Wincoop, Eric
    Abstract: This paper examines quantitatively the potential for monetary policy to avoid self-fulfilling sovereign debt crises. We combine a version of the slow-moving debt crisis model proposed by Lorenzoni and Werning (2014) with a standard New Keynesian model. We consider both conventional and unconventional monetary policy. Under conventional policy the central bank can preclude a debt crisis through inflation, lowering the real interest rate and raising output. These reduce the real value of the outstanding debt and the cost of new borrowing, and increase tax revenues and seigniorage. Unconventional policies take the form of liquidity support or debt buyback policies that raise the monetary base beyond the satiation level. We find that generally the central bank cannot credibly avoid a self-fulfilling debt crisis. Conventional policies needed to avert a crisis require excessive inflation for a sustained period of time. Unconventional monetary policy can only be effective when the economy is at a structural ZLB for a sustained length of time.
    Keywords: long-term debt; Monetary policy; Sovereign debt crises
    JEL: E52 E60 F34
    Date: 2015–05
  16. By: Hull, Isaiah (Research Department, Central Bank of Sweden)
    Abstract: Since the mid-1990s, many OECD countries have experienced a substantial in- crease in household indebtedness. Sweden, in particular, has seen indebtedness rise from 90% of disposable income in 1995 to 172% in 2014. The Swedish Financial Supervisory Authority (FSA) has identi ed mortgage amortization requirements as a potential instrument for reducing indebtedness; and has drafted guidelines that will intensify the rate and duration of amortization. In this paper, I charac- terize Swedish-style mortgage contracts, which dier substantially from U.S.-style contracts. I then evaluate the policy changes in an incomplete markets model with three types of debt and a novel mortgage contract speci cation that is cali- brated to match Swedish micro and macro data. I nd that intensifying the rate and duration of amortization is largely ineective at reducing indebtedness in a realistically-calibrated model. In the absence of implausibly large re nancing costs or tight restrictions on the maximum debt-service-to-income ratio, the policy im- pact is small in aggregate, over the lifecycle, and across employment statuses. These results may be relevant for other OECD countries, such as Norway and Canada, that have also not seen a reduction in house prices or indebtedness since the 2007 nancial crisis.
    Keywords: Mortgages; Amortization; Heterogeneous Agents; Incomplete Markets; Financial Regulation
    JEL: E44 G21 R21
    Date: 2015–04–01
  17. By: Jean-Marc Bonnisseau (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Lalaina Rakotonindrainy (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: We consider a pure exchange overlapping generations economy with finitely many commodities and consumers per period having possibly non-complete non transitive preferences. We provide a geometric and direct proof of the Balasko-Shell characterization of Pareto optimal allocation. To avoid some smoothness assumption, we replace the assumption on the curvature of the indifference surface by geometric properties of preferred sets. In particular, we use the notion of prox-regularity, introduced in variational analysis by Rockafellar and Poliquin. We provide preliminary results and explain how the multi-consumer case can be simplified by considering aggregate feasible Pareto improving transfer. We provide the proof and we show which assumptions are used for the "if" part and for the "only if" part of the criterion.
    Abstract: Nous considérons une économie d'échange pur à générations imbriquées, avec plusieurs biens et consommateurs par période, dont les préférences sont éventuellement non complètes et non transitives. Nous suivons les grandes lignes de la preuve fournie par Balasko et Shell pour caractériser les allocations Pareto optimales. Remplacer l'hypothèse sur la courbure de la surface d'indifférence par des propriétés géométriques des ensembles préférés permet d'éviter de toute hypothèse de différentiabilité. En particulier, nous utilisons la notion de prox-régularité, introduite en Analyse variationnelle par Rockafellar et Poliquin. Des résultats préliminaires sont fournis ainsi que les détails qui permettent de simplifier le cas de consommateurs multiples en considérant des transferts Pareto améliorants agrégés. La preuve met en évidence les hypothèses utilisées respectivement dans la condition nécessaire et la condition suffisante.
    Date: 2015–01

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