|
on Dynamic General Equilibrium |
|
Issue of 2015‒06‒27
nineteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Thierry Betti; Thomas Coudert |
| Abstract: | We develop a new-Keynesian model with a two-sector search and matching labor market framework. We investigate the first and second order effects of fiscal policy on labor market and on output. The model includes four fiscal instruments: a labor income tax, a social protection tax paid by firms, public wage and public vacancies. First-order simulations of the model indicate that whatever instrument is used, fiscal expansion significantly increases total employment and reduce unemployment. We explicit the different transmission channels at work. The main contribution is to use a second-order approximation of the model to investigate the effects of fiscal shocks for two states of the economy: a low unemployment state (6%) and a high unemployment state (12%). For the four fiscal instruments, response of employment is greater when the steady-state unemployment rate is high. We also emphasize a new channel for explaining a larger output fiscal multiplier in periods of economic downturn: the wage channel that plays a crucial role for explaining the non-linear effects of fiscal policy. |
| Keywords: | Labor Market Search, Wage Bargaining, PublicWage, Business Cycle, Fiscal Policy, Second Order. |
| JEL: | E62 J38 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2015-16&r=dge |
| By: | Enrique G. Mendoza (University of Pennsylvania and NBER); Linda L. Tesar (University of Michigan and NBER); Jing Zhang (Federal Reserve Bank of Chicago) |
| Abstract: | What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore cross-country spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity utilization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong crosscountry externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a "race to the bottom" in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria. |
| Keywords: | fiscal austerity, tax, public debt |
| JEL: | E6 E62 F34 F42 H6 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:644&r=dge |
| By: | Paolo Gelain (Norges Bank (Central Bank of Norway)); Kevin J. Lansing (Federal Reserve Bank San Francisco); Gisle J. Natvik (BI Norwegian Business School) |
| Abstract: | We use a simple quantitative asset pricing model to "reverse-engineer" the sequences of stochastic shocks to housing demand and lending standards that are needed to exactly replicate the boom-bust patterns in U.S. household real estate value and mortgage debt over the period 1995 to 2012. Conditional on the observed paths for U.S. disposable income growth and the mortgage interest rate, we consider four different specifications of the model that vary according to the way that household expectations are formed (rational versus moving average forecast rules) and the maturity of the mortgage contract (one-period versus long-term). We find that the model with moving average forecast rules and long-term mortgage debt does best in plausibly matching the patterns observed in the data. Counterfactual simulations show that shifting lending standards (as measured by a loan-to-equity limit) were an important driver of the episode while movements in the mortgage interest rate were not. All models deliver rapid consumption growth during the boom, negative consumption growth during the Great Recession, and sluggish consumption growth during the recovery when households are deleveraging. |
| Keywords: | Housing bubbles, Mortgage debt, Borrowing constraints, Lending standards, Macroprudential policy |
| JEL: | D84 E32 E44 G12 O40 R31 |
| Date: | 2015–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2015_11&r=dge |
| By: | Taha Choukhmane (Yale University); Nicolas Coeurdacier (Département d'économie); Keyu Jin (London School of Economics and Political Science (LSE)) |
| Abstract: | We investigate how the `one-child policy' has impacted China's household saving rate and human capital in the last three decades. In a life cycle model with endogenous fertility, intergenerational transfers and human capital accumulation, we show how fertility restrictions provide incentives for households to increase their offspring's education and to accumulate financial wealth in expectation of lower support from their children. Our quantitative OLG model calibrated to household level data shows that the policy significantly increased the human capital of the only child generation and can account for a third to 60% of the rise in aggregate savings. Equally important, it can capture much of the distinct shift in the level and shape of the age-saving profile observed from micro-level data estimates. Using the birth of twins (born under the one child policy) as an exogenous deviation from the policy, we provide an empirical out-of-sample check to our quantitative results; estimates on savings and education decisions are decidedly close between model and data. |
| Keywords: | Life Cycle Savings, Fertility, Human Capital, Intergenerational Transfers |
| JEL: | E21 D10 D91 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/5e8993t1rs83t9os9ctp26bhfv&r=dge |
| By: | Jess Benhabib; Xuewen Liu; Pengfei Wang |
| Abstract: | This paper studies how financial information frictions can generate sentiment-driven fluctuations in asset prices and self-fulfilling business cycles. In our model economy, exuberant financial market sentiments of high output and high demand for capital increase the price of capital, which signals strong fundamentals of the economy to the real side and consequently leads to an actual boom in real output and employment. The model further derives implications for asymmetric non-linear asset prices and for economic contagion and co-movement across countries. In the extension to the dynamic OLG setting, our model demonstrates that sentiment shocks can generate persistent output, employment and business cycle fluctuations, and offers some new implications for asset prices over business cycles. |
| JEL: | E02 E44 G01 G20 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21294&r=dge |
| By: | Diana Alessandrini (Auburn University); Stephen Kosempel (Department of Economics and Finance, University of Guelph); Thanasis Stengos (Department of Economics and Finance, University of Guelph) |
| Abstract: | This paper studies hours worked volatility and the cyclicality of human capital investments by embedding a Ben-Porath life-cycle model of human capital accumulation into an RBC setting. Agents differ across two dimensions: age and productivity in learning. Our results show that individuals invest more in human capital during economic downturns. However, human capital accumulation is more counter-cyclical for young and low-productivity individuals because they face a lower opportunity cost of education and a higher marginal product of human capital. These results are confirmed empirically using US data from the Current Population Survey and the American Time Use Survey. In addition, the paper contributes to the RBC literature by showing that the modelÕs business cycle properties, in particular hours worked volatility, are sensitive to assumptions of heterogeneity. Introducing heterogeneity in productivity increases the volatility of aggregate hours worked and changes the life-cycle profile for hours volatility to better match the data. |
| Keywords: | hours worked volatility; human capital accumulation; business cycles; heterogeneous agents |
| JEL: | J22 J24 E32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2014-07&r=dge |
| By: | Zsofia Barany (Département d'économie); Nicolas Coeurdacier (Département d'économie); Stéphane Guibaud (Département d'économie) |
| Abstract: | The neoclassical growth model predicts large capital flows towards fast-growing emerging countries. We show that incorporating fertility and longevity into a lifecycle model of savings changes the standard predictions when countries differ in their ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers capital flows from emerging to developed countries, and countries’ current account positions respond to growth adjusted by current and expected demographic composition. Data on international capital flows are broadly supportive of the theory. The fact that fast-growing emerging countries are also aging faster, while having less developed credit markets and pension systems, explains why they are more likely to export capital. Our quantitative multi-country overlapping generations model explains a significant fraction of the patterns of capital flows, across time and across developed and emerging countries. |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/5402sfihji9vea8rb66cd9nphe&r=dge |
| By: | Guerrieri, Luca (Board of Governors of the Federal Reserve System (U.S.)); Iacoviello, Matteo (Board of Governors of the Federal Reserve System (U.S.)); Covas, Francisco (Board of Governors of the Federal Reserve System (U.S.)); Driscoll, John C. (Board of Governors of the Federal Reserve System (U.S.)); Kiley, Michael T. (Board of Governors of the Federal Reserve System (U.S.)); Jahan-Parvar, Mohammad (Board of Governors of the Federal Reserve System (U.S.)); Queraltó, Albert (Board of Governors of the Federal Reserve System (U.S.)); Sim, Jae W. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | The macro spillover effects of capital shortfalls in the financial intermediation sector are compared across five dynamic equilibrium models for policy analysis. Although all the models considered share antecedents and a methodological core, each model emphasizes different transmission channels. This approach delivers "model-based confidence intervals" for the real and financial effects of shocks originating in the financial sector. The range of outcomes predicted by the five models is only slightly narrower than confidence intervals produced by simple vector autoregressions. |
| Keywords: | Bank losses; banks; capital requirements; DSGE models |
| JEL: | E42 E44 E47 |
| Date: | 2015–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-44&r=dge |
| By: | François Langot (GAINS-TEPP-IRA - Université du Maine, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, Banque de France - Banque de France, IZA - Institute for the Study of Labor); Alessandra Pizzo (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, Banque de France - Banque de France) |
| Abstract: | We develop a balanced growth model with labor supply and search and matching frictions in the labor market to study the impact of economic policy variables on the two margins which constitute the (total) labor input: the extensive one (the rate of employment) and the intensive one (the hours worked per worker). We show that the dynamics of the taxes have an impact mainly on the hours worked while labor market institutions have a large influence on the rate of employment. However, our findings underline that there is an interaction between the two margins. The model is tested on four countries (US, France, Germany and UK) which experiment different tax and labor market dynamics since the sixties. Using this structural approach, we can then perform counterfactual experiments about the evolution of the policy variables and to compare welfare levels implied by policy changes. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01164076&r=dge |
| By: | Steven Lugauer (Department of Economics, University of Notre Dame); Jinlan Ni (University of Nebraska at Omaha); Zhichao Yin (Southwestern University of Finance and Economics) |
| Abstract: | This paper examines the impact of family size on household saving. We first study a theoretical life-cycle model that includes finite lifetimes and saving for retirement and in which parents care about the consumption of their dependent children. The model implies a negative relationship between the number of dependent children in the family and the household’s saving rate. Then, we test the model’s implications using a new data set on household finances in China. We use the differential enforcement of the one-child policy across counties to address the endogeneity between household saving and fertility decisions within a standard two-stage least squares Tobit regression. We find that Chinese families with fewer dependent children have significantly higher saving rates. The regressions also indicate that saving rates vary with age and tend to be higher for households with more workers, higher education, better health, and more assets. |
| Keywords: | China, Household Saving, Demographics, Overlapping Generations |
| JEL: | D12 D91 E21 J11 O12 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:nod:wpaper:023&r=dge |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Alessia Paccagnini (Department of Economics, Università degli Studi Milano - Bicocca); Charles Rahal (Department of Economics, University of Birmingham) |
| Abstract: | We propose a comparison between a group of nested and non-nested atheoretical and theoretical models in forecasting the inflation rate for South Africa, an inflation-targeting country. In a pseudo real-time environment, our results show that for shorter horizons, the atheoretical models, such as Vector Error Correction Models, with and without factors, perform better, while for longer horizons, theoretical (DSGE based) models outperform their competitors. |
| Keywords: | Inflation, South Africa, Structural, Atheoretical, Factors, DSGE |
| JEL: | C11 C32 C52 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201547&r=dge |
| By: | Findeisen, Sebastian (University of Mannheim); Sachs, Dominik (University of Cologne) |
| Abstract: | We analyze optimal taxation of labor and capital income in a life-cycle framework with idiosyncratic income risk. We provide a novel decomposition of labor income tax formulas into a redistribution and an insurance component. The latter is independent of the social welfare function and determined by the degree of income risk and risk aversion. The optimal linear capital tax is non-zero and trades off redistribution and insurance against savings distortions. Our quantitative results reveal that the insurance component contributes significantly to optimal labor tax rates and provides an informative lower bound on optimal taxes: even for welfare functions that do not value redistribution, marginal tax rates are positive for all income levels. Optimal capital taxes are significant and yield sizable welfare gains; in particular if labor income taxes are suboptimal. |
| Keywords: | optimal taxation, capital taxation, redistribution, insurance |
| JEL: | H21 H23 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9123&r=dge |
| By: | Findeisen, Sebastian; Sachs, Dominik |
| Abstract: | We analyze optimal taxation of labor and capital income in a life-cycle framework with idiosyncratic income risk. We provide a novel decomposition of labor income tax formulas into a redistribution and an insurance component. The latter is independent of the social welfare function and determined by the degree of income risk and risk aversion. The optimal linear capital tax is non-zero and trades off redistribution and insurance against savings distortions. Our quantitative results reveal that the insurance component contributes significantly to optimal labor tax rates and provides an informative lower bound on optimal taxes: even for welfare functions that do not value redistribution, marginal tax rates are positive for all income levels. Optimal capital taxes are significant and yield sizable welfare gains; in particular if labor income taxes are suboptimal. |
| Keywords: | Capital Taxation; Insurance; Optimal Taxation; Redistribution |
| JEL: | H21 H23 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10668&r=dge |
| By: | Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw); Krzysztof Makarski (National Bank of Poland; Warsaw School of Economics); Joanna Tyrowicz (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland); Marcin Waniek (University of Warsaw) |
| Abstract: | We propose a politically feasible instrument for a nearly optimal transition from a pay-as-you-go to a funded scheme in a defined contribution pension system. It consists of compensating the transition generations in the form of pension benefits indexation more generous than would have prevailed in a clean DC system. Thus, this instrument allows to smoothen the welfare costs of transition over future generations via some small implicit debt. Our instrument proves robust to a number of parametric and modeling choices. |
| Keywords: | defined contribution, pay-as-you-go, pre-funded, pension system |
| JEL: | H55 E17 C60 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2015-22&r=dge |
| By: | Silvestrini, Andrea; Zaghini, Andrea |
| Abstract: | We examine the inter-linkages between financial factors and real economic activity. We review the main theoretical approaches that allow financial frictions to be embedded into general equilibrium models. We outline, from a policy perspective, the most recent empirical papers focusing on the propagation of exogenous shocks to the economy, with a particular emphasis on works dealing with time variation of parameters and other types of nonlinearities. We then present an application to the analysis of the changing transmission of financial shocks in the euro area. Results show that the effects of a financial shock are time-varying and contingent on the state of the economy. They are of negligible importance in normal times but they greatly matter in conditions of stress. |
| Keywords: | financial crisis,nonlinearities,financial shocks |
| JEL: | C32 E32 E44 E58 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:505&r=dge |
| By: | Galo Nuño (Banco de España); Carlos Thomas (Banco de España) |
| Abstract: | We investigate the trade-offs between price stability and the sustainability of sovereign debt, using a small open economy model where the government issues nominal defaultable debt and chooses fiscal and monetary policy under discretion. Inflation reduces the real value of outstanding debt, thus making it more sustainable; but it also raises nominal yields and entails direct welfare costs. We compare this scenario with a situation in which the government gives up the ability to deflate debt away, e.g. by issuing foreign currency debt or joining a monetary union with an anti-inflationary stance. We find that the benefits of giving up this adjustment margin outweigh the costs, both for our preferred calibration and for a wide range of parameter values. |
| Keywords: | monetary-fiscal interactions, discretion, sovereign default, continuous time, optimal stopping |
| JEL: | E5 E62 F34 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1517&r=dge |
| By: | Jana Hromcová (Departament d’Economia Aplicada, Universitat Autonoma de Barcelona); Pablo Agnese (yFH Düsseldorf and IZA, Department of Business Studies) |
| Abstract: | We analyze the e¤ects of low-skill o¤shoring on welfare. In the context of a matching model with di¤erent possible equilibria, we discuss two alternative policies that could potentially outweigh the negative welfare e¤ects of o¤shoring, namely, a change of the unemployment bene?ts and the ?exibilization of the labor market. Our calibrations for the German economy suggest that the ?exibilization of the labor market can bring low-skill workers to pre-o¤shoring welfare levels by slightly reducing the vacancy costs, something that cannot be accomplished by meddling with the unemployment bene?ts scheme. In addition, we ?nd that a full compensation can be achieved by an upgrading of low-skill workers, its size depending on the type of equilibrium involved. In sum, our analysis gives support to ?exibilization and upgrading by education as best therapies for o¤shoring. |
| Keywords: | Offshoring, Welfare, Unemployment bene?ts, Labor Market Flexibility, Upgrading. |
| JEL: | J68 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea1505&r=dge |
| By: | Longhi, Simonetta (ISER, University of Essex) |
| Abstract: | This paper analyses differences between unemployed and employed job seekers in job finding rates and in the quality of the job found. Compared to the unemployed, employed job seekers have a smaller pool of job offers that they consider acceptable; this leads to lower job finding rates but better quality jobs. Differences in job quality are tiny when unobserved heterogeneity and selection into accepting a job are accounted for. Hence, differences are mostly due to behaviour of unemployed people rather than negative signaling or employer discrimination. |
| Keywords: | on-the-job search, unemployment, job-finding rate, job quality |
| JEL: | J01 J20 J29 J62 J64 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9112&r=dge |
| By: | Galo Nuño (Banco de España); Cristiana Belu Manescu (European Commission) |
| Abstract: | The aim of this paper is to analyse the impact of the so-called «shale oil revolution» on oil prices and economic growth. We employ a general equilibrium model of the world oil market in which Saudi Arabia is the dominant firm, with the rest of the producers as a competitive fringe. Our results suggest that most of the expected increase in US oil supply due to the shale oil revolution has already been incorporated into prices and that it will produce an additional increase of 0.2 percent in the GDP of oil importers in the period 2010-2018. We also employ the model to analyse the collapse in oil prices in the second half of 2014 and conclude that it was mainly due to positive unanticipated supply shocks. |
| Keywords: | Saudi Arabia, general equilibrium, shale oil |
| JEL: | Q41 Q47 E17 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1518&r=dge |