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on Dynamic General Equilibrium |
| By: | Jean-Christophe Poutineau (CREM, UMR CNRS 6211, University of Rennes 1, France); Gauthier Vermandel (CREM, UMR CNRS 6211, University of Rennes 1, France) |
| Abstract: | This paper evaluates the role of financial intermediaries on the extensive margin of activity. We build a DSGE model that combines the endogenous determination of the number of firms with financial frictions giving rise to the financial accelerator. This model is estimated on US data between 1993Q1 to 2012Q3. We get three main results. First, financial frictions play a key role as a transmission channel for monetary policy shocks to get a standard drop in the number of new firms following a restrictive monetary policy decision. Second, in contrast with real macroeconomic shocks (where investment in existing production lines and the creation of new firms move in the opposite direction), financial shocks have a cumulative eect on the two margins of activity, amplifying macroeconomic fluctuations. Third, the critical role of financial factors is mainly observed in the period corresponding to the creation of new firms. In the long run, the variance of the effective entry share is almost explained by a combination of supply shocks. |
| Keywords: | Extensive Margin; Financial Frictions; Financial Accelerator; DSGE model; Bayesian estimation |
| JEL: | E31 E32 E52 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201510&r=dge |
| By: | Ungerer, Christoph T. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Expansionary monetary policy can increase household leverage by stimulating housing liquidity. Low mortgage rates encourage buyers to enter the housing market, raising the speed at which properties can be sold. Because lenders can resell seized foreclosure inventory at lower cost in such a hot housing market, ex-ante they are comfortable financing a larger fraction of the house purchase. Consistent with this mechanism, this study documents empirically that both the housing sales rate and loan-to-value ratios increase after expansionary monetary policy. Calibrating a New Keynesian macroeconomic model to fit the response of housing liquidity to monetary policy, the interaction between credit frictions and housing market search frictions generates endogenous movements in the loan-to-value ratio which amplify the economy's response to monetary policy. |
| Keywords: | Credit frictions; housing market; monetary policy; search frictions |
| JEL: | E32 E44 E52 R21 |
| Date: | 2015–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-48&r=dge |
| By: | Kopoin, Alexandre; Moran, Kevin; Paré, Jean-Pierre |
| Abstract: | Recent empirical evidence suggests that the state of banks’ balance sheets plays an important role in the transmission of monetary policy and other shocks. This paper presents an open-economy DSGE framework with credit market frictions and an active bank capital channel to assess issues regarding the transmission of domestic and foreign shocks. The theoretical framework includes the financial accelerator mechanism developed by Bernanke et al. (1999), the bank capital channel and the exchange rate channel. Our simulations show that the exchange rate channel plays an amplification role in the propagation of shocks. Furthermore, with these three channels present, domestic and foreign shocks have an important quantitative role in explaining domestic aggregates like output, consumption, inflation and total bank’s lending. In addition, results suggest that economies whose banks remain well-capitalized when affected by adverse shock experience less severe downturns. Our results highlight the importance of bank capital in an international framework and can be used to inform the worldwide debate over banking regulation. |
| Keywords: | Bank capital; credit channel; exchange rate channel; monetary policy. |
| JEL: | E44 E52 G21 |
| Date: | 2014–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:65512&r=dge |
| By: | Sören Radde; Cristina Checherita-Westphal; Wei Cui; |
| Abstract: | Banks in the euro area typically hold a large amount of government debt in their bond portfolios, which are valued both for their low credit risk and high liquidity. During the sovereign debt crisis, these characteristics of government debt were severely impaired in stressed euro area countries. In order to understand the transmission channels of stress from government debt markets to the real economy, we augment a standard dynamic macroeconomic model with a banking sector and a market for government debt characterized by search frictions. A sovereign solvency shock modelled as a haircut on government bonds is introduced to study the interaction of sovereign credit and liquidity risk. As banks react to this shock by rebalancing towards highly liquid short-run assets, such as central bank deposits, demand for government bonds collapses, which endogenously worsens their market liquidity. Thus, a sovereign liquidity risk channel from government bond markets to the real sector emerges. Endogenous government bond liquidity negatively affects the funding conditions of the fiscal sector, tightens financing constraints in the banking sector and lowers investment and output. The model is able to match a number of stylised facts regarding the behaviour of sovereign debt markets during the euro area sovereign debt crisis, such as depressed turnover rates and rising bid-ask spreads. |
| Keywords: | liquidity frictions; search; sovereign risk channel; sovereign-bank nexus |
| JEL: | G12 E41 E44 E63 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2015-032&r=dge |
| By: | Lancia, Francesco (University of Vienna); Russo, Alessia (Dept. of Economics, University of Oslo) |
| Abstract: | This paper presents a dynamic politico-economic theory of fiscal policy to explain the simultaneous existence of public education and pensions in modern democracies. The driving force of the model is the intergenerational conflict over the allocation of the public budget. Successive generations of voters choose fiscal policies through repeated elections. The political power of elderly voters creates the motive for adults to support public investment in the human capital of future generations, since it expands future pension possibilities. We characterize the Markov perfect equilibrium of the voting game in a small open economy. The equilibrium can reproduce qualitative and quantitative features of intergenerational fiscal policies in modern economies. |
| Keywords: | Intergenerational conflict; Markov perfect equilibrium; pension; public education; repeated voting; small open economy |
| JEL: | D72 E62 H23 H30 H53 |
| Date: | 2015–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2015_001&r=dge |
| By: | Agovino, Massimiliano; Ferrara, Maria |
| Abstract: | The aim of this paper is to investigate the effects of an increase in civilian disability pensions on key macroeconomic variables. In particular, the focus is on consumption of households with at least one disabled member. The analysis is performed simulating a DSGE model using Italian data. The exercise is implemented through a reduction of public spending. Results show that an increase of 0.1% of civilian disability pensions ensures that households with disabled member exit from poverty status and also generates an increase of their consumption. Moreover, we observe a positive indirect effect on consumption of households without disabled member. |
| Keywords: | Disabilità, Povertà, Politica fiscale |
| JEL: | E62 I14 J14 |
| Date: | 2015–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:65616&r=dge |
| By: | Kopoin, Alexandre |
| Abstract: | This paper studies the link between cross-border banking activities and the international propagation of real and financial shocks. We develop a two-country DSGE model with a bank capital channel and a financial accelerator, in which banks grant loans to domestic as well as to foreign firms. The model economy is calibrated to data from the U.S. and Canada. Our results suggest that following a positive technology shock and a tightening of home monetary policy, the existence of cross-border banking activities tends to amplify the transmission channel in both the domestic and the foreign country. However, cross-border banking activities tend to weaken the impact of shocks on foreign and home consumption because of the cross-border saving possibility between the two countries. Finally, our simulations suggest that under cross-border banking, correlations between macroeconomic variables of both countries become greater than in the absence of international banking activities. Overall, our results show sizable spillover effects of cross-border banking on macroeconomic dynamics and suggest cross border banking is an important source of the synchronization of business cycles between the U.S. and Canada. |
| Keywords: | Cross-border banking; bank capital, interest rate and exchange rate channels; business cycle synchronization. |
| JEL: | E44 E52 G21 |
| Date: | 2015–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:65515&r=dge |
| By: | Marc-Andre Letendre; Joel Wagner |
| Abstract: | We add agency costs as in Carlstrom and Fuerst (1997) into a two-country, two-good international business cycle model. In our model changes in the relative price of investment arise endogenously. Despite the fact that technology shocks are uncorrelated across countries the relative price of investment is positively correlated across countries in our model, much as it is in detrended US-Europe data. We also find that financial frictions tend to increase the volatility of the terms of trade and the international correlations of consumption, hours worked, output and investment. We then compare this model to an alternative model that also includes risk shocks a la Christiano et al. (2014). We use credit spread data (for the US) to calibrate the AR(1) process for risk shocks. We find that risk shocks are too small to significantly impact the model's dynamics. |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2015-09&r=dge |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | This paper uses a small model in the Cowles Commission (CC) tradition to examine the limits of aggregate data. It argues that more can be learned about the macroeconomy following the CC approach than the reduced form and VAR approaches allow, but less than the DSGE approach tries to do. |
| Keywords: | Aggregate data, Macro models |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2011&r=dge |
| By: | Paolo Melindi-Ghidi (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Willem Sas (Center for Economic Studies (CES), KU Leuven) |
| Abstract: | Better health not only boosts longevity in itself, it also postpones the initial onset of disability and chronic infirmity to a later age. In this paper we examine the potential effects of such 'compression of morbidity' on pensions, and introduce a health-dependent dimension to the standard pay-as-you-go (PAYG) pension scheme. Studying the long-term implications of such a system in a simple overlapping generations framework, we find that an increase in public health investment can augment capital accumulation in the long run. Because of this, the combination of health investment with a partially health-dependent PAYG scheme may in fact outperform a purely PAYG system in terms of lifetime welfare. |
| Keywords: | health investment, disability pension, long-term care, PAYG pension system, OLG model |
| JEL: | I15 J26 O41 |
| Date: | 2015–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1525&r=dge |
| By: | Hiroaki Miyamoto (University of Tokyo) |
| Abstract: | The share of non-regular employment has been increasing in many developed countries during the past two decades. The objective of this paper is to study a cause of the upward trend in non-regular employment by focusing on productivity growth. Data from Japan shows that productivity growth reduces both unemployment and the proportion of non-regular workers to total employed workers. In order to study the impact of long-run productivity growth on unemployment and non-regular employment, I develop a search and matching model with disembodied technological progress and two types of jobs, regular and non-regular jobs. The numerical analysis demonstrates that faster growth reduces the share of non-regular employment and the unemployment rate, which is consistent with empirical facts. |
| Keywords: | Growth, Unemployment, Non-regular employment, Search and matching model |
| JEL: | E24 J64 O40 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:kch:wpaper:sdes-2015-20&r=dge |
| By: | Jordi Galí |
| Abstract: | The unemployment rate in the euro area appears to contain a significant nonstationary component, suggesting that some shocks have permanent effects on that variable. I explore possible sources of this nonstationarity through the lens of a New Keynesian model with unemployment, and assess their empirical relevance. |
| Keywords: | wage stickiness, New Keynesian model, unemployment ‡uctuations, Phillips curve, insider-outsider model |
| JEL: | E24 E31 E32 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:837&r=dge |
| By: | Findeisen, Sebastian (University of Mannheim); Sachs, Dominik (University of Cologne) |
| Abstract: | The total social benefits of college education exceed the private benefits because the government receives a share of the monetary returns in the form of income taxes. We study the policy implications of this fiscal externality in an optimal dynamic tax framework. Using a variational approach we derive a formula for the revenue effect of an increase in college education subsidies and for the excess burden of income taxation caused by the college margin. We also show how the optimal nonlinear income tax problem is altered by the college margin. Our modeling assumptions are strongly guided by the recent structural labor literature on college education. The model incorporates multidimensional heterogeneity, idiosyncratic risk and borrowing constraints. The model matches key empirical results on college enrollment patterns, returns to education and enrollment elasticities. Quantitatively, we find that a marginal increase in college subsidies in the US is at least 70 percent self-financing through the net-present value increase in future tax revenue. When targeting this increase to children in the lowest parental income tercile, it is even up to 165 percent self-financing. The excess burden of income taxation is only slightly altered by the college margin and therefore the optimal Mirrleesian income tax schedule is barely affected as well, in particular if subsidies are set at their optimal level. |
| Keywords: | optimal taxation, college subsidies, college enrollment, tax reforms |
| JEL: | H21 H23 I22 I24 I28 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9171&r=dge |
| By: | Chihiro Inaba (Department of Economics, Kobe University); Katsufumi Fukuda (Graduate School of Social Science, Hiroshima University, Japan and Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan) |
| Abstract: | We construct a dynamic general-equilibrium North-South growth model with international trade with both homogenous and heterogeneous firms, endogenous northern economic growth, and unemployment. Unemployment is emerged from the imbalance between the endogenous labor supply and the firms' labor demand under binding the minimum wage policy. The north produces two goods, high-tech good and low-tech good, while the South produces only low-tech good by the scarcity of technology. Both goods are traded between the countries. The production of the high-tech good needs R&D activity for variety creation, which is a source of economic growth. In this setting, we analyze the southern policy change that increases the southern minimum wage, and show that the increase in the southern minimum wage affects the structure of international trade and the northern growth rate and unemployment. |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2015-29&r=dge |
| By: | De Pooter, Michiel (Board of Governors of the Federal Reserve System (U.S.)); Martin, Robert F. (Board of Governors of the Federal Reserve System (U.S.)); Pruitt, Seth (Arizona State University) |
| Abstract: | To "ensure depth and liquidity," the European Central Bank in 2010 and 2011 repeatedly intervened in sovereign debt markets through its Securities Markets Programme. These purchases provide a unique natural experiment for testing the effects of large-scale asset purchases on risk premia arising from liquidity concerns. To explore how official intervention influences liquidity premia, we develop a search-based asset-pricing model. Consistent with our model's predictions, we find statistically and economically significant stock and flow effects on sovereign bonds' liquidity premia in response to official purchases. |
| Keywords: | Securities Markets Programme; European Central Bank; bond; liquidity risk; search and matching |
| JEL: | D83 E43 E58 G12 |
| Date: | 2015–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1138&r=dge |