nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒08‒19
39 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Transition and capital misallocation: the Chinese case By Damien Cubizol
  2. Credit imperfections, labor market frictions and unemployment: a DSGE approach By Imen Ben Mohamed; Marine Salès
  3. Financial Intermediation and Capital Reallocation By Kai Li; Fang Yang; Hengjie Ai
  4. Wealth Inequality and Social Mobility By Mi Luo; Alberto Bisin; Jess Benhabib
  5. External Shocks, Financial Volatility and Reserve Requirements in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  6. Monetary Policy and the Redistribution Channel By Adrien Auclert
  7. Disinflation and Inequality in a DSGE monetary model: A Welfare Analysis By Maria Ferrara; Patrizio Tirelli
  8. Fiscal Multipliers in the 21st Century By Per Krusell; Laurence Malafry; Hans Holter; Pedro Brinca
  9. Employment-Based Health Insurance and Aggregate Labor Supply By Zhigang Feng; Kai Zhao
  10. Worker Mobility in a Search Model with Adverse Selection By Leo Kaas; Carlos Carrillo-Tudela
  11. Optimal Income Taxation with Asset Accumulation By Abraham, Arpad; Koehne, Sebastian; Pavoni, Nicola
  12. Optimal Taxation with Endogenous Default under Incomplete Markets By Demian Pouzo; Ignacio Presno
  13. Financial Shocks and Labor Market Fluctuations By Francesco Zanetti
  14. Fertility, Longevity and International Capital Flows By Zsofia Barany; Nicolas Coeurdacier; Stéphane Guibaud
  15. Government Spending at the Zero Lower Bound Desirable? By Florin Bilbiie; Tommaso Monacelli; Roberto Perotti
  16. Intersectoral Linkages, Diverse Information, and Aggregate Dynamics in a Neoclassical Model By Ryan Chahrour; Manoj Atolia
  17. Evaluating UK point and density forecasts from an estimated DSGE model: the role of off-model information over the financial crisis By Fawcett, Nicholas; Koerber, Lena; Masolo, Riccardo; Waldron, Matthew
  18. Phillips curves with observation and menu costs By Fernando Alvarez; Francesco Lippi; Luigi Paciello
  19. Income tax and retirement schemes By Philippe Choné; Guy Laroque
  20. Mortgages and Monetary Policy By Roman Sustek; Finn Kydland; Carlos Garriga
  21. ITQs, Firm Dynamics and Wealth Distribution: Does full tradability increase inequality? By Da Rocha Alvarez, Jose Maria; Sempere, Jaume
  22. Can civilian disability pensions overcome the poverty issue? A DSGE analysis for Italian data By Agovino, Massimiliano; Ferrara, Maria
  23. Trading Fees and Slow-Moving Capital By Adrian Buss; Bernard Dumas
  24. Wage Risk and the Value of Job Mobility in Early Employment Careers By Liu, Kai
  25. Financial Crises and Systemic Bank Runs in a Dynamic Model of Banking By Roberto Robatto
  26. Clearing Up the Fiscal Multiplier Morass: Prior and Posterior Analysis By Eric M. Leeper; Nora Traum; Todd B. Walker
  27. Geographical mobility and the labour market By Vives Coscojuela, Cecilia
  28. The Optimal Tradeoff Between Consumption Smoothing and Macroprudential Regulation By Jean-Paul L'Huillier; Facundo Piguillem; Jean Flemming
  29. US Monetary and Fiscal Policies - conflict or cooperation? By Xiaoshan Che; Eric M. Leepe; Campbell Leith
  30. Macroeconomic Effects of Banking Sector Losses across Structural Models By Luca Guerrieri; Matteo Iacoviello; Francisco Covas; John C. Driscoll; Mohammad Jahan-Parvar; Michael Kiley; Albert Queraltoy; Jae Sim
  31. Self-Fulfilling Unemployment Crises By Javier Bianchi
  32. Long-lasting consequences of the European crisis By Juan F. Jimeno
  33. A Model of Secular Stagnation By Gauti B. Eggertsson; Neil R. Mehrotra
  34. Long-run effects of capital market integration using OLG model By Philippe Darreau; François Pigalle
  35. Equilibrium Corporate Finance and Intermediation By Piero Gottardi; Guido Ruta; Alberto Bisin
  36. Phases of Global Liquidity, Fundamentals News, and the Design of Macroprudential Policy By Javier Bianchi; Enrique G. Mendoza
  37. Testing macro models by indirect inference: a survey for users By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael; Xu, Yongdeng
  38. International R&D Spillovers and Asset Prices By Ana Maria Santacreu; Federico Gavazzoni
  39. Infnite-Horizon Deterministic Dynamic Programming in Discrete Time: A Monotone Convergence Principle By Takashi Kamihigashi; Masayuki Yao

  1. By: Damien Cubizol (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS)
    Abstract: This paper addresses the allocation puzzle of capital flows and privatization in emerging countries in transition. It demonstrates that the allocation of household savings to State-Owned Enterprises (SOEs), and not to the increasing share of private firms, solves both the allocation puzzle of capital flows and the drop in consumption in China. The contribution is to explain these two elements in a dynamic general equilibrium model with TFP growth that differentiates FDI and financial capital. In addition to other frictions, public banks and SOEs have the crucial role in capital misallocation by misdirecting household savings. It modifies firms' labor and capital intensiveness, creates shifts in savings accumulation, and households satisfy the large cheap labor demand coupled with low returns on their savings. With a calibration adapted to the Chinese case and deterministic shocks, the model also matches to a large extent the data for a variety of stylized facts over the last 30 years.
    Date: 2015–07–16
  2. By: Imen Ben Mohamed (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Marine Salès (ENS Cachan - École normale supérieure - Cachan)
    Abstract: We construct a new-Keynesian DSGE model, integrating sticky prices in goods market and frictions in labor and credit markets. A search and matching process in the labor market and a costly state verification framework in the credit market are introduced. Capital spending, vacancy posting costs and wage bill need to be paid in advance of production and thus require external financing in a frictional credit market. According to our theoretical model, we find that the procyclicality of the risk premium impacts the vacancy posting decision, the wage and unemployment levels in the economy. Credit market frictions may be the source of lower posting vacancies and higher unemployment level. Indeed, asymmetric information pushes up wholesale firms' marginal costs, as well as hiring costs by a financial mark-up charged by financial intermediaries. This financial mark-up is then transmitted by these firms on prices. Thus, it affects their hiring behavior, as well as wage and employment levels in the economy. An empirical evidence is then presented by estimating dynamic responses of labor and credit markets variables to identified monetary and credit shocks, using a structural Bayesian VAR method. Notably, after a shock on the risk premium, we observe a hump-shaped increase of unemployment and an increase of real wages. According to our theoretical model, it represents the higher marginal costs incurred by wholesale firms due to the increase of the financial mark-up.
    Date: 2015–04–07
  3. By: Kai Li (HKUST); Fang Yang (Louisiana State University); Hengjie Ai (University of Minnesota)
    Abstract: We develop a general equilibrium framework to quantify the importance of intermediated capital reallocation in affecting macroeconomic fluctuations and asset returns. In our model, financial intermediaries intermediate capital reallocation between low productivity firms with excess capital and high productivity firms who need credit. Because lending contracts cannot be perfectly enforced, capital misallocation lowers aggregate productivity when intermediaries are financially constrained. As a result, shocks originated from the financial sector manifest themselves as fluctuations in total factor productivity and account for most of the business cycle variations in macroeconomic quantities. Our model produces a pro-cyclical capital reallocation and is consistent with the stylized fact that the volatilities of productivity are counter-cyclical at both the firm and the aggregate level. On the asset pricing side, our model matches well moments of interest rate spreads in the data and successfully generates a high and counter-cyclical equity premium.
    Date: 2015
  4. By: Mi Luo (New York University); Alberto Bisin (New York University); Jess Benhabib (NYU)
    Abstract: In this paper we study a model of the dynamics of wealth which we put to data with the objective of estimating the fundamental structural parameters of preferences and technology driving the cross-sectional distribution of wealth. As a consequence we can identify quantitatively the determinants of wealth inequality, including its recent rise and the effects of fiscal policies, e.g., a change in estate taxes. Our analysis of the dynamics of the wealth distribution emphasizes life-cycle wealth accumulation and bequests so as to assess the relative importance of social mobility in the wealth accumulation process. More specifically, we study the dynamics of the wealth distribution in an overlapping generations economy with finitely lived agents and intergenerational transmission of wealth. Our model builds on Benhabib, Bisin, Zhu (2011), generalizing the formulation of preferences for bequest to allow for heterogeneous savings rates depending on wealth, as in Atkinson (1971). The model accounts for a stochastic labor income process and for a stochastic idiosyncratic rate of returns on wealth, which captures returns on entrepreneurial activity, For simplicity, we reduce the stochastic variation over the life cycle assuming that each generation draws a single realization of the labor income and the rate of return process at birth. We also impose a no-borrowing constraint, in order to generate interesting savings patterns over the life cycle. We take the model to data by feeding the labor income process and matching the crosssectional wealth distribution and social mobility in wealth. More precisely, our empirical analysis builds on data regarding three distinct sources: (i) labor income and its transition over generations, (2) cross-sectional wealth distribution, as measured by inter-quantile shares, and (3) social mobility in wealth over generations. With regards to labor income, we resort to individual level data directly, as reported in Chetty, Hendren, Kline and Saez (2014). We collapse their 100 by 100 transition matrix for individual labor income in the U.S. (1980-82 birth cohorts and their parental labor income) as well as the marginal income distributions by centile from de-identified tax records, into a coarser grid of 10 states and an associated 10 by 10 transition matrix. With regards to the cross-sectional wealth distribution, we calculate the inter-quantile shares of net worth from the 2013 wave of the Survey of Consumer Finance. The exact measure we use are shares in bottom 20%, 20-40%, 40-60%, 60-80%, 80-90%, 90-95%, 95-99%, and top 1% of net worth holdings. Finally, with regards to social mobility in wealth, we use the six-year transition matrix (from 1983 to 1989) estimated by Kennickell and Starr-McCluer (1997) using the SCF panel for the following wealth quantiles: bottom 25%, 25-49%, 50-74%, 75-89%, 90-94%, top 2-5%, and top 1%. Our theoretical model of the wealth distribution can be shown to display ergodicity, that is, a unique stationary cross-sectional distribution of wealth, under reasonable restrictions on the stochastic processes governing earnings and the rate of return on wealth. Our baseline estimation procedure therefore involves matching, via the Method of Simulated Moments, the relevant moments of the simulated stationary distribution of wealth and social mobility with the corresponding data. In particular we compare two sets of moments: wealth inter-quantile shares and the inter-generational transition matrix. The sets of parameters we estimate include preferences for bequest, assuming a warm-glow bequest motive, and the mean and variance of a discretized AR(1) rate of return process. We fix (calibrate) several parameters in our estimation, including the intertemporal elasticity of substitution for consumption, the number of periods in the life-cycle, and the discount factor. The results we can report on are still very preliminary, though the fit of the model is very encouraging at this stage. Furthermore, though not explicitly targeted moments, our estimated model generates savings and bequests patterns that match the data, as e.g., documented in Saez and Zucman (2014). Interestingly, we show that the preferences for bequests turn out to display less curvature than preferences for consumption. As a consequence, the optimal savings rate at the estimated parameters is increasing in wealth, an element which feeds directly into wealth inequality. On the other hand this effect appears of rather limited empirical relevance. Most importantly, our preliminary estimates of the rate of return of wealth process display very small persistence across generations, which limits wealth inequality at the stationary distribution but especially induces high social mobility in wealth to match the observed intergenerational mobility in the data. Finally, as implied directly by the theoretical properties of the model, the labor income process has no effects on the stationary distribution of wealth. It affects the transition, however, after e.g., fiscal policy changes. We have not yet exploited these implications in our analysis. While this whole analysis is predicated on the assumption that the observed wealth distribution and mobility in the data represent a stationary distribution, we can exploit time series data on post-war wealth distribution and mobility to estimate our model without imposing any ergodicity assumptions, that is, without imposing that the current wealth distribution in the U.S. be stationary. This is an important issue in the current debate on the rising wealth inequality as e.g., lack of ergodicity seems to be implicitly assumed in Piketty’s study of the dynamics of the wealth distribution. Of course the implications of fiscal policies, notably of a change in the estate tax, would depend dramatically on whether the wealth dynamics process is ergodic or not. Our analysis should be able to settle the issue.
    Date: 2015
  5. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: The performance of a countercyclical reserve requirement rule is studied in a dynamic stochastic model of a small open economy with financial frictions, imperfect capital mobility, a managed float regime, and sterilized foreign exchange market intervention. Bank funding sources, domestic and foreign, are imperfect substitutes. The model is calibrated and used to study the effects of a temporary drop in the world risk-free interest rate. Consistent with stylized facts, the shock triggers an expansion in domestic credit and activity, asset price pressures, and a real appreciation. A credit-based reserve requirement rule helps to mitigate both macroeconomic and financial volatility, with the latter defined both in terms of a narrow measure based on the credit-to-output ratio, the ratio of capital flows to output, and interest rate spreads, and a broader measure that includes real asset prices as well. An optimal rule, based on minimizing a composite loss function, is also derived. Sensitivity tests, related to the intensity of sterilization, the degree of exchange rate smoothing, and the rule used by the central bank to set the cost of bank borrowing, are also performed, both in terms of the transmission process and the optimal rule
    Date: 2015–08
  6. By: Adrien Auclert (MIT)
    Abstract: This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Using consumer theory, I show that redistribution has aggregate effects whenever marginal propensities to consume (MPCs) covary, across households, with balance-sheet exposures to aggregate shocks. Unexpected inflation gives rise to a Fisher channel and real interest rate shocks to an interest rate exposure channel; both channels are likely to contribute to the expansionary effects of accommodative monetary policy. Indeed, using a sufficient statistic approach, I find that redistribution could be the dominant reason why aggregate consumer spending reacts to transitory changes in the real interest rate, provided households' elasticities of intertemporal substitution are reasonably small (0.3 or less in the United States). I then build and calibrate a general equilibrium model with heterogeneity in MPCs, and I evaluate how the redistribution channel alters the economy's response to shocks. When household assets and liabilities have short effective maturities, the interest rate exposure channel raises the elasticity of aggregate demand to real interest rates, which dampens fluctuations in the natural rate of interest in response to exogenous shocks and amplifies the real effects of monetary policy shocks. The model predicts that if U.S. mortgages all had adjustable rates---as they do in the U.K.---the effect of interest-rate changes on consumer spending would more than double. In addition, this effect would be asymmetric, with rate increases reducing spending by more than cuts would increase it.
    Date: 2015
  7. By: Maria Ferrara; Patrizio Tirelli
    Abstract: We investigate the redistributive e¤ects of a disinflation experiment in an otherwise standard medium-scale DSGE model augmented for Limited Asset Market Participation, implying that a fraction of households do not hold any wealth. We highlight two key mechanisms driving consumption and income distribution: i) the cash in advance constraint on firms working capital needs; ii) the response of profit margins to disinflation, which is crucially dependent on the two most used pricing assumptions in the New-Keynesian literature, i.e. Calvo vs Rotemberg. Results show that disinflation softens the cash in advance constraint and raises the real wage in steady state. This, in turn, lowers inequality. While under the Calvo formalism this e¤ect is reinforced by the fall of price markups, under Rotemberg it is more than compensated by the increase of price markups and, therefore, the opposite result obtains.
    Keywords: Disinflation, Inequality, Welfare, LAMP, Monetary Policy, Calvo Price Adjustment, Rotemberg Price Adjustment
    JEL: E31 E5
    Date: 2015–07
  8. By: Per Krusell (Stockholm University); Laurence Malafry (Stockholm University); Hans Holter (University of Oslo); Pedro Brinca (European University Institute)
    Abstract: The recent experience of a Great Recession has brought the effectiveness of fiscal policy back into focus. Fiscal multipliers do, however, vary greatly over time and place. Running VARs for a large number of countries, we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of OECD economies, including the distribution of wages and wealth, social security, taxes and debt and study the effects of changing policies and various forms of inequality on the fiscal multiplier. We find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also negatively related to the average wealth level in the economy. This explains the correlation between wealth inequality and fiscal multipliers.
    Date: 2015
  9. By: Zhigang Feng (University of Illinois at Urbana-Champaign); Kai Zhao (University of Connecticut)
    Abstract: We study the impact of the employment-based health insurance system on aggregate labor supply in a general equilibrium life cycle model with incomplete markets and idiosyncratic risks in both income and medical expenses. We find that employment-based health insurance provides Americans with an extra incentive to work and is an important reason why they work much more hours than Europeans. In contrast to Europeans, who get universal health insurance from the government, most working-age Americans get health insurance through their employers. Since medical expenses are large and volatile, and there is no good alternative available in the private market, health insurance from employers can be highly valuable to risk-averse individuals (much more than its actuarially fair cost), thus providing them with extra incentive to work. We calibrate the benchmark model to match the US system using the Medical Expenditure Panel Survey dataset. The results of our quantitative experiments suggest that different health insurance systems account for more than half of the difference in aggregate hours that Americans and Europeans work. Furthermore, our model can also match several other relevant empirical observations, that is, the different employment rates and the different shares of full-time/part-time workers in the U.S. and Europe. When our model is extended to include the different tax rates in the U.S. and Europe, a main existing explanation for the difference in aggregate labor supply, the extended model can account for a major portion of the difference in aggregate hours that Americans and Europeans work.
    Keywords: Labor Supply, Employment-Based Health Insurance, General Equilibrium
    JEL: E20 E60
    Date: 2015–08
  10. By: Leo Kaas (University of Konstanz); Carlos Carrillo-Tudela (Essex)
    Abstract: We analyze the effects of adverse selection on worker turnover and wage dynamics in a frictional labor market. We consider a model of on-the-job search where firms offer promotion wage contracts to workers of different ability, which is unknown to firms at the hiring stage. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts, promoting high-ability workers only. Low-ability workers have higher turnover rates and are more often employed in low-wage firms. The model replicates the negative relationship between job-to-job transitions and wages observed in the U.S. labor market.
    Date: 2015
  11. By: Abraham, Arpad; Koehne, Sebastian; Pavoni, Nicola
    Abstract: Several frictions restrict the government's ability to tax assets. First, it is very costly to monitor trades on international asset markets. Second, agents can resort to nonobservable low-return assets such as cash, gold or foreign currencies if taxes on observable assets become too high. This paper shows that limitations in asset taxation have important consequences for the taxation of labor income. Using a dynamic moral hazard model of social insurance, we find that optimal labor income taxes become less progressive when governments face limitations in asset taxation. We evaluate the quantitative effect of imperfect asset taxation for two applications of our model.
    Keywords: Optimal Income Taxation, Capital Taxation, Progressivity
    JEL: D82 D86 E21 H21
    Date: 2014
  12. By: Demian Pouzo; Ignacio Presno
    Abstract: In a dynamic economy, we characterize the fiscal policy of the government when it levies distortionary taxes and issues defaultable bonds to finance its stochastic expenditure. Default may occur in equilibrium as it prevents the government from incurring in future tax distortions that would come along with the service of the debt. Households anticipate the possibility of default generating endogenous credit limits. These credit limits hinder the government's ability to smooth taxes using debt, rendering more volatile and less serially correlated fiscal policies, higher borrowing costs and lower levels of indebtness. Also, the near-random walk behavior of debt and taxes with risk-free debt under incomplete markets is altered once default risk is incorporated. In order to exit temporary financial autarky following a default event, the government has to repay a random fraction of the defaulted debt. We show theoretically that our debt restructuring process has implications for haircuts and duration of renegotiation episodes that are aligned with the data.
    Date: 2015–08
  13. By: Francesco Zanetti
    Abstract: This paper investigates the effect of …financial shocks using an estimated gen-eral equilibrium model that links the …firm's flows of …financing with labor marketvariables. The results show that fi…nancial shocks have sizeable effects on …financialvariables, vacancy posting, unemployment and wages. Shocks to the job destruc-tion rate are important in describing fluctuations in unemployment. The analysisalso investigates the underlying driving forces of some key comovements in thedata.
    Keywords: Business cycle, labor market frictions, financial shocks.
    JEL: E32 E44
    Date: 2015–05–27
  14. By: Zsofia Barany (ECON - Département d'économie - Sciences Po); Nicolas Coeurdacier (ECON - Département d'économie - Sciences Po); Stéphane Guibaud (ECON - Département d'économie - Sciences Po)
    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
  15. By: Florin Bilbiie; Tommaso Monacelli; Roberto Perotti
    Abstract: Government spending at the zero lower bound (ZLB) is not necessarily welfare enhancing, even when its output multiplier is large. We illustrate this point in the context of a standard New Keynesian model. In that model, when government spending provides direct utility to the household, its optimal level is at most 0.5- 1 percent of GDP for recessions of -4 percent; the numbers are higher for deeper recessions. When spending does not provide direct utility, it is generically welfare- detrimental: it should be kept unchanged at a long run-optimal value. These results are con…rmed in a medium-scale DSGE version of the model featuring sticky wages and equilibrium unemployment. Keywords: Government spending multiplier, zero lower bound, welfare. JEL Classi…cation Numbers: E62, D91, E21.
    Date: 2015
  16. By: Ryan Chahrour (Boston College and Toulouse School of Economics); Manoj Atolia (Florida State University)
    Abstract: What do firms learn from their interactions in markets, and what are the implications for aggregate dynamics? We address this question in a multi-sector real-business cycle model with a sparse input-output structure. In each sector, firms observe their own productivity, along with the prices of their inputs and the price of their output. We show that general equilibrium market-clearing conditions constrain average expectations and characterize a set of cases where average expectations, and therefore average dynamics, are exactly those of the full-information model. This "aggregate irrelevance" of information can occur even when sectoral expectations and dynamics are quite different under partial information, and despite the fact that each sector represents a non-negligible portion of the overall economy. Using sectoral data from the United States, we show that the conditions for aggregate irrelevance of information are far from being met in practice, yet the aggregate dynamics of the model calibrated to match US data remain nearly identical to the model under full-information.
    Date: 2015
  17. By: Fawcett, Nicholas (Bank of England); Koerber, Lena (Bank of England); Masolo, Riccardo (Bank of England); Waldron, Matthew (Bank of England)
    Abstract: This paper investigates the real-time forecast performance of the Bank of England’s main DSGE model, COMPASS, before, during and after the financial crisis with reference to statistical and judgemental benchmarks. A general finding is that COMPASS’s relative forecast performance improves as the forecast horizon is extended (as does that of the Statistical Suite of forecasting models). The performance of forecasts from all three sources deteriorates substantially following the financial crisis. The deterioration is particularly marked for the DSGE model’s GDP forecasts. One possible explanation for that, and a key difference between DSGE models and judgemental forecasts, is that judgemental forecasts are implicitly conditioned on a broader information set, including faster-moving indicators that may be particularly informative when the state of the economy is evolving rapidly, as in periods of financial distress. Consistent with that interpretation, GDP forecasts from a version of the DSGE model augmented to include a survey measure of short-term GDP growth expectations are competitive with the judgemental forecasts at all horizons in the post-crisis period. More generally, a key theme of the paper is that both the type of off-model information and the method used to apply it are key determinants of DSGE model forecast accuracy.
    Keywords: DSGE models; forecasting; financial crisis.
    JEL: C53 E12 E17
    Date: 2015–07–31
  18. By: Fernando Alvarez (University of Chicago and NBER); Francesco Lippi (University of Sassari and EIEF); Luigi Paciello (EIEF)
    Abstract: We compute the response of output to a monetary shock in a general equilibrium model in which firms set prices subject to a menu cost as well a costly observation of the state. We consider economies that are observationally equivalent with respect to the average frequency and size of price adjustments, and show that these economies respond differently to monetary shocks, depending on the size of the menu cost relative to the observation cost. A calibration on US data requires both costs to be present and predicts real effects that are more persistent than in the corresponding menu-cost model, but smaller than in the observation-cost model. The presence of the observation cost injects a time dependent component in the firms’ decision rule which makes the impulse response quasi linear in the size of the shock.
    Date: 2015
  19. By: Philippe Choné (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Guy Laroque (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: This article aims at understanding the interplay between pension schemes and tax instruments. The model features extensive labor supply in a stationary environment with overlapping generations and perfect financial markets. Compared with the reference case of a pure taxation economy, we find that taxes become more redistributive when the pension instrument is available, while pensions provide incentives to work.
    Date: 2014–03
  20. By: Roman Sustek (Queen and Mary University of London); Finn Kydland (University of California, Santa Barbara); Carlos Garriga (Federal Reserve Bank of St. Louis)
    Abstract: Mortgages are a prime example of long-term nominal loans. As a result, under incomplete asset markets, monetary policy affects household decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels are distinct from the transmission through the real interest rate. A general equilibrium model incorporating these features is developed. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger real effects than transitory shocks. The transmission is stronger under adjustable- than fixed-rate mortgages. Higher inflation benefits homeowners under FRMs but hurts them under ARMs.
    Date: 2015
  21. By: Da Rocha Alvarez, Jose Maria; Sempere, Jaume
    Abstract: Concerns over the distributive effects of ITQ’s lead to restrictions on their tradability. We consider a general equilibrium model with firm dynamics. In contrast with the standard framework, the distribution of firms is not exogenous, but is instead determined endogenously by entry/exit decisions made by firms. We show that the stationary wealth distribution depends on whether the ITQs are fully tradable or not. We calibrate our model to match the observed increase in revenue inequality in the Northeast Multispecies (ground-fish) U.S. Fishery. We show that although observed revenue inequality increases, wealth inequality is reduced by 40%.
    Keywords: ITQ, wealth distribution, firm dynamics, inequality, permit markets
    JEL: D6 Q58
    Date: 2015–08–13
  22. By: Agovino, Massimiliano; Ferrara, Maria
    Abstract: In Italy, poverty and disability are two strictly related issues (Parodi, 2004, 2006, 2007; Parodi and Sciulli, 2008; Davila Quintana and Malo, 2012). Moreover, public transfers are not sufficient to exlude households with at least one disabled member from the poverty risk. We simulate a simple Real Business Cycle model to investigate the macroeconomic effects of a permanent increase in civilian disability pensions. In particular, we stress whether such a policy action is effective to stimulate private consumption. The exercise is implemented through both temporary and permanent reduction of public spending. Results show that in the long run a minimum increase in civilian disability pensions allows households with one disabled member to consume more and, importantly, to exit from poverty condition. In the short run we observe a policy trade-off. If public spending reduction is temporary and fast, private consumptions immediately increase but output deeply falls. On the contrary, if public spending permanently and slowly reduces, the recessionary effect softens but private consumptions only gradually increase.
    Keywords: Disability, Poverty, Fiscal policy
    JEL: E62 I14 J14
    Date: 2015–07
  23. By: Adrian Buss; Bernard Dumas
    Abstract: In some situations, investment capital seems to move slowly towards profitable trades. We develop a model of a financial market in which capital moves slowly simply because there is a proportional cost to moving capital. We incorporate trading fees in an infinite-horizon dynamic general-equilibrium model in which investors optimally and endogenously decide when and how much to trade. We determine the steady-state equilibrium no-trade zone, study the dynamics of equilibrium trades and prices and compare, for the same shocks, the impulse responses of this model to those of a model in which trading is infrequent because of investor inattention.
    JEL: G0 G1
    Date: 2015–07
  24. By: Liu, Kai (Norwegian School of Economics)
    Abstract: This paper shows that job mobility is a valuable channel which employed workers use to mitigate bad labor market shocks. I construct and estimate a model of wage dynamics jointly with a dynamic model of job mobility. The key feature of the model is the specification of wage shocks at the worker- firm match level, for workers can respond to these shocks by changing jobs. The model is estimated using a sample of young male workers from the 1996 panel of Survey of Income and Program Participation. The first result is that the variance of match-level shocks is large, and the consequent value of job mobility is substantial. The second result is that true wage risk is almost three times as large as the wage variance observed after job mobility, which is what other papers in the literature have called wage risk. This suggests a very different picture of the risks facing employed workers in the labor market.
    Keywords: job mobility, wage dynamics, wage risk, employment
    JEL: D91 J31 J62
    Date: 2015–08
  25. By: Roberto Robatto (University Wisconsin-Madison)
    Abstract: I present a new dynamic general equilibrium model of banking to analyze monetary policy during financial crises. A novel channel gives rise to multiple equilibria. In the good equilibrium, all banks are solvent. In the bad equilibrium, many banks are insolvent and subject to runs. The bad equilibrium is also characterized by deflation and a flight to liquidity. Some central bank interventions are more effective than others at eliminating the bad equilibrium. Interventions that do not eliminate the bad equilibrium still counteract deflation and reduce the losses of insolvent banks, but, for some parameter values, amplify the flight to liquidity.
    Date: 2015
  26. By: Eric M. Leeper; Nora Traum; Todd B. Walker
    Abstract: We use Bayesian prior and posterior analysis of a monetary DSGE model, extended to include fiscal details and two distinct monetary-fiscal policy regimes, to quantify government spending multipliers in U.S. data. The combination of model specification, observable data, and relatively diffuse priors for some parameters lands posterior estimates in regions of the parameter space that yield fresh perspectives on the transmission mechanisms that underlie government spending multipliers. Posterior mean estimates of short-run output multipliers are comparable across regimes—about 1.4 on impact—but much larger after 10 years under passive money/active fiscal than under active money/passive fiscal—means of 1.9 versus 0.7 in present value.
    JEL: C11 E62 E63
    Date: 2015–07
  27. By: Vives Coscojuela, Cecilia
    Abstract: This paper studies the e ect of home-owners' migration costs on migration and unemployment in an economy where workers move both for work- and nonwork- related reasons. To this end, a search model with heterogeneous locations is developed and calibrated to the U.S. economy. Consistent with the empirical evidence, the model predicts that home-owners have a lower unemployment rate than renters despite their higher migration costs. The result is due to home-owners' higher transition rate to employment and lower transition rate to unemployment.In addition, the model generates lower inequality in home-owners' local unemployment rates than in renters'. In line with this result, it is documented that, for the period 1996-2013, home-owners had less unemployment dispersion across metropolitan areas than renters.
    Keywords: mobility, home-ownership, unemployment, labour
    JEL: R23 J64 J61
    Date: 2015–05
  28. By: Jean-Paul L'Huillier (Einaudi Institute for Economics and Finance); Facundo Piguillem (EIEF); Jean Flemming (University of Rome, Tor Vergata)
    Abstract: We study the optimal determination of macroprudential regulation (Mendoza 2002, Bianchi 2011, Korinek 2014) in a macroeconomic model featuring advance information about future income ("news", cf. Beaudry and Portier 2006, or Schmitt-Grohe and Uribe 2012). We point out that the presence of news about the future in a standard model with systemic externalities introduces a tradeoff between consumption smoothing and macroprudential regulation. Indeed, favorable news call for lax regulation in order to allow for consumption smoothing, but this also increases the severity of welfare losses in systemic crises. We study this tradeoff first theoretically in a simple 3-period model, and then quantitatively in a fully dynamic model. We conclude that the possibility of news is an important consideration in the evaluation and of macroprudential regulation.
    Date: 2015
  29. By: Xiaoshan Che; Eric M. Leepe; Campbell Leith
    Abstract: Most of the literature estimating DSGE models for monetary policy analysis ignores Öscal policy and assumes that monetary policy follows a simple rule. In this paper we allow both Öscal and monetary policy to be described by rules and/or optimal policy which are subject to switches over time. We Önd that US monetary and Öscal policy have often been in conáict, and that it is relatively rare that we observe the benign policy combination of an conservative monetary policy paired with a debt stabilizing Öscal policy. In a series of counterfactuals, a conservative central bank following a time-consistent Öscal policy leader would come close to mimicking the cooperative Ramsey policy. However, if policy makers cannot credibly commit to such a regime, monetary accommodation of the prevailing Öscal regime may actually be welfare improving.
    Keywords: Bayesian Estimation, interest rate rules, Öscal policy rules, optimal mone- tary policy, optimal Öscal policy, great moderation, commitment, discretion
    Date: 2015–06
  30. By: Luca Guerrieri; Matteo Iacoviello; Francisco Covas; John C. Driscoll; Mohammad Jahan-Parvar; Michael Kiley; Albert Queraltoy; Jae Sim
    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: banks, DSGE models, capital requirements, bank losses
    Date: 2015–07
  31. By: Javier Bianchi (Federal Reserve Bank of Minneapolis)
    Abstract: This paper proposes a theory of self-fulfilling unemployment fluctuations driven by an aggregate demand externality. Expectations of high unemployment, lead to low income and low aggregate demand. In turn, low aggregate demand leads to expectations of deflation and high unemployment. I show that this feedback between expectations and aggregate demand can lead to the emergence of self-fulfilling fluctuations in involuntary unemployment. Quantitative analysis calibrated to Spain shows that episodes of large unemployment are a result of pessimistic expectations. We discuss the policy implications of this novel source of multiplicity.
    Date: 2015
  32. By: Juan F. Jimeno (Banco de España)
    Abstract: The Great Recession and the subsequent European crisis may have long-lasting effects on aggregate demand, aggregate supply and, hence, on macroeconomic performance over the medium and long run. Besides the fact that financial crises last longer and are succeeded by slower recoveries, and apart from the hysteresis effects that may operate after episodes of long-term unemployment, the combination of high (public and private) debt and low population and productivity growth may create significant constraints for monetary and fiscal policies. In this paper I develop an OLG model, one earlier used by Eggertsson and Mehrotra (2014) to rationalise the «secular stagnation hypothesis», to show how high debt and low population and productivity growth may condition the macroeconomic performance of some European countries over the medium and long run.
    Keywords: natural rate of interest, zero lower bound, population and productivity growth, inter-generational transfers, secular stagnation.
    JEL: E20 E43 E52 E66
    Date: 2015–08
  33. By: Gauti B. Eggertsson (Brown University (E-mail:; Neil R. Mehrotra (Brown University (E-mail:
    Abstract: We propose an overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self- correcting force to full employment. The trigger for the slump is a deleveraging shock, which creates an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem include a drop in population growth, an increase in income inequality, and a fall in the relative price of investment. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession. It also highlights several implications for policy.
    Keywords: Secular stagnation, monetary policy, zero lower bound
    JEL: E31 E32 E52
    Date: 2015–07
  34. By: Philippe Darreau (LAPE - Laboratoire d'Analyse et de Prospective Economique - unilim - Université de Limoges - Institut Sciences de l'Homme et de la Société); François Pigalle (LAPE - Laboratoire d'Analyse et de Prospective Economique - unilim - Université de Limoges - Institut Sciences de l'Homme et de la Société)
    Abstract: Buiter (1981) illustrates that in the OLG model, the ranking of stationary utility levels under autarky and openness, is ambiguous. We show that both countries increase their stationary utility levels only if the autarky capital-labor ratios are on opposite sides of the golden rule.
    Date: 2014–08–20
  35. By: Piero Gottardi (European University Institute); Guido Ruta (NYU and University of Bologna); Alberto Bisin (New York University)
    Abstract: This paper analyzes a class of competitive economies with production, incomplete financial markets, and agency frictions. Firms take their production, financing, and contractual decisions so as to maximize their value under rational conjectures. We show that competitive equilibria exist and that shareholders always unanimously support firms' choices. In addition, equilibrium allocations have well-defined welfare properties: they are constrained efficient when information is symmetric, or when agency frictions satisfy certain specific conditions. Furthermore, equilibria may display specialization on the part of identical firms and, when equilibria are constrained inefficient, may exhibit excessive aggregate risk. Financial decisions of the corporate sector are determined at equilibrium and depend not only on the nature of financial frictions but also on the consumers' demand for risk. Financial intermediation and short sales are naturally accounted for at equilibrium.
    Date: 2015
  36. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: The unconventional shocks and non-linear dynamics behind the high volatility of financial markets present a challenge for the implementation of macroprudential policy. This paper introduces two of these unconventional shocks, news shocks about future fundamentals and regime changes in global liquidity, into a quantitative non-linear model of financial crises. The model is then used to examine how these shocks affect the design and effectiveness of optimal macroprudential policy. The results show that both shocks contribute to strengthen the amplification mechanism driving financial crisis dynamics. Macroprudential policy is effective for reducing the likelihood and magnitude of financial crises, but the optimal policy requires significant variation across regimes of global liquidity and realizations of news shocks. Moreover, the effectiveness of the policy improves as the precision of news rises from low levels, but at high levels of precision it becomes less effective (financial crises are less likely, but the optimal policy does not weaken them significantly).
    Keywords: financial crises, macroprudential policy, systemic risk, global liquidity, news shocks
    Date: 2015–07
  37. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School); Xu, Yongdeng
    Abstract: With Monte Carlo experiments on models in widespread use we examine the performance of indirect inference (II) tests of DSGE models in small samples. We compare these tests with ones based on direct inference (using the Likelihood Ratio, LR). We find that both tests have power so that a substantially false model will tend to be rejected by both; but that the power of the II test is substantially greater, both because the LR is applied after reestimation of the model error processes and because the II test uses the false model’s own restricted distribution for the auxiliary model’s coefficients. This greater power allows users to focus this test more narrowly on features of interest, trading off power against tractability.
    Keywords: Bootstrap; DSGE; New Keynesian; New Classical; indirect inference; Wald statistic; likelihood ratio
    JEL: C12 C32 C52 E1
    Date: 2015–07
  38. By: Ana Maria Santacreu (Federal Reserve Bank of Saint Louis and INSEAD); Federico Gavazzoni (INSEAD)
    Abstract: We document that international R&D spillovers through trade in varieties is a major driver of asset prices. We find that country pairs that share more R&D have more correlated stock market returns and less volatile exchange rates. Moreover, we show that countries that depend more heavily on their trading partner's R&D have currencies that tend to pay a positive excess return. We develop an endogenous growth model of innovation and international technology diffusion that rationalizes our empirical findings. A calibrated version of our model matches several important asset pricing and quantity moments, thus alleviating several of the classic quantity-price puzzles of the international macroeconomic literature.
    Date: 2015
  39. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Masayuki Yao (Graduate School of Economics, Keio University)
    Abstract: We consider infinite-horizon deterministic dynamic programming problems in discrete time. We show that the value function is always a fixed point of a modified version of the Bellman operator. We also show that value iteration monotonically converges to the value function if the initial function is dominated by the value function, is mapped upward by the modified Bellman operator, and satisfies a transversality-like condition. These results require no assumption except for the general framework of infinite-horizon deterministic dynamic programming.
    Keywords: Dynamic Programming, Bellman Operator, Fixed Point, Value Iteration
    Date: 2015–07

This nep-dge issue is ©2015 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.