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on Dynamic General Equilibrium |
| By: | Petrosky-Nadeau, Nicolas (Carnegie Mellon University and Federal Reserve Bank of San Francisco); Zhang, Lu (OH State University) |
| Abstract: | A search and matching model, when calibrated to the mean and volatility of unemployment in the postwar sample, can potentially explain the unemployment crisis in the Great Depression. The limited responses of wages from credible bargaining to labor market conditions, along with the congestion externality from matching frictions, cause the unemployment rate to rise sharply in recessions but decline gradually in booms. The frequency, severity, and persistence of unemployment crises in the model are quantitatively consistent with U.S. historical time series. The welfare gain from eliminating business cycle fluctuations is large. |
| JEL: | E24 E32 J63 J64 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2014-11&r=all |
| By: | Gabriel Chodorow-Reich; Johannes Wieland |
| Abstract: | We study the effect of mean-preserving idiosyncratic industry shocks on business cycle outcomes. We develop an empirical methodology using a local area's exposure to industry reallocation based on the area's initial industry composition and employment trends in the rest of the country over a full employment cycle. Using confidential employment data by local area and industry over the period 1980-2014, we find sharp evidence of reallocation contributing to worse employment outcomes during national recessions but not during national expansions. We repeat our empirical exercise in a multi-area, multi-sector search and matching model of the labor market. The model reproduces the empirical results subject to inclusion of two key, empirically plausible frictions: imperfect mobility across industries, and downward nominal wage rigidity. Combining the empirical and model results, we conclude that reallocation can generate substantial amplification and persistence of business cycles at both the local and the aggregate level. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:313261&r=all |
| By: | Guillermo Escudé (Central Bank of Argentina) |
| Abstract: | A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the "impossible trinity" or "trilemma", in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escudé (2012), which focused on interest rate and XR policies, since it introduces the third vertex of the "trinity" in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE´s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies correspond to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or "possible trinity" is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions. |
| Keywords: | DSGE models, Small Open Economy, monetary and exchange rate policy, capital controls, optimal policy |
| JEL: | E58 O24 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:201563&r=all |
| By: | Nguyen, Thien Tung (OH State University) |
| Abstract: | This paper examines the welfare implications of bank capital requirements in a general equilibrium model in which a dynamic banking sector endogenously determines aggregate growth. Due to government bailouts, banks engage in risk-shifting, thereby depressing investment efficiency; furthermore, they over-lever, causing fragility in the financial sector. Capital regulation can address these distortions and has a first-order effect on both growth and welfare. In the model, the optimal level of minimum Tier 1 capital requirement is 8%, greater than that prescribed by both Basel II and III. Increasing bank capital requirements can produce welfare gains greater than 1% of lifetime consumption. |
| JEL: | G21 G28 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2015-14&r=all |
| By: | Ferreira, Pedro Cavalcanti; Gomes, Diego Braz Pereira |
| Abstract: | In this article, we built a standard life cycle general equilibrium model with heterogeneous agents with the additional feature that young adults enter the economy with assets drawn from an initial distribution. We estimated this distribution using a non-parametric method applied to data from the Survey of Consumer Finances. We compared the distribution of wealth generated by our model with the distribution generated by a model that assumes that all young adults enter the economy with zero initial assets, an assumption commonly adopted in the literature. We found that a properly estimated initial distribution of assets is key for a standard life cycle model that replicates U.S. wealth inequality. According to our results, American inequality can be explained almost entirely by the fact that some individuals are lucky enough to be born into wealth, while others are born with few or no assets. In addition, we concluded that both the inequality of the initial distribution and the absolute values of the distribution’s support are important for the model to replicate the inequality in the data. |
| Date: | 2015–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:768&r=all |
| By: | Benzoni, Luca (Federal Reserve Bank of Chicago); Chyruk, Olena (Federal Reserve Bank of Chicago) |
| Abstract: | Human capital embodies the knowledge, skills, health and values that contribute to making people productive. These qualities, however, are hard to measure, and quantitative studies of human capital are typically based on the valuation of the lifetime income that a person generates in the labor market. This article surveys the theoretical and empirical literature that models a worker’s life-cycle earnings and identifies appropriate discount rates to translate those cash flows into a certainty equivalent of wealth. This paper begins with an overview of a stylized model of human capital valuation with exogenous labor income. The authors then discuss extensions to this framework that study the underlying economic sources of labor income shocks, the choices, such as work, leisure, retirement and investment in education, that people make over their life and their implications for human capital valuation and risk. |
| Keywords: | human capital; labor income; employment |
| JEL: | G10 G12 J22 J24 J26 J31 |
| Date: | 2015–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2015-06&r=all |
| By: | Sterk, Vincent; Tenreyro, Silvana |
| Abstract: | The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. We show that in an OLG setting, standard open market operations (OMO) carried by central banks have important revaluation effects that alter the level and distribution of wealth and the incentives to work and save for retirement. Specifically, expansionary OMO lead households to front-load their purchases of durable goods and work and save more, thus generating a temporary boom in durables, followed by a bust. The mechanism can account for the empirical responses of key macroeconomic variables to monetary policy interventions. Moreover, the model implies that different monetary interventions (e.g., OMO versus helicopter drops) can have different qualitative effects on activity. The mechanism can thus complement the NK paradigm. We study an extension of the model incorporating labor market frictions. |
| Keywords: | durable goods; monetary policy; open market operations; redistributive effects of monetary policy; transmission mechanism |
| JEL: | E1 E31 E32 E52 E58 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10785&r=all |
| By: | Gita Gopinath; Sebnem Kalemli-Ozcan; Loukas Karabarbounis; Carolina Villegas-Sanchez |
| Abstract: | Following the introduction of the euro in 1999, countries in the South experienced large capital inflows and low productivity. We use data for manufacturing firms in Spain to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor across firms, and a significant increase in productivity losses from misallocation over time. We develop a model of heterogeneous firms facing financial frictions and investment adjustment costs. The model generates cross-sectional and time-series patterns in size, productivity, capital returns, investment, and debt consistent with those observed in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We conclude by showing that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway. |
| JEL: | D24 E22 F41 O16 O47 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21453&r=all |
| By: | Gayle, George-Levi (Federal Reserve Bank of St. Louis); Golan, Limor (Federal Reserve Bank of St. Louis); Soytas, Mehmet A. (Graduate School of Business, Ozyegin University) |
| Abstract: | This paper analyzes the sources of the racial difference in the intergenerational transmission of human capital by developing and estimating a dynastic model of parental time and monetary inputs in early childhood with endogenous fertility, home hours, labor supply, marriage, and divorce. It finds that the racial differences in the marriage matching patterns lead to racial differences in labor supply and home hours of couples. Although both the black-white labor market earnings and marriage market gaps are important sources of the black-white achievement gap, the assortative mating and divorce probabilities racial gaps accounts for a larger fraction of it. |
| Keywords: | Life-cycle dynastic models; Household allocation of resource; Estimation of dynamic game of complete information; Human capital production function; Quantity-quality trade-off. |
| JEL: | C13 J13 J22 J62 |
| Date: | 2015–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2015-018&r=all |
| By: | Aldy, Joseph E. (Harvard University); Smyth, Seamus J. (Caxton Associates) |
| Abstract: | We develop a numerical life-cycle model with choice over consumption and leisure, stochastic mortality and labor income processes, and calibrated to U.S. data to characterize willingness to pay (WTP) for mortality risk reduction. Our theoretical framework can explain many empirical findings in this literature, including an inverted-U life-cycle WTP and an order of magnitude difference in prime-aged adults WTP. By endogenizing leisure and employing multiple income measures, we reconcile the literature's large variation in estimated income elasticities. By accounting for gender- and race-specific stochastic mortality and income processes, we explain the literature's black-white and female-male differences. |
| JEL: | D91 J17 Q51 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp14-024&r=all |
| By: | Chen, Hung-Ju |
| Abstract: | This paper examines the effect of fertility and official pension age on long-run pay-as-you-go (PAYG) pensions based on an overlapping generations model. We find that increasing the fertility rate or official pension age does not necessarily raise pensions. When the output elasticity of capital is low, an increase in the fertility rate or official pension age may raise pensions, but such a change reduces pensions if the output elasticity of capital and the tax rate are high. |
| Keywords: | Fertility; Official pension age; OLG, PAYG pensions. |
| JEL: | H55 J13 J26 |
| Date: | 2015–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66429&r=all |
| By: | Athreya, Kartik B. (Federal Reserve Bank of Richmond); Ionescu, Felicia (Board of Governors of the Federal Reserve System (U.S.)); Neelakantan, Urvi (Federal Reserve Bank of Richmond) |
| Abstract: | Portfolio choice models counterfactually predict (or advise) almost universal equity market participation and a high share for equity in wealth early in life. Empirically consistent predictions have proved elusive without participation costs, informational frictions, or nonstandard preferences. We demonstrate that once human capital investment is allowed, standard theory predicts portfolio choices much closer to those empirically observed. Two intuitive mechanisms are at work: For participation, human capital returns exceed ?nancial asset returns for most young households and, as households age, this is reversed. For shares, risks to human capital limit the household's desire to hold wealth in risky ?nancial equity. |
| Keywords: | Human capital investment; life-cycle; financial portfolios |
| JEL: | E21 G11 J24 |
| Date: | 2015–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-65&r=all |