nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒09‒11
27 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Learning Efficiency Shocks, Knowledge Capital and the Business Cycle : A Bayesian Evaluation By Alok Johri; Muhebullah Karimzada
  2. Efficiency and Labor Market Dynamics in a Model of Labor Selection By Chugh, Sanjay K.; Merkl, Christian
  3. A Keynesian Dynamic Stochastic Labor-Market Disequilibrium model for business cycle analysis By Christian Schoder
  4. Over consumption. A horse race of Bayesian DSGE models By Argentiero, Amedeo; Bovi, Maurizio; Cerqueti, Roy
  5. Financial News, Banks and Business Cycles By Christopher M. Gunn; Alok Johri
  6. Household search and the aggregate labor market By Mankart, Jochen; Oikonomou, Rigas
  7. On the Optimal Provision of Social Insurance: Progressive Taxation versus Education Subsidies in General Equilibrium By Krueger, Dirk; Ludwig, Alexander
  8. Financial Factors: Implications for Output Gaps By Pau Rabanal; Marzie Taheri Sanjani
  9. Crisis, contagion and international policy spillovers under foreign ownership of banks By Marcin Kolasa; Krzysztof Makarski; Michal Brzoza-Brzezina
  10. German labor market and fiscal reforms 1999 to 2008: Can they be blamed for intra-euro area imbalances? By Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin
  11. Banks in The Global Integrated Monetary and Fiscal Model By Michal Andrle; Michael Kumhof; Douglas Laxton; Dirk Muir
  12. Innovation, Deregulation, and the Life Cycle of a Financial Service Industry By Fumiko Hayashi; Grace Bin Li; Zhu Wang
  13. Aggregate and distributional effects of increasing taxes on top income earners By Brüggemann, Bettina; Yoo, Jinhyuk
  14. Personal bankruptcy law, debt portfolios, and entrepreneurship By Mankart, Jochen; Rodano, Giacomo
  15. Workforce location and equilibrium unemployment in a duocentric economy with matching frictions By Etienne Lehmann; Paola L. Montero Ledezma; Bruno Van der Linden
  16. The Impact of Foreclosure Delay on U.S. Employment By Kyle F. Herkenhoff; Lee E. Ohanian
  17. Search and Bargaining in the Product Market and Price Rigidities By Mirko Abbritti; Tommaso Trani
  18. Government deficits in large open economies: The problem of too little public debt By Buiter, Willem H.; Sibert, Anne C.
  19. The End of the Flat Tax Experiment in Slovakia By Michal Horváth; Matus Senaj; Zuzana Siebertova; Norbert Svarda
  20. Trading Down and the Business Cycle By Nir Jaimovich; Sergio Rebelo; Arlene Wong
  21. The macroeconomic effects of the Euro Area's fiscal consolidation 2011-2013: A Simulation-based approach By Rannenberg, Ansgar; Schoder, Christian; Strasky, Jan
  22. Systemic Risk: A New Trade-off for Monetary Policy? By Stefan Laseen; Andrea Pescatori; Jarkko Turunen
  23. Initiative for Infrastructure Integration in South America: Way toward Regional Convergence By Andrea Bonilla
  24. Monetary Exchange in Over-the-Counter Markets: A Theory of Speculative Bubbles, the Fed Model, and Self-fulfilling Liquidity Crises By Ricardo Lagos; Shengxing Zhang
  25. The macroeconomic effects of the Euro Area?s fiscal consolidation 2011-2013 By Ansgar Rannenberg; Christian Schoder; Jan Strásky
  26. An Overlapping Generation Model of Labour Productivity and Economic Growth in Colombia By Fernando MESA PARRA
  27. Does Home Production Drive Structural Transformation? By Solmaz Moslehi; Satoshi Tanaka; Alessio Moro

  1. By: Alok Johri; Muhebullah Karimzada
    Abstract: We incorporate shocks to the efficiency by which firms learn from production activity and accumulate knowledge into an otherwise standard real DSGE model with imperfect competition. Using real aggregate data from the United States and Bayesian inference techniques, we find that learning efficiency shocks are an important source of observed variation in the growth rate of aggregate consumption and hours worked in post-war US data. The estimated shock processes suggest much less exogenous variation in preferences and total factor productivity are needed by our model to account for the joint dynamics of consumption and hours. This occurs because learning efficiency shocks induce shifts in labour demand uncorrelated with current TFP, a role usually played by preference shocks. At the same time, knowledge capital acts like an endogenous source of productivity variation in the model. Measures of model fit prefer the specification with learning efficiency shocks.
    Keywords: business cycles, learning-by-doing, learning efficiency shocks, knowledge capital.
    JEL: E32
    Date: 2015–08
  2. By: Chugh, Sanjay K. (Boston College); Merkl, Christian (University of Erlangen-Nuremberg)
    Abstract: This paper characterizes efficient labor-market allocations in a labor selection model. The model's crucial aspect is cross-sectional heterogeneity for new job contacts, which leads to an endogenous selection threshold for new hires. With cross-sectional dispersion calibrated to microeconomic data, 40 percent of empirically-relevant fluctuations in the job-finding rate arise, which contrasts with results in an efficient search and matching economy. The efficient selection model's results hold in partial and general equilibrium, as well as with sequential search.
    Keywords: labor market, labor selection, labor market frictions, hiring costs, sequential search, efficiency, amplification
    JEL: E24 E32 J20
    Date: 2015–08
  3. By: Christian Schoder
    Abstract: A Dynamic Stochastic Labor-Market Disequilibrium (DSLMD) model is proposed for Keynesian business cycle analysis. It shares the type of micro-foundation known from neoclassical Dynamic Stochastic General Equilibrium (DSGE) models but characterizes economic mechanisms consistent with Traditional Post-Keynesian (TPK) models. Wage inflation is perceived as a non-market-clearing policy variable which may be subject to a collective Nash bargaining process with the state of the labor market affecting the relative bargaining power. The core insights are twofold: First, apart from assumptions regarding expectation formation, the DSGE-type of microfoundation is, to a considerable extent, consistent with the behavioral hypotheses underlying TPK models. Second, the economy characterized by the DSLMD model is post-Keynesian rather than neoclassical.
    Keywords: Dynamic stochastic labor-market disequilibrium, dynamic stochastic general equilibrium, post-Keynesian economics, micro-foundations
    JEL: B41 E12 J52
    Date: 2015
  4. By: Argentiero, Amedeo; Bovi, Maurizio; Cerqueti, Roy
    Abstract: Standard dynamic stochastic general equilibrium (DSGE) models are populated by fully-informed-optimising Muth-rational agents. This kind of agent is at odds with well-known psychological biases, not to mention real life people. In particular, there are strong theoretical and empirical reasons to believe that consumers are overly optimistic. Also, the size of over optimism is likely to show cyclical features. In this paper we simulate two DSGE models, one standard with Muth-rational consumers, the other different just because agents are allowed to over consume. We then compare them throughout different cyclical phases. Results show that taking into account psychological biases allows the DSGE to fit better actual data in the long-run and in an economic boom scenario. Recessions are instead characterized by pessimism. We also find that over consumption is a structural trait. Moreover, booms enlarge significantly the magnitude of the bias. These findings are in line with - and enrich - both the economic and psychological literature, implying i) that the business cycle has a non trivial psychological content, and ii) that the size of psychological biases is affected by macroeconomic evolutions.
    Keywords: DSGE models, Psychological Biases, Business Cycle.
    JEL: C30 E32
    Date: 2015–09–03
  5. By: Christopher M. Gunn; Alok Johri
    Abstract: Can variations in the expected future return on a portfolio of sovereign bonds itself have real effects on a small open economy? We build a model where banks face a capital sufficiency requirement to demonstrate that news about a fall in the expected return on a portfolio of international long bonds held by the bank can lead to an immediate and persistent fall in economic activity. Even if the news never materializes, the model can generate several periods of below steady state investment, hours worked and production followed by a recovery. The presence of long bonds in bank portfolios enable the news to have an immediate impact on bank capital via an immediate fall in bond prices. The portfolio adjustment induced by the capital sufficiency requirements leads to a rise in loan rates and tighter credit conditions which trigger the fall in activity. The model contributes to the news-shock literature by showing that imperfect signals about future financial returns can create business cycles without relying on the usual suspects: variation in domestic fundamentals such as technology shocks, preference shocks and fiscal policy. It also contributes to the emerging economy business cycle literature in that disturbances in world financial markets can lead to domestic business cycles without relying on shocks to the world interest rate or to country spreads.
    Keywords: expectations-driven business cycles, financial news shocks,financial intermediation, business cycles, small open economy, capital adequacy requirements.
    JEL: E3 E44 F4 G21
    Date: 2015–08
  6. By: Mankart, Jochen; Oikonomou, Rigas
    Abstract: We develop a theoretical model with labor market frictions, incomplete financial markets and with households which have two members. Households face unemployment risks but their members adjust their labor supplies to insure against unemployment. We use the model to explain the cyclical properties of aggregate employment and participation. As in the US data, the model predicts that the participation rate (the fraction of individuals that want jobs) is not strongly correlated with aggregate economic activity. This property is in sharp contrast to the strongly procyclical participation predicted by both neoclassical models and models with search frictions, when we assume bachelor households or households with infinitely many members (complete markets). In the two member household model and in the data, primary earners are always in the labor force, secondary earners have a mildly countercyclical participation rate and a mildly procyclical employment rate. Their behavior insures the household against unemployment risks.
    Keywords: Heterogeneous Agents,Family Self Insurance,Labor Market Search,Aggregate Fluctuations
    JEL: E24 E25 E32 J10 J64
    Date: 2015
  7. By: Krueger, Dirk; Ludwig, Alexander
    Abstract: In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.
    Keywords: education subsidy; progressive taxation; transitional dynamics
    JEL: E62 H21 H24
    Date: 2015–09
  8. By: Pau Rabanal; Marzie Taheri Sanjani
    Abstract: We suggest a new approach for analyzing the role of financial variables and shocks in computing the output gap. We estimate a two-region DSGE model for the euro area, with financial frictions at the household level, between 2000-2013. After joining the monetary union, a decline in some countries’ borrowing costs contributed to a credit, housing and real boom and bust cycle. We show that financial frictions amplified economic fluctuations and the measure of the output gap in those countries. On the contrary, in countries such as France and Germany, financial frictions played a minor role in output gap measures. We also present evidence of the trade-offs faced by the European Central Bank when trying to stabilize two regions in a currency union with unsynchronized economic cycles.
    Date: 2015–07–14
  9. By: Marcin Kolasa (National Bank of Poland); Krzysztof Makarski (National Bank of Poland); Michal Brzoza-Brzezina (National Bank of Poland)
    Abstract: This paper checks how international spillovers of shocks and polices are modified when banks are foreign owned. We build a two-country DSGE model with banking sectors that are owned by residents of one (big and foreign) country. Consistently with empirical findings we find that foreign ownership of banks amplifies spillovers from foreign shocks. Moreover, it also strenghtens the international transmission of monetary and macroprudential policies. Finaly, we replicate the financial crisis in the euro area and show how, by preventing bank capital outflow in 2009 Polish regulatory authorities managed to reduce its spillover to Poland. We also show that under foreign bank ownership such policy is strongly prefered to a recapitalization of domestic banks.
    Date: 2015
  10. By: Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin
    Abstract: In this paper, we assess the impact of major German structural reforms from 1999 to 2008 on key macroeconomic variables. By many, these reforms, especially the Hartz reforms on the labor market, are considered to be the root of observed imbalances in the Euro Area. Our simulations within a two-country monetary union DSGE model show that, in terms of German GDP, consumption, investment and (un)employment, the reforms were a clear success albeit the impact on the German current account was only minor. Most importantly, the rest of the Euro Area benefited from positive spillover effects. Hence, our analysis suggests that the reforms cannot be held responsible for the currently observed macroeconomic imbalances within the Euro Area. Further simulations highlight the importance of increased savings preferences in Germany to explain the latter.
    Keywords: Fiscal Policy,Labor Market Reforms,DSGE Modeling,Macroeconomics
    JEL: H2 J6 E32 E62
    Date: 2015
  11. By: Michal Andrle; Michael Kumhof; Douglas Laxton; Dirk Muir
    Abstract: The Global Integrated Monetary and Fiscal model (GIMF) is a multi-region DSGE model developed by the Economic Modeling Division of the IMF for policy and scenario analysis. This paper compares two versions of GIMF, GIMF with a conventional financial accelerator, where bank balance sheets do not play a prominent role, and GIMF with both a financial accelerator and a fully specified banking sector that can make lending losses, and that is regulated according to Basel-III. We illustrate the comparative macroeconomic properties of both models by presenting their responses to a wide range of fiscal, demand, supply and financial shocks.
    Keywords: Macroprudential Policy;Multi-Region DSGE Models, Financial Accelerator, Macro-Financial Linkages, banks, bank, capital, lending, interest, Other,
    Date: 2015–07–10
  12. By: Fumiko Hayashi; Grace Bin Li; Zhu Wang
    Abstract: This paper examines innovation, deregulation, and firm dynamics over the life cycle of the U.S. ATM and debit card industry. In doing so, we construct a dynamic equilibrium model to study how a major product innovation (introducing the new debit card function) interacted with banking deregulation drove the industry shakeout. Calibrating the model to a novel dataset on ATM network entry, exit, size, and product offerings shows that our theory fits the quantitative pattern of the industry well. The model also allows us to conduct counterfactual analyses to evaluate the respective roles that innovation and deregulation played in the industry evolution.
    Keywords: Financial services industry;United States;Industrial structure;Technological innovation;Equilibrium. Econometric models;Innovation; Deregulation; Industry Dynamics; Shakeout
    Date: 2015–08–18
  13. By: Brüggemann, Bettina; Yoo, Jinhyuk
    Abstract: We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual U.S. tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.
    Keywords: Top Income Taxation,Heterogeneous Agents,Incomplete Markets,Income and Wealth Inequality
    JEL: E21 E62 H21 H24
    Date: 2015
  14. By: Mankart, Jochen; Rodano, Giacomo
    Abstract: Every year 400,000 entrepreneurs fail and 60,000 file for personal bankruptcy. The option to declare bankruptcy provides entrepreneurs with insurance against the financial consequences of business failures. However, it comes at the cost of worsened credit market conditions. In this paper, we construct a quantitative general equilibrium model of entrepreneurship to show that the presence of secured credit in addition to unsecured credit substantially alters the trade-off between insurance and credit conditions. A lenient bankruptcy law always worsens credit conditions, in particular for poor entrepreneurs. If secured credit is not available, their credit conditions are so bad that many prefer to become workers. In that case, we show that the optimal bankruptcy law is very harsh because the benefits from better credit conditions dominate the worsened insurance. However, if secured credit is available, entrepreneurs who might be rationed out of the unsecured credit market can still obtain secured credit. Therefore, they can run larger firms, which makes entrepreneurship more attractive. Since the presence of secured credit lowers the cost of a generous bankruptcy law, we find that the optimal law is lenient in this case; exactly the opposite result as obtained in the model version without secured credit.
    Keywords: Personal Bankruptcy,Entrepreneurship,Occupational Choice
    JEL: M13 K10 O41 E20
    Date: 2015
  15. By: Etienne Lehmann (CRED (TEPP) University Panthéon Assas, Paris 2); Paola L. Montero Ledezma (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Bruno Van der Linden (FNRS and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This article examines unemployment disparities and efficiency in a densely populated economy with two job centers and workers distributed between them. We introduce commuting costs and search-matching frictions to deal with the spatial mismatch between workers and firms. In a decentralized economy job-seekers do not internalize a composition externality they impose on all the unemployed. With symmetric job centers, a change in the distribution of the workforce can lead to asymmetric equilibrium outcomes. We calibrate the model for Los Angeles and Chicago Metropolitan Statistical Areas. Simulations suggest that changes in the workforce distribution have non-negligible effects on unemployment rates, wages, and net output, but cannot be the unique explanation of a substantial mismatch problem.
    Keywords: Spatial mismatch, commuting, urban unemployment, externality
    JEL: J64 R13 R23
    Date: 2015–08–26
  16. By: Kyle F. Herkenhoff; Lee E. Ohanian
    Abstract: This paper documents that the time required to initiate and complete a home foreclosure rose from about 9 months on average prior to the Great Recession to an average of 15 months during the Great Recession and afterward. We refer to these changes as foreclosure delay. We also document that many borrowers who are in foreclosure ultimately exit foreclosure and keep their homes by making up for missed mortgage payments. We analyze the impact of foreclosure delay on the U.S. labor market as an implicit credit line from a lender to a borrower (mortgagor) within a search model. In the model, foreclosure delay provides unemployed mortgagors with additional time to search for a high-paying job. We find that foreclosure delay decreases mortgagor employment by about 0.75 percentage points, nearly doubles the stock of delinquent mortgages, increases the rate of homeownership by about 0.3 percentage points, and increases job match quality, as mortgagors search longer. Severe foreclosure delays, such as those observed in Florida and New Jersey, can depress mortgagor employment by up to 1.3 percentage points. The model results are consistent with PSID and SCF data that show that employment rates rise for delinquent mortgagors once the mortgagor is in the foreclosure process.
    JEL: E24 J0 R3
    Date: 2015–09
  17. By: Mirko Abbritti (University of Navarra); Tommaso Trani (University of Navarra)
    Abstract: This paper develops a model of pricing dynamics in business to business relationships. The formation of business relationships is a process of search and matching between retailers and wholesalers in the product market. The size of each transaction and the related price are set through bilateral bargaining. There are three key factors that influence the reaction of prices and quantities to cost shocks: the persistence of the shocks, the adjustment of final goods production and the search externalities. These factors determine how firms adjust, whether through the intensive margin, through the extensive margin or through both. Based on this, we assess to what extent wholesale prices affect the allocation of consumption in closed economy and deliver expenditure switching in open economy.
    Date: 2014–11–01
  18. By: Buiter, Willem H.; Sibert, Anne C.
    Abstract: Large and growing levels of public debt in the United States, United Kingdom, Japan and the Euro Area raise new interest in the cross-country effects of a large open economy's deficits. The authors consider a dynamic optimising model with costly tax collection and exogenously given public spending and initial debt. They ask whether the externalities associated with an individual country's deficits are positive or negative. They characterise the path of taxes in the Nash equilibrium where policy makers act nationalistically and compare this outcome to the global optimal outcome.
    Keywords: fiscal policy,international policy coordination,optimal taxation
    JEL: E62 F42 H21
    Date: 2015
  19. By: Michal Horváth (University of York); Matus Senaj (Council for Budget Responsibility); Zuzana Siebertova (Council for Budget Responsibility); Norbert Svarda (Council for Budget Responsibility)
    Abstract: The paper provides a quantitative assessment of the consequences of departing from a flat-tax system in the context of Slovakia. A behavioural microsimulation model of the labour supply is embedded into a general equilibrium framework with search and matching frictions. Some recently implemented changes in the tax system leave aggregate labour market indicators as well as inequality measures virtually unaffected. We also examine hypothetical revenue-neutral reforms that would significantly increase the progressivity of the system through graduated marginal tax rates. We find that there are narrow limits to what policy makers could accomplish through such reforms in terms of employment and equality of income. Hence, an income tax reform should at best be seen as a complementary tool to other initiatives promoting such objectives. Moreover, we highlight an important trade-off: income tax reforms that promote employment may harm growth.
    Keywords: flat tax, microsimulation, general equilibrium, search and matching, labour supply elasticity
    JEL: E24 H24 H31 J22
    Date: 2015–08
  20. By: Nir Jaimovich; Sergio Rebelo; Arlene Wong
    Abstract: We document two facts. First, during recessions consumers trade down in the quality of the goods and services they consume. Second, the production of low-quality goods is less labor intensive than that of high-quality goods. So, when households trade down, labor demand falls, increasing the severity of recessions. We find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. We study two business cycle models that embed quality choice and find that the presence of quality choice magnifies the response of these economies to real and monetary shocks.
    JEL: E1 E2 E3
    Date: 2015–09
  21. By: Rannenberg, Ansgar (Central Bank of Ireland); Schoder, Christian (Vienna University of Economics and Business); Strasky, Jan (Organisation for Economic Co-operation and Development)
    Abstract: Since 2010, fiscal policy in the Euro Area (EA) turned progressively more restrictive.According to estimates by the European Commission (2012), spending cuts and tax increases accumulated to about 4% of annual Euro Area GDP between 2011 and 2013.The switch to fiscal austerity has been associated with a return of the EA economy to recession. The role of the fiscal consolidation in driving the Euro Area's disappointing economic performance is uncertain and disputed. This paper gauges the impact of this policy employing variants of two DSGE models used for policy analysis by the ECB (the New Area Wide Model, NAWM) and the European Commission (QUEST III). We find that, first, the simulated effect of the Euro Area's fiscal consolidation strongly depends on one's view regarding the expected persistence of the measures anticipated by the agents. If agents believe the measures to be permanent, the consolidation might even have been expansionary due to strong riccardian effects. However, it is plausible to assume that households and firms did not expect the measures to be permanent, and have a finite horizon due to some degree of myopia. We operationalize these concerns by simulating the measures as very persistent but not permanent. In this scenario, which we treat as our baseline, GDP contracts in both models, with the cumulative multiplier of the fiscal consolidation amounting to 0.7 and 1.0 over the 2011-2013 period, respectively. The government debt-to-GDP ratio declines below the non-consolidation case only after one or three years. We then investigate the impact of two plausible enhancements of the degree of financial frictions in the models. First, we add a reasonably parameterised financial accelerator along the lines of Bernanke et al. (1999). As a result, the output contraction becomes considerably bigger. Second, we allow for a plausible crisis-related increase of the share of liquidity constrained households. With both of these enhancements, the debt-to-GDP ratio increases for 4 or 5 years relative to the non-consolidation case. The cumulative multiplier equals 1.3. These results would imply that, in our baseline scenario, fiscal consolidation is responsible for between one third (NAWM) and one half (QUEST III) of the decline of the Euro Area's output gap from the beginning of 2011 until the end of the EA's recent recession in 2013, with the share rising to about 80% in the presence of enhanced financial frictions. Moreover, most of the output costs of fiscal consolidation could have been avoided if it had been postponed until the zero lower bound constraint on monetary policy was no longer binding, and under such conditions the government debt-to-GDP ratio could have been reduced much more quickly.
    Keywords: Fiscal policy simulations, fiscal consolidation, fiscal multiplier, Euro Area
    JEL: E32 E62
    Date: 2015–08
  22. By: Stefan Laseen; Andrea Pescatori; Jarkko Turunen
    Abstract: We introduce time-varying systemic risk in an otherwise standard New-Keynesian model to study whether a simple leaning-against-the-wind policy can reduce systemic risk and improve welfare. We find that an unexpected increase in policy rates reduces output, inflation, and asset prices without fundamentally mitigating financial risks. We also find that while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is highly sensitive to parameters of the model and (2) is detrimental in the presence of falling asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more robust and leads to higher welfare gains.
    Keywords: Monetary policy;Endogenous Financial Risk, DSGE models, Non-Linear Dynamics, Policy Evaluation, financial sector, welfare, prices, equity,
    Date: 2015–06–30
  23. By: Andrea Bonilla (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 studies how the public provision of transportation infrastructure impact output convergence and trade integration in a two-country dynamic general equilibrium model in which the transportation cost between countries is endogenously determined by the stock of public infrastructure in both countries. Because of its particular conception, the so-called « Initiative for the Integration of Regional Infrastructure in South America (IIRSA) » serves as the case study. Data from Argentina and Brazil is thus used to solve the model. Two main results emerge. First, increasing public investment in infrastructure provides an impetus to commercial integration but does not necessarily generate output convergence. Second, the model shows that the only way for the two countries to achieve output convergence (in a win-win economic growth scenario) is to coordinate their increments on public infrastructure, as proposed by IIRSA.
    Date: 2015
  24. By: Ricardo Lagos; Shengxing Zhang
    Abstract: We develop a model of monetary exchange in over-the-counter markets to study the effects of monetary policy on asset prices and standard measures of financial liquidity, such as bid-ask spreads, trade volume, and the incentives of dealers to supply immediacy, both by participating in the market-making activity and by holding asset inventories on their own account. The theory predicts that asset prices carry a speculative premium that reflects the asset's marketability and depends on monetary policy as well as the microstructure of the market where it is traded. These liquidity considerations imply a positive correlation between the real yield on stocks and the nominal yield on Treasury bonds---an empirical observation long regarded anomalous. The theory also exhibits rational expectations equilibria with recurring belief driven events that resemble liquidity crises, i.e., times of sharp persistent declines in asset prices, trade volume, and dealer participation in market-making activity, accompanied by large increases in spreads and abnormally long trading delays.
    JEL: D83 E31 E52 E58 G12
    Date: 2015–09
  25. By: Ansgar Rannenberg; Christian Schoder; Jan Strásky
    Abstract: We simulate the Euro Area's fiscal consolidation between 2011 and 2013 by employing two DSGE models used by the ECB and the European Commission, respectively. The cumulative multiplier amounts to 0.7 and 1.0 in the baseline, but increases to 1.3 with a reasonably calibrated financial accelerator and a crisis-related increase of the share of liquidity constrained households. In the latter scenario, fiscal consolidation would be largely responsible for the decline in the output gap from 2011-2013. Postponing the fiscal consolidation to a period of unconstrained monetary policy (until after the economic recovery) would have avoided most of these losses.
    Keywords: Fiscal policy simulations, fiscal consolidation, fiscal multiplier, Euro Area
    JEL: E32 E62
    Date: 2015
  26. By: Fernando MESA PARRA
    Abstract: This paper focuses on the decomposition of real wages in Colombia both by workers' ages and by cohorts, which overlap over time. The paper analyses how the Colombia's labour structure has undergone important changes in the period 1982-2007. This period has been characterized by a demographic transition that has tilted the balance from a relatively young population to an older one. The effects of capital accumulation have been estimated and modelled considering the presence of ever more sophisticated machinery, usually replacing less-skilled, younger workers, in relation to older and more qualified ones. In general real wages present a curved shape for each generation, as is acknowledged in the life-cycle hypothesis, according to which people generally start their working life with low incomes and rising debts and then obtain higher income and accumulate assets.
    Keywords: Demographic trends, Macroeconomic effects, Wage levels andstructure, Wage differential, Intergenerational income distribution.
    JEL: J11 J23 E24
    Date: 2015–05–20
  27. By: Solmaz Moslehi (Monash University); Satoshi Tanaka (University of Queensland); Alessio Moro (University of Cagliari)
    Abstract: Using new home production data for the U.S., we estimate a model of structural transformation with a home production sector, allowing for both non-homotheticity of preferences and differential productivity growth in each sector. We report three main findings. First, the data support a specification with a different income elasticity of market and home services. Second, the non-homotheticity can account alone for the decline in the home services share, while price and income effects together are responsible for the rise of market services. Third, the slowdown in home labor productivity, started in the late 70s, is a key determinant of the late acceleration of the share of market services. We use the estimated model to run a counter-factual experiment and find that, by keeping the average growth rate of home labor productivity as before 1978, the model displays the consumption per capita of market services lowered by 26.1% in 2010.
    Date: 2015

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