|
on Dynamic General Equilibrium |
| By: | Yasin Mimir; Enes Sunel |
| Abstract: | We systematically document that the 2007-09 financial crisis exposed emerging market economies (EMEs) to an adverse feedback loop of capital outflows, depreciating exchange rates, deteriorating balance sheets, rising credit spreads and falling real economic activity. Using a medium-scale New Keynesian DSGE model of a small open economy augmented with a banking sector that has access to both domestic and foreign funds, we explore the quantitative performances of alternative augmented IT rules in terms of macroeconomic and financial stabilization. In response to external financial shocks, credit-augmented IT rules are found to outperform output and exchange rate augmented rules in achieving policy mandates that target financial and external stability. A countercyclical reserve requirement policy that positively responds to the noncore liabilities share is found effective especially in coordination with monetary policy in reducing the procyclicality of the financial system. |
| Keywords: | External shocks, Banks, Foreign debt, Reserve requirements |
| JEL: | E44 G21 G28 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1525&r=all |
| By: | Lorenza Rossi |
| Abstract: | I consider a NK-DSGE model with endogenous ?firms'? exit and entry together with a monopolistic competitive banking sector, where defaulting ?firms do not repay loans to banks. I show that the exit margin is an important shock transmission channel. It implies: i) an endogenous countercyclical number of fi?rms destruction; ii) an endogenous countercyclical bank markup and spread. The interaction between i) and ii) generates a stronger propagation mechanism with respect to a model with efficient banks. Compared to a model with exogenous exit the model generates a correlation between output and ?firms' ?entry closer to the data. |
| Keywords: | fi?rms ?endogenous exit, ?firms dynamics, monopolistic banking, inefficient fi?nancial markets, countercyclical bank markup, interest rate spread.. |
| JEL: | E32 E44 E52 E58 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:lui:lleewp:15117&r=all |
| By: | Tavares, Tiago |
| Abstract: | Risk of sovereign debt default has frequently affected emerging market and developed economies. Such financial crisis are often accompanied with severe declines of employment that are hard to justify using a standard dynamic stochastic model. In this paper, I document that a labor wedge deteriorates substantially around swift reversals of current accounts or default episodes. I propose and evaluate two different explanations for these movements by linking the wedges to changes in labor taxes and in the cost of working capital. With these two features included, a dynamic model of equilibrium default is able to replicate the behavior of the labor wedge observed in the data around financial crisis. In the model, higher interest rates are propagated into larger costs of hiring labor through the presence of working capital. As an economy is hit with a stream of bad productivity shocks, the incentives to default become stronger, thus increasing the cost of debt. This reduces firm demand for labor and generates a labor wedge. A similar effect is obtained with a counter-cyclical tax rate policy. The model is used to shed light on the recent events of the Euro Area debt crisis and in particular of the Greek default event. |
| Keywords: | Sovereign default, labor markets, distortionary taxation, external debt, debt renegotiation, labor wedge |
| JEL: | E62 F32 F34 F41 |
| Date: | 2015–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66964&r=all |
| By: | Hande Kucuk; Alan Sutherland |
| Abstract: | This paper aims to account for the Backus-Smith puzzle in a generally calibrated two-country DSGE model with endogenous portfolio choice in international bonds and equities. There are multiple shocks, including shocks to TFP, labour supply, investment, government spending and monetary policy. Hence, there are more risks than can be spanned by international trade in equities and bonds, i.e. markets are incomplete. The utility function in the benchmark model is non-separable in consumption and leisure and there is external habit formation in consumption. We compare the benchmark model with models that differ according to preference/habit specification and financial market structure. We find that the benchmark model with non-separable preferences across consumption and leisure, habit formation and incomplete financial markets implies almost zero correlation between relative consumption and the real exchange rate while generating bond and equity portfolios that are broadly in line with the data. What is more, the cross-country correlation of consumption is lower than the cross-country correlation of output in our benchmark model, which has proved to be a difficult fact to match in IRBC models. Non-separable preferences are found to be crucial to generating these results but financial market structure plays only a minor role. |
| Keywords: | Portfolio choice, International risk sharing, Consumption-real exchange rate anomaly, Backus-Smith puzzle, Non separable preferences, Incomplete markets |
| JEL: | F31 F41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1517&r=all |
| By: | Nicolas Petrosky-Nadeau (Carnegie Mellon University) |
| Abstract: | We develop a two-sector search-matching model of the labor market with imperfect mobility of work- ers, augmented to incorporate a housing market and a frictional goods market. Homeowners use home equity as collateral to finance idiosyncratic consumption opportunities. A financial innovation that raises the acceptability of homes as collateral raises house prices and reduces unemployment. It also triggers a reallocation of workers, with the direction of the change depending on firms' market power in the goods market. A calibrated version of the model under adaptive learning can account for house prices, sectoral labor flows, and unemployment rate changes over 1996-2010. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:892&r=all |
| By: | Olivier Allais (Inra); Xavier Ragot (Paris School of Economics); Edouard Challe (Ecole Polytechnique); Yann Algan (Sciences Po) |
| Abstract: | What are the costs of inflation fluctuations and who bears those costs? In this paper, we investigate this question by means of a quantitative incomplete-market, heterogenous-agent model wherein households hold real and nominal assets and are subject to both idiosyncratic labor income shocks and aggregate inflation risk. Inflation risk is found to generates signicant welfare losses for most households, i.e., between 1 and 1.5 percent of permanent consumption. The loss is small or even negative for households at the very top of the productivity and/or wealth distribution. A key feature of our analysis is a nonhomothetic specication for households' preferences towards money and consumption goods. Unlike traditional specications, ours allows the model to reproduce the broad features of the distribution of monetary assets (in addition to being consistent with the distribution of nonmonetary assets). |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:867&r=all |
| By: | Ma³gorzata Skibiñska |
| Abstract: | We use a structural macroeconomic model with search and matching frictions on the labour market to analyse the di?erences in the business cycle ?uctuations of the labour wedge between two CEE countries and the Euro Area. Our results indicate that the observed higher volatility of this wedge in the CEE region re?ects mainly di?erent characteristics of stochastic disturbances rather than country-speci?c features of the labour market. We also ?nd signi?cant di?erences in the sources of labour wedge ?uctuations across the considered economies. While the labour wedge dynamics in Poland is to large extent explained by shocks originating in the labour market, most of its variations in the Czech Republic and in the Eurozone are attributable to changes in households’ preferences. Overall, our results suggest that labour market frictions in Poland are relatively more severe and generate ?uctuations that are more harmful for social welfare. |
| Keywords: | labour wedge, search and matching frictions, business cycle, CEE countries |
| JEL: | E32 J64 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:ibt:wpaper:wp142015&r=all |
| By: | Stephane Auray (CREST-Ensai and Universite du Littoral Cote d'Opale); Aurelien Eyquem (CREST-Ensai, CNRS, and GATE-Lyon Saint-Etienne); Paul Gomme (Concordia University and CIREQ) |
| Abstract: | To evaluate fiscal policy reforms for Euro-area countries, this paper develops and calibrates a small open economy model. Debt reduction reforms require higher tax rates in the short term in exchange for lower rates in the long term as the debt servicing burden falls. Using the capital income tax to implement such a policy leads to welfare gains; the consumption tax, a very small welfare gain; and the labor income tax, a welfare loss. Holding fixed the long run debt-output ratio, offsetting a lower capital income tax with either a higher labor income or consumption tax generally yields welfare gains. |
| Keywords: | Fiscal policies, open economies, public deficits, tax reforms. |
| JEL: | E31 E62 F41 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:15004&r=all |
| By: | Bayer, Christian; Lütticke, Ralph; Pham-Do, Lien; Tjaden, Volker |
| Abstract: | Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid ``paper'' assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. This translates into output losses, which a central bank can prevent by providing liquidity. We show that the welfare consequences of uncertainty shocks crucially depend on a household's asset position. Households with little human capital but high illiquid wealth lose the most from an uncertainty shock and gain the most from stabilization policy. |
| Keywords: | incomplete markets; nominal rigidities; uncertain shocks |
| JEL: | E12 E22 E32 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10849&r=all |
| By: | Louis Phaneuf; Eric R. Sims; Jean Gardy Victor |
| Abstract: | We formulate a medium-scale DSGE model that emphasizes a strong interplay between a roundabout production structure and a working capital channel that requires firms to borrow funds to finance the costs of all their variable inputs and not just the wage bill. Despite an absence of backward-looking price and wage indexation, our model is able to account for (i) a persistent and hump-shaped response of inflation to a monetary policy shock, (ii) a large and persistent response of output to a monetary policy shock, (iii) a mild "price puzzle," (iv) a procyclical price markup conditional on a monetary shock, (v) non-inertial responses of inflation to non-monetary shocks, and (vi) a negative unconditional autocorrelation of the first difference of inflation that is consistent with the data. A medium-scale model relying on backward indexation of wages and prices to past inflation fails along several of these dimensions. |
| JEL: | E00 E1 E4 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21599&r=all |
| By: | Antoine Le Riche (GAINS, Aix-Marseille University (Aix-Marseille School of Economics), GREQAM, CNRS & EHESS); Francesco Magris (LEO, University “François Rabelais” of Tours) |
| Abstract: | We study a two-sector OLG economy in which a share of old age consumption expenditures must be paid out of money balances and we appraise its dynamic features. We first show that competitive equilibrium is dynamically efficient if and only if the share of capital on total income is large enough while a steady state capital per capita above its Golden Rule level is not consistent with a binding liquidity constraint. We thus focus on the gross substitutability in consumption and on dynamic efficiency assumptions and show that, gathered together, they ensure the local determinacy of equilibrium and, as a consequence, rule out sunspot fluctuations. In addition, we prove that the unique steady state may change its stability from a saddle configuration to a source one (undergoing a flip bifurcation) for a capital intensive investment good as well as for a capital intensive consumption good, when the elasticity of the interest rate is set low enough. However, when the investment good is not too capital intensive, the flip bifurcation turns out to be compatible with high elasticities of the interest rate too. Analogous results within dynamic efficiency are found in the non-monetary model, the existence of a flip bifurcation requiring now a capital intensive investment good. Eventually, under dynamic inefficiency, in the non-monetary economy local indeterminacy may instead appear, either through a Hopf bifurcation or through a flip one, and its scope improves as soon as the consumption good becomes more and more capital intensive. |
| Keywords: | overlapping generations, two-sector, money demand, dynamic efficiency, equilibrium dynamics |
| Date: | 2015–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1536&r=all |
| By: | Yavuz Aslan; Bulent Guler; Temel Taskin |
| Abstract: | This paper studies the joint transitional dynamics of the foreclosures and house prices in a standard life-cycle incomplete markets model with housing and a realistic long-term mortgage structure. We calibrate our model to match several long term features of the US housing market, and analyze the effects of several unexpected and permanent shocks on the house price and the foreclosure rate both across the steady-states and along the transition between the steady-states. We examine permanent, unexpected shocks to the risk-free interest rate, the minimum down payment ratio, and unemployment. During the transition, these shocks create large movements in house prices. More importantly, the foreclosure dynamics are quite significant along the transition compared to the steady-state changes, and there are strong feedbacks between foreclosures and house prices. We assess the effects of a temporary reduction in the risk-free interest rate, which has moderate effects on house prices but little effect on foreclosure dynamics. We also study the effects of an ex-ante macroprudential policy, which establishes a minimum downpayment requirement at a higher threshold. Such a macroprudential policy helps substantially stabilize both house prices and foreclosures. |
| Keywords: | Housing, House price, Interest rate, Mortgage contract, Mortgage default, Home equity |
| JEL: | D91 E21 G01 R21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1440&r=all |
| By: | Kavli, Haakon; Viegi, Nicola |
| Abstract: | The paper presents a two-country real business cycle model with a financial sector that intermediates portfolio flows. It is changes in demand for financial assets from foreign investors relative to domestic investors that gives rise to portfolio flows. The simulations show that portfolio flows to emerging markets respond negatively to global risk in line with findings from the empirical literature. The transmission channel that links portfolio flows to credit in emerging markets is the financial intermediary's demand for deposit liabilities (demand for savings). One can avoid the transmission by absorbing the shock before it affects the intermediary's demand for savings. The results show that financial shocks (eg: risk) can be absorbed by optimal changes in the supply of risk free assets. Real shocks (eg: income) can be absorbed by keeping the supply of financial assets fixed and instead allowing the prices to adjust to demand. Macroprudential regulation that limits the total risk exposure of the financial sector increases the volatility of portfolio flows, but reduces the volatility of consumption and labour and therefore increases welfare. Volatility in the composition of the balance sheet (portfolio flows), does not necessarily increase volatility in the aggregate size of the balance sheet (savings). The model uses a risk-constraint on bank balance sheets as a tool to ensure less-than-perfect elasticity of demand for financial assets. The elasticity of demand is important because it determines the size and direction of portfolio flows. |
| Keywords: | International capital flows, portfolio flows, financial intermediaries, macroprudential policies, DSGE Open Economy |
| JEL: | F3 F4 F41 F44 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66875&r=all |
| By: | Tavares, Tiago |
| Abstract: | Highly indebted developing economies commonly also hold large external reserves. This behavior seems puzzling given that governments in these countries borrow with an interest rate penalty to compensate lenders for default risk. Reducing debt to the same extent as reserves would maintain net liabilities constant while decreasing interest payments. However, holding reserves can have insurance benefits in a financial crisis. To rationalize the levels of international reserves and external debt observed in the data, a standard dynamic model of equilibrium default is extended to include distortionary taxation and debt restructuring. This paper shows that fiscal adjustments induced by sovereign default can generate large demand for reserves if taxation is distortionary. At the same time, a non-negligible position in reserves modifies the debt restructuring negotiations upon default. A calibrated version of the model produces recovery rate schedules that are increasing with reserves, as seen in the data, being also able to replicate large positions of reserves and debt to GDP. Finally, I study how both mechanisms play a key quantitative role to generate such result, in fact, not including them, produces a counterfactual demand for reserves that is close to zero. |
| Keywords: | Sovereign default, international reserves, distortionary taxation, external debt, sudden stops, debt renegotiation |
| JEL: | E62 F32 F34 F41 |
| Date: | 2015–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66962&r=all |
| By: | Stadin, Karolina (Department of Economics, Uppsala University) |
| Abstract: | According to search and matching theory, a greater availability of unemployed workers should make it easier for a firm to fill a vacancy but more vacancies at other firms should make recruitment more difficult. But what can we say about the expected magnitudes of these effects on firms’ employment dynamics? In this paper, I simulate a theoretical model featuring search frictions in the labor market, imperfect competition in the product market and quadratic adjustment costs. The simulations show quite small employment effects of typical shocks to the number of vacancies in the local labor market and very small effects of typical shocks to the number of unemployed. The employment effects are smaller in recessions than in booms. Estimation of an employment equation using panel data for Swedish firms suggests that neither the number of unemployed nor the number of vacancies in the local labor market are important for firms’ employment dynamics. Thus, the empirical results are in line with the predictions from the theoretical simulations. |
| Keywords: | Employment dynamics; search and matching frictions |
| JEL: | E24 J23 J63 J64 |
| Date: | 2015–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ifauwp:2015_020&r=all |
| By: | Carlos da Costa (Fundacao Getulio Vargas) |
| Abstract: | We calculate optimal age-dependent labor income taxes in an environment for which the age efficiency profile is endogenously determined by human capital investment. Heterogeneous individuals are exposed to idiosyncratic shocks to their human capital investments, a key element, along with the endogeneity of human capital itself in the determination of optimal age-dependent taxes. Our results highlight the complementary role of capital income taxation when human capital is endogenous. The nature of human capital accumulation is quantitatively relevant for determining the age dependence of income taxes. We assess the cost of ignoring the endogenous nature of age-efficiency profiles. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:824&r=all |
| By: | Semih Tumen; Deren Unalmis; Ibrahim Unalmis; D. Filiz Unsal |
| Abstract: | This paper investigates the mechanisms through which environmental taxes on fossil fuel usage can affect the main macroeconomic variables in the short-run. We concentrate on a particular mechanism : speculative storage. The existence of forward-looking speculators in the model improves the effectiveness of tax policies in reducing fossil fuel usage. Improved policy effectiveness, however, is costly : it drives inflation and interest rates up, while impeding output. Based on this tradeoff, we seek an answer to the question how monetary policy should interact with environmental tax policies in our DSGE model of fossil fuel storage. |
| Keywords: | Fossil fuel, Environmental taxes, Speculative storage, DSGE |
| JEL: | E31 E52 H23 O44 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1502&r=all |
| By: | Makoto Nakajima (Federal Reserve Bank of Philadelphia) |
| Abstract: | We ask two questions related to how access to credit affects the nature of business cycles. First, does the standard theory of unsecured credit account for the high volatility and procyclicality of credit and the high volatility and countercyclicality of bankruptcy filings found in U.S. data? Yes, it does, but only if we explicitly model recessions as displaying countercyclical earnings risk (i.e., rather than having all households fare slightly worse than normal during recessions, we ensure that more households than normal fare very poorly). Second, does access to credit smooth aggregate consumption or aggregate hours worked, and if so, does it matter with respect to the nature of business cycles? No, it does not; in fact, consumption is 20 percent more volatile when credit is available. The interest rate premia increase in recessions because of higher bankruptcy risk discouraging households from using credit. This finding contradicts the intuition that access to credit helps households to smooth their consumption. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:833&r=all |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Hylton Hollander (African Institute of Financial Markets & Risk Management, Faculty of Commerce, University of Cape Town, South Africa); Rudi Steinbach (Economic Research and Statistics Department, South African Reserve Bank) |
| Abstract: | Evidence in favor of the ability of the term spread to forecast economic growth of the South African economy is non-existent. Presuming that this could be due to the term spread aggregating, and hence loosing out on important, information contained in the expected spread and the term premium, we: (i) Develop an estimable Small Open Economy New Keynesian Dynamic Stochastic General Equilibrium (SOENKDSGE) model of the in ation targeting South African economy; (ii) Use the SOENKDSGE model, estimated using Bayesian methods, to decompose the term spread into an expected spread and the term premium over the quarterly period of 2000:01-2014:04, and; (iii) Use a linear predictive regression framework to analyze the out-of-sample forecasting ability of the aggregate term spread, as well as the expected spread and term premium. Our forecasting results fail to detect forecasting gains from the aggregate term spread and also the term premium, but the expected spread is found to contain important information in forecasting the output growth over short- to medium-run horizons, over the out-of-sample period of 2004:01-2014:04. In other words, we confirm our presumption, and in the process highlight the importance of the forward looking component of the term spread, i.e., the expected spread, in forecasting output growth of South Africa. |
| Keywords: | Structural decomposition, Term spread, DSGE, Predictive regression framework, Forecasting output growth, South Africa |
| JEL: | C22 C53 E32 E43 E47 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201567&r=all |
| By: | Michael Chin (Bank of England); Thomai Filippeli (Queen Mary University of London); Konstantinos Theodoridis (Bank of England) |
| Abstract: | Long-term interest rates in a number of small-open inflation targeting economies co-move more strongly with US long-term rates than with short-term rates in those economies. We augment a standard small open-economy model with imperfectly substitutable government bonds and time-varying term premia that captures this phenomenon. The estimated model fits a range of US and UK data remarkably well, and produces term premium estimates that are comparable to estimates from the affine term structure model literature. We find that the strong co-movement between US and UK long-term interest rates arises primarily via correlated policy rate expectations, rather than through correlated term premia. This is due to policymakers in both economies responding to foreign productivity and discount factor shocks that cause persistent changes in inflation. We also overcome the common failure of similar models to account for the large influence of foreign disturbances on domestic economies found empirically, where in our model around 40% of the variation in UK GDP can be explained by shocks originating in the US economy. |
| Keywords: | DSGE model, Small open economy, Yield curve, Long-term interest rates, Term premia, Co-movement |
| JEL: | E43 E44 F30 F44 G15 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp753&r=all |
| By: | Dedry,Antoine; Onder,Harun; Pestieau,Pierre |
| Abstract: | This paper analyzes the impact of aging on capital accumulation and welfare in a country with a sizable unfunded social security system. Using a two-period overlapping generation model with endogenous retirement decisions, the paper shows that the type of aging and the type of unfunded social security system are important in understanding this impact. The analysis compares two types of demographic changes, declining fertility and increasing longevity; three types of pensions, defined contributions, defined benefits, and defined annuities; as well as mandatory and optimal retirement systems to investigate the differences in implications of aging. |
| Keywords: | Economic Theory&Research,Population Policies,Emerging Markets,Labor Policies,Pensions&Retirement Systems |
| Date: | 2015–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:7418&r=all |
| By: | Osman Furkan Abbasoglu |
| Abstract: | This paper develops a model of risky health behaviors to explore the optimal cost-sharing mechanism in a single provider health insurance system in which everyone contributes the same amount. In this economy, health insurance provides coverage against controllable health outcomes, and idiosyncratic health shocks. The model is calibrated to the U.S. economy using the Medical Expenditures Panel Survey dataset. I find that the optimal set of policies is the one in which workers pay 30 percent of their health care bills while retirees pay 20 percent. Welfare gains mostly come from the healthy who prefers less generous health insurance policies. |
| Keywords: | Health insurance, Life cycle model, Medical expenditures |
| JEL: | D91 E60 I12 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1508&r=all |
| By: | Alexis Akira Toda (UC San Diego); Kieran Walsh (University of Virginia Darden School of Business) |
| Abstract: | We find that when the income share of the top 1% income earners in the U.S. rises above trend by one percentage point, subsequent one year market excess returns decline on average by 5.6%. This negative relation remains strong and significant even when controlling for classic return predictors such as the price-dividend and the consumption-wealth ratios. To explain this stylized fact, we build a general equilibrium asset pricing model with heterogeneity in wealth and risk aversion across agents. Our model admits a testable moment condition and a novel two factor covariance pricing formula, where one factor is inequality. Intuitively, when wealth shifts into the hands of rich and risk tolerant agents, average risk aversion falls, pushing down the risk premium. Our model is broadly consistent with data and provides a novel positive explanation of both market excess returns over time and the cross section of returns across stocks. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:858&r=all |
| By: | Berka, M; Devereux, MB; Engel, C |
| Abstract: | We investigate the link between real exchange rates and sectoral total factor productivity measures for countries in the Eurozone. We show that real exchange rate variation, both in cross-country and time series, closely accords withan amended Balassa-Samuelson interpretation, incorporating shocks both to sectoral productivity and a labor market wedge. We construct a sticky price dynamic general equilibrium model to generate a cross-section and time series of real exchange rates that can be directly compared to the data. Under the assumption of a common currency, estimates from simulated regressions are very similar to the empirical estimates for the Eurozone. Our findings contrast with previous studies that have found little relationship between productivity levels and the real exchange rate among high-income countries, but those studies have included country pairs which have a floating nominal exchange rate. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:auc:wpaper:26970&r=all |
| By: | Clément Carbonnier (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS) |
| Abstract: | The present paper investigates the incidence of payroll taxation - and more generally labor income taxation - in a search and matching model. The model considers a production function with different type of workers, allowing to understand the interactions between segmented labor markets. Furthermore, the equilibrium is reach through a double process of intra-firm wage bargaining ex post and labor demand ex ante. The model is derived analytically for linear tax function differentiated for worker type, and numerically for non-linear tax functions. The bargaining power parameter is interpreted as reflecting the intra-segment substitutability, in parallel to the inter-segment substitutability deriving from the production function and the segment size and productivity. Some standard results are found, such as the wages, unemployment and incidence increasing with respect to bargaining power; or the payroll tax burden falling mainly on workers. Moreover, it is shown that over-shifting of payroll taxes on net wages may happen. It is also shown that a stronger bargaining power induced weaker direct effect of taxes but larger crossed effects on other segments. In addition, marginal incidence decreases with respect to the payroll tax level and is therefore significantly lower than mean incidence, which may induce an underestimation of overall incidence by empirical analyses. This also induces a marginally decreasing effect on loabor costs of payroll tax cuts. |
| Keywords: | Search and matching, segemented labor market, intra-firm bargaining, tax incidence |
| Date: | 2014–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01203122&r=all |
| By: | Okan Eren; Serife Genc Ileri |
| Abstract: | A new private pension scheme where the government makes direct contributions to the retirement accounts has been effective in Turkey since 2013. In this paper we examine the quantitative impacts of this new individual retirement system on the saving rate, capital stock and the long-run welfare of the individuals. We build a multi-period OLG model and simulate an economy with a pension scheme similar to the one in Turkey. Our simulation results reveal that the introduction of this private pension scheme increases the net saving rate by 0.27 percentage points. 23.9 percent of the increase in individual retirement assets constitutes incremental saving. The impact of the new system on physical capital stock is a 15.6 percent rise. According to our long-run welfare analysis, an unborn individual prefers to be born into the economy with individual retirement accounts (IRAs). Our results also suggest that cutting down the fees charged on individual retirement accounts generates a considerable improvement in net saving rate and the stock of physical capital. |
| Keywords: | Household Saving, Fiscal Policy, Private Pension Accounts |
| JEL: | D14 D91 E21 E62 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1520&r=all |
| By: | Jesús Rodríguez-López (U. Pablo de Olavide); Gustavo A. Marrero (U. La Laguna and CAERP); Rosa Marina González-Marrero (U. La Laguna and CAERP) |
| Abstract: | The stock of diesel motor cars has been growing during the last decades in Europe and nowadays accounts for nearly 40% of automobile fleet. Two issues helps explain this process. Firstly, fuel efficiency (liters/km) of diesel cars is about 20% higher than that of gasoline cars on average; secondly European governments have implemented tax policies lenient with diesel fuel, thus generating an extra stimulus to use diesel motor cars. We build on an dynamic general equilibrium model that makes distinction of diesel motor and gasoline motor vehicles, and calibrate it for main European countries. The model reproduces the vehicle fleet dieselization, the rebound effects in kilometers driven, the demand for fuel, and CO2 emissions dynamics. From a normative view, the model recommends a tax discrimination according to the carbon content of each fuel, and not according to the fuel efficiency of the engine. Given that such a content is 15% higher for diesel relative to gasoline, tax rates should reflect this point: 1.40 cents of Euro per liter of diesel, and 1.22 cents per liter of gasoline. This is equivalent to imposing a tax of 19 Euros per ton of carbon. Yet Pigouvian sale taxes on new cars are useless to internalize the costs of externalities. Both recommendations are radically different to the existing fuel tax design in most OECD countries, except in Australia, Switzerland, UK and the US. |
| Keywords: | Energy efficiency, Rebound effect, CO2 emissions, Pigouvian taxation. |
| JEL: | E13 H22 Q43 Q54 R40 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:15.11&r=all |
| By: | Juliana Salomao (University of Minnesota) |
| Abstract: | A credit default swap (CDS) contract provides insurance against default. After a country defaults, the country and its lenders usually negotiate over the share of the defaulted debt to be repaid. This paper incorporates CDS contracts into a sovereign default model and demonstrates that the existence of a CDS market results in lower default probability, higher debt levels, and lower financing costs for the country. Since the CDS payout is not automatically triggered by losses from renegotiations, the lender needs to be compensated for lower expected insurance payments. This leads to higher debt repayment in renegotiation, decreasing the benefits of defaulting, and hence allowing the country to borrow more at lower rates. Uncertainty over the insurance payout when the debt is renegotiated explains why in the data, as the output declines, the CDS spread becomes lower than the bond spread. Furthermore, this pricing dynamic during a debt crisis can be used to infer market perceptions of the probability of the CDS paying out after a renegotiation. The model is calibrated to Greek data and shows that increasing CDS levels from 0 to 5% of debt lowers the unconditional default probability from 2.6% to 2.0% per year with no impact on debt level. Further increasing the CDS to 40% of debt increases the equilibrium debt level by 15%, but also increases the probability of default to 3.1%. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:826&r=all |
| By: | Semih Tumen |
| Abstract: | Estimates on the effect of job contact method—i.e., informal versus formal search—on wage offers vary considerably across studies, with some of them finding a positive correlation between getting help from informal connections and obtaining high-paying jobs, while others finding a negative one. In this paper, I theoretically investigate the sources of discrepancies in these empirical results. Using a formal job search framework, I derive an equilibrium wage distribution which reveals that the informal search yields for some groups higher and for some others lower wages than formal search. The key result is the existence of nonmonotonicities in wage offers. Two potential sources of these nonmonotonicities exist : (i) peer effects and (ii) unobserved worker heterogeneity in terms of the inherent cost of maintaining connections within a productive informal network. The model predicts that a greater degree of unobserved heterogeneity tilts the estimates toward producing a positive correlation between informal search and higher wages, whereas stronger peer influences tend to yield a negative correlation. This conclusion informs the empirical research in the sense that identification of the true correlation between job contact methods and wage offers requires a careful assessment of the unobserved heterogeneity and peer influences in the relevant sample. |
| Keywords: | Job search, Informal networks, Peer effects, Heterogeneity |
| JEL: | D85 J31 J64 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1507&r=all |
| By: | Urvi Neelakantan (Federal Reserve Bank of Richmond); Felicia Ionescu (Federal Reserve Board); Kartik Athreya (Federal Reserve Bank of Richmond) |
| Abstract: | Households invest substantially in human capital, especially early in life, through partic- ipation in formal higher education. Later in life, they primarily invest in financial assets. Formal educational investments are lumpy and illiquid, financial investments are not. Both are risky. We show that in the presence of short-sale constraints on risky financial assets alone, the characteristics of formal education, including the cost of debt-finance, have strong effects on financial portfolios throughout life. Conversely, we show that changes in the rate of return on financial wealth can exert substantial influence on human capital investment decisions. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:804&r=all |
| By: | Mordecai Kurz; M. Motolese; G. Piccillo; H. Hu |
| Abstract: | We study the impact of diverse beliefs on conduct of monetary policy. Individual belief is modeled by a state variable that defines an individual’s perceived laws of motion. We use a New Keynesian Model that is solved with a quadratic approximation hence individual decisions are quadratic functions. Aggregation renders the belief distribution an aggregate state variable. Although the model has standard technology and policy shocks, diverse expectations change materially standard results about a smooth trade-off between inflation volatility and output volatility. Our main results are summed up as follows: (i) The policy space contains a curve of singularity which is a collection of policy parameters that divides the space into two sub-regions. Some trade-off between output and inflation volatilities exists within each region and some across regions. (ii) The singularity causes volatility of variables to be non monotone in policy parameters. Policymakers cannot assume a more aggressive policy will change outcomes in a predictable manner. (iii) When beliefs are diverse a central bank must also consider the volatility of individual consumption and the related volatility of financial markets. We show aggressive anti-inflation policy increases consumption volatility and aggressive output stabilization policy entails rising inflation volatility. Efficient central bank policy must therefore be moderate. (iv) High optimism about the future typically lowers aggregate output and increases inflation. This “stagflation†effect is stronger the stickier prices are. Policy response is muted since the effects of higher inflation and lower output on interest rates partially cancel each other. Effective policy requires targeting exuberance directly or its effects in asset markets. Central banks already do so with short term interventions. (v) The observed high serial correlation of 0.80 in policy shocks contributes greatly to market volatility and we show that a reduction in persistence of central bank’s deviations from a fixed rule will contribute to stability. (vi) Belief dispersion is measured by cross sectional standard deviation of individual beliefs. An increased belief diversity is found to make policy coordination harder and results in lower aggregate output and lower rate of inflation. Bank policy can lower belief dispersion by being more transparent. |
| Keywords: | New Keynesian Model, heterogeneous beliefs, market state of belief, Rational Beliefs, monetary policy rule |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1503&r=all |
| By: | Yongyang Cai; Kenneth Judd; Jevgenijs Steinbuks |
| Abstract: | This paper introduces a nonlinear certainty equivalent approximation method for dynamic stochastic problems. We first use a novel, stable and efficient method for computing the optimal policy functions for deterministic dynamic optimization problems, and then use them as certainty-equivalent approximations for the stochastic versions. Our examples demonstrate that it can be applied to solve high-dimensional problems with up to four hundred state variables with an acceptable accuracy. This method can also be applied to solve problems with inequality constraints that occasionally bind. These features make the nonlinear certainty equivalent approximation method suitable for solving complex economic problems, where other algorithms, such as log-linearization, fail or are far less tractable. |
| JEL: | C61 C63 C68 E31 E52 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21590&r=all |
| By: | Ryo Arawatari (Graduate School of Economics, Nagoya University); Tetsuo Ono (Graduate School of Economics, Osaka University) |
| Abstract: | This study extends the multi-country, politico-economic model of fiscal policy developed by Song, Storesletten, and Zilibotti (2012) to incorporate wage inequal- ity within each country. In this extended framework, we present conflict over fiscal policy within and across generations and show that a low-inequality country real- izes tight fiscal policy with low public debt accumulation, whereas a high-inequality country experiences loose fiscal policy with high public debt. This model predic- tion is consistent with empirical evidence from OECD countries for the past three decades. |
| Keywords: | scal policy; inequality; probabilistic voting; public debt; small openeconomies. |
| JEL: | D72 E62 F34 H41 H60 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1501r&r=all |
| By: | Mike Waugh (New York University); David Lagakos (University of California, San Diego) |
| Abstract: | This paper uses new tracking surveys for several developing countries to analyze rural-urban migration and their macroeconomic implications. We document that migrants from rural to urban areas typically experience large consumption growth one year after migrating, though overall migration rates are low. To understand these facts we build a model that generates a rural-urban gap in average consumption due to three factors: income risk from migration, worker sorting, and disutility from migration. We structurally estimate the model and assess the relative importance of each factor in explaining rural-urban consumption gaps. We then cross-check the model's predictions using evidence from a controlled migration experiment. Quantitative experiments using the model provide guidance about the quantitative importance of migration policy on aggregate consumption growth. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:888&r=all |
| By: | Ying Chen (Johns Hopkins University); Jan Zapal (CERGE-EI & IAE-CSIC and Barcelona GSE); Hulya Eraslan (Rice University); Renee Bowen (Stanford GSB) |
| Abstract: | Which budgetary institutions result in efficient provision of public goods? We analyze a model with two parties bargaining over the allocation to a public good each period. Parties place different values on the public good, and these values may change over time. We focus on budgetary institutions that determine the rules governing feasible allocations to mandatory and discretionary spending programs. Mandatory spending is enacted by law and remains in effect until changed, and thus induces an endogenous status quo, whereas discretionary spending is a periodic appropriation that is not allocated if no new agreement is reached. We show that discretionary only and mandatory only institutions typically lead to dynamic inefficiency and that mandatory only institutions can even lead to static inefficiency. By introducing flexibility, either through a combination of mandatory and discretionary programs, or through a state-contingent mandatory program, we obtain static and dynamic efficiency. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:843&r=all |
| By: | Ellen McGrattan (University of Minnesota) |
| Abstract: | Firms make large investments in intangible capital, which drive innovative activities and market values. These investments impact productivity but are difficult to measure and thus mislead researchers who restrict attention to only those assets in the BEA fixed asset tables. For example, in previous work with Ed Prescott ("Labor Productivity Puzzle"), we showed that measured productivity will be overstated in recessionary periods when there are large declines in intangible investments because measured GDP does not fall by as much as total output. This is important because the rise in productivity during 2008--2009 has led many economists to the natural conclusion that financial disruptions---not changes in firm productivity---are the primary cause of the large fluctuations in real activity. While our previous work has shown that there is no logical inconsistency with aggregate observations on GDP, hours, and labor productivity, my current work considers both the macro and micro data, extending theory to include both intangible investments (as in McGrattan and Prescott) and sectoral input-output linkages (as in earlier work by Long and Plosser, 1983). There is microevidence showing that intangible investments are large, especially for the high-technology industries that have important input-output linkages with other industries. They are also large for U.S. multinationals, implying both domestic and foreign linkages. The primary goal is to assess the theoretical predictions for post-war business cycles and ask, how much of the variation in GDP, investment, and hours can plausibly be attributed to changes in firm-level and industry-wide TFPs? This work will also be useful in a second project that extends the analysis of Holmes, McGrattan, and Prescott ("Quid Pro Quo: Technology capital transfer for market access in China," forthcoming ReStud) who study the impact of quid pro quo policies governing foreign direct investment (FDI) into China in a multicountry model with technology capital (e.g., nonrival intangible capital). The model has an aggregate technology with a single consumption good and thus no scope for "wool for wine" trade. As a conceptual matter, it is straightforward to generalize the model to include multiple industries, generating trade in consumption goods based on comparative advantage. Such an extension would allow for industry-specific intangible capital and for technology and policy parameters to vary across industries. The goal here is to study regulation of FDI---which varies by industry---and its impact on global innovation and capital flows. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:871&r=all |
| By: | Richard Rogerson (Princeton University); Joseph Kaboski (University of Notre Dame); Francisco Buera (Federal Reserve Bank of Chicago) |
| Abstract: | We document for a broad panel of advanced economies that increases in GDP per capita are associated with a shift in the composition of value added to sectors that are intensive in high-skill labor. It follows that further development in these economies leads to an increase in the relative demand for skilled labor. We develop a two-sector model of this process and use it to assess the contribution of this process of skill-biased structural change to the rise of the skill premium in the US over the period 1977 to 2005. We find that these compositional demands account for roughly 30% of the overall increase of the skill premium due to technical change. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:895&r=all |
| By: | Jaromir Nosal (Columbia University); Manolis Galenianos (Royal Holloway, University of London) |
| Abstract: | In this paper we examine theoretically and quantitatively the relationship between, on the one hand, the greater ease of risk evaluation and, on the other, the increase in unsecured credit, bankruptcy rates and charge-off rates. Our theoretical model has three key features: borrowers that are heterogeneous with respect to their repayment probability; a lender has to pay an up-front screening cost in order to identify the type of borrower; the market for unsecured credit is segmented by borrower type and imperfectly competitive. These features lead to natural separation of the market into borrowers who have access to unsecured credit and those who do not. We evaluate the quantitative implications of the model in response to progress in screening technology that benefits new entrants relative to incumbent banks. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:814&r=all |
| By: | Joseph Mullins (NYU); Christopher Flinn (New York University); Meta Brown (Federal Reserve Bank of New York) |
| Abstract: | In order to assess the child welfare impact of policies governing divorced parenting, such as child support orders, child custody and placement regulations, and marital dissolution standards, one must consider their influence not only on the divorce rate but also on spouses' fertility choices and child investments. We develop a model of marriage, fertility and parenting, with the main goal being the investigation of how policies toward divorce influence outcomes for husbands, wives and children. Estimates of preferences and the technology of child development are disciplined by data on parental time inputs, and simulations based on the model explore the effects of changes in custody allocations and child support standards on outcomes for intact and divided families. Simulations indicate that, while a small decrease in the divorce rate may be induced by a significant child support hike, the major effect of child support levels for both intact and divided households is on the distribution of welfare between parents. Simulated divorce, fertility, test scores and parental welfare all increase with a move toward shared physical placement. Finally, the simulations indicate that children's interests are not necessarily best served by minimizing divorced parenting. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:883&r=all |