|
on Dynamic General Equilibrium |
| By: | Gottlieb, Charles |
| Abstract: | This paper undertakes a quantitative investigation of the effects of anticipated inflation on the distribution of household wealth and welfare. Consumer Finance Data on household financial wealth suggests that about a third of the US population holds all its financial assets in transaction accounts. The remaining two-third of the US population holds most of their financial assets outside transaction accounts. To account for this evidence, I introduce a portfolio choice in a standard incomplete markets model with heterogeneous agents. I calibrate the model economy to SCF 2010 US data and use this environment to study the distributive effects of changes in anticipated inflation. An increase in anticipated inflation leads households to reshuffle their portfolio towards real assets. This crowding-in of supply for real assets lowers equilibrium interest rates and thereby redistributes wealth from creditors to borrowers. Because borrowers have a higher marginal utility, this redistribution improves aggregate welfare. First, this paper shows that inflation acts not only a regressive consumption tax as in Erosa and Ventura (2002), but also as a progressive tax. Second, this paper shows that the welfare cost of inflation are even lower than the estimates computed by Lucas (2000) and Ireland (2009). Finally, this paper offers insights into why deflationary environments should be avoided. |
| Keywords: | Anticipated Inflation,Monetary Policy,Incomplete markets,Heterogeneous agents,Endogenous Asset Market Participation |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:116&r=all |
| By: | Javier García-Cicco; Enrique Kawamura |
| Abstract: | This paper evaluates from a welfare perspective three policy alternatives for dealing with Dutch disease problems originating from cyclical movements in commodity prices: fiscal rules for government expenditures, capital controls, and taxes on domestic lending. A DSGE model of a small open economy is developed, with a sectoral decomposition that features three distinctive characteristics: financial frictions, a learning-by-doing externality in the industrial sector, and a fraction of households being non-Ricardian (credit constrained). The model is calibrated using Chilean data. For each policy tool, optimal simple rules are analyzed from a welfare (Ramsey) perspective, describing how different households rank the several policy alternatives, and studying how each of the models features shapes the optimal policy design. A general conclusion of the analysis is that the included Dutch disease inefficiencies are of quantitatively limited relevance in analyzing the desirability of these policies from a welfare perspective. |
| Keywords: | Fiscal management, Policy evaluation, Fiscal Policy, Taxation, Government budget, Dutch Disease, Fiscal procyclicality, Fiscal rules, Capital controls, Macro-prudential policies |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:90216&r=all |
| By: | Chu, Angus C.; Liao, Chih-Hsing; Liu, Xiangbo; Zhang, Mengbo |
| Abstract: | This study explores the effects of inflation on economic growth in a monetary search-and-matching model with productive government expenditure. Our results can be summarized as follows. When labor intensity in the production function is below a threshold value, the economy features a unique balanced growth equilibrium in which inflation reduces economic growth. When labor intensity in the production function is above a threshold value, the economy may feature multiple balanced growth paths. Multiple equilibria (i.e., global indeterminacy) arise when the matching probability in the decentralized market is sufficiently large. In this case, the high-growth equilibrium features a negative effect of inflation on economic growth whereas the low-growth equilibrium features a U-shaped effect of inflation on growth. Furthermore, under a sufficiently large matching probability in the decentralized market, both equilibria are locally determinate, and hence, either equilibrium may emerge in the economy. |
| Keywords: | Economic growth; inflation; money; random matching ; indeterminacy |
| JEL: | E3 E4 O42 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67172&r=all |
| By: | Nuguer Victoria |
| Abstract: | I develop a two-country DSGE model with global banks (financial intermediaries in one country lend to banks in the other country). Banks are financially constrained on how much they can borrow from households. The main goal is to obtain a framework that captures the international transmission of a financial crisis through the balance sheet of the global banks, as well as to explain the insurance mechanism of the international asset market. A negative shock to the value of the capital in one country generates a global financial crisis through the international interbank market. In this model, unconventional credit policies help to mitigate the effects of a financial disruption. The policies are carried out by the policy maker of the country directly hit by the shock. Consumers of that country are better off with policy than without it, while consumers from the other country are worse off. |
| Keywords: | Global financial crisis; global banking; asset prices; financial frictions |
| JEL: | G01 E44 F40 G21 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2015-05&r=all |
| By: | Eerola , Essi (Bank of Finland Research); Määttänen , Niku (Research Institute of the Finnish Economy, Aalto University and HECER) |
| Abstract: | We study the interaction of matching and credit frictions in the housing market. In the model, risk-averse households may save or borrow in order to smooth consumption over time and finance owner housing. Prospective sellers and buyers meet randomly and bargain over the price. We analyze how borrowing constraints influence house price determination in the presence of matching frictions. We also show that credit frictions greatly magnify the effects of matching frictions. For instance, in the presence of matching frictions, a moderate tightening of the borrowing constraint increases idiosyncratic price dispersion and the average time-on-the-market substantially. |
| Keywords: | housing; borrowing constraint; matching |
| JEL: | C78 E21 R21 |
| Date: | 2015–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2015_020&r=all |
| By: | Michele Loberto (Bank of Italy); Chiara Perricone (LUISS Guido Carli) |
| Abstract: | Although the average inflation rate of developed countries in the postwar period has been greater than zero, much of the extensive literature on monetary policy has employed models that assume zero steady-state inflation. In comparing four estimated medium-scale NK DSGE models with real and nominal frictions, we seek to shed light on the quantitative implications of omitting trend inflation, that is, positive steady-state inflation. We compare certain population characteristics and the IRFs for the four models by applying two loss functions based on a point distance criterion and on a distribution distance criterion, respectively. Finally, we compare the RMSE forecasts. We repeat the analysis for three sub-periods: the Great Inflation, the Great Moderation and the union of the two periods. We do not find clear evidence for always preferring a model that uses trend inflation. |
| Keywords: | new Keynesian DSGE, trend inflation, loss function, entropy |
| JEL: | C1 C5 E4 E5 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1033_15&r=all |
| By: | Stefano Bosi (EPEE - Université d'Evry); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics, IPAG Business School and VCREME); Ngoc-Sang Pham (Centre d'Economie de la Sorbonne and EPEE - Université d'Evry) |
| Abstract: | We build dynamic general equilibrium models with heterogeneous producers and financial market imperfections. First, we prove the existence of equilibrium. Second, we investigate the role of financial market imperfection in growth and land prices. Third, we introduce land dividends, then define and study land bubbles as well as individual land bubbles |
| Keywords: | Infinite horizon, general equilibrium, financial market imperfection, land bubbles |
| JEL: | C62 D53 D9 E44 G10 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:15067&r=all |
| By: | Pietro Cova (Bank of Italy); Patrizio Pagano (The World Bank); Massimiliano Pisani (Bank of Italy) |
| Abstract: | This paper evaluates the domestic and international macroeconomic effects of purchases of domestic long-term sovereign bonds by the Eurosystem. To this end, we calibrate a five-country dynamic general equilibrium model of the world economy. According to our results, the sovereign bond purchases would generate an increase in economic activity and in inflation in the euro area of about one percentage point in the first two years by inducing a fall in the long-term interest rates and an increase in liquidity. International spillovers may be nontrivial and expansionary, depending on the monetary policy stance of the partner countries and on the response of international relative prices. |
| Keywords: | DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound |
| JEL: | E43 E44 E52 E58 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1036_15&r=all |
| By: | Javier Bianchi; Enrique G Mendoza |
| Abstract: | Collateral constraints widely used in models of financial crises feature a pecuniary externality: Agents do not internalize how borrowing decisions taken in "good times" affect collateral prices during a crisis. We show that agents in a competitive equilibrium borrow more than a financial regulator who internalizes this externality. We also find, however, that under commitment the regulator's plans are time-inconsistent, and hence focus on studying optimal, time-consistent policy without commitment. This policy features a state-contingent macroprudential debt tax that is strictly positive at date t if a crisis has positive probability at t + 1. Quantitatively, this policy reduces sharply the frequency and magnitude of crises, removes fat tails from the distribution of returns, and increases social welfare. In contrast, constant debt taxes are ineffective and can be welfare-reducing, while an optimized "macroprudential Taylor rule" is e effective but less so than the optimal policy. |
| Keywords: | Financial crises, macroprudential policy, systemic risk, collateral constraints |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:516&r=all |
| By: | Jean-Marc Bonnisseau (Centre d'Economie de la Sorbonne - Paris School of Economics); Lalaina Rakotonindrainy (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | We consider a pure exchange overlapping generations economy with a varying number of commodities and consumers per period having possibly non-complete non transitive preferences. We provide a geometric and direct proof of the Balasko-Shell characterization of Pareto optimal allocation. As a by-product, we compute an explicit Pareto improving transfer when the criterion is not satisfied, which is minimal for some suitable distance |
| Keywords: | Overlapping generations model; non complete non transitive preferences; normal cone; equilibrium; Pareto optimality |
| JEL: | C62 D50 D62 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:15003r&r=all |
| By: | Marco A. F. H. Cavalcanti; Ajax R. B. Moreira |
| Abstract: | Este exercício contribui para literatura que relaciona ciclo macroeconômico com mercado de trabalho, estimando um modelo Favar para o Brasil com quatro variáveis – grau de utilização, taxa de inflação, taxa Selic e taxa de câmbio real – e uma variável latente que resume o estado do mercado de trabalho, que é representado com as probabilidades de estar empregado, permanecer empregado e permanecer desempregado de diferentes grupos demográficos. São identificados os choques de demanda, oferta, monetário, cambial e social, utilizando o sinal da resposta de um modelo macroeconômico estrutural − o modelo Dinâmico Estocástico de Equilíbrio Geral (Dynamic Stochastic General Equilibrium − DSGE). Os resultados confirmam que o mercado de trabalho é afetado pelo ciclo através das flutuações das contratações. This exercise contributes to the literature that relates macroeconomic cycle with the labor market, estimating an Favar model to Brazil with four variables − degree of utilization, inflation rate, Selic rate and real exchange rate − and a latent variable that summarizes the state of the labor market, which is represented with the odds of being employed, stay employed and remain unemployed in different demographic groups. The shocks – demand, supply, monetary, foreign exchange and social – are identified, using the signal response of a structural macroeconomic model, the Dynamic Stochastic General Equilibrium (DSGE). The results confirm that the labor market is affected by cycle through the fluctuations of contracts. |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:2138&r=all |
| By: | Pancrazi, Roberto (Department of Economics University of Warwick); Seoane, Hernan D (Department of Economics, Universidad Carlos III de Madrid,); Vukotic, Marija (Department of Economics University of Warwick) |
| Abstract: | In this paper we examine the impact of bailout policies in small open economies that are subject to financial frictions. We extend standard endogenous default models in two ways. First, we augment the government’s choice set with a bailout option. In addition to the standard choice of defaulting or repaying the debt, a government can also choose to ask for a third-party bailout, which comes at a cost of an imposed borrowing limit. Second, we introduce financial frictions and a financial intermediation channel, which tie conditions on the private credit market to the conditions on the sovereign credit market. This link has been very strong in European countries during the recent sovereign crisis. We find that the existence of a bailout option reduces sovereign spreads and, through the described link, private credit rates as well. The implementation of a rescue program reduces output losses and increases welfare, measured in consumption equivalent terms. Moreover, bailout benefits emerge even when a government only has the option of asking for a bailout, but does not take advantage of it. |
| Keywords: | Default ; Sovereign Spread ; Private Spread ; Bailouts |
| JEL: | E44 F32 F34 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1069&r=all |
| By: | Bharat Diwakar; Gilad Sorek |
| Abstract: | We study growth-maximizing Intellectual Property Rights (IPR) policy for developing economy in a close Overlapping-Generations model. We first show that R&D-based growth in such economy is subject to threshold externalities and transitional dynamics. Then we show that the IPR policy that maximizes output growth rates is stage-dependent: in early phases of development weak IPR protection may be necessary to sustain and to fasten economic growth. This is because weaker IPR protection shifts income from the old to the young generation and thereby enhancing saving and investment, which otherwise are insu¢cient to initiate growth. However as the economy develops and growth sustains optimal IPR protection tightens. |
| Keywords: | Stage-Dependent IPR, OLG, Poverty Trap, Growth |
| JEL: | O31 O34 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2015-16&r=all |
| By: | Derek G. Stacey (Department of Economics, Ryerson University, Toronto, Canada) |
| Abstract: | A model of a decentralized market is developed that features search frictions, advertised prices and bargaining. Sellers can post ask prices to attract buyers through a process of directed search, but ex post there is the possibility of renegotiation. Similarly, buyers can advertise negotiable bid prices to attract sellers. Even though transaction prices often differ from quoted prices, advertised bid and ask prices play a crucial role in directing search and reducing trading frictions. The features and predictions of the model align well with aspects of the secondary market for transferable taxicab license plates in Toronto. This provides a useful and unique context for studying the relationships between advertised and actual prices in a decentralized market. |
| Keywords: | Bid and Ask Prices, Search Frictions, Price Commitment |
| JEL: | D40 G12 L10 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:rye:wpaper:wp059&r=all |
| By: | Derek G. Stacey (Department of Economics, Ryerson University, Toronto, Canada) |
| Abstract: | I propose a model of a decentralized market using a search framework with asymmetric information in which sellers are unable to commit to asking prices announced ex ante. Relaxing the commitment assumption prevents sellers from using price posting as a signalling device to direct buyers' search. Private information about the gains from trade and inefficient entry on the demand side then contribute to market illiquidity. Endogenous sorting among costly marketing platforms can facilitate the search process by segmenting the market to alleviate information frictions. Seemingly irrelevant but incentive compatible listing fees are implementable as long as the market is not already sufficiently active. The theoretical implications are qualitatively consistent with the empirical observations of real estate brokerage in housing markets: listing fees, platform differentiation, and endogenous sorting based on seller motivation. |
| Keywords: | Search, Costly Signalling, Efficiency, Housing |
| JEL: | C78 D40 D44 D83 R31 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:rye:wpaper:wp060&r=all |
| By: | Michal Horváth; Matúš Senaj; Zuzana Siebertová; Norbert Švarda |
| 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: | 2015–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:cel:dpaper:33&r=all |
| By: | Ouazad, Amine; Rancière, Romain |
| Abstract: | Structural models of housing or product choice use observed demand to estimate household preferences. However, household demand may be partly determined by borrowing constraints, limiting households’ choice set. Such borrowing constraints will differ across locations, households, and years. We put forward a model of neighborhood choice with borrowing constraints that accounts for mortgage credit approval rates. We estimate the model's parameters using micro-level data on households, property transactions and mortgage applications for the San Francisco Bay. Approval rates vary significantly both across households and across neighborhoods. The model with borrowing constraints yields significantly higher estimated willingness to pay to live close to good schools and in majority-white neighborhoods. The model provides general equilibrium estimates of the impact of a relaxation of lending standards. Between 2000 and 2006, the model provides two out-of-sample predictions: (i) a compression of the price distribution and (ii) a decline in black households' exposure to white households. Both predictions are supported by empirical observation. |
| Keywords: | demand estimation; house prices; housing; mortgage credit; segregation |
| JEL: | G21 R21 R23 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10866&r=all |
| By: | Francesco Sergi (Centre d'Economie de la Sorbonne) |
| Abstract: | The purpose of the article is to analyze and criticize the way how DSGE macroeconomists working in policy-making institutions think about the history of their own modeling practice. Our contribution is, first of all, historiographical: it investigates an original literature, emphasizing in the history of DSGE as it is told by its own practitioners. The results of this analysis is what we will call a “naïve history” of DSGE modeling. Modellers working from this perspective present their models as the achievement of a “scientific progress”, which is linear and cumulative both in macroeconomic theorizing and in the application of formalized methods and econometric techniques to the theory. This article also proposes a critical perspective about the naïve history of the DSGE models, which drawns, by contrast, the main lines of an alternative, “non-naïve” history. of the DSGE models is incomplete and imprecise. It mainly ignores controversies, failures and blind alleys in previous research; as a consequence, the major theoretical and empirical turning points are made invisible. The naïve history also provides an ahistorical account of assessment criteria for modeling (especially for evaluating empirical consistency), which hides the underlying methodological and epistemological debates. Finally, we will claim that the naïve history plays an active and rhetoric role in legitimizing the DSGE models as a dominant tool for policy expertise |
| Keywords: | DSGE; new neoclassical synthesis, history of macroeconomics, modelling methodology, central banks, rhetoric of economics |
| JEL: | B22 B41 E60 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:15066&r=all |
| By: | Hugo C. W. Chu |
| Abstract: | Robert E. Lucas Jr. is considered the “architect” of modern macroeconomics. His equilibrium approach to the business cycles has provoked a major change in the understanding of macroeconomic phenomena since the late 1960s. In this article we attempt to describe historically how he put together the main elements that formed the body of his theoretical framework, namely, the optimizing representative agent, the contingent-claim approach to general equilibrium analysis and the modeling of the rational expectation hypothesis. Lucas’ Expectations and the Neutrality of Money, published in 1972, is the first article containing all elements aforementioned. To reach such a result, he collaborated with Leonard Rapping in 1969 (their first article) and later developed a joint work with Edward Prescott in 1971. Furthermore, we also argue that the way Robert Lucas saw business cycles can be considered an inevitable progress in macroeconomics. |
| Keywords: | Robert Lucas; Business Cycles; Representative Agent; General Equilibrium; Rational Expectations |
| JEL: | B2 B22 |
| Date: | 2015–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2015wpecon30&r=all |
| By: | Pancrazi, Roberto (Department of Economics University of Warwick); Mengus , Eric (HEC Paris) |
| Abstract: | We show that the transition from an economy characterized by idiosyncratic income shocks and incomplete markets a la Aiyagari (1994) to markets where statecontingent assets are available but costly (in order to purchase a contingent asset, households have to pay a xed participation cost) leads to a large increase of wealth inequality. Using a standard calibration our model can match a Gini of 0.93 close to the level of wealth inequality observed in the US. In addition, under this level of participation costs, wealth inequality is particularly sensitive to income inequality. We label this phenomenon as the Inequality Accelerator. We demonstrate how costly access to contingent asset-markets generates these eects. The key insight stems from the non-monotonic relationship between wealth and desired degree of insurance, in an economy with participation costs. Poor borrowing constrained households remain uninsured, middle-class households are almost perfectly insured, while rich households decide to self-insure by purchasing risk-free assets. This feature of households' risk management has crucial eects in asset prices, wealth inequality, and social mobility. |
| Keywords: | Wealth Inequality ; Participation costs ; Insurancecreation-date: 2015 |
| JEL: | D31 E21 G11 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1067&r=all |
| By: | Andreas Bachmann |
| Abstract: | Abstract The macroeconomic implications of firms' lumpy investment behavior are subject to ongoing research. Lumpy investment results from fixed capital adjustment costs which give firms an incentive to reduce the frequency of capital adjustments. However, previous studies have underestimated the lumpiness. Their assumption of constant capital utilization reduces firms' incentives to undertake large investments as it prevents reserve capacity building. This paper shows that if capacity utilization is allowed to vary, firms optimally undertake larger investments and leave parts of the new capital stock idle for some periods, thereby reducing the frequency of investment activities. Using a dynamic stochastic general equilibrium model with fixed capital adjustment costs, heterogeneous firms, variable utilization, and aggregate technology shocks, I numerically compute firms' optimal decisions on investment, utilization and labor demand. Compared to the constant utilization model, the findings reveal magnified investment lumpiness: Firms adjust capital less frequently, but invest more when they adjust. However, this appears to be of minor macroeconomic relevance: Moments and impulse responses of macroeconomic quantities change in a similar way when variable utilization is introduced in a lumpy or in a frictionless model. New empirical evidence based on firm-level panel data confirms some of the theoretical findings. |
| Keywords: | lumpy investment; adjustment costs; reserve capacity; utilization; business cycles |
| JEL: | E22 E32 D92 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1510&r=all |
| By: | Parsiad Azimzadeh; Peter A. Forsyth |
| Abstract: | This work is motivated by numerical solutions to Hamilton-Jacobi-Bellman quasi-variational inequalities (HJBQVIs) associated with combined stochastic and impulse control problems. In particular, we consider (i) direct control, (ii) penalized, and (iii) explicit control schemes applied to the HJBQVI problem. Scheme (i) takes the form of a Bellman problem involving an operator which is not necessarily contractive. We consider the well-posedness of the Bellman problem and give sufficient conditions for convergence of the corresponding policy iteration. To do so, we use weakly chained diagonally dominant matrices, which give a graph-theoretic characterization of weakly diagonally dominant M-matrices. We compare schemes (i)--(iii) under the following examples: (a) optimal control of the exchange rate, (b) optimal consumption with fixed and proportional transaction costs, and (c) pricing guaranteed minimum withdrawal benefits in variable annuities. Perhaps controversially, we find that one should abstain from using scheme (i). |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1510.03928&r=all |
| By: | Grames, Johanna; Prskawetz, Alexia; Grass, Dieter; Viglione, Alberto; Blöschl, Günter |
| Abstract: | Recently socio-hydrology models have been proposed to analyse the interplay of community risk-coping culture, flooding damage and economic growth. These models descriptively explain the feedbacks between socio-economic development and natural disasters such as floods. Complementary to these descriptive models, we develop a dynamic optimization model, where the inter-temporal decision of an economic agent interacts with the hydrological system. We assume a standard macro-economic growth model where agents derive utility from consumption and output depends on physical capital that can be accumulated through investment. To this framework we add the occurrence of flooding events which will destroy part of the capital. We identify two specific periodic long term solutions and denote them rich and poor economies. Whereas rich economies can afford to invest in flood defence and therefore avoid flood damage and develop high living standards, poor economies prefer consumption instead of investing in flood defence capital and end up facing flood damages every time the water level rises. Nevertheless, they manage to sustain at least a low level of physical capital. We identify optimal investment strategies and compare simulations with more frequent and more intense high water level events. |
| Keywords: | flood,socio-hydrology,dynamic optimization,investment strategy |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuweco:042015&r=all |
| By: | Pedro Carneiro; Italo Lopez Garcia; Kjell G. Salvanes; Emma Tominey |
| Abstract: | We extend the standard intergenerational mobility literature by modelling individual outcomes as a function of the whole history of parental income, using data from Norway. We find that, conditional on permanent income, education is maximized when income is balanced between the early childhood and middle childhood years. In addition, there is an advantage to having income occur in late adolescence rather than in early childhood. These result are consistent with a model of parental investments in children with multiple periods of childhood, income shocks, imperfect insurance, dynamic complementarity, and uncertainty about the production function and the ability of the child. |
| Keywords: | Child human capital; intergenerational mobility; parental income timing; semiparametric estimation. |
| JEL: | J24 E24 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:15/20&r=all |
| By: | Rabah Arezki; Valerie A Ramey; Liugang Sheng |
| Abstract: | This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output ? the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time. |
| Keywords: | Oil sector;External shocks;Oil production;Current account;Open economies;oil, news shocks, current account and business cycles |
| Date: | 2015–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/209&r=all |
| By: | Mourad Lazgham |
| Abstract: | We consider the value function originating from an expected utility maximization problem with finite fuel constraint and show its close relation to a nonlinear parabolic degenerated Hamilton-Jacobi-Bellman (HJB) equation with singularity. On one hand, we give a so-called verification argument based on the dynamic programming principle, which allows us to derive conditions under which a classical solution of the HJB equation coincides with our value function (provided that it is smooth enough). On the other hand, we establish a comparison principle, which allows us to characterize our value function as the unique viscosity solution of the HJB equation. |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1510.03584&r=all |
| By: | Pancrazi, Roberto (Department of Economics University of Warwick); Pietrunti, Mario (Banca d’Italia and Toulouse School of Economics) |
| Abstract: | In this paper we propose a novel explanation for the increase in households' leverage during the recent boom in U.S. housing prices. We use the U.S. housing market's boombust episode that led to the Great Recession as a case study, and we show that biased long-run expectations of both households and, especially, nancial intermediaries about future housing prices had a large impact on households' indebtedness. Specically, first we show that it is likely that financial intermediaries used forecasting models that ignored the long-run mean reversion of housing prices after a short-run momentum, thus leading to an overestimation of future households' housing wealth. We frame this finding in the theory of natural expectations, proposed by Fuster et al. (2010), to the housing market. Then, using a tractable model of collateralized credit market populated by households and banks, we find that: (1) mild variations in long-run forecasts of housing prices result in quantitatively considerable dierences in the amount of home equity extracted during a housing price boom; (2) the equilibrium levels of debt and interest rate are particularly sensitive to nancial intermediaries' naturalness; (3) home equity extraction data are better matched by models in which agents are fairly natural. |
| Keywords: | Natural expectations ; Home equity extraction ; Consumption/saving decision ; Housing pricecreation-date: 2015 |
| JEL: | E21 E32 E44 D84 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1068&r=all |