|
on Dynamic General Equilibrium |
| By: | Sebastian Dyrda; Marcelo Pedroni |
| Abstract: | This paper studies optimal taxation in an environment where heterogeneous households face uninsurable idiosyncratic risk. To do this, we formulate a Ramsey problem in a standard infinite horizon incomplete markets model. We solve numerically for the optimal path of proportional capital and labor income taxes, (possibly negative) lump-sum transfers, and government debt. The solution maximizes welfare along the transition between an initial steady state, calibrated to replicate key features of the US economy, and an endogenously determined final steady state. We find that in the optimal (utilitarian) policy: (i) capital income taxes are front-loaded hitting the imposed upper bound of 100 percent for 33 years before decreasing to 45 percent in the long-run; (ii) labor income taxes are reduced to less than half of their initial level, from 28 percent to about 13 percent in the long-run; and (iii) the government accumulates assets over time reducing the debt-to-output ratio from 63 percent to -17 percent in the long-run. Relative to keeping fiscal instruments at their initial levels, this leads to an average welfare gain equivalent to a permanent 4.9 percent increase in consumption. Even though non-distortive lump-sum taxes are available, the optimal plan has positive capital and labor taxes. Such taxes reduce the proportions of uncertain and unequal labor and capital incomes in total income, increasing welfare by providing insurance and redistribution. We quantify these welfare effects. We also show that calculating the entire transition path (as opposed to considering steady states only) is quantitatively important. Implementing the policy that maximizes welfare in steady state leads to a welfare loss of 6.4 percent once transitory effects are accounted for. |
| Keywords: | Optimal Taxation; Heterogenous Agents; Incomplete markets |
| JEL: | E2 E6 H2 H3 D52 |
| Date: | 2015–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-550&r=dge |
| By: | Pablo Ottonello (Columbia university) |
| Abstract: | Recoveries from financial crises are characterized by low investment rates and declines in capital stocks. This paper constructs an equilibrium framework in which financial shocks have a persistent effect on aggregate investment. The key assumption is that physical capital is traded in a decentralized market with search frictions, generating 'capital unemployment.' After a negative financial shock, the share of unemployed capital is high, and the economy dedicates more resources to absorbing existing unemployed capital into production, and less to accumulating new capital. An estimation of the model for the U.S. economy using Bayesian techniques shows that the model can generate the investment persistence and half of the output persistence observed in the Great Recession. Investment search frictions also lead to a different interpretation of the sources of business-cycle fluctuations, with a larger role for financial shocks, which account for 33% of output fluctuations. Extending the model to allow for heterogeneity in match productivity, the framework also provides a mechanism for procyclical capital reallocation, as observed in the data. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1153&r=dge |
| By: | Pintus, Patrick A. (Banque de France); Wen, Yi (Federal Reserve Bank of St. Louis); Xing, Xiaochuan (Tsinghua University) |
| Abstract: | The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates forecast booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when business-cycle movements are driven, in a significant way, by animal spirit shocks to credit-financed investment demand. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the source of fluctuations and on the property that the loan contract has a variable-rate component. In addition, Bayesian estimation of our benchmark DSGE model on US data 1975-2010 shows that movements in investment driven by animal spirits are quantitatively important and result in a better fit to the data than both standard RBC models and Kiyotaki-Moore type models with unique equilibrium. |
| Keywords: | Endogenous Borrowing Constraints; Collateral; Variable-Rate Loans; Multiple Equilibria; Sunspot Shocks |
| JEL: | E21 E22 E32 E44 E63 |
| Date: | 2015–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2015-032&r=dge |
| By: | Tao Zha (Federal Reserve Bank of Atlanta); Jianjun Miao (Boston University); Zheng Liu (Federal Reserve Bank of San Francisco) |
| Abstract: | We integrate the housing market and the labor market in a dynamic general equilibrium model with credit and search frictions. The model is confronted with the U.S. macroeconomic time series. Our estimated model can account for two prominent facts observed in the data. First, the land price and the unemployment rate tend to move in opposite directions over the business cycle. Second, a shock that moves the land price is capable of generating large volatility in unemployment. Our estimation indicates that a 10 percent drop in the land price leads to a 0.34 percentage point increase of the unemployment rate (relative to its steady state). |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1118&r=dge |
| By: | Adam Blandin (Arizona State University) |
| Abstract: | The human capital literature is largely split between two models of human capital investment: Learning By Doing (LBD) and Ben-Porath (BP). Given the importance of human capital investment for a host of policy issues, I ask whether observable macroeconomic moments are informative about the relative importance of LBD investment versus BP investment. A life-cycle human capital model is constructed which nests both LBD and BP as extreme special cases. I find: (1) Both the BP and LBD versions of the model are consistent with the aggregate distribution of earnings, hourly wages, and hours worked for men in the PSID. (2) Conditional on matching these aggregate levels facts, the BP version of the model is more consistent with the variance in earnings growth rates in the data. (3) Policies which decrease the return to human capital investment, such as a progressive earnings tax, decrease aggregate human capital investment and earnings substantially more in a BP world than in a LBD world. Taken together my findings suggest that within a plausibly parametrized model of human capital accumulation, government policies which reduce the return to human capital investment will generate large decreases in human capital investment and earnings. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1147&r=dge |
| By: | Serena Rhee (University of Hawaii at Manoa); Fatih Karahan (Federal Reserve Bank of New York) |
| Abstract: | Interstate migration in the United States has declined by 50 percent since the mid-1980s. This paper studies the role of the aging population in this long-run decline. We argue that demographic changes trigger a general equilibrium effect in the labor market, which affects the migration rate of all workers. We document that an increase in the share of middle-aged workers (40-60) in the working age population in one state causes a large fall in the migration rate of all workers in that state, regardless of their age. To understand this finding, we develop an equilibrium search model of many locations populated by workers whose moving costs differ. Firms prefer hiring local workers with high moving costs as they command lower wages due to their lower outside option. An increase in the share of middle-aged workers causes firms to recruit more from the local labor market instead of hiring from other locations, which increases the local job-finding rate and reduces everyone's migration rate ('migration spillovers'). Our model reproduces remarkably well several cross-sectional facts between population flows and the age structure of the labor force. Our quantitative analysis suggests that population aging accounts for about half of the observed decline, of which 75 percent is attributable to the general equilibrium effect. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1177&r=dge |
| By: | Giorgio Di Giorgio (LUISS Guido Carli, Department of Economics and Finance, Rome (Italy)); Salvatore Nisticò (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome); Guido Traficante (European University of Rome) |
| Abstract: | Contrary to widespread empirical evidence, standard NOEM models imply that the real exchange rate appreciates following an increase in public spending. This paper uses a two-country \perpetual youth" DSGE model with productive government purchases to show to what extent the real exchange rate can instead depreciate after a positive spending shock, thus reconciling the theoretical model with the empirical evidence. In particular, the model is able to imply a depreciation both on impact and in the transition, displaying the hump-shaped response documented by most empirical studies. The transmission mechanism of fiscal shocks works through an increase in domestic private sector productivity and, in turn, lower real marginal costs at Home. |
| Keywords: | Exchange Rate, Fiscal Shocks, Endogenous Monetary and Fiscal Policy. |
| JEL: | E52 E62 F41 F42 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:04/15&r=dge |
| By: | Rodrigo Mariscal; Andrew Powell; Guido Sandleris; Pilar Tavella |
| Abstract: | The current system of sovereign debt renegotiation has tended to produce restructuring agreements with low haircuts and relatively few events with deeper haircuts. Although this may seem like a successful outcome we uncovered a new empirical fact that throws some doubts on this interpretation, namely that renegotiations that end up in relatively low haircuts are frequently followed by a subsequent renegotiation soon afterwards. Low haircuts and re-renegotiations seems to be the name of the game under the current system. Yet most models of sovereign default consider only a single type of default and ignore multiple renegotiations completely. In this paper, we develop a DSGE model where countries can default in different ways and in which multiple credit events are possible. We solve the model numerically and show how countries may default in different ways and renegotiate debt multiple times. We discuss how recent changes in the international financial architecture may affect the way in which countries default in the future. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpbsdt:2015-03&r=dge |
| By: | Frederic Malherbe (London Business School) |
| Abstract: | I propose a simple theory of intertwined business and financial cycles, where financial regulation both optimally responds to and influences the cycles. In this model, banks do not internalize the effect of their credit expansion on other banks' expected bankruptcy costs, which leads to excessive aggregate lending. In response, the regulator sets a capital requirement to trade off expected output against financial stability. The capital requirement that ensures investment efficiency depends on the state of the economy and, because of a general equilibrium effect, its stringency increases with aggregate banking capital. A regulation that fails to take this effect into account would exacerbate economic fluctuations and result in excessive aggregate lending during a boom. It would also allow for an excessive build-up of risk in the financial sector, which implies that, at the peak of a boom, even a small adverse shock could trigger a banking sector collapse, followed by an excessively severe credit crunch. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1154&r=dge |
| By: | Canova, Fabio (BI Norwegian Business School and CEPR); Ferroni, Filippo (Banque de France and University of Surrey); Matthes, Christian (Federal Reserve Bank of Richmond) |
| Abstract: | The paper studies how parameter variation affects the decision rules of a DSGE model and structural inference. We provide diagnostics to detect parameter variations and to ascertain whether they are exogenous or endogenous. Identifi cation and inferential distortions when a constant parameter model is incorrectly assumed are examined. Likelihood and VAR-based estimates of the structural dynamics when parameter variations are neglected are compared. Time variations in the financial frictions of Gertler and Karadi's (2010) model are studied. |
| JEL: | C10 E27 E32 |
| Date: | 2015–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:15-10&r=dge |
| By: | Yicheng Wang (University of Rochester) |
| Abstract: | Evidence suggests that financially constrained firms may offer lower wages, coupled with faster wage growth. If these constrained firms can tilt wages, cutting current wages in exchange for later increases, this potentially mitigates the impact of financial frictions or shocks. This paper studies the aggregate implications of this mitigating effect with an application to the 2008 financial crisis. I provide a new, tractable equilibrium model of wage dynamics for heterogeneous firms--some are financially constrained, some not. Risk-neutral firms post optimal long-term wage contracts to attract risk-averse workers through competitive search. When applied to the 2008 financial crisis, the model predicts that small firms, being more likely to be constrained, tend to temporarily cut workers' wages, while for large firms wages are quite smooth and stable. Counterfactual experiments in the model show that the mitigating effect can be important. For instance, if the wages within a contract were more rigid (e.g., by raising workers' risk aversion parameter from $2$ to $10$), the aggregate output would have been even lower in the crisis by about 2\% and the unemployment rate higher by about a third of a percentage point. Lastly, I find that the model has empirical support along several dimensions. The model is consistent with cyclical behavior in wage data (including new hires and job stayers' wage behavior). Its prediction that small firms cut wages much more than large firms is also consistent with micro-level data during the Great Recession. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1189&r=dge |
| By: | Grochulski, Borys (Federal Reserve Bank of Richmond); Zhang, Yuzhe (Texas A&M University) |
| Abstract: | We study the impact of shadow banking on optimal liquidity regulations in a Diamond-Dybvig maturity mismatch environment. A pecuniary externality arising out of the banks' access to private retrade renders competitive equilibrium inefficient. Shadow banking provides an outside option for banks, which adds a new constraint in the mechanism design problem that determines the optimal allocation. A tax on illiquid assets and a subsidy to the liquid asset similar to the payment of interest on reserves (IOR) constitute an optimal liquidity regulation policy in this economy. During expansions, i.e., when the return on illiquid assets is high, the threat of investors flocking out to shadow banking pins down optimal policy rates. These rates do not respond to business cycle fluctuations as long as the economy stays out of recession. In recessions, when the return on illiquid assets is low, optimal liquidity regulation policy becomes sensitive to the business cycle: both policy rates are reduced, with deeper discounts given in deeper recessions. In addition, when high aggregate demand for liquidity is anticipated, the IOR rate is reduced and, unless the shadow banking constraint binds, the tax rate on illiquid assets is increased. |
| Date: | 2015–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:15-12&r=dge |
| By: | Engin Kara (Department of Economics, Ozyegin University); Ahmed Jamal Pirzaday |
| Abstract: | During the Great Recession, despite the large fall in output, inflation did not fall much. This is known as the missing deflation puzzle. In this paper, we develop and estimate a New Keynesian Dynamic Stochastic General Equilibrium model to provide an explanation for the puzzle. The new model allows for time-varying volatility in cross-sectional idiosyncratic uncertainty and accounts for the changes in intermediate goods prices. Our model can forecast the large fall in output and stable inflation during the Great Recession. We show that inflation did not fall much because intermediate goods prices were increasing during the Great Recession. |
| Keywords: | Price Mark-up Shocks; Great Recession; Inflation; DSGE; Intermediate Inputs. |
| JEL: | E52 E58 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1521&r=dge |
| By: | Ignacio Presno (Universidad de Montevideo); Scott Davis (Federal Reserve Bank of Dallas) |
| Abstract: | Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy makers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by foreign capital inflows and outflows, the adoption of temporary capital controls can lead to a significant welfare improvement. The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1167&r=dge |
| By: | Pedro Carneiro (Institute for Fiscal Studies and University College London); Italo Lopez Garcia (Institute for Fiscal Studies); Kjell G. Salvanes (Institute for Fiscal Studies); Emma Tominey (Institute for Fiscal Studies and University of York) |
| 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. |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:66/15&r=dge |
| By: | Rody Manuelli (Washington University in St. Louis) |
| Abstract: | In this paper I study a model in which the existence of a 'disease environment' influences parental investment in early childhood human capital and individual schooling and on the job training decisions. The model is used to analyze the effect of HIV/AIDS on aggregate output per worker. I use a calibrated version of the model to estimate the long run impact on output per worker of increasing life expectancy for individuals who have HIV/AIDS and reducing the rate of transmission of the disease in a subset of Sub-Saharan countries. I find that the effects on output per worker, the prevalence of the diseases and the growth rate of population can be substantial. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1193&r=dge |
| By: | Sebastián Cea-Echenique (Paris School of Economics - Centre d'Economie de la Sorbonne); Juan Pablo Torres-Martínez (Department of Economics - Faculty of Economics and Business - University of Chile) |
| Abstract: | We build a general equilibrium model with endogenous borrowing constraints compatible with credit segmentation. There are personalized trading restrictions connecting prices with both portfolio constraints and consumption possibilities, a setting which has not thoroughly been addressed by the literature. Our approach is general enough to be compatible with incomplete market economies where there exist wealth-dependent and/or investment-dependent credit access, borrowing constraints precluding bankruptcy, or assets backed by physical collateral. To prove equilibrium existence, we assume that both investment on segmented assets is not required to obtain access to credit and transfers implementable in segmented markets can be super-replicated by investing in non-segmented markets. For instance, this super-replication property is satisfied if either (i) all individuals have access to borrow at a risk-free rate; or (ii) financial contracts make real promises in terms of non-perishable commodities; or (iii) promises are backed by physical collateral |
| Keywords: | Incomplete Markets; General Equilibrium; Endogenous Trading Constraints |
| JEL: | D52 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14095r&r=dge |
| By: | Carillo-Tudela, Carlos (University of Essex, CEPR, CESifo and IZA); Coles, Melvyn (University of Essex) |
| Abstract: | Workers might change jobs for many reasons. They might fall out with the boss and so decide to change employer, or learn that the job is not really for them, or they might accept a poorly paid job as being preferable to being unemployed - say gathering work experience improves one's CV - and continue search for something better while employed. A slightly different reason is that some firms may hit a sticky patch and, fearing the risk of layoff, employees quit to more permanent employment elsewhere. A competitive labor market ensures such quit turnover is efficient: it reallocates workers from less to more productive matches. In non-competitive labor markets, however, firms always have the incentive to increase profit by paying a wage below marginal product while, in the absence of slavery contracts, employees always retain the option of quitting to better paid employment. The interaction between these two forces need not generate efficient outcomes. The focus of this chapter is to consider new develpments in the search and matching literature where wages, quit turnover and unemployment are endogenously determined in economies with aggregate shocks. The aim of the discussion is not only to highlight possible market failures but also to explain how on-the-job search and employee turnover fundamentally affect our understanding of fluctuations in aggregate employment. |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:317&r=dge |
| By: | Jan Eeckhout (Institute for Fiscal Studies and University College London); Ilse Lindenlaub (Institute for Fiscal Studies) |
| Abstract: | The labor market by itself can create cyclical outcomes, even in the absence of exogenous shocks. We propose a theory that shows that the search behavior of the employed has profound aggregate implications for the unemployed. There is a strategic complementarity between active on-the-job search and vacancy posting by firms: active search changes the number of searchers and the duration of a job, and in the presence of sorting, it improves the quality of the pool of searchers. More vacancy posting in turn makes costly on-the-job search more attractive, a self-fulfilling belief. The absence of on-the-job search discourages vacancy posting, rendering costly on-the-job search unattractive. This model of multiple equilibria can account for large fluctuations in vacancies, unemployment, and job-to-job transitions; it provides a rationale for the Jobless Recovery through a novel channel of the employed searchers crowding out the unemployed; and it gives rise to a shift in the Beveridge Curve (the unemployment-vacancy locus). Each of these phenomena is matched in the data. |
| Keywords: | On-the-job search; strategic complementarity; unemployment cycles; sorting; mis-match; job-to-job flows; Jobless Recovery |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:15/26&r=dge |
| By: | Lorenzo Burlon (Bank of Italy) |
| Abstract: | We study how aggregate volatility is influenced by the propagation of idiosyncratic shocks across firms through the network of ownership relations. To this purpose, we use detailed data on cross-holdings as well as relevant balance sheet information for almost the universe of Italian limited liability firms over the period 2005-2013. We first document that the ownership network matters for the correlation across firms' sales. Then, we construct a model where firms are linked through ownership relations and have limited access to credit markets. We characterize key features of the network structure that are relevant for the dynamics of the economy. A calibration to key features of the Italian economy shows that the model-implied volatility can account for a sizable percentage of actual GDP fluctuations. Moreover, we conduct a counterfactual exercise to isolate the role played by the network structure alone in the propagation of idiosyncratic shocks to the aggregate level. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1157&r=dge |
| By: | Matteo Maggiori (Harvard University); Xavier Gabaix (Stern School of Business) |
| Abstract: | We explore the quantitative implications of a framework where exchange rates are directly affected by financiers' risk bearing capacity and capital flows. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus impacting both the level and volatility of exchange rates. We calibrate the model show that it can account for the variability and correlation not only of financial variables, such as the exchange rate and capital flows, but also real variables, such as exports imports and consumption. The model can account for the "excess volatility" of the exchange rate, Backus and Smith puzzle, the failure of UIP, and the exchange rate disconnect. We also consider how policy interventions (especially interventions in the FX market) can mitigate the excess volatility and increase welfare. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1104&r=dge |
| By: | Chen, kaiji (Emory University); Zha, Tao (Federal Reserve Bank of Atlanta) |
| Abstract: | We take a structural approach to assessing the empirical importance of shocks to the supply of bank-intermediated credit in affecting macroeconomic fluctuations. First, we develop a theoretical model to show how credit supply shocks can be transmitted into disruptions in the production economy. Second, we use the unique micro-banking data to identify and support the model's key mechanism. Third, we find that the output effect of credit supply shocks is not only economically and statistically significant but also consistent with the vector autogression evidence. Our mode estimation indicates that a negative one-standard-deviation shock to credit supply generates a loss of output by 1 percent. |
| Keywords: | intermediation cost; credit supply channel; micro bank-level data; call report; senior loan officers; identification; supply and demand; intermediation costs; endogenous monitoring activities |
| JEL: | C51 C81 C82 E32 E44 G21 |
| Date: | 2015–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2015-08&r=dge |
| By: | Pástor, Luboš; Veronesi, Pietro |
| Abstract: | We develop a simple general equilibrium model with heterogeneous agents, incomplete financial markets, and redistributive taxation. Agents differ in both skill and risk aversion. In equilibrium, agents become entrepreneurs if their skill is sufficiently high or risk aversion sufficiently low. Under heavier taxation, entrepreneurs are more skilled and less risk-averse, on average. Through these selection effects, the tax rate is positively related to aggregate productivity and negatively related to the expected stock market return. Both income inequality and the level of stock prices initially increase but eventually decrease with the tax rate. Investment risk, stock market participation, and skill heterogeneity all contribute to inequality. Cross-country empirical evidence largely supports the model's predictions. |
| Keywords: | asset pricing; entrepreneurship; inequality; redistribution; taxation |
| JEL: | E24 G12 G18 H23 J24 J31 J38 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10899&r=dge |
| By: | Gregor Jarosch (University of Chicago); Maryam Farboodi (Princeton University) |
| Abstract: | We study decentralized trading networks where agents differ in both their time-varying taste for an asset and the constant frequency at which they meet others. We show that a high meeting rate dampens the effect of the idiosyncratic taste on an agent's net valuation of an asset. As a consequence, the identity of the agents with a ``moderate'' valuation, and thus at the core of the financial network, remains relatively stable. This overcomes a common empirical deficiency of search-theoretic models of over-the-counter markets. In the model, traders not only differ in their time-varying taste for the asset, but also in the speed at which they trade. This implies that the option value of search differs across traders, and this option value moderates the impact of the flow value on a trader's net valuation of an asset. A higher option value of search for high frequency traders gives rise to fan shaped iso-value curves in the two-dimensional type space. As a result, the model offers a theory of intermediation in which the endogenous intermediators, that is the agents who are at the center of the intermediation chain, is quite stable. Moreover, the model sheds light on efficiency aspects of high frequency trading. We study whether an ex-ante investment into a meeting technology is efficient in an environment where agents are both buyers and sellers depending on whom they meet. Our preliminary results suggest that the well-known results in Hosios (1990) generalize to this environment. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1102&r=dge |
| By: | Aaron Hedlund (University of Missouri) |
| Abstract: | Can in?ating away nominal mortgage liabilities cure debt overhang and combat a severe housing bust? With a focus on the Great Recession, I address this question using a structural macroeconomic model of illiquid housing, endogenous credit supply, and equilibrium default. First, I show that the model successfully replicates and provides insight into the dynamics of the U.S. economy since 2006. Second, I show that temporarily raising the in?ation target would have cut foreclosures by over 60% and led to a more robust recovery in real economic variables. Price-level targeting that promises to o?set this temporary in?ation with future disin?ation has more modest positive e?ects. In short, forward guidance matters. Higher in?ation loses its potency in the counterfactual where all homeowners have adjustable rate mortgages, which highlights the importance of nominal rigidities for the e?ectiveness of these policies. Lastly, in?ation proves e?ective even if wages exhibit substantial nominal stickiness. |
| Keywords: | Housing, Liquidity, Mortgage Debt, Foreclosure, In?ation |
| JEL: | D31 D83 E21 E22 G11 G12 G21 R21 R31 |
| Date: | 2015–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:1515&r=dge |
| By: | Angela Cipollone (CeLEG (Center for Labor and Economic Growth)); Paolo E. Giordani (LUISS "Guido Carli" University) |
| Abstract: | This paper proposes a model of entrepreneurial innovation that explains its pronounced pattern of boom and bust. In the model, a successful entrepreneurial project is the result of a search and matching process between entrepreneurs looking for funds and capitalists looking for new ideas to finance. The resulting strategic complementarity between them gives rise to a multiplier effect, whereby any exogenous shock has a magnified effect on the process of innovation. Hand-collecting data on the venture capital market of 21 developed countries for the period 2004-2012, we show that, at the country level, a complementarity exists between the size of the venture capital sector and the number of innovative entrepreneurs. This evidence suggests the existence of a thick market externality in the financial market for innovation. |
| Keywords: | Financing of innovation, search and matching, strategic complementarities, venture capital. |
| JEL: | C78 L26 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:lui:celegw:1505&r=dge |
| By: | Viktoria C. E. Langer (Chair for Economic Policy, University of Hamburg) |
| Abstract: | Extending and modifying the canonical New Keynesian (NK) model, this study provides a novel approach to examine the impact of anticipated shocks called “news shocks” on business cycles. The analysis shows that news shocks are less stressful for an economy than commonly assumed. The main results are as follows: (1) triggering lower economic fluctuations than unanticipated shocks of equal size news shocks behave in a welfare-enhancing manner, and (2) purely history-dependent monetary policy rules do not constitute an effective monetary instrument to keep welfare losses to a minimum. |
| Keywords: | Anticipated shock, welfare, business cycle, monetary policy |
| JEL: | E32 E52 |
| Date: | 2015–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:hce:wpaper:053&r=dge |
| By: | Satoshi Tanaka (University of Queensland); David Wiczer (FRB St. Louis); Burhanettin Kuruscu (University of Toronto); Fatih Guvenen (University of Minnesota) |
| Abstract: | This paper studies workers' occupational switching behavior and how lifetime earnings inequality is affected by the match between workers' ability and the skills required by their occupation. Using Armed Services Vocational Aptitude Battery (ASVAB), O*NET, and National Longitudinal Survey of Youth 1979 (NLSY79), we create empirical measures of the match quality between each worker's ability and the skills emphasized by his/her occupation, and analyze their effects on workers' labor market outcomes. We find that low match quality---what we also call 'skill mismatch'---between one's skills and required occupational skills reduces wage growth during an occupational tenure. Furthermore there is a persistence across occupations: match quality in occupations held early in life has a strong effect on wages in future occupations. We view these findings within the context of a general equilibrium model of occupational choice and human capital accumulation. We believe that our study sheds light on the importance of (i) occupational match on determination of wages, and (ii) workers' learning on their ability and the skills required by occupations. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1181&r=dge |
| By: | Christoph Boehm (University of Michigan) |
| Abstract: | Weak household balance sheets and household defaults were ubiquitous dur- ing the Great Recession and the subsequent recovery. In this paper I argue that both, weak balance sheets and default play a role for the effectiveness of fiscal policy. To do so, I develop a model in which weak balance sheets naturally cause households to use income from government transfers to pay down debt. Never- theless fiscal policy can stimulate aggregate demand in this environment. The reason is that transfers to borrowers also prevent some households from default- ing. These households continue to borrow which -- under plausible conditions -- raises aggregate demand at the zero lower bound. The main conclusion is that marginal propensities to consume are not sufficient to characterize the effects of fiscal policy. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1195&r=dge |
| By: | Michal Szkup (University of British Columbia) |
| Abstract: | This paper develops a model of self-fulfilling debt crises and uses it to study the effectiveness of various government policies in preventing such crises. In the model, a crisis is a result of the interaction between bad fundamentals and self-fulfilling expectations of domestic firms and lenders. I solve the model using the global games approach and analyze policy proposals directed at preventing debt crises, such as, an increase in taxes, spending cuts and fiscal stimulus. I explain the costs and benefits associated with each policy, provide conditions under which these policies decrease or increase probability of default, and investigate their welfare implications. I find that tax increase or spending cuts tend to decrease the likelihood of crisis but may result in lower welfare. On the other hand, a well-timed fiscal stimulus can improve welfare, but it tends to increase the probability of a crisis. The above conclusions depend crucially on the timing and credibility of the government's policies, as well as on the initial state of the economy. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1144&r=dge |