|
on Dynamic General Equilibrium |
| By: | Stan du Plessis; Ben Smit; Rudi Steinbach |
| Abstract: | In this paper a dynamic stochastic general equilibrium (DSGE) model is specified for the South African economy. Nominal and real frictions help to make the model estimable, and is then estimated on South African and global data using Bayesian techniques. The empirical fit of the model is validated through a forecast comparison with private sector consensus forecasts. The model is found to outperform the inflation forecasts of private sector economists. |
| Date: | 2014–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:6319&r=dge |
| By: | Leena Rudanko (Federal Reserve Bank of Philadelphia); Per Krusell (Institute for International Economic Studies (IIES); University of Göteborg; CEPR; NBER) |
| Abstract: | We analyze a labor market with search and matching frictions where wage setting is controlled by a monopoly union. Frictions render existing matches a form of firm-specific capital which is subject to a hold-up problem in a unionized labor market. We study how this hold-up problem manifests itself in a dynamic infinite horizon model, with fully rational agents. We find that wage solidarity, seemingly an important norm governing union operations, leaves the unionized labor market vulnerable to potentially substantial distortions due to hold-up. Introducing a tenure premium in wages may allow the union to avoid the problem entirely, however, potentially allowing efficient hiring. Under an egalitarian wage policy, the degree of commitment to future wages is important for outcomes: with full commitment to future wages, the union achieves efficient hiring in the long run, but hikes up wages in the short run to appropriate rents from firms. Without commitment, and in a Markov-perfect equilibrium, hiring is well below its efficient level both in the short and the long run. We demonstrate the quantitative impact of the union in an extended model with partial union coverage and multi-period union contracting. |
| Keywords: | Labour unions, frictional labour markets, time inconsistency, limited commitment, long-term contracting |
| JEL: | E02 E24 J51 J64 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1531&r=dge |
| By: | Sebastian Dyrda (University of Minnesota) |
| Abstract: | In this paper, I quantify the importance of microeconomic uncertainty shocks for the firm dynamics over the business cycle in an economy with frictional financial markets. To begin, I document facts on asymmetric response across age and size groups of firms in the U.S. to the changes in aggregate economic conditions. I argue that age rather than size is a relevant margin for the magnitude of employment volatility over the cycle; in particular total employment of young firms varies 2.6 times more relative to the old firms. Then I propose a theory that, contrary to the existing studies, generates endogenously a link between firm's age and size and its ability to obtain financing, and induces an asymmetric response to shocks. A key element of my theory is a financial friction originating from the presence of the firm's private information and long-term, efficient lending contract between a risk averse entrepreneur and financial intermediary, which manifests itself as a borrowing constraint. I argue that, for any given expected return on project, young firms are more constrained in borrowing and they grow out of the constraint as they age up to the optimal, unconstrained size. Next I establish that, for any given age, firm's financing increases in line with the average return on a project. In times of high idiosyncratic uncertainty the financial contract calls for tightening of the borrowing constraint transmitting the initial impulse into a decline in demand for production inputs and further, including general equilibrium effects, into an economic downturn. This mechanism affects disproportionally young firms. Not only are they more constrained in borrowing but also they start smaller due to a reduced level of initial financing. A quantitative version of the model accounts for the fall of the aggregate output, employment and investment, decline of credit to GDP ratio and asymmetric employment dynamics of different groups of firms observed in the US data in recessions. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1243&r=dge |
| By: | Zhongjun Qu (Boston University) |
| Abstract: | This paper builds upon the composite likelihood concept of Lindsay (1988) to develop a framework for parameter identification, estimation, inference and forecasting in DSGE models allowing for stochastic singularity. The framework consists of the following four components. First, it provides a necessary and sufficient condition for parameter identification, where the identifying information is provided by the first and second order properties of the nonsingular submodels. Second, it provides an MCMC based procedure for parameter estimation. Third, it delivers confidence sets for the structural parameters and the impulse responses that allow for model misspecification. Fourth, it generates forecasts for all the observed endogenous variables, irrespective of the number of shocks in the model. The framework encompasses the conventional likelihood analysis as a special case when the model is nonsingular. Importantly, it enables the researcher to start with a basic model and then gradually incorporate more shocks and other features, meanwhile confronting all the models with the data to assess their implications. The methodology is illustrated using both small and medium scale DSGE models. These models have numbers of shocks ranging between one and seven. |
| Keywords: | business cycle, dynamic stochastic general equilibrium models, identification, impulse response, MCMC, stochastic singularity |
| JEL: | C13 C32 C51 E1 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2015-003&r=dge |
| By: | Selahattin IMROHOROGLU; KITAO Sagiri; YAMADA Tomoaki |
| Abstract: | The labor force in Japan is projected to fall from about 64 million in 2014 to nearly 20 million in 2100. In addition, large increases in aging related public expenditures are projected which would require unprecedented fiscal adjustments to achieve sustainability under current policies. In this paper, we develop an overlapping generations model calibrated to micro and macro data in Japan and conduct experiments with a variety of guest worker and immigration programs under different assumptions on factor prices and labor productivities. Against a baseline general equilibrium transition which relies on a consumption tax to achieve fiscal sustainability, we compute alternative transitions with guest worker programs that bring in annual flows of foreign born workers residing in Japan for 10 years with the share of guest workers in total employment in a range between 4% and 16%. Depending on the size and skill distribution of guest workers, these programs significantly mitigate Japan's fiscal imbalance problem with a relatively manageable and temporary increase in the consumption tax rate. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:15129&r=dge |
| By: | Daragh Clancy (ESM) |
| Abstract: | We examine the implications of government expenditure that is complementary to private consumption, and government investment that can improve the productivity of private capital in a global DSGE model. We show that government investment can improve an economy’s external competitiveness and stimulate private investment. If governments can finance this investment by reducing consumption that is not complementary to private consumption, then this is ex-ante budget-neutral, provides a small, but persistent stimulus without a deterioration in competitiveness, and leads to lower debt in the medium run. We also examine the cross-border transmission channels of government expenditure shocks in a monetary union when government consumption is complementary to private and public investment is productive. While both assumptions enhance cross-border spillovers, a direct import content is required to generate spillovers similar to those found in the literature |
| Keywords: | Government expenditure, Competitiveness, EMU, Spillovers, Trade |
| JEL: | E22 E62 H54 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:4&r=dge |
| By: | Stefano Bosi (EPEE - Université d'Evry-Val d'Essonne); Cuong Le Van (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, IPAG - Business School); Ngoc-Sang Pham (EPEE - Université d'Evry-Val d'Essonne) |
| 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 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01223969&r=dge |
| By: | Yikai Wang (University of Oslo); Hans Holter (University of Oslo); Marcus Hagedorn (University of Oslo) |
| Abstract: | In this paper we consider an optimal taxation problem in an incomplete markets model to study the optimal quantity of capital and debt. The government commits itself ex-ante to a tax schedule and government debt. In contrast to most of the existing literature these instruments are chosen to to maximize agents' discounted present value of lifetime utility. Whereas the literature mainly focuses on characterizing the steady state which maximizes welfare, we characterize and compute the optimal policy along the full transition path. In particular our characterization takes into account that the optimal long-run policy depends on capital, debt and taxation during the transition path. We show theoretically that it is optimal to equalize the pre-tax return on capital and the rate of time preference in the long-run, i.e. the capital stock satisfies the modified golden-rule. Quantitatively we find that the tax on capital is around 3 percent in the long-run. Labor is taxed at a much higher rate where the precise number depends on the labor supply elasticity. For standard choices for this elasticity we find a labor tax rate of almost 40 percent to be optimal in the long-run. The reason for such a hight tax rate on labor income is that labor income is risky. Taxing this risky income and redistributing it back through lump-sum transfers improves ex-ante welfare in the long-run. Transfers and the optimal level of debt along the transition are chosen to equalize the amount of redistribution over time. Initially capital is taxed higher than in the long-run since it is inelastically supplied whereas labor is taxed less than in steady state. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1220&r=dge |
| By: | David Rappoport (Federal Reserve Board); Alexandros Vardoulakis (Board of Governors of the Federal Reserve System); David Arseneau (Federal Reserve Board) |
| Abstract: | We present a model to study the feedback loop between secondary market liquidity and firm's financing decisions in primary markets. The model features two key frictions: a costly state verification problem in primary markets, and search frictions in over-the-counter secondary markets. Our liquidity concept depends on the endogenous holdings of assets put for sale relative to the resources available for buying illiquid assets. This creates a feedback loop as issuance in primary markets affects secondary market liquidity, and vice versa through liquidity premia. We show that the privately optimal allocations are inefficient. Both investors and firms can be made better off if firms take on lower leverage and less risk, and investors provide more liquidity. These inefficiencies are established analytically through a set of wedge expressions for key efficiency margins. Our analysis provides a rationale for the effect of quantitative easing on secondary and primary capital markets and the real economy. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1274&r=dge |
| By: | Emircan Yurdagul (Washington University in Saint Louis); Julieta Caunedo (Cornell University) |
| Abstract: | This paper provides a theory linking characteristics of the industry dynamics to aggregate growth. We analyze firms' life cycle productivity, employment-age profiles, and firm selection across countries. Using a large cross-country dataset we document (i) more frequent labor productivity growth for firms operating in fast growing economies, (ii) lack of systematic relationship between the tail of the employment size distribution and growth and (iii) steeper employment-age profiles in slow growing economies. Our working thesis is that firms' likelihood of turning their investments into actual productivity growth, and uncertainty on their returns if successful, impacts firms investment in productivity, selection and aggregate growth. We think of firm uncertainty broadly, to include for example political instability, changes in tax regimes, lack of social capital or firm demand fluctuations. We argue that in slow growing rich productive economies, steep-employment age profiles are related to high return uncertainty and strong firm selection. We are able to accommodate poor and rich slow growing economies by decoupling firm's probability of success from return uncertainty. We build a tractable general equilibrium model that displays endogenous long run growth compatible with a stationary size distribution and the documented empirical facts. We contribute to the literature by analyzing how variations in the probability of firm success and return uncertainty account for differences in observed industry structure and its relationship with aggregate growth. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1240&r=dge |
| By: | Per Krusell (Institute for International Economic Studies (IIES); University of Göteborg; CEPR; NBER); Toshihiko Mukoyama (University of Virginia); Richard Rogerson (Princeton University; National Bureau of Economic Research (NBER)); Aysegul Sahin (Federal Reserve Bank of New York) |
| Abstract: | We build a hybrid model of the aggregate labor market that features both standard labor supply forces and frictions in order to study the cyclical properties of gross worker flows across the three labor market states: employment, unemployment, and non-participation. Our goal is to assess the relative importance of frictions and labor supply in accounting for fluctuations in labor market outcomes. Our parsimonious model is able to capture the key features of the cyclical movements in gross worker flows and indicates an important role for both frictions and labor supply. |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1530&r=dge |
| By: | Leonardo Martinez (International Monetary Fund); Francisco Roch (International Monetary Fund); Juan Hatchondo (Indiana University) |
| Abstract: | We present a sovereign default model that can mimic salient features in a typical small open economy. We then use the model to study the effects of introducing limits to the decision-making ability of governments' fiscal rules. We show that optimal limits to the debt level vary greatly across parameterizations of the model. In contrast, optimal limits to the sovereign premium the government can pay while increasing its debt are very similar across parameterizations. Given the uncertainty about model parameter values and political constraints that may force common fiscal rule targets across economies, these findings indicate that sovereign-premium limits may be preferable over debt limits. We also show that rules should not necessarily promote a countercyclical fiscal policy. Benets from imposing a rule arise even if governments are not shortsighted. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1262&r=dge |
| By: | Viktor Tsyrennikov (IMF); Serguei Maliar (Santa Clara University); Lilia Maliar (Stanford University); Cristina Arellano (Federal Reserve Bank of Minneapolis) |
| Abstract: | We develop an envelope condition method (ECM) for dynamic programming problems -- a tractable alternative to expensive conventional value function iteration. ECM has two novel features: First, to reduce the cost, ECM replaces expensive backward iteration on Bellman equation with relatively cheap forward iteration on an envelope condition. Second, to increase the accuracy of solutions, ECM solves for derivatives of a value function jointly with a value function itself. We complement ECM with other computational techniques that are suitable for high-dimensional problems, such as simulation-based grids, monomial integration rules and derivative-free solvers. The resulting value-iterative ECM method can accurately solve models with at least up to 20 state variables and can successfully compete in accuracy and speed with state-of-the-art Euler equation methods. We also use ECM to solve a challenging default risk model with a kink in value and policy functions, and we find it to be fast, accurate and reliable. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1239&r=dge |
| By: | Francesco Sergi (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS) |
| 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. |
| Abstract: | L'article propose d'analyser et de critiquer la manière dont les macroéconomistes actifs dans les institutions chargées de la politique économique et se situant dans l'approche DSGE (dynamic stochastic general equilibrium) conçoivent l'histoire de leur propre pratique de modélisation. Notre contribution est avant tout historiographique, traçant les contours d'un corpus original, mettant en évidence l'histoire des modèles DSGE telle qu'elle est racontée par ses protagonistes. Le résultat obtenu peut être qualifié d'historiographie « naïve » des modèles DSGE. Les modélisateurs actifs dans cette approche conçoivent leurs modèles comme le résultat abouti d'un « progrès scientifique », linéaire et continu, concernant à la fois la théorie macroéconomique sous-jacente aux modèles et l'application à ceux-ci des méthodes formelles et des techniques économétriques. Parallèlement à l'analyse du corpus, l'article propose une critique de l'histoire naïve des modèles DSGE, traçant les contours d'une histoire « non-naïve ». L'approche adoptée par les macroéconomistes est historiographiquement et méthodologiquement incomplète et imprécise. Les difficultés et les impasses sont ignorées, rendant invisibles les tournants (théoriques et empiriques) pour la discipline. De même, la présentation anhistorique des critères d'évaluation des modélisations (notamment l'évaluation des « performances empiriques ») occulte l'ensemble des débats méthodologiques et épistémologiques. Enfin, on mettra en évidence comment cette naïveté joue un rôle rhétorique actif, de légitimation des DSGE comme pratique dominante pour l'expertise des politiques économiques. |
| Keywords: | new neoclassical synthesis,history of macroeconomics,modelling methodology,central banks,rhetoric of economics,rhétorique de l'économie,méthodologie et modélisation,banques centrales,DSGE,nouvelle synthèse néoclassique,histoire de la macroéconomie |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01222798&r=dge |
| By: | Luigi Iovino (Bocconi University); Jennifer La'O (Columbia University); George-Marios Angeletos (M.I.T.) |
| Abstract: | Does welfare improve when firms have more information about the state of the economy and can better coordinate their production and pricing decisions? We address this question in a business-cycle model that highlights how informational frictions can be the source of both nominal and real rigidity. We then elaborate on how the answer to this question depends on each of these rigidities, on the sources of the business cycle, and on the conduct of monetary policy. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1299&r=dge |
| By: | Shengxing Zhang (London School of Economics); Briana Chang (University of Wisconsin Madison) |
| Abstract: | This paper develops a dynamic matching model to analyze the equilibrium trading structure in OTC markets. All traders have the same trading technology, and they optimally choose whom to connect to as well as whether to remain active in each period. We show that traders with more volatile preference (i.e. with higher needs for trade) always choose to match with traders with more stable preference (i.e., with less needs for trade) and they also leave the market earlier. The model therefore endogenously generates a core-periphery market structure, where traders with less trading needs develop more trading links in equilibrium and act like market makers. As the role of market-making is endogenous, we therefore provide an answer to why customers choose to trade with dealers instead of trading among themselves, and we can analyze how the market-making profit depends on underlying frictions. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1227&r=dge |
| By: | Badel, Alejandro (Federal Reserve Bank of St. Louis); Huggett, Mark (Georgetown University) |
| Abstract: | We provide a formula for the tax rate at the top of the Laffer curve as a function of three elasticities. Our formula applies to static models and to steady states of dynamic models. One of the elasticities that enters our formula has been estimated in the elasticity of taxable income literature. We apply standard empirical methods from this literature to data produced by reforming the tax system in a model economy. We find that these standard methods underestimate the relevant elasticity in models with endogenous human capital accumulation. |
| Keywords: | Sufficient Statistic; Laffer Curve; Marginal Tax Rate; Elasticity |
| JEL: | D91 E21 H2 J24 |
| Date: | 2015–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2015-038&r=dge |
| By: | Zhongjun Qu (Boston University); Denis Tkachenko (National University of Singapore) |
| Abstract: | This paper presents a framework for analyzing global identification in log linearized DSGE models that encompasses both determinacy and indeterminacy. First, it considers a frequency domain expression for the Kullback-Leibler distance between two DSGE models, and shows that global identification fails if and only if the minimized distance equals zero. This result has three features. (1) It can be applied across DSGE models with different structures. (2) It permits checking whether a subset of frequencies can deliver identification. (3) It delivers parameter values that yield observational equivalence if there is identification failure. Next, the paper proposes a measure for the empirical closeness between two DSGE models for a further understanding of the strength of identification. The measure gauges the feasibility of distinguishing one model from another based on a finite number of observations generated by the two models. It is shown to be equal to the highest possible power in a Gaussian model under a local asymptotic framework. The above theory is illustrated using two small scale and one medium scale DSGE models. The results document that certain parameters can be identified under indeterminacy but not determinacy, that different monetary policy rules can be (nearly) observationally equivalent, and that identification properties can differ substantially between small and medium scale models. For implementation, two procedures are developed and made available, both of which can be used to obtain and thus to cross validate the findings reported in the empirical applications. Although the paper focuses on DSGE models, the results are also applicable to other vector linear processes with well defined spectra, such as the (factor augmented) vector autoregression. |
| Keywords: | Dynamic stochastic general equilibrium models, frequency domain, global identification, multiple equilibria, spectral density |
| JEL: | C10 C30 C52 E1 E3 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2015-002&r=dge |
| By: | Carneiro, Pedro (University College London); Lopez Garcia, Italo (RAND); Salvanes, Kjell G. (Norwegian School of Economics); Tominey, Emma (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. |
| Keywords: | child human capital, intergenerational mobility, parental income timing, semiparametric estimation |
| JEL: | J24 E24 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9479&r=dge |
| By: | Yena Park (University of Rochester) |
| Abstract: | This paper studies optimal sovereign debt policy of the government with limited commitment and compare the optimal policies in economies with and without government's capital control. The comparison of optimal sovereign debt policies can rationalize why more financially open market economies show more severe allocation puzzle -- more negative relationship between growth and public capital flows, which is observed in the data. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1229&r=dge |
| By: | Andrew Glover (University of Texas at Austin); Dean Corbae (University of Wisconsin) |
| Abstract: | We study a dynamic model of unsecured credit markets with adverse selection and an endogenous signal of a borrower's riskiness (modeled as a credit score). Credit contracts are statically constrained efficient in our environment, which is achieved by limiting the debt of low-risk borrowers while subsidizing the interest rate for the high-risk borrowers. A higher credit score (i.e. higher prior that the borrower is low risk) relaxes the constraint on low-risk borrowers and increases the subsidization for high-risk, which means that utility for both types increases with their credit scores. We calibrate the model to salient features of the unsecured credit market and consider the welfare consequences of different information regimes. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1265&r=dge |
| By: | Dimitris Papageorgiou (Bank of Greece); Evangelia Vourvachaki (Bank of Greece) |
| Abstract: | This paper studies the impact of product and labour market structural reforms and the effects of their joint implementation with alternative debt consolidation strategies. The set-up is a DSGE model calibrated for the Greek economy. The results show that structural reforms produce important long-run GDP gains that materialize earlier, the faster the reforms are implemented. When implemented jointly with fiscal consolidations, structural reforms may amplify the short-run costs of fiscal tightening. The GDP dynamics depend on the fiscal instrument used for public debt consolidation. In the long run, however, there are complementarity gains irrespective of the fiscal instrument used. |
| Keywords: | Structural reforms; Debt consolidation; Small open economy; General equilibrium model |
| JEL: | E27 E62 O4 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:197&r=dge |
| By: | Charles Gottlieb (University of Cambridge); Maren Froemel (University of Cambridge) |
| Abstract: | Transfers have recently become the most important fiscal policy tool of the U.S. Government. Moreover, within the transfer category, refundable tax credits have reached the same magnitude as unemployment insurance, yet little research documents the macroeconomic implications of tax credits. The existing literature on the effect of tax credits, abstract from behavioral responses to policy changes and are silent on potential general equilibrium effects. This paper fills this gap by addressing these two shortcomings of the existing literature, by modeling the Earned Income Tax Credits (EITC) in an infinite horizon economy with exogenously incomplete asset markets and heterogeneous agents. In particular, we assess the welfare effects of the EITC and analyze how effective targeted transfers are in alleviating distortions arising from incomplete financial markets, and contribute to the debate on labor supply responses to EITC. We also conduct two policy exercises. First, we evaluate the impact of a more generous targeted transfer program on welfare and aggregate outcomes, and thereby uncover the distributional properties of this fiscal policy tool. Secondly, we assess whether targeted transfers are a better policy tool than lump sum transfers and show that targeted transfers are indeed welfare enhancing as they achieve more redistribution at lower tax rates, but that they lead to a less efficient production at the aggregate level. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1264&r=dge |
| By: | Dean Corbae (University of Wisconsin); Pablo D'Erasmo (FRB Philadelphia) |
| Abstract: | We develop a simple general equilibrium framework to study the effects of global competition on banking industry dynamics and welfare. We apply the framework to the Mexican banking industry, which underwent a major structural change in the 1990s as a consequence of both government policy and external shocks. Given high concentration in the Mexican banking industry, domestic and foreign banks act strategically in our framework. After calibrating the model to Mexican data, we examine the welfare consequences of government policies which promote global competition. We find modest welfare gains for households and substantial gains for business. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1205&r=dge |
| By: | Thwaites, Gregory (Bank of England) |
| Abstract: | Over the past four decades, real interest rates have risen then fallen across the industrialised world. Over the same period, nominal investment rates fell, while house prices and household debt ratios rose. I explain these four trends with a fifth — the widespread fall in the relative price of investment goods. I present a simple closed-economy OLG model in which households finance retirement in part by selling claims on the corporate sector accumulated over their working lives. With lower capital goods prices, a given quantity of saving buys more capital goods, but the increase in the real capital-output ratio lowers the marginal product. This has ambiguous effects on interest rates in the long run: if capital and labour are complements, in line with most estimates in the literature, interest rates remain low even if the relative price of capital stabilises. Lower interest rates reduce the user cost of housing, raise house prices and, given that housing is bought early in life, increase household debt. Housing is another vehicle for retirement saving, so omitting housing from the model exacerbates the fall in interest rates. I extend the model to allow for bequests and a heterogeneous bequest motive, and show that wealth inequality rises but consumption inequality falls when capital goods prices fall. Adding a third factor of production can reconcile the recent fall in the investment rate with the fall in the labour share. I test the model on cross-country data and find support for its assumptions and predictions. The analysis in this paper shows recent debates on macroeconomic imbalances and household and government indebtedness in a new light. In particular, low real interest rates may be the new normal. The debt of the young provides an alternative outlet for the retirement savings of the old; preventing the accumulation of debt, for example through macroprudential policy, leads to a bigger fall in interest rates. |
| Keywords: | Real interest rates; relative price of capital; overlapping generations; secular stagnation |
| JEL: | E13 E22 E43 E60 |
| Date: | 2015–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0564&r=dge |
| By: | Ben Etheridge (University of Essex) |
| Abstract: | Abstract We examine whether households combine (or `complement') precautionary saving for near-term risks with saving for long-term risks. In a realistic life-cycle model, we find this complementarity effect accounts for 8-16% of precautionary savings. Almost all this effect is driven by permanent shocks. We then obtain analytical results from a 3-period model. We find permanent shocks induce complementarity for a general class of preferences, including those with constant relative risk aversion (CRRA). However, for most preferences in this class, the interaction of transitory shocks amplifies the precautionary motive. We interpret these results in terms of the structure of risks and the pattern of prudence over the wealth spectrum. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1202&r=dge |
| By: | Raquel Fonseca Benito; Thepthida Sopraseuth |
| Abstract: | This paper uses a calibrated dynamic life-cycle model to quantify the long-run distributional impact of two opposite Social Security reforms: modifying the parameters of a defined benefit (DB) plan (such as in France with Ayrault’s reform) or switching to a notional defined contribution (NDC) plan (such as in Italy). Both reforms yield an inequal distribution of welfare losses. Low-skilled workers are the main losers of the reforms. This is so for different reasons in each reform. In the case of Ayrault’s reform, low-skilled individuals delay retirement by 2 years, up to age 62. In switching to a NDC scheme, low-skilled workers’ pensions fall substantially. In NDC schemes, inequalities along the working-life are directly translated into inequalities in pension levels. The switch from a DB plan to the Italian reform yields substantial welfare losses, pensions drastically fall, and individuals save more. Since low-skilled workers do not save as much as middle or high-skilled workers, the switch to NDC schemes leads to a more unequal society in terms of asset distribution. Cet article utilise un modèle de cycle de vie dynamique calibré pour quantifier l’impact distributif à long terme de deux réformes du système de retraite : la première modifie les paramètres d’un système à prestations déterminées (PD) (comme la réforme Ayrault en France). La seconde est fondée que le passage à un système de comptes notionnels à contribution définie (NDC) (comme en Italie). Les deux réformes donnent lieu à une répartition inégale des pertes en bien-être. Les travailleurs peu qualifiés sont les principaux perdants des réforme. Il en est ainsi pour des raisons différentes. Dans le cas de la réforme Ayrault, les individus peu qualifiés retardent la retraite de 2 ans, jusqu’à 62 ans. Dans un système de retraite NDC, les pensions des travailleurs peu qualifiés sont sensiblement réduites. Les inégalités au long de la vie active sont directement traduites en inégalités dans le niveau des pensions. Le passage au régime NDC génère d’importantes pertes de bien-être. Les pensions sont réduites, les individus épargnent davantage. Puisque les travailleurs peu qualifiés n’épargent pas autant que les autres travailleurs, le passage au régime NDC conduit à une société plus inégalitaire en termes de répartition du patrimoine financier. |
| Keywords: | Pension reforms, life-cycle heterogeneous-agent model, distributional effects, |
| JEL: | D8 K4 Z13 |
| Date: | 2015–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2015s-49&r=dge |
| By: | Matteo Cacciatore (HEC Montreal); Giuseppe Fiori (North Carolina State University) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:14-313&r=dge |
| By: | Mauro Napoletano (OFCE Sciences Po Skema Busibess School); Andrea Roventini (OFCE-SciencesPo & Skema Business School); Jean Luc Gaffard (OFCE Sciences Po & Skema Business School) |
| Abstract: | We build an agent-based model populated by households with heterogenous and time-varying nancial conditions in order to study how scal multipliers can change over the business cycle and are aected by the state of credit markets. We nd that deficit-spending scal policy dampens the eect of bankruptcy shocks and lowers their persistence. Moreover, the size and dynamics of government spending multipli- ers are related to the degree and persistence of credit rationing in the economy. On the contrary, in presence of balanced-budget rules, output permanently falls below pre-shock levels and the ensuing multipliers fall below one and are much lower than the ones emerging from the deficit-spending policy. Finally, we show that dierent conditions in the credit market significantly aect the size and the evolution of fiscal multipliers |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1525&r=dge |
| By: | Karen Kopecky (Federal Reserve Bank of Atlanta); Anastasios Karantounias (Federal Reserve Bank of Atlanta) |
| Abstract: | We study optimal time-consistent distortionary taxation when the repayment of government debt is not enforceable. The government taxes labor income or issues non-contingent debt in order to finance an exogenous stream of stochastic government expenditures. The government can repudiate its debt subject to some default costs. Our setup blends elements of time-consistent fiscal policy and the sovereign default literature. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1297&r=dge |
| By: | Roberto Pancrazi (University of Warwick); Christian Hellwig (Toulouse School of Economics); Constance de Soyres (Toulouse School of Economics) |
| Abstract: | We argue that information frictions in sovereign bond markets, along with limits to arbitrage, can account for anomalies in sovereign bond spreads, as well as empirically plausible savings and default incentives for borrowing countries. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1212&r=dge |
| By: | K. Istrefi; B. Vonnak |
| Abstract: | Some authors argue that the delayed overshooting puzzle often found in the literature is an artifact of improper identification of monetary policy shocks, like Cholesky ordering. We investigate this claim by estimating the dynamic effect of monetary policy shocks on exchange rate using various identification schemes, where the data is generated by a small open economy DSGE model. We find that, on large sample, Cholesky type of restrictions perform comparably with model-consistent sign restrictions approach and do not produce the puzzle artificially. On short samples, however, Cholesky restrictions produce a more uncertain estimate for the shape of the exchange rate than sign restrictions. |
| Keywords: | Monetary Policy; Exchange Rate; DSGE; Vector Autoregressions; Cholesky Decomposition; Sign restrictions. |
| JEL: | E52 F41 C32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:576&r=dge |
| By: | Ram Yamarthy (University of Pennsylvania); Amir Yaron (University of Pennsylvania); Joao Gomes (University of Pennsylvania) |
| Abstract: | Models with financial frictions have been shown to create amplification and persistence effects in macroeconomic fluctuations. We test the ability that Costly State Verification (CSV) has to generate empirically plausible risk exposures in asset markets, when Epstein and Zin (1989) preferences are implemented. Under the setup of Carlstrom and Fuerst (1997) alongside recursive preferences, we find that the CSV friction is negligible in augmenting the aggregate equity premium, explaining roughly thirty basis points when monitoring costs are increased. Additionally we find that the separation between the elasticity of intertemporal substitution and risk aversion plays a key role in explaining financial market dynamics. We are only able to generate sizable equity premium when the elasticity is greater than one. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1267&r=dge |
| By: | Howard Kung (London Business School); Gonzalo Morales (University of British Columbia); Francesco Bianchi (Cornell University) |
| Abstract: | This paper estimates monetary and fiscal policy rules using a New Keynesian model that allows for changes in the monetary/fiscal policy mix, generates a sizeable bond risk premia, and takes into account the effects of the zero lower bound. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1224&r=dge |
| By: | Laps, Jochen |
| Abstract: | The paper analyzes the welfare consequences of insuring mortality risk by means of standard, fully funded Social Security pensions when individuals wish to make transfers to their heirs. In the presence of uninsured mortality risk, within-family transfers depend on realized lifespan. While crowding out private transfers, Social Security provides transfer insurance and insurance of the ex ante risk of future generations inheriting a particular amount of transfer wealth. We find that, once ex ante insurance is taken into account, Social Security is welfare improving over the long-run as long as capital is not too productive and the transfer motive is not too strong. Altruists gain far less from Social Security than egoists. |
| Keywords: | Uninsured mortality risk; social security pensions; bequest motive; bequest insurance |
| Date: | 2015–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0603&r=dge |
| By: | Shengxing Zhang (London School of Economics); Keyu Jin (London School of Economics) |
| Abstract: | We analyze a two country stochastic open-economy framework in which countries differ in their ability to create liquid assets. We examine the consequences of this asymmetry on international asset prices and asset creation. Higher volatility, financial integration of emerging markets drive up the liquidity premium of assets created in advanced economies, and also stimulate the latter's production of liquid assets. Financial development (innovation) in advanced economies, on the other hand, also drive up the liquidity premium of these assets, and boost growth in both economies. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1253&r=dge |
| By: | Raoul Minetti (Michigan State University); Pietro Peretto (Duke University); Maurizio Iacopetta (OFCE/Sciences Po and SKEMA Business School) |
| Abstract: | We study the impact of corporate governance frictions in an economy where growth is driven both by the foundation of new firms and by the in-house investment of incumbent firms. Firms' managers engage in tunneling and empire building activities. Active shareholders monitor managers, but can shirk on their monitoring, to the detriment of minority (passive) shareholders. The analysis reveals that these conflicts among firms' stakeholders inhibit the entry of new firms, thereby increasing market concentration. Despite depressing investment returns in the short run, the frictions can however lead incumbents to invest more aggressively in the long run to exploit the concentrated market structure. By means of quantitative analysis, we characterize conditions under which corporate governance reforms boost or reduce welfare. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1252&r=dge |
| By: | Tobias Broer (Stockholm University); Tessa Bold (Goethe University) |
| Abstract: | The limited enforcement model is popular for the analysis of village risk-sharing as it captures both the observed degree of insurance and the presumption that incomes are well observed but formal contracts absent in rural communities. Enforcement constraints in insurance contracts, however, typically bind only in case of positive income shocks, when the outside option of leaving the village is attractive. We show how this results in strongly counterfactual asymmetries in the consumption process at usual village sizes. When households can renege on informal contracts together with other villagers, however, the size of insurance groups becomes endogenous, and is usually much smaller than typical villages. This brings the predicted consumption process, which is more symmetric in small groups, in line with observed data. We thus argue that village risk-sharing should be replaced by neighbourhood, or kinship, risk-sharing. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1232&r=dge |
| By: | Latchezar Popov (The University of Virginia); Toshihiko Mukoyama (University of Virginia) |
| Abstract: | We analyze the evolution of economic institution during the process of industrialization. In particular, we focus on the institution of contract enforcement. Empirically, we show that, during the process of industrialization, countries tend to shift their manufacturing production towards industries that require more relationship-specific investment. Theoretically, we build a dynamic model with incomplete contracts and evolving institutions to account for this pattern. In our model, the incompleteness of contract leads to two types of misallocations that leads to production inefficiency: unbalanced use of inputs and unbalanced production of different goods. In addition to this production inefficiency, the imperfect contract enforcement leads to distortions in factor supply. The government invests in enforcement institutions in order to improve the contractual environment, and the evolution of industry composition crucially depends on how contractual environment changes over time. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1275&r=dge |