|
on Dynamic General Equilibrium |
|
Issue of 2015‒11‒21
thirty-six papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Yahong (Department of Economics, University of Windsor) |
| Abstract: | The collapse of the housing prices in the U.S. during the Great Recession not only eroded housing wealth held by households, but also the values of the assets in the banking sector. As a result, during the Great Recession mortgage risk premium increases signi?cantly. I introduce a micro-founded banking sector to a standard DSGE model with household debt to study the interaction between housing prices, household debt and banks’ balance sheet positions. I estimate the model using the US data from 1991Q1 to 2014Q1. I ?nd that the model accounts well the negative relationship between housing prices and mortgage risk premium. In the model, a weakened households’ demand for housing leads to a decline in housing prices, which worsens the banks’ balance sheet positions, and as a result, risk premium rises. The results show that housing demand shocks as well as shocks that increases the riskiness of the banking sector contribute signi?cantly to the decline in output during the Great Recession. I also ?nd that the unconventional monetary policy implemented by the Federal Reserve mitigates the decline in output. |
| Keywords: | household debt, risk premium, banking, unconventional monetary policy |
| JEL: | E32 E44 E52 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:wis:wpaper:1504&r=dge |
| By: | Ohanian, Lee E. (University of California); Restrepo-Echavarria, Paulina; Wright, Mark L. J. (Federal Reserve Bank of Chicago) |
| Abstract: | Since 1950, the economies of East Asia grew rapidly but received little international capital, while Latin America received considerable international capital even as their economies stagnated. The literature typically explains the failure of capital to flow to high growth regions as resulting from international capital market imperfections. This paper proposes a broader thesis that country-specific distortions, such as domestic labor and capital market distortions, also impact capital flows. We develop a DSGE model of Asia, Latin America, and the Rest of the World that features an open-economy business cycle accounting framework to measure these domestic and international distortions, and to quantify their contributions to international capital flows. We find that domestic distortions have been the predominant drivers of international capital flows, and that the general equilibrium effects of these distortions are very large. International capital market distortions also matter, but less so. |
| Keywords: | Investments; capital flows; Asia; Latin America |
| JEL: | E22 N25 N26 |
| Date: | 2013–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2015-08&r=dge |
| By: | Minford, Lucy |
| Abstract: | This paper investigates whether government policy had a causal impact on UK output and productivity growth between 1970 and 2009. An open economy DSGE model of the UK is set up, with productivity growth determined by the tax and regulatory environment in which firms start up and operate. The agent’s optimality conditions imply a reduced form linear relationship between policy and short-run productivity growth. Identification is assured for the DSGE model by the rational expectations restrictions; therefore the direction of causality is unambiguously from policy to productivity. The model is estimated and tested by Indirect Inference, a simulation-based method with good power against general misspecification. The results of this study offer robust empirical evidence that temporary changes in policies underpinning the business environment can have long-lasting effects on UK economic growth. |
| JEL: | E6 O11 O47 O5 O38 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2015/16&r=dge |
| By: | Roberta Cardani; Alessia Paccagnini; Stefania Villa |
| Abstract: | This paper examines whether the presence of parameter instabilities in dynamic stochastic general equilibrium (DSGE) models affects their forecasting performance. We apply this analysis to medium-scale DSGE models with and without financial frictions for the US economy. Over the forecast period 2001-2013, the models augmented with financial frictions lead to an improvement in forecasts for inflation and the short term interest rate, while for GDP growth rate the performance depends on the horizon/period. We interpret this finding taking into account parameters instabilities. Fluctuation test shows that models with financial frictions outperform in forecasting inflation but not the GDP growth rate. |
| Keywords: | Bayesian estimation; Forecasting; Financial frictions; Parameter instabilities |
| JEL: | C11 C13 C32 E37 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201523&r=dge |
| By: | Fabrizio Perri (University of Minnesota); Jonathan Heathcote (Minneapolis FED) |
| Abstract: | In a standard two country international macro model we ask whether shutting down the market for international non-contingent borrowing and lending is ever desirable. The answer is yes. Imposing capital controls is unilaterally desirable when initial conditions are such that ruling out bond trade generates a sufficiently favorable change in the expected path for the terms of trade. Imposing capital controls can be welfare improving for both countries for calibrations in which changes in equilibrium terms of trade movements induced by the controls improve insurance against country specific shocks. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1349&r=dge |
| By: | Martin Kliem (Deutsche Bundesbank, Frankfurt am Main, Germany); Alexander Kriwoluzky (Martin-Luther-Universit¨at Halle-Wittenberg and Halle Institute for Economic Research (IWH) Halle, Germany); Samad Sarferaz (KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation. |
| Keywords: | Time-Varying VAR, Inflation, Public Deficits |
| JEL: | E42 E58 E61 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:15-396&r=dge |
| By: | Robert Kollmann (ECARES, Universite Libre de Bruxelles) |
| Abstract: | Standard macro models cannot explain why real exchange rates are volatile and disconnected from macro aggregates. Recent research argues that models with persistent growth rate shocks and recursive preferences can solve that puzzle (e.g., Colacito and Croce, 2013). I show that this result is highly sensitive to the structure of financial markets. When just a bond is traded internationally, then long-run risk generates insufficient exchange rate volatility. A long-run risk model with recursive-preferences can generate realistic exchange rate volatility, if all agents efficiently share their consumption risk by trading in complete financial markets; however, this entails massive international wealth transfers, and excessive swings in net foreign asset positions. By contrast, a long-run risk, recursive-preferences model in which only a fraction of households trades in complete markets, while the remaining households lead hand-to-mouth lives, can generate realistic exchange rate and external balance volatility. In that framework, a rise in the volatility of a country's endowment or in the risk appetite of local investors is predicted to deteriorate the country's trade balance, and to appreciate its real exchange rate. A rise in global volatility and risk aversion improves a country's current account if that country has lower steady state risk aversion than the rest of the world. These predictions seem consistent with the fact that fluctuations in the VIX are positively correlated with the US current account. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1397&r=dge |
| By: | Rasmus Lentz (University of Wisconsin-Madison); Jesper Bagger (Royal Holloway, University of London) |
| Abstract: | This paper studies wage dispersion in an equilibrium on-the-job-search model with endogenous search intensity and wage setting through bargaining with employers competing for workers' services. Workers differ in permanent skills, firms differ in productivity. Workers can respond to mismatch by searching harder for better matches; they 'create their own luck'. This mechanism may generate labor market sorting. The model is estimated on Danish matched employer-employee data. We find that high-skilled workers tend to sort into high-productive firms. Log wage variation comprises worker heterogeneity, firm heterogeneity, imperfect labor market competition, and sorting in proportions 49%, 17%, 23% and 11%. Hence, labor market sorting is a separate and significant source of dispersion. In a counterfactual economy where workers are prevented from acting on mismatch, there is no sorting, and worker heterogeneity is found to be a much weaker contributor to wage variation, and imperfect labor market competition, effectively 'luck', a much stronger contributor. Ignoring worker's search choice may thus substantially impact our understanding wage inequality. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1345&r=dge |
| By: | Kim Ruhl (New York University Stern School of Busi); Horag Choi (Monash University); George Alessandria (University of Rochester) |
| Abstract: | We build a micro-founded two-country dynamic general equilibrium model in which trade responds more to a cut in tariffs in the long run than in the short run. The model introduces a time element to the fixed-variable cost trade-off in a heterogeneous producer trade model. Thus, the dynamics of aggregate trade adjustment arise from producer-level decisions to invest in lowering their future variable export costs. The model is calibrated to match salient features of new exporter growth and provides a new estimate of the exporting technology. At the micro level, we find that new exporters commonly incur substantial losses in the first three years in the export market and that export profits are backloaded. At the macro level, the slow export expansion at the producer level leads to sluggishness in the aggregate response of exports to a change in tariffs, with a long-run trade elasticity that is 2.9 times the short-run trade elasticity. We estimate the welfare gains from trade from a cut in tariffs, taking into account the transition period. While the intensity of trade expands slowly, consumption overshoots its new steady-state level, so the welfare gains are almost 15 times larger than the long-run change in consumption. Models without this dynamic export decision underestimate the gains to lowering tariffs, particularly when constrained to also match the gradual expansion of aggregate trade flows. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1361&r=dge |
| By: | Mathieu Taschereau-Dumouchel (University of Pennsylvania - Wharton); Edouard Schaal (New York University) |
| Abstract: | We propose a search theory of unemployment in which coordination concerns amplify and propagate shocks. Because of an aggregate demand externality, firms are more likely to create jobs when aggregate employment is high. The model features multiple equilibria under complete information, but we extend the global game approach of Schaal and Taschereau-Dumouchel (2014) to obtain uniqueness. Because coordination is persistent, the model can generate large, long-lasting unemployment crises. When unemployment is high, aggregate demand is low and firms are more likely to coordinate on low job creation. As a result, unemployment persists and job creation remains durably low. We calibrate the model to the United States economy and find that it generates more volatile, persistent and asymmetric fluctuations than a benchmark Diamond-Mortensen-Pissarides search model. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1324&r=dge |
| By: | Willi Mutschler |
| Abstract: | This note derives closed-form expressions for unconditional moments, cumulants and polyspectra of order higher than two for linear and nonlinear (pruned) DSGE models. The procedures are demonstrated by means of the Smets and Wouters (2007) model (first-order approximation), the An and Schorfheide (2007) model (second-order approximation) and the canonical neoclassical growth model (third-order approximation). Both the Gaussian as well as Student's t-distribution are considered as the underlying stochastic process. Useful Matrix tools and computational aspects are also discussed. |
| Keywords: | higher-order moments, cumulants, polyspectra, nonlinear SDGE, pruning |
| JEL: | C10 C51 E1 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:4315&r=dge |
| By: | M. Kliem; Alexander Kriwoluzky; S. Sarferaz |
| Abstract: | We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation. |
| Keywords: | time-varying VAR, inflation, public deficits |
| JEL: | E42 E58 E61 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:17-15&r=dge |
| By: | Piotr Ciżkowicz; Andrzej RzoÅ„ca; Andrzej Torój |
| Abstract: | We lay a ground for a simple comparison of positive and possible side (adverse) effects of zero interest rate policy (ZLB policy) on welfare. Using a standard New Keynesian dynamic stochastic general equilibrium model, we show that if one assumes that the ZLB policy has no side effects, then this policy is welfare enhancing relative to positive lower bound (PLB) policy, except for the case where PLB policy is pursued under commitment, while the ZLB policy is discretionary. However, moderate side effects of the ZLB policy usually suffice for the PLB policy to pay off in terms of welfare. Only if the ZLB policy was pursued under commitment, while PLB policy was discretionary, would the PLB policy dominance over the ZLB policy, in terms of welfare, require strong side effects of ZLB policy. Otherwise PLB policy could dominate the ZLB policy in terms of welfare, even if restructuring, fostered by the PLB policy, entailed some costs, which could be reduced (or avoided) through slow restructuring. For given side effects of the ZLB, the larger and the more persistent the shock that makes the ZLB bind, the more likely PLB policy dominance over the ZLB policy. The findings holds for economies with both fast and slow potential output growth, with low and high inflation target, flexible and rigid. |
| Keywords: | fiscal reaction function, sovereign bond yields’ convergence, fiscal adjustment composition |
| JEL: | C23 E62 F34 H63 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:215&r=dge |
| By: | Ilse Lindenlaub (New York University) |
| Abstract: | The labor market by itself can create cyclical outcomes, even in the absence of exogenous shocks. We show that the search behavior of the employed has profound aggregate implications for the unemployed. Active on-the-job search increases vacancy posting by firms: it changes the number of searchers and in the presence of sorting, it improves the quality of the pool of searchers. More vacancy posting in turn makes on-the-job search more attractive, a self-fulfilling belief. The absence of on-the-job search discourages vacancy posting, making costly on-the-job search little attractive. 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 crowding out the unemployed; and it gives rise to a shift in the Beveridge Curve (the unemployment-vacancy locus). Each of these phenomena are matched in the data. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1368&r=dge |
| By: | Kazuo MIno (Kyoto University) |
| Abstract: | This paper constructs a tractable model of endogenous growth with financial frictions and fi rm heterogeneity. We introduce factor income tax, consumption tax as well as the government consumption into the base model and explore the growth effect of fiscal policy. We show that from the qualitative perspective, the long-run effects of fiscal actions in our model are similar to those obtained in the representative-agent models. However, the quantitative impacts of fiscal policy on long-run growth in our setting can be substantially different from those established in the model where agents are homogeneous and there is no fi nancial friction. |
| Keywords: | fiscal policy, financial constraints, firm heterogeneity, endogenous growth |
| JEL: | D31 O41 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:930&r=dge |
| By: | Jean-François Rouillard (GREDI, Universite de Sherbrooke) |
| Abstract: |  A canonical two-country real business cycle model with complete international asset markets fails to replicate the sign of the correlation between relative consumptions and real exchange rates—i.e. the consumption–real exchange rate anomaly or Backus-Smith puzzle. When preferences are non-separable between consumption and leisure, the same two-country model augmented by domestic financial frictions and shocks can account for the sign of the Backus-Smith correlation. Specifically, shocks to the firms’ borrowing capacity create important fluctuations in the labor wedge, inducing firms to demand more labor following these positive financial shocks. These procyclical movements in hours worked significantly affect the marginal utility of consumption and explain the Backus-Smith correlation. Moreover, the same model under financial autarky predicts a correlation that is far away from its empirical counterpart. This finding suggests that this correlation is not a good indicator of international risk sharing. |
| Keywords: | Backus-Smith puzzle, borrowing constraints, labor wedge, working capital, financial shocks, non-separable preferences |
| JEL: | E44 F34 F44 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:15-13&r=dge |
| By: | Manuel Amador (Federal Reserve Bank of Minneapolis); Gita Gopinath (Harvard); Emmanuel Farhi (Harvard University); Mark Aguiar (Princeton University) |
| Abstract: | We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1337&r=dge |
| By: | enoch hill (university of minnesota); Fabrizio Perri (University of Minnesota); Alessandra Fogli (Minneapolis Federal Reserve Bank) |
| Abstract: | This paper uses micro-spatial data and develops a simple theory that explicitly includes a spatial dimension to better understand the start and the diffusion of business cycles. We first document how unemployment has diffused across US counties during recent recessions and find a recurring spatial pattern. Unemployment does not increase in all counties at the same time; at the start of the recession it increases in a few specific areas and then spreads from there to the rest of the country, following an epidemic pattern, i.e. increasing first in areas that are closer to areas of high unemployment. Our theory develops a stylized model of a country, composed by many locations, where each location is connected to its neighbors by explicit trade links. In particular we assume that each location produces a differentiated good which is demanded more heavily by locations which are nearby. Labor markets are segmented at the location level and in each location there can be unemployment due to sticky wages. We then model an aggregate shock as an event that affects, at the same time, the productivity or the demand (modeled as government demand for a good produced by a given location) of many different (random) locations. We have two main findings. The first is that our setup is able to account for the spatial pattern of business cycles we document in the data. The second is that the intensity of the local trade links is an important determinant of the amplification and propagation of the initial aggregate shock. If trade links are strong, small shocks tend to be muted and not persistent, while large shocks can be very disruptive. If trade links are weak, the opposite is true, small shocks |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1356&r=dge |
| By: | Jean-François Rouillard (GREDI, Universite de Sherbrooke) |
| Abstract: | Â A two-country real business cycle model with national endogenous borrowing con- straints and frictionless international financial markets can account for the high level of international co-movements. The borrowing mechanism brings about a wedge be- tween the real interest rate and the expected marginal product of capital, which plays a key role in the international transmission of technology shocks. Moreover, terms of trade are amplified by the effects of these shocks on real interest rates which ultimately lead to greater synchronization of economic activities across countries. Finally, the signs of international co-movements are not sensitive to the structure of international asset markets (incomplete markets or financial autarky). Therefore, in the presence of national financial frictions, international efficiency cannot be assessed from looking at the behavior of aggregate variables. |
| Keywords: | Â borrowing constraints, working capital, international co-movements, terms of trade. |
| JEL: | E44 F34 F44 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:15-12&r=dge |
| By: | Givens, Gregory |
| Abstract: | I study the welfare gains from commitment relative to discretion in the context of an equilibrium model that features deep habits in consumption. Policy simulations reveal that the welfare gains are increasing in the degree of habit formation and economically significant for a range of values consistent with U.S. data. I trace these results to the supply-side effects that deep habits impart on the economy and show that they ultimately weaken the stabilization trade-offs facing a discretionary planner. Most of the inefficiencies from discretion, it turns out, can be avoided by installing commitment regimes that last just two years or less. Extending the commitment horizon further delivers marginal welfare gains that are trivial by comparison. |
| Keywords: | Deep Habits, Optimal Monetary Policy, Commitment, Discretion |
| JEL: | E52 E61 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67996&r=dge |
| By: | Karl Farmer (University of Graz); Bogdan Mihaiescu (University of Graz) |
| Abstract: | Farmer and Ban (2014) find in a three-country OLG model (= basic model) that financial integration between both EMU core and periphery and between Asia and USA induce trade surpluses in EMU core and in Asia while in EMU periphery and in USA trade balances become negative when the global economy is dynamically inefficient. While exhibiting the right sign, model-generated steady-state trade balance to GDP ratios turn out, however, being too low compared to empirical counterparts. In order to address this problem we first extend the basic OLG model in line with Eugeni (2015) by introducing pay-as-you-go pension systems in EMU and US but not in Asia. Second, we introduce financial constraints following Coeurdacier et al. (2015) to achieve a better data fit compared to the basic model. Both extensions improve the empirical relevance of the basic model. |
| Keywords: | Trade Imbalances; European Economic and Monetary Union; Overlapping Generations; Three-Country Model; Global imbalances |
| JEL: | F36 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2015-08&r=dge |
| By: | Richard Charlton |
| Abstract: | The chaotic and ergodic equilibrium consumption profiles of a two period lived representative agent overlapping generations model are examined. Given a specific utility function, it is shown that for a typical equilibrium path expected indirect utility of consumption is less than the utility of expected equilibrium consumption. In turn, utility of expected consumption in equilibrium is less than utility at the steady state equilibrium. This result holds for a set of equilibrium maps of positive measure and suggests that stabilisation of the erratic system would bring about an improvement in welfare. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:559&r=dge |
| By: | Dimitrios Tsomocos (to be added); Alexandros Vardoulakis (Board of Governors of the Federal Reserve System); Anil Kashyap (University of Chicago) |
| Abstract: | We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and there is a probability of a run which is governed by the bank's leverage and its mix of safe and risky assets. The possibility of the run reduces the incentive to lend and take risk, while limited liability pushes for excessive lending and risk-taking. We explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes interact to offset these frictions. We compare agents welfare in the decentralized equilibrium absent regulation with welfare in equilibria that prevail with various regulations that are optimally chosen. In general, regulation can lead to Pareto improvements but fully correcting both distortions requires more than one regulation. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1338&r=dge |
| By: | Mark Huggett (Georgetown University); Alejandro Badel (St. Louis Fed) |
| Abstract: | We provide a formula that relates the tax rate at the top of the Laffer curve to three elasticities. The formula applies to static models and to steady states of dynamic models. We also explore whether existing methods for estimating elasticities, common in the elasticity of taxable income literature, accurately estimate the theoretically-relevant elasticity. Existing methods work poorly in models with endogenous human capital accumulation but better in models with exogenous human capital. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1396&r=dge |
| By: | jae sim (Federal Reserve Board); Raphael Schoenle (Brandeis University); Egon Zakrajsek (Federal Reserve Board); Simon Gilchrist (Boston University) |
| Abstract: | In this paper, we analyze the business cycle and welfare consequences of monetary union among countries that face heterogeneous financial market frictions. We show that facing financial distress in the absence of devaluation, the firms in financially weak countries countries have an incentive to raise their prices to cope with liquidity shortfalls. At the same time, firms in countries with greater financial slack poach from the customer base of the former countries by undercutting their prices, without internalizing the detrimental effects on union-wide aggregate demand. Thus, a monetary union among countries with heterogeneous degrees of financial frictions may create a tendency toward internal devaluation for core countries with greater financial resources, leading to chronic current account deficits of the peripheral countries. A risk-sharing arrangement between the core and the periphery can potentially undo the distortion brought about by the currency union. However, such risk sharing requires unrealistic amounts of wealth transfers from the core to the periphery. We show that unilateral fiscal devaluation carried out by the peripheral countries can substantially improve the situation not only for themselves but also for the core countries if there exists an important degree of pecuniary externality not internalized by the predatory pricing strategies of individual firms. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1327&r=dge |
| By: | Bilin Neyapti (Bilkent University) |
| Abstract: | This paper presents a model to explore the welfare effects of the government’s choice over two types of public goods provision: domestic regulatory and security spending (adjudication) versus education. Output is a function of physical and social capital, both of which can be heterogeneous across the regions. Local social capital is exposed to spillover effects of other regions. Education spending increases social capital, whereas adjudication spending increases total factor productivity. The solution in an OLG framework indicates that the welfare maximizing ratio of education spending is negatively related with the past levels of social capital stock and the degree of social cohesion, but positively related with the current levels of aggregate income and the tax rate. Simulations of the model’s temporal solution reveal the short-run and long-run difference, reversing the positive effects of the tax rate and the income level, which is a crucial point. Income and cultural homogeneity are associated positively with the level of aggregate income and social cohesion whereas the relationship between income distribution and social cohesion is non-linear in the short-run. |
| Keywords: | Economic Development; Income Equality; Public Spending; Social Capital; Social Cohesion. |
| JEL: | E02 E6 H11 H52 I24 I25 I31 Z18 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1526&r=dge |
| By: | Güneş Kamber; Chris McDonald; Nicholas Sander; Konstantinos Theodoridis (Reserve Bank of New Zealand) |
| Abstract: | We describe the underlying structure of the new forecasting and policy model used at the Reserve Bank of New Zealand. This paper outlines the dynamic stochastic general equilibrium part of the model, which is deliberately kept small so that it is easily understood and applied in the forecasting context. We also discuss the key transmission channels in the model, estimate the model's parameters and evaluate its ability to explain New Zealand data. macroprudential policies. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2015/05&r=dge |
| By: | Jack Rossbach (University of Minnesota) |
| Abstract: | This paper theoretically and quantitatively evaluates the hypothesis that, due to the existence of large firms (granularity), idiosyncratic shocks to individual firms can lead to significant variation in the growth of countries. I embed granularity, through finiteness in the set of firms, in a general equilibrium environment featuring monopolistic competition, growth, and international trade. Firm productivities grow according to idiosyncratic productivity shocks, which obey a Gibrat's law proportional growth process, and are the only source of growth in the model. I derive an approximate analytic mapping for the standard deviation of GDP growth in this framework, which is non-zero due to granularity. This mapping depends on only a few key parameters, which I estimate for a wide-range of countries using firm-level micro data. My results indicate that idiosyncratic shocks to firms can play a significant role in generating both short-run macroeconomic fluctuations and variation in longer-run growth trends, particularly for countries that engage heavily in international trade. Empirically, I show that the model does well in matching relative differences in GDP volatility across OECD countries. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1311&r=dge |
| By: | Paulina Restrepo-Echavarria (Federal Reserve Bank of St Louis and The); Mark Wright (Federal Reserve Bank of Chicago); Lee Ohanian (University of California Los Angeles) |
| Abstract: | Theory predicts that capital should flow to countries where economic growth and the return to capital is highest. However, in the post-World War II period, per-capita GDP grew almost three times faster in East Asia than in Latin America, yet capital flowed in greater quantities into Latin America. In this paper we propose a 3-country 2-sector growth model, augmented by 'wedges' to quantify and evaluate the importance of international capital market imperfections versus domestic imperfections in explaining this anomalous behavior of capital flows. We find that during the 1950's capital controls where important, but domestic conditions dominate. And contrary to what has been thought, after 1960 capital controls in Asia encouraged borrowing. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1377&r=dge |
| By: | Diego Restuccia (University of Toronto); Pedro Bento (West Virginia University) |
| Abstract: | We construct a new dataset using census, survey, and registry data from hundreds of sources to document a clear positive relationship between aggregate productivity and average establishment size in manufacturing across 134 countries. We rationalize this relationship using a standard model of reallocation among production units that features endogenous entry and productivity investment. The model connects small operational scales to the prevalence in poor countries of correlated distortions (the elasticity between wedges and establishment productivity). The model also rationalizes the finding in poor countries of low establishment-level productivity and low aggregate productivity investment. A calibrated version of the model implies that when correlated distortions change from 0.09 in the U.S. to 0.5 in India, establishment size and productivity fall by a factor of more than five, and aggregate productivity by a factor of three. These substantial size and productivity losses are large compared to the existing literature and more in line with actual data for the differences in size and productivity between India and the United States. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1391&r=dge |
| By: | Heejeong Kim (Ohio State University); Aubhik Khan (Ohio State University) |
| Abstract: | Using the 2004 Survey of Consumer Finances data, we find significant heterogeneity in household portfolio choice across ages and wealth levels. First, 30 percent of the U.S. households hold high-yield assets defined as stocks, bonds, and mutual and hedge funds. Second, the probability of a household participating in high-yield asset markets is rising with age and wealth level. Lastly, wealthy households tend to hold more of their financial assets as high-yield assets. We study a quantitative overlapping-generations model to explore the effects of segmented assets markets on wealth distribution. At any time, a household is identified by its age, wealth and labour income. There are two asset markets, one associated with a high-yield asset, the other with a low yield asset. At any age, a household gains access to the high-yield asset market through payment of a fixed cost. We estimate earnings processes for households from the Panel Study of Income Dynamics using the minimum method of moments. We choose the distribution of fixed costs associated with access to the high yield asset market, in our model economy, to be consistent with our measure of asset market segmentation from the SCF data. Solving for stationary equilibrium, we study the effect of different11 returns on savings on the distribution of wealth. We first find that segmented asset markets lead to a substantial increase in wealth dispersion across households and move the model economy to empirical measures of overall inequality. Specifically, an alternative model without market segmentation, wherein all households earn the average return on assets in our benchmark segmented markets economy, generates a Gini coefficient for wealth that is approximately 7 to 10 percent lower. Moreover the concentration of wealth in the top percentiles is substantially less. Second, we reproduce the empirical findings that households are more likely to hold high-yield assets if they are older and wealthier. Given recent empirical evidence on heterogeneity in households' portfolios, our results suggest asset market segmentation is an important source of wealth inequality. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1385&r=dge |
| By: | Tatsuro Senga (The Ohio State University) |
| Abstract: | Uncertainty faced by individual firms appears to be heterogeneous. In this paper, I construct new empirical measures of firm-level uncertainty using data from the I/B/E/S and Compustat. These new measures reveal persistent differences in the degree of uncertainty facing individual firms not reflected by existing measures. Consistent with existing measures, I find that the average level of uncertainty across firms is countercyclical, and that it rose sharply at the start of the Great Recession. I next develop a heterogeneous firm model with Bayesian learning and uncertainty shocks to study the aggregate implications of my new empirical findings. My model establishes a close link between the rise in firms' uncertainty at the start of a recession and the slow pace of subsequent recovery. These results are obtained in an environment that embeds Jovanovic's (1982) model of learning in a setting where each firm gradually learns about its own productivity, and each occasionally experiences a shock forcing it to start learning afresh. Firms differ in their information; more informed firms have lower posterior variances in beliefs. An uncertainty shock is a rise in the probability that any given firm will lose its information. When calibrated to reproduce the level and cyclicality of my leading measure of firm-level uncertainty, the model generates a prolonged recession followed by anemic recovery in response to an uncertainty shock. When confronted with a rise in firm-level uncertainty consistent with advent of the Great Recession, it explains 79 percent of the observed decline in GDP and 89 percent of the fall in investment. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1373&r=dge |
| By: | Vivian Malta (BTG Pactual); Rene Garcia (EDHEC Business School); Carlos Carvalho (PUC-Rio); Marco Bonomo (Insper Institute of Education and Research) |
| Abstract: | We propose a price-setting model which helps to reconcile micro evidence of relatively frequent price adjustments with macroeconomic persistent effects of aggregate shocks. In our model, both price adjustments and the gathering of some types of information are costly, requiring the payment of a lump-sum cost. Additional relevant information flows continuously, and can be factored into pricing decisions costlessly. We estimate three versions of the model by a Simulated Method of Moments, including a special case in which all information is costly. When idiosyncratic information is free and aggregate information is costly, our estimated model is able to match individual price-setting statistics for the U.S. and, at the same time, produce persistent monetary non-neutrality. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1339&r=dge |
| By: | Julian Kozlowski (NYU); Juan Sanchez (Federal Reserve Bank of St. Louis); Emilio Espino (Universidad Torcuato Di Tella) |
| Abstract: | Many economic activities are organized as partnerships. These ventures are formed with capital contributions by partnership members who obtain a share of ownership in exchange. The design of the partnership dictates how much of the profits is distributed among the mem- bers and how much is reinvested. In this paper, we study the optimal design of partnerships under the assumption that partners privately observe shocks to their liquidity needs. When the ownership share of a partner is large enough, his incentives to misreport vanish. This occurs because a fraction of the increase in his payouts after reporting high liquidity needs is financed by disinvesting in the partnership. When his ownership share is not big enough, the ownership structure of the partnership must vary over time to prevent misreporting. The limiting distri- bution of shares depends on the initial ownership structure. Under certain conditions, if the partnership starts with approximately equally distributed shares, both partners are too big to cheat and the ownership structure remains unchanged forever. Instead, if the initial ownership structure is such that one of the partners is too big to cheat but the other is not, the share of the initially larger partner ends up either reaching 100% (i.e., sole proprietorship forever) or decreasing to the point at which both partners are too big to cheat (i.e., shares are approximately equally distributed forever). |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1308&r=dge |
| By: | Maryam Saeedi (The Ohio State University); Hugo A. Hopenhayn (UCLA) |
| Abstract: | We consider equilibrium bidding behavior in a dynamic second price auction where agents have the option to increase bids at random times and values follow a Markov process. We prove that equilibrium exists and is unique and give an algorithm to solve for bids as a function of time and values. Equilibrium bids equal the expected final value conditional on the bid placed being the final one, meaning that either the agent doesn't get another opportunity to rebid or chooses not to increase this bid if given the option. This results in adverse selection with respect to a bidder's own future strategy, and as a result bids are shaded relative to the bidder's expected value. This is true in spite of values being independent across bidders. Under mild conditions, desired bids increase as time increases and the close of the auction is approached. Our results are consistent with repeated bidding and sniping, two puzzling observations in eBay auctions. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1346&r=dge |
| By: | Mirko Wiederholt (Goethe University Frankfurt); Filip Matejka (CERGE-EI); Bartosz Mackowiak (European Central Bank) |
| Abstract: | Dynamic rational inattention problems are notoriously difficult to solve. We consider a standard linear quadratic Gaussian tracking problem, as in Sims (2003), Section 4. Let Xt denote the variable being tracked and let t denote the time t innovation in the variable being tracked. We show that if the variable being tracked follows an AR(p) process, the optimal signal is about a linear combination of {Xt, ..., Xt-p+1} only. If the variable being tracked follows an ARMA(p,q) process, the optimal signal is about a linear combination of {Xt, ..., Xt-p+1} and {t, ..., t-q+1} only. Furthermore, the agent can attain the optimum with a single informative signal. These results make it much easier to solve dynamic rational inattention problems. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1316&r=dge |