nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒12‒08
33 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Regime-switching volatility of Euro Area Business Cycles By Stéphane Lhuissier
  2. Finance, Volatility, and Growth By Lukas Schmid; Howard Kung; Alexandre Corhay
  3. Parameter bias in an estimated DSGE model: does nonlinearity matter? By Yasuo Hirose; Takeki Sunakawa
  4. Financial Intermediation, Capital Accumulation, and Recovery By Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
  5. An Economic Analysis of Pension Tax Proposals By Angus Armstrong; Philip Davis; Monique Ebell
  6. Solving OLG Models with Asset Choice By Michael Reiter
  7. Macroprudential Policy in a DSGE Model: anchoring the countercyclical capital buffer By Leonardo Nogueira Ferreira; Márcio Issao Nakane
  8. Monetary and Macroprudential Policies under Fixed and Variable Interest Rates By Margarita Rubio
  9. Education Choices, Longevity and Optimal Policy in a Ben-Porath Economy By Yukihiro Nishimura; Pierre Pestieau; Gregory Ponthiere
  10. The Blighted Youth: The Impact of Recessions and Policies on Life-Cycle Unemployment By López-Martín Bernabé; Takayama Naoki
  11. Preferences and pollution cycles By Stefano Bosi; David Desmarchelier; Lionel Ragot
  12. Endogenous Market Making and Network Formation By Briana Chang; Shengxing Zhang
  13. Foreign shocks By Drago Bergholt
  14. On the sources of macroeconomic stability in the euro area. By S. Avouyi-Dovi; J-G. Sahuc
  15. Dynamic Effects of Monetary Policy Shocks on Macroeconomic Volatility By Haroon Mumtaz; Konstantinos Theodoridis
  16. Sovereign Default: The Role of Expectations By Pedro Teles; Juan Nicolini; Gaston Navarro; Joao Ayres
  17. How Risky Is College Investment? By Lutz Hendricks; Oksana Leukhina
  18. The effects of global bank competition and presence on local business cycles: The Goldilocks principle does not apply to global banking By Uluc Aysun
  19. The Forward Guidance Puzzle By Marc Giannoni; Christina Patterson; Marco Del Negro
  20. Equilibrium Default By Manuel Amador; Ivan Werning; Hugo A. Hopenhayn; Mark Aguiar
  21. Determining the Optimal Selling Time of Cattle: A Stochastic Dynamic Programming Approach By Susana Mejía; Andrés Ramírez Hassan
  22. Energy Business Cycles By Meenagh, David; Minford, Patrick; Oyekola, Olayinka
  23. A Search and Learning Model of Export Dynamics By Marcela Eslava; James Tybout; David Jinkins; C. Krizan; Jonathan Eaton
  24. Health-care reform or labor market reform? A quantitative analysis of the affordable care act By Nakajima, Makoto; Tuzemen, Didem
  25. Communal Land and Agricultural Productivity By Charles Gottlieb; Jan Grobovsek
  26. Why Are Exchange Rates So Smooth? A Segmented Asset Markets Explanation By Chien, YiLi; Lustig, Hanno; Naknoi, Kanda
  27. The Welfare State and the demographic dividend: A cross-country comparison By Gemma Abio Roig; Concepció Patxot Cardoner; Miguel Sánchez-Romero; Guadalupe Souto Nieves
  28. On the Distribution of College Dropouts: Wealth and Uninsurable Idiosyncratic Risk By Ozdagli, Ali K.; Trachter, Nicholas
  29. Banking panics and protracted recessions By Sanches, Daniel R.
  30. Macroprudential and Monetary Policy Interaction: a Brazilian perspective By Fabia A. de Carvalho; Marcos R. de Castro
  31. Foreign competition and banking industry dynamics: an application to Mexico By Corbae, Dean; D'Erasmo, Pablo
  32. The Return to College: Selection and Dropout Risk By Lutz Hendricks; Oksana Leukhina
  33. Monetary Policy According to HANK By Gianluca Violante; Benjamin Moll; Greg Kaplan

  1. By: Stéphane Lhuissier
    Abstract: We document the strong evidence of time variation in the volatility of euro area business cycles since 1970. Then, we provide the quantitative sources of these changes by using a medium-scale DSGE model allowing time variation in structural disturbance variances. We show that: 1) The size of different types of shock oscillates, in a synchronized manner, between two regimes over time, with the high-volatility regime prevailing predominantly in the 1970s, sporadically in the 1980s and 1990s, and during the Great Recession. 2) Their relative importance remains, however, unchanged across regimes, where neutral technology shocks and marginal efficiency of investment shocks are the dominant sources of business cycle fluctuations; and 3) These investment shocks, which affect the transformation of savings into productive capital, can be interpreted as an indicator of credit condtions.
    Keywords: Business Cycles;DSGE;Euro Area;Heteroskedasticity;Markov-switching
    JEL: C11 C51 E32 E42 E52
    Date: 2015–11
  2. By: Lukas Schmid (Duke University); Howard Kung (London Business School); Alexandre Corhay (University of British Columbia, Sauder School of Business)
    Abstract: Is there a fundamental link between macroeconomic risk and growth? Is there a causal link between finance and growth? These questions are central for the design of stabilization policies and for welfare. How- ever, no consensus has yet emerged in the literature. We contribute to that debate by developing a general equilibrium stochastic endogenous growth model that allows to examine the impact of financial frictions on volatility and growth. In the model, growth is driven by the endogenous accumulation of physical and intangible capital, both of which are subject to distinct financial frictions. We characterize the conditions under which finance and volatility foster growth. We find that in the presence of relatively mild financial frictions, alleviating financial constraints leads to both higher average as well as more volatile growth rates, so that a trade-off between volatility and growth emerges. When financial frictions primarily affect physical capital accumulation, the ensuing cycles occur at business cycle frequency. On the other hand, frictions to intangible capital accumulation imply amplified low-frequency movements. The welfare implications depend on preferences: with recursive preferences, low-frequency volatility is very costly
    Date: 2015
  3. By: Yasuo Hirose; Takeki Sunakawa
    Abstract: How can parameter estimates be biased in a dynamic stochastic general equilibrium model that omits nonlinearity in the economy? To answer this question, we simulate data from a fully nonlinear New Keynesian model with the zero lower bound constraint and estimate a linearized version of the model. Monte Carlo experiments show that significant biases are detected in the estimates of monetary policy parameters and the steady-state inflation and real interest rates. These biases arise mainly from neglecting the zero lower bound constraint rather than linearizing equilibrium conditions. With fixed parameters, the variance-covariance matrix and impulse response functions of observed variables implied by the linearized model substantially differ from those implied by its nonlinear counterpart. However, we find that the biased estimates of parameters in the estimated linear model can make most of the differences small.
    Keywords: Nonlinearity, Zero lower bound, DSGE model, Parameter bias, Bayesian estimation
    JEL: C32 E30 E52
    Date: 2015–11
  4. By: Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
    Abstract: This paper integrates a simple model of banks into a two-sector neoclassical growth model. The integration yields an analytically tractable framework with two coupled accumulation rules for household capital and bank equity. We analyze steady state properties, transition and recovery patterns, as well as policies to accelerate recoveries. After establishing existence, uniqueness and global stability of the steady state, we identify in particular five key results and predictions, and we provide a quantitative assessment. First, larger financial frictions in financial intermediation may increase banker wealth although total capital is depressed. Second, negative shocks to bank equity cause considerably larger downturns than comparable shocks to household wealth, but their persistence is similar. Third, temporary worsening of shocks to financial frictions (called "trust shocks") induces divergent reactions of household wealth and bank equity, causes a boom in the banking sector, and possibly in the economy – after an initial bust. Fourth, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and counter-cyclical bond financing. Finally, a combination of bailouts and dividend-payout-restrictions ensures a rapid build-up of bank equity after a slump in the banking sector and increases total production.
    Keywords: banking crises; business cycles; bust-boom cycles; capital accumulation; financial intermediation; macroeconomic shocks; recovery policies
    JEL: E21 E32 F44 G21 G28
    Date: 2015–11
  5. By: Angus Armstrong (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM)); Philip Davis (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM)); Monique Ebell (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM))
    Abstract: The Government has recently issued a consultation document which raises the possibility of a substantial change in the taxation of pensions. In this paper we assess the economic consequences of changing from the existing EET system (where pension savings and returns are exempt from income tax, but pension income is taxed) to a TEE system (pension savings would be from taxed income but with no further taxation thereafter), making use of two complementary approaches. First, we review the economic and empirical literature, and second we construct a general equilibrium overlapping generations (OLG) model parameterised to UK data and the UK tax system. Both approaches lead to the same outcome: that changing from EET to TEE would lead to a fall in personal savings. In addition, our analysis shows that the move would be counter to a series of pension reform principles the Government has set out. Our review of published literature shows most authors find EET (which is used in 22 of 30 OECD countries) more economically beneficial. This benefit manifests itself in an increased amount of personal and national saving, as well as in the risk on retirement portfolios, the effect on capital markets and overall benefits to economic growth. These findings are supported by our general equilibrium overlapping generations (OLG) model. OLG models are ideally suited to the analysis of life-cycle issues such as pensions, as they allow several cohorts or generations to be alive and interacting at once. General equilibrium allows us to capture all the complex feedback effects between taxes, savings decisions, and other variables such as investment, productivity, output (GDP), wages and interest rates. Our model shows that switching from EET to TEE would lead to a fall in personal savings, even if there are top-ups or subsidies from the Government. The intuition is simple: moving from EET to TEE frontloads the tax burden onto younger households. Bringing forward taxation would reduce the resources available to working aged households, leading to reductions in both consumption and savings. In addition, the current EET system provides added incentives for higher and additional rate taxpayers to save, in order to benefit from lower tax rates in retirement. This reduction in savings would have broader macroeconomic consequences including lower aggregate consumption, a lower capital stock, lower productivity and a higher real interest rate. The Government has stated that any reform must encourage people to save more; our analysis suggests that the proposed policy change will deliver the opposite outcome. Another principle set out by the Government is that the proposal ought to be consistent with its fiscal framework. The TEE system would lead to an immediate tax revenue gain from removing the current tax relief, which would improve today’s headline fiscal deficit. However, this would be at the expense of tomorrow’s fiscal accounts. We note that the only scenario where output (almost) and consumption return to the levels comparable to the current EET system are with a 50% government pension subsidy which would likely be detrimental on a Whole Government Accounts basis. Our model also reveals that a move from EET to TEE is inconsistent with the Government’s requirement that any reform should encourage individuals to take personal responsibility for adequate retirement savings. There is a dynamic inconsistency problem inherent in TEE because no government can credibly commit to never re-introducing taxation on pension income given likely challenges ahead. Retirement savings largely depend on future Government pension policy, and it is easy to see that the scrapping of taxation on pension income might be reversed in the future. As a result, individuals would be less, rather than more, willing to take personal responsibility under a TEE regime. The final principal set out by the Government is that the policy is simple and transparent. We note that the transition from EET to TEE would require earmarking different pension pots of savings as accumulated under different tax regimes. The transitional costs for defined contribution pensions could be considerable (assuming they would be forced to pay additional top-ups out of taxed income). We are unconvinced that having separate pension savings under different tax regimes would be beneficial in terms of transparency and simplicity.
    Date: 2015–11
  6. By: Michael Reiter (Institute for Advanced Studies)
    Abstract: The paper presents a computationally efficient method to solve overlapping generations models with asset choice. The method is used to study an OLG economy with many cohorts, up to 3 different assets, stochastic volatility, short-sale constraints, and subject to rather large technology shocks. On the methodological side, the main findings are that global projection methods with polynomial approximations of degree 3 are sufficient to provide a very precise solution, even in the case of large shocks. Globally linear approximations, in contrast to local linear approximations, are sufficient to capture the most important financial statistics, including not only the average risk premium, but also the variation of the risk premium over the cycle. However, global linear approximations are not sufficient to reliably pin down asset choices. With a risk aversion parameter of only 4, the model generates a price of risk, measured as the Sharpe ratio, that is about two thirds of that of US stocks. Being subject to three types of shocks, the equilibiurm allocation, even with 3 assets, differs substantially from an allocation under sequentially complete markets. In particular, the oldest cohorts are more more heavily exposed to negative shocks.
    Date: 2015
  7. By: Leonardo Nogueira Ferreira; Márcio Issao Nakane
    Abstract: The 2007-8 world financial crisis highlighted the deficiency of the regulatory framework in place at the time. Thenceforth many papers have been assessing the introduction of macroprudential policy in a DSGE model. However, they do not focus on the choice of the variable to which the macroprudential instrument must respond - the anchor variable. In order to fulfil this gap, we input different macroprudential rules into the DSGE with a banking sector proposed by Gerali et al. (2010), and estimate its key parameters using Bayesian techniques applied to Brazilian data. We then rank the results using the unconditional expectation of lifetime utility as of time zero as the measure of welfare: the larger the welfare, the better the anchor variable. We find that credit growth is the variable that performs best
    Date: 2015–11
  8. By: Margarita Rubio
    Abstract: In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and nancial markets under two different scenarios: fixed and variable-rate mortgages. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given share of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. I consider two alternative ways of introducing a macroprudential approach to enhance nancial stability: one in which monetary policy, using the interest rate as an instrument, responds to credit growth; and a second one in which the macroprudential instrument is instead the loan-to-value ratio (LTV). Results show that when rates are variable, a countercyclical LTV rule performs better to stabilize financial markets than monetary policy. However, when they are fixed, even though monetary policy is less effective to stabilize the macroeconomy, it does a good job to promote financial stability.
    Keywords: Fixed/Variable-rate mortgages, monetary policy, macroprudential policy, LTV, housing market, collateral constraint
    Date: 2015
  9. By: Yukihiro Nishimura (Osaka University [Osaka]); Pierre Pestieau (CEPR - Center for Economic Policy Research - CEPR, CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - Institut national de la recherche agronomique (INRA) - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Gregory Ponthiere (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - Institut national de la recherche agronomique (INRA) - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: We develop a 3-period overlapping generations (OLG) model where individuals borrow at the young age to finance their education. Education does not only increase future wages, but, also, raises the duration of life, which, in turn, affects education choices, in line with Ben Porath (1967). We first identify conditions that guarantee the existence of a stationary equilibrium with perfect foresight. Then, we reexamine the conditions under which the Ben-Porath effect prevails, and emphasize the impact of human capital decay and preferences. We compare the laissez-faire with the social optimum, and show that the latter can be decentralized provided the laissez-faire capital stock corresponds to the one satisfying the modified Golden Rule. Finally, we introduce intracohort heterogeneity in the learning ability, and we show that, under asymmetric information, the second-best optimal non-linear tax scheme involves a downward distortion in the level of education of less able types, which, quite paradoxically, would reinforce the longevity gap in comparison with the laissez-faire.
    Keywords: Education,Life expectancy,OLG models,Optimal policy
    Date: 2015–11
  10. By: López-Martín Bernabé; Takayama Naoki
    Abstract: We construct a theoretical model of labor markets with human capital accumulation to understand and quantify the earnings losses for young workers generated by unemployment: unemployment represents time forgone in terms of human capital accumulation, which adversely affects long-term income prospects of individuals. We show that lifetime earnings losses generated by job-displacement are larger for individuals with lower capacity to accumulate human capital and during an economic downturn, as documented in the empirical literature. At the aggregate level, the framework delivers youth unemployment rates that are higher and more sensitive to fluctuations in aggregate productivity than total unemployment rates. Additionally, in economies with a higher tax-wedge, unemployment rates are more sensitive to aggregate productivity shocks. A higher tax-wedge and minimum wage increase the long-term earnings losses produced by job-displacement, especially for low-skill individuals.
    Keywords: aggregate fluctuations; directed search; unemployment; worker heterogeneity; life cycle; human capital.
    JEL: E24 E32 J63 J64
    Date: 2015–11
  11. By: Stefano Bosi; David Desmarchelier; Lionel Ragot
    Abstract: We consider a competitive Ramsey economy where a pollution externality affects both consumption demand and labor supply, and we assume the stock of pollution to be persistent over time. Surprisingly, when pollution jointly increases the consumption demand (compensation effect) and lowers the labor supply (leisure effect ), multiple equilibria arise near the steady state (local indeterminacy) through a Hopf bifurcation (limit cycle). This result challenges the standard view of pollution as a fow to obtain local indeterminacy, and depends on the leisure effect which renders the pollution accumulation process more volatile.
    Keywords: pollution, endogenous labor supply, limit cycle, Ramsey model.
    JEL: E32 O44
    Date: 2015
  12. By: Briana Chang (School of Business, University of Wisconsin–Madison;); Shengxing Zhang (Department of Economics, London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: This paper proposes a theory of intermediation in which intermediaries emerge endogenously as the choice of agents. In contrast to the previous trading models based on random matching or exogenous networks, we allow traders to explicitly choose their trading partners as well as the number of trading links in a dynamic framework. We show that traders with higher trading needs optimally choose to match with traders with lower needs for trade and they build fewer links in equilibrium. As a result, traders with the least trading need turn out to be the most connected and have the highest gross trade volume. The model therefore endogenously generates a core-periphery trading network that we often observe: a financial architecture that involves a small number of large, interconnected institutions. We use this framework to study bid-ask spreads, trading volume, asset allocation and implications on systemic risk.
    Keywords: Over-the-Counter Market, Trading Network, Matching, Intermediation
    JEL: C70 G1 G20
    Date: 2015–11
  13. By: Drago Bergholt (Norges Bank)
    Abstract: How and to what extent are small open economies affected by international shocks? I develop and estimate a medium scale DSGE model that addresses both questions. The model incorporates i) international markets for firm-to-firm trade in production inputs, and ii) producer heterogeneity where technology and price setting constraints vary across industries. Using Bayesian techniques on Canadian and US data, I document several macroeconomic regularities in the small open economy, all attributed to international disturbances. First, foreign shocks are crucial for domestic fluctuations at all forecasting horizons. Second, productivity is the most important driver of business cycles. Investment efficiency shocks on the other hand have counterfactual implications for international spillover. Third, the relevance of foreign shocks accumulates over time. Fourth, business cycles display strong co-movement across countries, even though shocks are uncorrelated and the trade balance is countercyclical. Fifth, exchange rate pass-through to aggregate CPI inflation is moderate, while pass-through at the sector level is positively linked to the frequency of price changes. Few of these features have been accounted for by existing open economy DSGE literature, but all are consistent with reduced form evidence. The model presented here offers a structural interpretation of the results.
    Keywords: DSGE, small open economy, international business cycles, Bayesian estimation
    JEL: C11 E30 F41 F44
    Date: 2015–11–25
  14. By: S. Avouyi-Dovi; J-G. Sahuc
    Abstract: In the mid-1990s the euro area experienced a change in macroeconomic volatility. Around the same time, at business cycle frequencies the correlation between inflation and money growth changed markedly, turning from positive to negative. Distinguishing the periods pre- and post-1994, we estimate a dynamic stochastic general equilibrium model with money for the euro area. The model accounts for the salient facts. We then perform several counterfactual exercises to assess the drivers of these phenomena. The moderation of real variables was essentially due to relatively smaller shocks to investment, wage markups and preferences. The apparent lack of evidence for the quantity theory of money in the short run and the changes in the volatility of nominal variables resulted primarily from a more anti-inflationary and gradual monetary policy.
    Keywords: Macroeconomic volatility, quantity theory of money, monetary policy, DSGE model, euro area.
    JEL: E32 E51 E52
    Date: 2015
  15. By: Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Bank of England, and Lancaster University)
    Abstract: We use a simple New Keynesian model, with firm specific capital, non-zero steady-state inflation, long-run risks and Epstein-Zin preferences to study the volatility implications of a monetary policy shock. An unexpected increases in the policy rate by 150 basis points causes output and inflation volatility to rise around 10% above their steady-state standard deviations. VAR based empirical results support the model implications that contractionary shocks increase volatility. The volatility effects of the shock are driven by agents' concern about the (in)ability of the monetary authority to reverse deviations from the policy rule and the results are re-enforced by the presence of non-zero trend inflation.
    Keywords: DSGE, Non-linear SVAR, New Keynesian, Non-zero steady state inflation, Epstein-Zin preferences, Stochastic volatility
    JEL: E30 E40 E52 C11 C13 C15 C50
    Date: 2015–11
  16. By: Pedro Teles (Banco de Portugal, Universidade Catolica); Juan Nicolini (Federal Reserve Bank of Minneapolis); Gaston Navarro (New York University); Joao Ayres (University of Minnesota)
    Abstract: The standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), is consistent with multiple equilibrium interest rates. Some of those equilibria resemble the ones identified by Calvo (1988) where default is likely because rates are high, and rates are high because default is likely. The model is used to simulate equilibrium movements in sovereign bond spreads that resemble sovereign debt crisis. It is also used to discuss lending policies similar to the ones announced by the European Central Bank in 2012.
    Date: 2015
  17. By: Lutz Hendricks (University of North Carolina, Chapel Hill); Oksana Leukhina (University of Washington)
    Abstract: This paper is motivated by the fact that nearly half of U.S. college students drop out without earning a bachelor’s degree. Its objective is to quantify how much uncertainty college entrants face about their graduation outcomes. To do so, we develop a quantitative model of college choice. The innovation is to model in detail how students progress towards a college degree. The model is calibrated using transcript and financial data. We find that more than half of college entrants can predict whether they will graduate with at least 80% probability. As a result, stylized policies that insure students against the financial risks associated with uncertain graduation have little value for the majority of college entrants.
    Keywords: education, college dropout risk
    JEL: E24 J24 I21
    Date: 2015–11
  18. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: I solve a two-country real business cycle model that includes Cournot competitive global and local banks to investigate the impact of banking competition and global bank presence on local business cycles. Simulations reveal an inverted U-shaped relationship between the two factors and the volatility of output when global banks face portfolio adjustment costs. This relationship is determined by the asymmetric degree of diminishing returns to lending that global banks face in each economy. Specifcally, when global banks have a larger presence or are less competitive in one of the economies than the other, the cross-country mobility of loanable funds and the local responses to domestic shocks are smaller compared those obtained when the two economies are more symmetric.
    Keywords: Global banks, Cournot competition, real business cycles, bank size
    JEL: E32 E44 F33 F44
    Date: 2015–08
  19. By: Marc Giannoni (Federal Reserve Bank of New York); Christina Patterson (MIT); Marco Del Negro (Federal Reserve Bank of New York)
    Abstract: With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers and yet we know little about its effectiveness. We show that standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy, a phenomenon we call the "forward guidance puzzle," and explain why this is the case. We document the impact of forward guidance announcements on 1) a broad cross section of financial markets data, and 2) on the panel of Blue Chip forecasts. We find that this effect has been very heterogeneous across announcements and relate this heterogeneity to the type of forward guidance, whether delphic (news about the economy) or odyssean. We also discuss various explanations to the puzzle that have been advanced in the literature.
    Date: 2015
  20. By: Manuel Amador (Federal Reserve Bank of Minneapolis); Ivan Werning (Massachusetts Institute of Technology); Hugo A. Hopenhayn (UCLA); Mark Aguiar (Princeton University)
    Abstract: This paper studies the optimal financing of an investment project subject to the risk of default. A project needs outside funding from a lender, but the borrower can walk away at any moment and take some outside opportunity. The value of this opportunity is random and not observable by the lender. We show that the optimal dynamic contract may allow default along the equilibrium path. Focusing on the dynamics of default, debt and capital accumulation, we find that over the life of the project the probability of default declines, long-term debt falls and capital rises
    Date: 2015
  21. By: Susana Mejía; Andrés Ramírez Hassan
    Abstract: The world meat market demands competitiveness and optimal livestock replacement decisions can help to achieve this goal. We introduce a novel discrete stochastic dynamic programming framework to support a manager’s decision-making process of whether to sell or keep fattening animals in the beef sector. In particular, our proposal uses a non-convex value function, combining both economic and biological variables, and involving uncertainty with regard to price fluctuations. Our methodology is very general, so practitioners can apply it in different regions around the world. We illustrate the model’s convenience with an empirical application, finding that our methodology generates better results than actions based on empirical experience.
    Keywords: Decision Analysis; Farm Management; Simulation.
    JEL: Q12 C51 C61
    Date: 2015–07–09
  22. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Oyekola, Olayinka
    Abstract: We find that, when estimated, a two sector computable dynamic stochastic general equilibrium open economy model of the U.S. that formally admits energy into the production process can generate plausible parameter values that can be applied to deal with a broad range of economic issues. As a benchmark, we require that the model fits the data for output, real exchange rate, energy use, and consumption: output because it serves as a measure of a country’s total income; real exchange rate because it serves as a determinant of a country’s relative competitiveness; energy use because it serves as an indicator of special inputs into a country’s production process; and consumption because it serves as a yardstick for evaluating a country’s standard of living. Finally, we argue that this model, with appropriate extensions, some of which we also propose, can help future modelers to tackle other research questions.
    Keywords: Two sector; US DSGE model; Oil price volatility; Open economy; Indirect inference
    JEL: E32 D58 F41 C52 Q43
    Date: 2015–11
  23. By: Marcela Eslava (Universidad de Los Andes); James Tybout (Pennsylvania State University); David Jinkins (Copenhagen Business School); C. Krizan (U.S. Bureau of the Census); Jonathan Eaton (Brown University)
    Abstract: Customs record data reveal a number of patterns in relationships Colombian firms have with their U.S. buyers. We interpret these patterns in terms of a continuous-time model in which heterogeneous sellers search for buyers in a market. Success in selling to a buyer reveals information to the seller about the appeal of her product in the market, affecting her incentive to search for more buyers. Fit using the method of simulated moments, the model replicates key patterns in the customs records and allows us quantify several types of trade costs, including the search costs of identifying potential clients and the costs of maintaining business relationships with existing clients. It also allows us to estimate the effect of previous exporting activity on the costs of meeting new clients, and to characterize the cumulative effects of learning on firms' search intensities. Finally, we use our fitted model to explore the effects of these trade costs and learning effects on aggregate export dynamics
    Date: 2015
  24. By: Nakajima, Makoto (Federal Reserve Bank of Philadelphia); Tuzemen, Didem (Federal Reserve Bank of Kansas City)
    Abstract: An equilibrium model with firm and worker heterogeneity is constructed to analyze labor market and welfare implications of the Patient Protection and Affordable Care Act, commonly called the Affordable Care Act (ACA). The authors’ model implies a significant reduction in the uninsured rate from 22.6 percent to 5.6 percent. The model predicts a moderate positive welfare gain from the ACA because of the redistribution of income through health insurance subsidies at the exchange as well as the Medicaid expansion. About 2.1 million more part-time jobs are created under the ACA at the expense of 1.6 million full-time jobs, mainly because the link between full-time employment and health insurance is weakened. The model predicts a small negative effect on total hours worked (0.36 percent), partly because of the general equilibrium effect.
    Keywords: Health insurance; Health-care reform; Affordable care act; Labor market; Heterogeneous agents
    JEL: D91 E24 E65 I10
    Date: 2015–09–16
  25. By: Charles Gottlieb (University of Cambridge); Jan Grobovsek (University of Edinburgh)
    Abstract: This paper quantifies the aggregate impact of communal land tenure arrangements such as those that predominate in Sub-Saharan Africa. For this we use a general equilibrium selection model featuring agents that are heterogeneous in agricultural and non-agricultural skills. A fraction of aggregate land is communal and there are policy rules governing its expropriation and redistribution. These create operational frictions by subjecting rented-out communal land to the risk of expropriation. They also create occupational frictions as agricultural employment lowers the risk of expropriation as well as raises the prospect of communal land accumulation. The quantification of the model is based on policies deduced from Ethiopia. It reveals that communal land decreases productivity in agriculture relative to non-agriculture roughly by 20% in nominal and 10% in real terms. Employment and GDP, however, are not substantially affected. That serves as a reminder that ostensibly highly distortionary policies need not have substantial bite when individuals strategically adjust to them.
    Date: 2015
  26. By: Chien, YiLi (Federal Reserve Bank of St. Louis); Lustig, Hanno (Stanford University); Naknoi, Kanda (University of Connecticut)
    Abstract: Empirical work on asset prices suggests that pricing kernels have to be almost perfectly correlated across countries. If they are not, real exchange rates are too smooth to be consistent with high Sharpe ratios in asset markets. However, the cross-country correlation of macro fundamentals is far from perfect. We reconcile these empirical facts in a two-country stochastic growth model with segmented markets. A large fraction of households either do not participate in the equity market or hold few equities, and these households drive down the cross-country correlation in aggregate consumption. Only a small fraction of households participate in international risk sharing by frequently trading domestic and foreign equities. These active traders are the marginal investors, who impute the almost perfect correlation in pricing kernels. In our calibrated economy, we show that this mechanism can quantitatively account for the excess smoothness of exchange rates in the presence of highly volatile stochastic discount factors.
    Keywords: asset pricing; market segmentation; exchange rate; international risk sharing
    JEL: F10 F31 G12 G15
    Date: 2015–11–27
  27. By: Gemma Abio Roig (Universitat de Barcelona); Concepció Patxot Cardoner (Universitat de Barcelona); Miguel Sánchez-Romero (Wittgenstein Centre (IIASA, VID/OAW and WU)); Guadalupe Souto Nieves (Universitat Autònoma de Barcelona)
    Abstract: The sustainability of the welfare state is in doubt in many developed countries due to drastic population ageing. The extent of the problem and the margin for reforms depend - among other factors - on the size of the ageing process and the size of the public transfer system. The latter has a crucial impact on the extent to which the first demographic dividend previous to the ageing process turns into a second demographic dividend. The contribution of the different factors driving the demographic dividend is, ultimately, an empirical question. In this paper we contribute to the debate, exploding the cross-country comparison potentialities of the National Transfer Accounts (NTA) database. In particular, we introduce different configurations of the welfare state transfers – Sweden, United States and Spain - into a realistic demography Overlapping Generations (OLG) model and simulate its effects on the second demographic dividend.
    Keywords: Ageing, demographic dividend, intergenerational transfers, national transfer accounts, overlapping generations model, welfare state.
    JEL: J11 J18 E21 H53
    Date: 2015
  28. By: Ozdagli, Ali K. (Federal Reserve Bank of Boston); Trachter, Nicholas (Federal Reserve Bank of Richmond)
    Abstract: We present a dynamic model of the decision to pursue a college degree in which students face uncertainty about their future income stream after graduation due to unobserved heterogeneity in their innate scholastic ability. After matriculating and taking some exams, students re-evaluate their expectations about succeeding in college and may decide to drop out and start working. The model shows that, in accordance with the data, poorer students are less likely to graduate and are likely to drop out sooner than wealthier students. Our model generates these results without introducing explicit credit constraints.
    Date: 2015–11–19
  29. By: Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: This paper develops a dynamic model of bank liquidity provision to characterize the ex post efficient policy response to a banking panic and study its implications for the behavior of output in the aftermath of a panic. It is shown that the trajectory of real output following a panic episode crucially depends on the cost of converting long-term assets into liquid funds. For small values of this liquidation cost, the recession associated with a banking panic is protracted. For intermediate values, the recession is more severe but short lived. For relatively large values, the contemporaneous decline in real output in the event of a panic is substantial but followed by a vigorous rebound in real activity above the long-run level. The author argues that these theoretical predictions are consistent with the observed disparity in crisis-related output losses.
    Keywords: Banking panic; Deposit contract; Suspension of convertibility; Time-consistent policy
    JEL: E32 E42 G21
    Date: 2015–10–21
  30. By: Fabia A. de Carvalho; Marcos R. de Castro
    Abstract: This paper discusses the interaction between monetary and macroprudential policy in Brazil under both normative and positive perspectives. We investigate optimal combinations of simple, implementable macroprudential and monetary policy rules that react to the financial cycle using a DSGE model built to reproduce Brazilian particularities, and estimated with Bayesian techniques with data from the inflation targeting regime. We also investigate whether recent macroprudential policy announcements that targeted credit variables had important spillover effects on variables targeted by monetary policy in Brazil. To this end, we use a rich daily panel of private inflation forecasts surveyed by the Central Bank of Brazil’s Investor Relations Office and investigate the impact of announcements of macroprudential policy changes on the gap between inflation forecasts and the inflation target. The paper also presents an overview of the challenges facing macroprudential policy in Brazil after the global financial crisis and glimpses at a few important future challenges
    Date: 2015–11
  31. By: Corbae, Dean (University of Wisconsin‒Madison); D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia)
    Abstract: The authors develop a simple general equilibrium framework to study the effects of global competition on banking industry dynamics and welfare. They 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 the high concentration in the Mexican banking industry, domestic and foreign banks act strategically in the authors’ framework. After calibrating the model to Mexican data, the authors examine the welfare consequences of government policies that promote global competition. They find relatively high economy-wide welfare gains from allowing foreign bank entry.
    Keywords: Global banks; Foreign bank competition; Bank industry dynamics
    JEL: E60 F30 F41 G01 G21
    Date: 2015–09–18
  32. By: Lutz Hendricks (University of North Carolina, Chapel Hill); Oksana Leukhina (University of Washington)
    Abstract: This paper studies the effect of graduating from college on lifetime earnings. We develop a quantitative model of college choice with uncertain graduation. Departing from much of the literature, we model in detail how students progress through college. This allows us to parameterize the model using transcript data. College transcripts reveal substantial and persistent heterogeneity in students’ credit accumulation rates that are strongly related to graduation outcomes. From this data, the model infers a large ability gap between college graduates and high school graduates that accounts for 54% of the college lifetime earnings premium.
    Keywords: education, college premium, college dropout risk
    JEL: E24 J24 I21
    Date: 2015–11
  33. By: Gianluca Violante (NYU); Benjamin Moll (Princeton University); Greg Kaplan (Princeton University)
    Abstract: A new framework for analyzing fiscal and monetary policy.
    Date: 2015

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