nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒12‒20
fifteen papers chosen by

  1. Search-and-Matching Frictions and Labour Market Dynamics in Latvia By Ginters Buss
  2. Capital Income Taxation and Welfare under DSGE Framework By Unal, Umut
  3. House prices and job losses By Pinter, Gabor
  4. Monetary-fiscal policy interaction and fiscal inflation: A tale of three countries By Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
  5. Loss of Skill during Unemployment and TFP Differences across Countries By Victor Ortego-Marti
  6. Public policies over the life cycle: a large scale OLG model for France, Italy and Sweden By Alessandro Bucciol; Laura Cavalli; Igor Fedotenkov; Paolo Pertile; Veronica Polin; Nicola Sartor; Alessandro Sommacal
  7. Short-Term Pain for Long-Term Gain: Market Deregulation and Monetary Policy in Small Open Economies By Cacciatore, Matteo; Duval, Romain; Fiori, Giuseppe; Ghironi, Fabio
  8. Capital Misallocation during the Great Recession By Di Nola, Alessandro
  9. Endogenous firm entry in an estimated model of the US business cycle. Updated version By Offick, Sven; Winkler, Roland C.
  10. Liquidity Shocks and Asset Prices By GUERRON-QUINTANA, Pablo A.; JINNAI, Ryo
  11. On Impatience, Temptation & Ramsey's Conjecture By Jean-Pierre Drugeon; Bertand Wigniolle
  12. On Time-Consistent Policy Rules for Heterogeneous Discounting Programs By Jean-Pierre Drugeon; Bertand Wigniolle
  13. Labour Market Modelling within a DSGE Approach By Jaromir Tonner; Stanislav Tvrz; Osvald Vasicek
  14. Non stationary additive utility and time consistency By Nicolas Drouhin
  15. The Costs and Benefits of Balanced Budget Rules: Lessons from a Political Economy Model of Fiscal Policy By Marina Azzimonti; Marco Battaglini; Stephen Coate

  1. By: Ginters Buss (Bank of Latvia)
    Abstract: This paper examines, in an estimated, full-fledged New Keynesian DSGE model with Nash wage bargaining, sticky wage and high value of leisure akin to Christiano, Trabandt and Walentin (2011), whether search-and-matching frictions in the labour market can explain aggregate labour market dynamics in Latvia. If vacancies are not observed, the model can, to a reasonable degree, generate realistic variance and dynamics of unemployment and the correlation between unemployment and (latent) vacancies, yet at the expense of too volatile vacancies. As a by-product, one quarter ahead forecasts of hours worked and GDP exhibit less excess volatility and, thus, are more precise compared to a model without search-and-matching frictions. However, if both unemployment and vacancies are observed and a shock to matching efficiency is allowed for, then cyclical behaviour of forecasted vacancies as well as correlation between unemployment and vacancies tend to counter the data (to the advantage of a better fit of vacancy volatility), and the smoothed matching efficiency is counter-intuitively counter-cyclical. Hence the model cannot fit the three statistics – variance of unemployment and vacancies, and correlation between the two, simultaneously.
    Keywords: DSGE model, unemployment, small open economy, Bayesian estimation, currency union, forecasting
    JEL: E0 E3 F0 F4 G0 G1
    Date: 2015–12–10
  2. By: Unal, Umut
    Abstract: This paper develops a dynamic stochastic general equilibrium (DSGE) model for analyzing the impact of various capital income tax policies in a small open economy that is populated by households possessing endogenous time preferences. We contribute to the literature by studying the impacts of: i) anticipated tax shocks under stochastically growing output, ii) stochastic tax shocks under deterministic output, on our dynamic general equilibrium framework. With our model's specifications, this is the first attempt to integrate uncertainty in the study of taxation and welfare. Our results suggest that only under certain conditions welfare paradoxes may exist, in the sense that increases in tax instruments may improve welfare.
    Keywords: Endogenous time preference, adjustment costs, perturbation methods, stochastic shocks.
    JEL: E62 F4
    Date: 2015
  3. By: Pinter, Gabor (Bank of England)
    Abstract: What explains the strong comovement between house prices and job losses over the UK business cycle? To study this question, I build a general equilibrium model with collateral constraints, endogenous job separation and housing shocks, and confront it with macroeconomic data via Bayesian methods. The results suggest that shocks to house prices (i) explain about 10-20% of output fluctuations and about 20%–30% of fluctuations in unemployment and job separation rates via the collateral channel, and (ii) were a major cause in triggering the 1990 and 2008 recessions in the United Kingdom.
    Keywords: Business cycle; house prices; financial frictions; labour market frictions.
    JEL: E21 E27 E32 E44
    Date: 2015–12–11
  4. By: Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
    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 crosscountry 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
  5. By: Victor Ortego-Marti (Department of Economics, University of California Riverside)
    Abstract: In an economy with search and matching frictions in which workers lose human capital during unemployment, TFP becomes endogenous and depends on workers’ unemployment history. Using available estimates of labor market flows for a sample of OECD countries, this paper quantifies the amount of TFP differences due to skill losses during unemployment. Continental European countries, with their low job finding rates, exhibit the lowest TFPs. Nordic countries and Japan display the highest levels of TFP due to their high job finding rate relative to the separation rate. TFP in Anglo-Saxon countries stands in-between the two groups. The paper further studies the effect of hiring subsidies on the labor market and TFP.
    Date: 2015–12
  6. By: Alessandro Bucciol (Department of Economics (University of Verona)); Laura Cavalli (Department of Economics (University of Verona)); Igor Fedotenkov (Department of Economics (University of Verona)); Paolo Pertile (Department of Economics (University of Verona)); Veronica Polin (Department of Economics (University of Verona)); Nicola Sartor (Department of Economics (University of Verona)); Alessandro Sommacal (Department of Economics (University of Verona))
    Abstract: The paper presents a large scale overlapping generation model with heterogeneous agents, where the family is the decision unit. We calibrate the model for three European countries - France, Italy and Sweden - which show marked differences in the design of some public programs. We examine the properties in terms of annual and lifetime redistribution of a number of tax-benefit programs, by studying the impact of removing from our model economies some or all of them. We find that whether one considers a life-cycle or an annual horizon, and whether behavioral responses are accounted for or not, has a large impact on the results. The model may provide useful insights for policy makers on which kind of reforms are more likely to achieve specific equity objectives.
    Keywords: Redistribution, Fiscal policy, Computable OLG models
    JEL: H2 H3
    Date: 2015–11
  7. By: Cacciatore, Matteo; Duval, Romain; Fiori, Giuseppe; Ghironi, Fabio
    Abstract: This paper explores the effects of labor and product market reforms in a New Keynesian, small open economy model with labor market frictions and endogenous producer entry. We show that it takes time for reforms to pay off, typically at least a couple of years. This is partly because the benefits materialize through firm entry and increased hiring, both of which are gradual processes, while any reform-driven layoffs are immediate. Some reforms---such as reductions in employment protection---increase unemployment temporarily. Implementing a broad package of labor and product market reforms minimizes transition costs. Importantly, reforms do not have noticeable deflationary effects, suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath---either because of the zero bound on policy rates or because of membership in a monetary union---may not be a relevant obstacle to reform. Alternative simple monetary policy rules do not have a large effect on transition costs.
    Keywords: employment protection; firm entry; product market regulation; structural reforms; unemployment benefits
    JEL: E24 E32 E52 F41 J64 L51
    Date: 2015–12
  8. By: Di Nola, Alessandro
    Abstract: In this paper I evaluate the contribution of financial frictions in explaining the drop in aggregate TFP through misallocation during the Great Recession. I build a quantitative model with heterogeneous establishments; with the help of the model I compute the counterfactual drop in misallocation: by how much would aggregate TFP have decreased if the credit crunch had been absent. I find that a "real recession" would have caused a drop of only 0.16 percent, as opposed to 1.04 percent found in the data; therefore financial frictions account for a significant part of the drop in aggregate TFP. The key mechanism is the following: the increase in the cost of external finance affects negatively the reallocation of productive inputs from low to high productivity firms, by dampening the growth of small-highly productive firms.
    Keywords: Financing constraints, misallocation, heterogeneous firms, incomplete markets, idiosyncratic shocks.
    JEL: E2 E22 E25
    Date: 2015–09–01
  9. By: Offick, Sven; Winkler, Roland C.
    Abstract: A recent theoretical literature highlights the role of endogenous firm entry as an internal amplification mechanism of business cycle fluctuations. The amplification mechanism works through the competition and the variety effect. This paper tests the significance of this amplification mechanism, quantifies its importance, and disentangles the competition and the variety effect. To this end, we estimate a medium-scale real business cycle model with firm entry for the U.S. economy. The competition and the variety effect are estimated to be statistically significant. Together, they amplify the volatility of output by 8.5 percent relative to a model in which both effects are switched off. The competition effect accounts for most amplification, whereas the variety effect only plays a minor role.
    Keywords: Bayesian estimation,Business Cycles,Competition Effect,Entry,Mark-ups,Variety Effect
    JEL: E20 E32
    Date: 2015
    Abstract: In models of liquidity, stock market booms tend to follow adverse liquidity shocks. This result is clearly at odds with the data. We demonstrate that allowing for endogenous productivity corrects this puzzling price dynamics. Negative growth prospects decrease equity prices because of a long-run predictable component in dividend growth.
    Keywords: liquidity, asset prices, endogenous growth, long-run risk
    Date: 2015–12–01
  11. By: Jean-Pierre Drugeon (Paris School of Economics); Bertand Wigniolle (Paris School of Economics)
    Abstract: This article is aimed at exploring the implications of the introduction of self-control and temptation motives in inter temporal preferences within an elementary competitive equilibrium with production. Letting heterogeneous agents differ from both their discounting parameters and their temptation motives, this article is interested in the long-run distribution of consumptions and wealths. Results are at odds from the ones obtained in a standard Ramsey benchmark setup in that long-run distributions are commonly non degenerated ones
    Keywords: Impatience; Temptation; Self-Control; Ramsey's Conjecture
    JEL: E32 O41
    Date: 2015–10
  12. By: Jean-Pierre Drugeon (Paris School of Economics); Bertand Wigniolle (Paris School of Economics)
    Abstract: This article considers a new concept of social optimum for an economy populated by agents with heterogeneous discount factors. It is based upon an approach that constrains decision rules to be temporally consistent: these are stationary and unequivocally ruled by the state variable. For agents who differ only in their discount factors and have equal weights in the planner's objective, the temporally-consistent optimal solution produces identical consumption for the agents at all time periods. In the long run, the capital stock is determined by a modified golden rule that corresponds to an average-like summation of all discount factors. The general argument is illustrated by various two-agent examples that allow for an explicit determination of the temporally consistent decision rules. Interestingly, this temporally consistent solution can be simply recovered from the characterization of a social planner's problem with variable discounting and can also be decentralised as a competitive equilibrium through the use of various instruments
    Keywords: Time-Consistent Policy Rules; heterogeneous Discounting Programs
    JEL: E32 O41
    Date: 2015–10
  13. By: Jaromir Tonner; Stanislav Tvrz; Osvald Vasicek
    Abstract: The goal of this paper is to find a suitable way of modelling the main labour market variables in the framework of the CNB's core DSGE model. The model selection criteria are: the predictive ability for unemployment, the change in the overall predictive ability in comparison to the baseline model and the extent of the required model change. We find that the incorporation of a modified Gali, Smets and Wouters (2011) labour market specification allows us to predict unemployment with an acceptable forecast error. At the same time it leads to a moderate improvement in the overall predictive ability of the model and requires only minor adjustments to the model structure. Thus, it should be preferred to more complicated concepts that yield a similar improvement in predictive ability. We also came to the conclusion that the concept linking unemployment and the GDP gap is promising. However, its practical application would require (additional) improvement in the accuracy of the consumption prediction. As a practical experiment, we compare the inflation pressures arising from nominal wages and the exchange rate in the baseline model and in alternative specifications. The experiment is motivated by the use of the exchange rate as an additional monetary policy instrument by the CNB since November 2013 in an environment of near-zero interest rates and growing disinflationary pressures. We find that the baseline model tends to forecast higher nominal wage growth and lower exchange rate depreciation than the models with more elaborate labour markets. Therefore, the alternative models would probably have identified an even higher need for exchange rate depreciation than the baseline model did.
    Keywords: DSGE, labour market, Nash bargaining, right to manage
    JEL: C53 E32 E37
    Date: 2015–08
  14. By: Nicolas Drouhin (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, ENS Cachan - École normale supérieure - Cachan)
    Abstract: By solving dynamic optimization programs, we study the most general class of intertemporal utility functional, that are additive, but not necessarily stationary, nor multiplicatively separating a discount factor from "per period utility". We define the fisherian instantaneous subjective rate of discount as the log-derivative of the marginal utility of consumption. We prove that time consistency holds, if and only if, the "per period" felicity function is multiplicatively separable in t, the date of decision and in s, the date of consumption, or equivalently, if the instantaneous subjective rate of discount does not depend on t. The model allows to explain "anomalies in intertemporal choice" and various empirical regularities even when the agent are time consistent. On the other hand, the model allows to characterize mathematically the "effective consumption profile" of naive time inconsistent agent.
    Keywords: intertemporal choice, life cycle theory of consumption and saving, stationarity, time consistency, time invariance, exponential discounting, hyperbolic discounting, aging
    Date: 2015–12–05
  15. By: Marina Azzimonti; Marco Battaglini; Stephen Coate
    Date: 2015

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