|
on Dynamic General Equilibrium |
| By: | Omar Licandro |
| Abstract: | This paper integrates firm dynamics theory into the Neoclassical growth framework. It embeds selection into an otherwise standard dynamic general equilibrium model of one good, two production factors (capital and labor) and competitive markets. Selection relies on firm specific investment: i) capital is a fixed production factor {an entry cost, ii) the productivity of capital is firm specific, but observed after investment, iii) firm specific capital is partially reversible {its opportunity cost plays the same role as fixed production costs. At equilibrium, aggregate technology is Neoclassical, but TFP is endogenous and positively related to selection; capital depreciation positively depends on selection too, due to capital irreversibility. The Neoclassical model is the limit case of homogeneous firms. At steady state, output per capita and welfare both raise with selection. Rendering capital more reversible or increasing the variance of the idiosyncratic shock both raise selection, productivity, output per capita and welfare. |
| Keywords: | Firm dynamics, Selection, Neoclassical Growth model, Scrapping, Capital irreversibility |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:15/17&r=dge |
| By: | Ana Beatriz Galvão (University of Warwick); Liudas Giraitis (Queen Mary University of London); George Kapetanios (Queen Mary University of London); Katerina Petrova (Queen Mary University of London) |
| Abstract: | We build a time varying DSGE model with financial frictions in order to evaluate changes in the responses of the macroeconomy to financial friction shocks. Using US data, we find that the transmission of the financial friction shock to economic variables, such as output growth, has not changed in the last 30 years. The volatility of the financial friction shock, however, has changed, so that output responses to a one-standard deviation shock increase twofold in the 2007-2011 period in comparison with the 1985-2006 period. The time varying DSGE model with financial frictions improves the accuracy of forecasts of output growth and inflation during the tranquil period of 2000-2006, while delivering similar performance to the fixed coefficient DSGE model for the 2007-2012 period. |
| Keywords: | DSGE models, Financial frictions, Local likelihood, Bayesian methods, Time varying parameters |
| JEL: | C11 C53 E27 E52 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp769&r=dge |
| By: | Stelios D. Bekiros; Roberta Cardani; Alessia Paccagnini; Stefania Villa |
| Abstract: | In DSGE literature there has been an increasing awareness on the role that the banking sector can play in macroeconomic activity. In most of recent works, purely Önancial instabilities and frictions are derived from intermediaries that affect the real economy by means of a credit channel or a balance sheet channel. We model Önancial intermediation as in Gertler and Karadi (2011) to take into account the bank leverage constraint in the propagation of shocks to the real economy. Within this framework, the evolution of estimated shocks and the instabilities in the structural parameters show that time-variation should be crucial in any attempted empirical analysis. However, DSGE modelling usually fails to take into account inherent nonlinearities of the economy, especially in crisis time periods. Hence, we propose a novel time-varying parameter (TVP) state-space estimation method for VAR processes both for homoskedastic and heteroskedastic error structures. We conduct an exhaustive empirical exercise that includes the comparison of the out-of-sample predictive performance of the estimated DSGE model with that of standard VARs, Bayesian VARs and TVP-VARs. Overall, a Örst attempt is made to Önd macro-Önancial micro-founded DSGE models as well as adaptive TVP-VARs, which are able to deal with Önancial instabilities via incorporating banking intermediation. |
| Keywords: | Financial frictions; DSGE; Time-varying coefficients; Extended Kalman filter |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:oapubs:10197/7323&r=dge |
| By: | Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong |
| Abstract: | We construct a tractable model of monetary exchange with search and bargaining that features a non- degenerate distribution of money holdings in which one can study the short-run and long-run effects of changes in the money supply. While money is neutral in the long run, a one-time money injection in a centralized market with flexible prices generates an increase in aggregate real balances in the short run, a decrease in the rate of return of money, and a redistribution of consumption levels across agents. The price level in the short run varies in a non-monotonic fashion with the size of the money injection, e.g., small injections can lead to short-run deflation while large injections generate inflation. We extend our model to include employment risk and show that repeated money injections can raise output and welfare when unemployment is high. |
| JEL: | E0 E4 E52 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21779&r=dge |
| By: | Jorge Duran; Omar Licandro |
| Abstract: | National Income and Product Accounts (NIPA) measure real output growth by means of a Fisher ideal chain index. Bridging modern macroeconomics and the economic theory of index numbers, this paper shows that output growth as measured by NIPA is welfare based. In a dynamic general equilibrium model with genreral recursive preferences and technology, welfare depends on present and future consumption. Indeed, the associated Bellman equation provides a representation of preferences in the domain of current consumption and current investment. Applying standard index number theory to this representation of preferences shows that the Fisher-Shell true quantity index is equal to the Divisia index, in turn well approximated by the Fisher ideal index used in NIPA. |
| Keywords: | Growth measurement, Quantity indexes, NIPA, Fisher-Shell index, Embodied technical change. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:15/18&r=dge |
| By: | Lee E. Ohanian; Paulina Restrepo-Echavarria; Mark L. J. Wright |
| Abstract: | Since 1950, the economies of East Asia grew rapidly but received little inter-national capital, while Latin America received considerable international capitaleven as their economies stagnated. The literature typically explains the failureof capital to flow to high growth regions as resulting from international capitalmarket imperfections. This paper proposes a broader thesis that country-specificdistortions, such as domestic labor and capital market distortions, also impactcapital flows. We develop a DSGE model of Asia, Latin America, and the Rest ofthe World that features an open-economy business cycle accounting framework tomeasure these domestic and international distortions, and to quantify their con-tributions to international capital flows. We find that domestic distortions havebeen the predominant drivers of international capital flows, and that the generalequilibrium effects of these distortions are very large. International capital market distortions also matter, but less. |
| JEL: | F21 F32 F41 F44 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21744&r=dge |
| By: | Francisco ALVAREZ-CUADRADO; Irakli JAPARIDZE |
| Abstract: | Over the last thirty years the U.S. experienced a surge in income inequality coupled with increasing levels of borrowing. We model an OLG economy populated by two types of household that care about how their consumption compares to that of their peers. In this framework individual debt-to-income ratios decrease with income, increases in consumption of rich households lead to increases in consumption of the rest, and aggregate borrowing increases with income inequality. We calibrate our model to evaluate the welfare implications of the process of financial liberalization that began in the 1980s. Our analysis suggests that some of the financial developments that lead to the recent expansion of credit may have decreased, rather than increased, welfare. |
| Keywords: | relative consumption, indebtness, inequality, credit constraints |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montec:10-2015&r=dge |
| By: | Stelios D. Bekiros; Alessia Paccagnini |
| Abstract: | Advanced Bayesian methods are employed in estimating dynamic stochastic general equilibrium (DSGE) models. Although policymakers and practitioners are particularly interested in DSGE models, these are typically too stylized to be taken directly to the data and often yield weak prediction results. Hybrid models can deal with some of the DSGE model misspecifications. Major advances in Bayesian estimation methodology could allow these models to outperform well-known time series models and effectively deal with more complex real-world problems as richer sources of data become available. A comparative evaluation of the out-of-sample predictive performance of many different specifications of estimated DSGE models and various classes of VAR models is performed, using datasets from the US economy. Simple and hybrid DSGE models are implemented, such as DSGE–VAR and Factor Augmented DSGEs and tested against standard, Bayesian and Factor Augmented VARs. Moreover, small scale models including the real gross domestic product, the harmonized consumer price index and the nominal short-term federal funds interest rate, are comparatively assessed against medium scale models featuring additionally sticky nominal prices, wage contracts, habit formation, variable capital utilization and investment adjustment costs. The investigated period spans 1960:Q4–2010:Q4 and forecasts are produced for the out-of-sample testing period 1997:Q1–2010:Q4. This comparative validation can be useful to monetary policy analysis and macro-forecasting with the use of advanced Bayesian methods. |
| Keywords: | Bayesian estimation; Forecasting; Metropolis–Hastings; Markov Chain Monte Carlo; Marginal data density; Factor augmented DSGE |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:oapubs:10197/7322&r=dge |
| By: | Liudas Giraitis (Queen Mary University of London); George Kapetanios (Queen Mary University of London); Konstantinos Theodoridis (Bank of England); Tony Yates (University of Bristol and Centre for Macroeconomics) |
| Abstract: | Following Giraitis, Kapetanios, and Yates (2014b), this paper uses kernel methods to estimate a seven variable time-varying (TV) vector autoregressive (VAR) model on the data set constructed by Smets and Wouters (2007). We apply an indirect inference method to map from this TV VAR to time variation in implied Dynamic Stochastic General Equilibrium (DSGE) parameters. We find that many parameters change substantially, particularly those defining nominal rigidities, habits and investment adjustment costs. In contrast to the 'Great Moderation' literature our monetary policy parameter estimates suggest that authorities tried to deliver a low and stable inflation from 1975 onwards, however, the severe adverse supply shocks in the 70s could have caused these policies to fail. |
| Keywords: | DSGE, Structural change, Kernel estimation, Time-varying VAR, Monetary policy shocks |
| JEL: | E52 E61 E66 C14 C18 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp768&r=dge |
| By: | Ana Beatriz Galvão (University of Warwick); Liudas Giraitis (Queen Mary University of London); George Kapetanios (Queen Mary University of London); Katerina Petrova (Queen Mary University of London) |
| Abstract: | DSGE models have recently received considerable attention in macroeconomic analysis and forecasting. They are usually estimated using Bayesian methods, which require the computation of the likelihood function under the assumption that the parameters of the model remain fixed throughout the sample. This paper presents a Local Bayesian Likelihood method suitable for estimation of DSGE models that can accommodate time variation in all parameters of the model. There are two advantages in allowing the parameters to vary over time. The first is that it enables us to assess the possibilities of regime changes, caused by shifts in the policy preferences or the volatility of shocks, as well as the possibility of misspecification in the design of DSGE models. The second advantage is that we can compute predictive densities based on the most recent parameters' values that could provide us with more accurate forecasts. The novel Bayesian Local Likelihood method applied to the Smets and Wouters (2007) model provides evidence of time variation in the policy parameters of the model as well as the volatility of the shocks. We also show that allowing for time variation improves considerably density forecasts in comparison to the fixed parameter model and we interpret this result as evidence for the presence of stochastic volatility in the structural shocks. |
| Keywords: | DSGE models, Local likelihood, Bayesian methods, Time varying parameters |
| JEL: | C11 C53 E27 E52 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp770&r=dge |
| By: | Beker, Pablo (University of Warwick); Emilio ESPINO (Universidad Torcuato Di Tella) |
| Abstract: | We evaluate the ability of the Lucas [25] tree and the Alvarez-Jermann [3] models, both with homogeneous as well as heterogeneous beliefs, to generate a time series of excess returns that displays both short-term momentum and long-term reversal, i.e., positive autocorrelation in the short-run and negative autocorrelation in the long-run. Our analysis is based on a methodological contribution that consists in (i) a recursive characterisation of the set of constrained Pareto optimal allocations in economies with limited enforceability and belief heterogeneity and (ii) an alternative decentralisation of these allocations as competitive equilibria with endogenous borrowing constraints. We calibrate the model to U.S. data as in Alvarez and Jermann [4]. We find that only the Alvarez-Jermann model with heterogeneous beliefs delivers autocorrelations that not only have the correct sign but are also of magnitude similar to the US data. Keywords: Heterogeneous beliefs, Endogenously Incomplete Markets, Financial Markets |
| Keywords: | Anomalies ; Limited Enforceability ; Constrained Pareto Optimality ; Recursive Methods |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wcreta:11&r=dge |
| By: | Nicolas Coeurdacier; Hélène Rey; Pablo Winant |
| Abstract: | We revisit the debate on the benefits of financial integration in a two-country neoclassical growth model with aggregate uncertainty. Our framework accounts simultaneously for gains from a more efficient capital allocation and gains from risk sharing—together with their interaction. In our general equilibrium model, risk sharing brought by financial integration has an effect on the steady-state itself, altering convergence gains from capital accumulation. Because we use global numerical methods, we are able to do meaningful welfare comparisons along the transition paths. Allowing for country asymmetries in terms of risk, capital scarcity and size, we find important differences in the effect of financial integration on output, direction of capital flows, consumption and welfare over time and across countries. This opens the door to a richer set of empirical implications than previously considered in the literature. |
| JEL: | F21 F3 F43 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21817&r=dge |
| By: | Francesco Nucci (Sapienza Universita' di Roma); Marianna Riggi (Bank of Italy) |
| Abstract: | The fall in the US labor force participation during the Great Recession stands in sharp contrast with its parallel increase in the euro area. In addition to structural forces, cyclical factors are also shown to account for these patterns, with the participation rate being procyclical in the US since the inception of the crisis and countercyclical in the euro area. We rationalize these diverging developments by using a general equilibrium business cycle model, which nests the endogenous participation decisions into a search and matching framework. We show that the "added worker" e¤ect might outweigh the "discouragement effect" if real wage rigidities are allowed for and/or habit in consumers.preferences is sufficiently strong. We then draw the implications of variable labor force participation for inflation and establish the following result: if endogenous movements in labor market participation are envisaged, then the degree of real wage rigidities becomes almost irrelevant for price dynamics. Indeed, during recessions, the upward pressures on in.ation stemming from the lack of downward adjustment of real wages are offset by an opposite influence from the additional looseness in the labor market, due to the higher participation associated with wage rigidities. |
| Keywords: | Labor Force Participation, Wage Rigidities, Inflation |
| JEL: | J21 J30 E31 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:sas:wpaper:20152&r=dge |
| By: | Matteo Cacciatore; Romain Duval; Giuseppe Fiori; Fabio Ghironi |
| 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. |
| JEL: | E24 E32 E52 F41 J64 L51 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21784&r=dge |
| By: | Michael B. Devereux; Eric R. Young; Changhua Yu |
| Abstract: | The dangers of high capital flow volatility and sudden stops have led economists to promote the use of capital controls as an addition to monetary policy in emerging market economies. This paper studies the benefits of capital controls and monetary policy in an open economy with financial frictions, nominal rigidities, and sudden stops. We focus on a time-consistent policy equilibrium. We find that during a crisis, an optimal monetary policy should sharply diverge from price stability. Without commitment, policymakers will also tax capital inflows in a crisis. But this is not optimal from an ex-ante social welfare perspective. An outcome without capital inflow taxes, using optimal monetary policy alone to respond to crises, is superior in welfare terms, but not time-consistent. If policy commitment were in place, capital inflows would be subsidized during crises. We also show that an optimal policy will never involve macro-prudential capital inflow taxes as a precaution against the risk of future crises (whether or not commitment is available). |
| JEL: | E44 E58 F41 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21791&r=dge |
| By: | Julian Kozlowski; Laura Veldkamp; Venky Venkateswaran |
| Abstract: | The “Great Recession” was a deep downturn with long-lasting effects on credit markets, labor markets and output. We explore a simple explanation: This recession has been more persistent than others because it was perceived as an extremely unlikely event before 2007. Observing such an episode led all agents to re-assess macro risk, in particular, the probability of tail events. Since changes in beliefs endure long after the event itself has passed and through its effects on prices and choices, it produces long-lasting effects on borrowing, investment, employment and output. To model this idea, we study a production economy with debt-financed firms. Agents use standard econometric tools to estimate the distribution of aggregate shocks. When they observe a new shock, they re-estimate the distribution from which it was drawn. Even transitory shocks have persistent effects because, once observed, they stay forever in the agents’ data set. We feed a time-series of US macro data into our model and show that our belief revision mechanism can explain the 12% downward shift in US trend output. |
| JEL: | D84 E32 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21719&r=dge |
| By: | Rasmus Lentz; Nicolas Roys |
| Abstract: | The paper studies human capital accumulation over workers' careers in an on the job search setting with heterogenous firms. In renegotiation proof employment contracts, more productive firms provide more training. Both general and specific training induce higher wages within jobs, and with future employers, even conditional on the future employer type. Because matches do not internalize the specific capital loss from employer changes, specific human capital can be over-accumulated, more so in low type firms. While validating the Acemoglu and Pischke (1999) mechanisms, the analysis nevertheless arrives at the opposite conclusion: That increased labor market friction reduces training in equilibrium. |
| JEL: | D21 D43 D83 E24 J24 J31 J33 J41 J62 J63 J64 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21702&r=dge |
| By: | Borissov, Kirill; Pakhnin, Mikhail; Puppe, Clemens |
| Abstract: | In dynamic resource allocation models, the non-existence of voting equilibria is a generic phenomenon due to the multi-dimensionality of the choice space even with agents heterogeneous only in their discount factors. Nevertheless, at each point of time there may exist a "median voter" whose preferred instantaneous consumption rate is supported by a majority of agents. Based on this observation, we propose an institutional setup ("intertemporal majority voting") in a Ramsey-type growth model with common consumption and heterogeneous agents, and show that it provides a microfoundation of the choice of the optimal consumption stream of the median agent. While the corresponding intertemporal consumption stream is in general not a Condorcet winner among all feasible paths, its induced instantaneous consumption rate receives a majority at each point in time in the proposed intertemporal majority voting procedure. We also provide a characterization of balanced-growth and steady-state voting equilibria in the case in which agents may differ not only in their time preference, but also in their instantaneous utility functions. |
| Keywords: | collective choice,common-pool resource,economic growth,heterogeneous agents,median voter theorem |
| JEL: | D11 D71 D91 O13 O43 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:77&r=dge |
| By: | Carola Frydman; Dimitris Papanikolaou |
| Abstract: | We develop a general equilibrium model that delivers realistic fluctuations in both the level as well as the dispersion in executive pay as a result of changes in the technology frontier. Our model recognizes that executives add value to the firm not only by participating in production decisions, but also by identifying new investment opportunities. The economic value of these two distinct components of the executive's job varies with the state of the economy. Improvements in technology that are specific to new vintages of capital raise the skill price of discovering new growth prospects -- and thus raise the compensation of executives relative to workers. If most of the dispersion in managerial skill lies in the ability to find new projects, dispersion in executive pay will also rise. Our model delivers testable predictions about the relation between executive pay and growth opportunities that are quantitatively consistent with the data. |
| JEL: | E22 G10 G30 J24 J3 M52 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21795&r=dge |
| By: | Mariacristina De Nardi; Giulio Fella; Fang Yang |
| Abstract: | Piketty's book, Capital in the Twenty-First Century, discusses several factors affecting wealth inequality: rates of return on capital, output growth rates, tax progressivity, top income shares, and heterogeneity in saving rates and inheritances. This paper studies the role of various forces affecting savings in quantitative models of wealth inequality, discusses their successes and failures in accounting for the observed facts, and compares these model's implications with Piketty's conclusions. |
| JEL: | D14 E21 H2 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21730&r=dge |
| By: | Darrell Duffie; Lei Qiao; Yeneng Sun |
| Abstract: | We demonstrate the existence of a continuum of agents conducting directed random searches for counterparties, and characterize the implications. Our results provide the first probabilistic foundation for static and dynamic directed random search (including the matching function approach) that is commonly used in the search-based models of financial markets, monetary theory, and labor economics. The agents' types are shown to be independent discrete-time Markov processes that incorporate the effects of random mutation, random matching with match-induced type changes, and with the potential for enduring partnerships that may have randomly timed break-ups. The multi-period cross-sectional distribution of types is shown to be deterministic via the exact law of large numbers. |
| JEL: | C78 D83 E41 G12 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21731&r=dge |
| By: | Jess Benhabib; Alberto Bisin; Mi Luo |
| Abstract: | This paper attempts to quantitatively identify the factors that drive wealth dynamics in the U.S. and are consistent with its observed skewed cross-sectional distribution and social mobility. We concentrate on three critical factors: a skewed and persistent distribution of earnings, differential saving and bequest rates across wealth levels, and capital income risk. All of these factors are necessary for matching both distribution and mobility, with a distinct role in inducing wealth accumulation near the borrowing constraints, contributing to the thick top tail of wealth, and affecting upward and/or downward social mobility. |
| JEL: | E21 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21721&r=dge |
| By: | Vasco Cúrdia; Michael Woodford |
| Abstract: | We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion—a linear relation that should be maintained between the inflation rate and changes in the output gap—that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. Such a "flexible inflation target" can be implemented by a central-bank reaction function that is similar to a forward-looking Taylor rule, but adjusted for changes in current and expected future credit spreads. |
| JEL: | E44 E52 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21820&r=dge |
| By: | Robert E. Hall; Andreas I. Mueller |
| Abstract: | We use a rich new body of data on the experiences of unemployed job-seekers to determine the sources of wage dispersion and to create a search model consistent with the acceptance decisions the job-seekers made. From the data and the model, we identify the distributions of four key variables: offered wages, offered non-wage job values, the value of the job-seeker's non-work alternative, and the job-seeker's personal productivity. We find that, conditional on personal productivity, the dispersion of offered wages is moderate, accounting for 21 percent of the total variation in observed offered wages, whereas the dispersion of the non-wage component of offered job values is substantially larger. We relate our findings to an influential recent paper by Hornstein, Krusell, and Violante who called attention to the tension between the fairly high dispersion of the values job-seekers assign to their job offers–which suggest a high value to sampling from multiple offers–and the fact that the job-seekers often accept the first offer they receive. |
| JEL: | J31 J32 J64 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21764&r=dge |
| By: | Jean-Pierre Drugeon (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Bertrand Wigniolle (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - 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 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01243656&r=dge |
| By: | Mikhail Golosov; Guido Menzio |
| Abstract: | We propose a new business cycle theory. Firms need to randomize over firing or keeping workers who have performed poorly in the past, in order to give them an ex-ante incentive to exert effort. Firms have an incentive to coordinate the outcome of their randomizations, as coordination allows them to load the firing probability on states of the world in which it is costlier for workers to become unemployed and, hence, allows them to reduce overall agency costs. In the unique robust equilibrium, firms use a sunspot to coordinate the randomization outcomes and the economy experiences endogenous, stochastic aggregate fluctuations. |
| JEL: | D86 E24 E32 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21743&r=dge |
| By: | Ufuk Akcigit (University of Chicago and NBER); Murat Alp Celik (University of Pennsylvania); Jeremy Greenwood (University of Pennsylvania and NBER) |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:593&r=dge |
| By: | David Backus; Chase Coleman; Axelle Ferriere; Spencer Lyon |
| Abstract: | In models with recursive preferences, endogenous variation in Pareto weights would be interpreted as wedges from the perspective of a frictionless model with additive preferences. We describe the behavior of the (relative) Pareto weight in a two-country world and explore its interaction with consumption and the real exchange rate. |
| JEL: | F31 F41 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21773&r=dge |
| By: | Olivier CARDI; Romain RESTOUT |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:leo:wpaper:2299&r=dge |
| By: | Hanming Fang; You Suk Kim; Wenli Li |
| Abstract: | We present a dynamic structural model of subprime adjustable-rate mortgage (ARM) borrowers making payment decisions taking into account possible consequences of different degrees of delinquency from their lenders. We empirically implement the model using unique data sets that contain information on borrowers' mortgage payment history, their broad balance sheets, and lender responses. Our investigation of the factors that drive borrowers' decisions reveals that subprime ARMs are not all alike. For loans originated in 2004 and 2005, the interest rate resets associated with ARMs, as well as the housing and labor market conditions were not as important in borrowers' delinquency decisions as in their decisions to pay off their loans. For loans originated in 2006, interest rate resets, housing price declines, and worsening labor market conditions all contributed importantly to their high delinquency rates. Counterfactual policy simulations reveal that even if the Libor rate could be lowered to zero by aggressive traditional monetary policies, it would have a limited effect on reducing the delinquency rates. We find that automatic modification mortgage designs under which the monthly payment or the principal balance of the loans are automatically reduced when housing prices decline can be effective in reducing both delinquency and foreclosure. Importantly, we find that automatic modification mortgages with a cushion, under which the monthly payment or principal balance reductions are triggered only when housing price declines exceed a certain percentage may result in a Pareto improvement in that borrowers and lenders are both made better off than under the baseline, with a lower delinquency and foreclosure rates. Our counterfactual analysis also suggests that limited commitment power on the part of the lenders to loan modification policies may be an important reason for the relatively small rate of modifications observed during the housing crisis. |
| JEL: | D12 D14 G2 G21 G33 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21810&r=dge |
| By: | Jean-Pierre Drugeon (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Bertrand Wigniolle (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - 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 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01243669&r=dge |
| By: | Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi |
| Abstract: | This study explores the macroeconomic effects of labor unions in a two-country R&D-based growth model in which the market size of each country determines the incentives for innovation. We find that an increase in the bargaining power of a wage-oriented union leads to a decrease in employment in the domestic economy. This result has two important implications on innovation. First, it reduces the rates of innovation and economic growth. Second, it causes innovation to be directed to the foreign economy, which in turn causes a negative effect on domestic wages relative to foreign wages in the long run. We also derive welfare implications and calibrate our model to data in the US and the UK to quantify the effects of labor unions on social welfare and wage inequality across countries. Our calibrated model is able to explain about half of the decrease in relative wage between the US and the UK from 1980 to 2007. Furthermore, the decrease in unions' bargaining power leads to quantitatively significant welfare gains in the two countries. |
| Keywords: | economic growth; R&D; labor unions; wage inequality |
| JEL: | E24 J51 O30 O43 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68447&r=dge |
| By: | Ryan Banerjee; Michael B. Devereux; Giovanni Lombardo |
| Abstract: | This paper explores the nature of macroeconomic spillovers from advanced economies to emerging market economies (EMEs) and the consequences for independent use of monetary policy in EMEs. We first empirically document the effects of US monetary policy shocks on a sample group of EMEs. A contractionary monetary shock leads a retrenchment in EME capital flows, a fall in EME GDP, and an exchange rate depreciation. We construct a the- oretical model which can help to account for these findings. In the model, macroeconomic spillovers are exacerbated by financial frictions. We assess the extent to which domestic monetary policy can mitigate the negative spillovers from foreign shocks. Absent financial frictions, international spillovers are minor, and an inflation targeting rule represents an ef- fective policy for the EME. With frictions in financial intermediation, however, spillovers are substantially magnified, and an inflation targeting rule has little advantage over an exchange rate peg. However, an optimal monetary policy markedly improves on the performance of naive inflation targeting or an exchange rate peg. Furthermore, optimal policies don’t need to be coordinated across countries. Under the specific set of assumptions maintained in our model, a non-cooperative, self-oriented optimal policy gives results very similar to those of a global cooperative optimal policy. |
| JEL: | E3 E5 F3 F5 G1 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21737&r=dge |
| By: | Tatsuro Senga (Queen Mary University of London) |
| 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. |
| Keywords: | Uncertainty, Learning, Misallocation and business cycles |
| JEL: | E22 E32 D8 D92 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp763&r=dge |
| By: | Divounguy Nding, Orphe |
| Abstract: | In this paper,we construct an equilibrium search model of the labor market augmented to include lump sum taxes that finance government expenditures. Using the model, we can decompose the decline in labor force participation (LFP) into the policy effect and that of other factors such as declining economic output. Using census data for the state of Ohio, we learn that declining LFP and the increase in public assistance spending were caused by weaker economic output that led to an increase in the claimant count. Our results indicate that if the economy resembled the pre-crisis period, the Kasich administration would have led to an increase in LFP of approximately 0.6 percentage points. This effect goes up to 2% if all inactive workers are assumed to claim welfare income. |
| Keywords: | Government Spending, Taxation, Unemployment Insurance, Search Theory |
| JEL: | H2 H30 J0 J01 |
| Date: | 2015–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68446&r=dge |