|
on Dynamic General Equilibrium |
|
Issue of 2016‒02‒12
twenty-two papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Fernández-Villaverde, Jesús; Rubio-Ramírez, Juan Francisco; Schorfheide, Frank |
| Abstract: | This paper provides an overview of solution and estimation techniques for dynamic stochastic general equilibrium (DSGE) models. We cover the foundations of numerical approximation techniques as well as statistical inference and survey the latest developments in the field. |
| Keywords: | approximation error analysis; Bayesian inference; DSGE model; frequentist inference; GMM estimation; impulse response function matching; likelihood-based inference; Metropolis-Hastings algorithm; minimum distance estimation; particle filter; perturbation methods; projection methods; sequential Monte Carlo |
| JEL: | C11 C13 C32 C52 C61 C63 E32 E52 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11032&r=dge |
| By: | Giovanni Caggiano (University of Padova); Efrem Castelnuovo (University of Melbourne, University of Padova, Bank of Finland); Nicolas Groshenny (University of Adelaide) |
| Abstract: | What are the effects of uncertainty shocks on unemployment dynamics? We answer this question by estimating non-linear (Smooth-Transition) VARs with post-WWII U.S. data. The relevance of uncertainty shocks is found to be much larger than that predicted by standard linear VARs in terms of i) magnitude of the reaction of the unemployment rate to such shocks, and ii) contribution to the variance of the prediction errors of unemployment at business cycle frequencies. The ability of different classes of DSGE models to replicate our results is discussed. |
| Keywords: | Uncertainty shocks, Unemployment Dynamics, Smooth Transition Vector-AutoRegressions, Recessions. |
| JEL: | C32 E32 E52 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1195&r=dge |
| By: | Yashiv, Eran |
| Abstract: | U.S. CPS data indicate that in recessions firms actually increase their hiring rates from the pools of the unemployed and out of the labor force. Why so? The paper provides an explanation by studying the optimal recruiting behavior of the representative firm. The model combines labor frictions, of the search and matching type, with capital frictions, of the q-model type. Optimal firm behavior is a function of the value of jobs, i.e., the expected present value of the marginal worker to the firm. These are estimated to be counter-cyclical, the underlying reason being the dynamic behavior of the labor share of GDP. The counter-cyclicality of hiring rates and job values, which may appear counter-intuitive, is shown to be consistent with well-known business cycle facts. The analysis emphasizes the difference between current labor productivity and the wider, forward-looking concept of job values. The paper explains the high volatility of firm recruiting behavior, as well as the reduction over time in labor market fluidity in the U.S., using the same estimated model. Part of the explanation has to do with job values and another part with the interaction of hiring and investment costs, both determinants having been typically overlooked. |
| Keywords: | aggregate hiring; business cycles; capital market frictions; job values; labor market fluidity; labor market frictions; vacancies; volatility |
| JEL: | E24 E32 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11076&r=dge |
| By: | Victor Filipe Martins da Rocha (EESP - Sao Paulo School of Economics - FGV - Fundação Getulio Vargas, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris IX - Paris Dauphine - CNRS - Centre National de la Recherche Scientifique); Yiannis Vailakis (Adam Smith Business School - University of Glasgow) |
| Abstract: | This paper aims at improving our understanding of self-enforcing debt in competitive dynamic economies without commitment when default induces a permanent loss of access to international credit markets. We show, by means of two examples, that sovereigns can sustain self-enforcing debt levels in excess of their natural ability to repay represented by the present value of future endowments. This is in sharp contrast with the standard results in the full commitment literature and shows that the future resources for repayment and the market value of time (i.e., the interest rates) are not the only relevant aspects of a sovereign’s borrowing capacity. Indeed, we reveal a new channel through which self-enforcing debt is sustained at equilibrium: creditworthiness in international credit markets may reflect the intermediation services of the debtors to alleviate the financial frictions of potential creditors. |
| Keywords: | Limited Commitment,Self-enforcing Debt,Natural Debt Limit |
| Date: | 2015–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01249202&r=dge |
| By: | Daniel Schaefer; Carl A. Singleton |
| Abstract: | We apply well-known results of the econometric learning literature to the Mortensen-Pissarides real business cycle model. The unique rational expectations equilibrium (REE) is always expectationally stable with decreasing gain learning, and this result is robust to over-parametrisation of the econometric model relative to the minimum state variable form used by agents. And so, from this perspective, the assumption of rational expectations in the model is not unreasonable. However, using a parametrisation with UK data, simulations suggest that the implied rate of convergence to the REE with least squares learning is slow. The cyclical response of unemployment to structural shocks is muted under learning, and a parametrisation which guarantees root-t convergence is generally not consistent with attempts to match the observed volatility of labour market data using the standard model. |
| Keywords: | real business cycle, unemployment, adaptive learning, expectational stability |
| JEL: | E24 E32 J64 |
| Date: | 2016–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:267&r=dge |
| By: | Marion Goussé (Département d'Economique, Université Laval - Universite Laval (Quebec)); Nicolas Jacquemet (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Jean-Marc Robin (ECON - Département d'économie - Sciences Po) |
| Abstract: | We extend the search-matching model of the marriage market of Shimer and Smith (2000) to allow for labor supply, home production, match-specific shocks and endogenous divorce. We study nonparametric identification using panel data on marital status, education, family values, wages, and market and non market hours, and we develop a semiparametric estimator. We estimate how much sorting results from time use specialization or homophilic preferences. We estimate how equilibrium marriage formation affects the wage elasticities of market and non market hours. We estimate individuals’ willingness to pay for marriage and quantify the redistributive effect of intra- household resource sharing |
| Keywords: | structural estimation, collective labor supply,Search-matching, sorting, assortative matching |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01261040&r=dge |
| By: | Coles, Melvyn; Mortensen, Dale T |
| Abstract: | This paper considers an equilibrium labour market with on-the-job search where heterogeneous ?rms, both by productivity and size, post wages and choose optimal hiring strategies. There are aggregate and ?rm speci?c pro- ductivity shocks. Industry dynamics are rich. By comparing the market out- come to the competitive allocation, simple numerical examples establishes how dynamic monopsony generates excessive job-to-job turnover, excessive job destruction rates at low productivity ?rms and so generates "too high" unemployment. It explains why gross hire ?ows and gross separation ?ows may be large and volatile, yet yield an unemployment process which is highly persistent. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:14457&r=dge |
| By: | Fabio Canova; Christian Matthes |
| Abstract: | The paper studies how parameter variation affects the decision rules of a DSGE model and structural inference. We provide diagnostics to detect parameter variations and to ascertain whether they are exogenous or endogenous. Identification and inferential distortions when a constant parameter model is incorrectly assumed are examined. Likelihood and VAR-based estimates of the structural dynamics when parameter variations are neglected are compared. Time variations in the financial frictions of Gertler and Karadiís (2010) model are studied. |
| Keywords: | Structural model, Time-varying coefficients, Endogenous variations, Misspecification |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0041&r=dge |
| By: | Olivier Cardi (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique, Université François Rabelais - Tours); Romain Restout (UCL - Université Catholique de Louvain, BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We use a two-sector neoclassical open economy model with traded and non-traded goods and endogenous markups to investigate the effects of temporary fiscal shocks. One central finding is that theory can be reconciled with evidence once we allow for endogenous markups and assume that the traded sector is more capital intensive than the non-traded sector. More precisely, while both ingredients are essential to produce the real exchange rate depreciation, only the second ingredient is necessary to account for the simultaneous decline in investment and the current account, in line with the evidence. |
| Keywords: | Non-traded Goods, Fiscal Shocks, Investment, Current Account, Endogenous markup. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01252524&r=dge |
| By: | Mitman, Kurt |
| Abstract: | I study the implications of two major debt-relief policies in the US: the Bankruptcy Abuse and Consumer Protection Act (BAPCPA) and the Home Affordable Refinance Program (HARP). To do so, I develop a model of housing and default that includes relevant dimensions of credit-market policy and captures rich heterogeneity in household balance sheets. The model also explains the observed cross-state variation in consumer default rates. I find that BAPCPA significantly reduced bankruptcy rates, but increased foreclosure rates when house prices fell. HARP reduced foreclosures by one percentage point and provided substantial welfare gains to households with high loan-to-value mortgages. |
| Keywords: | bankruptcy; default risk; foreclosure; household debt; housing |
| JEL: | E21 G11 K35 R21 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11043&r=dge |
| By: | Valeri Sorolla; José Ramón García |
| Abstract: | With the standard Diamond-Mortensen-Pissarides labor market with frictions we analyze when there is more employment with individual wage setting compared to collective wage setting, using a wage equation generated by the standard total surplus sharing rule. Using a Cobb-Douglas production function we ?find that if the bargaining power of the individual is high compared to the bargaining power of the union there is more unemployment with individual wage setting and the opposite is also true. When the individual worker and the union have the same bargaining power, if the cost of open a vacancy is high enough, there is more unemployment with individual wage setting. Finally, for a constant marginal product of labor production function AL, when the individual worker and the union have the same bargaining power, individual bargaining produces more unemployment. |
| Keywords: | matching frictions, unemployment, individual and collective wage setting |
| JEL: | E24 O41 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:853&r=dge |
| By: | Coles, Melvyn; Kelishomi, Ali Moghaddasi |
| Abstract: | The current DMP approach to labor markets presumes job destruction shocks are small. We relax that assumption and also allow un lled jobs, like unemployment, to evolve as a state variable. Calibrating an otherwise standard DMP framework, we identify a remarkable, (almost) perfect, fit of the empirical facts as reported in Shimer (2005, 2012). The results, how- ever, are also consistent with the insights of Davis and Haltiwanger (1992): that unemployment volatility is driven by large but infrequent job separation shocks. The approach not only provides an important synthesis of two litera- tures which, in other contexts, have appeared contradictory, it also identfies a more traditional view of the timing and progression of recessions. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:14462&r=dge |
| By: | Kaplan, Greg; Moll, Benjamin; Violante, Giovanni L. |
| Abstract: | We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where intertemporal substitution drives virtually all of the transmission from interest rates to consumption. |
| Keywords: | consumption; earnings kurtosis; heterogeneous agents; inequality; liquidity; monetary policy; New Keynesian |
| JEL: | D14 D31 E21 E52 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11068&r=dge |
| By: | Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University) |
| Abstract: | We quantify the welfare implications of three alternative approaches to providing social health insurance: (i) a mix of private and public health insurance (US-style), (ii) compulsory universal public health insurance (UPHI), and (iii) private health insurance for workers combined with government subsidies and price regulation. We use a Bewley-Grossman lifecycle model calibrated to match the lifecycle structure of earnings and health risks in the US. For all three systems we find that welfare gains triggered by a combination of improvements in risk sharing and wealth redistribution dominate welfare losses caused by tax distortions and ex-post moral hazard effects. Overall, the UPHI system outperforms the other two systems in terms of welfare gains if the coinsurance rate is properly designed. A switch from the US system to a well-designed UPHI system results in large welfare gains. However, such a radical reform faces political impediments due to opposing welfare effects across different income groups. . |
| Keywords: | Health capital, lifecycle health risk, incomplete insurance markets, social insurance, optimal policy, dynamic general equilibrium with idiosyncratic shocks. |
| JEL: | I13 D52 E62 H31 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2016-02&r=dge |
| By: | Heathcote, Jonathan; Perri, Fabrizio |
| Abstract: | In a standard two-country international macro model, we ask whether imposing restrictions on international non contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country-specific shocks and thereby increase welfare for both countries. |
| Keywords: | capital controls; international risk sharing; terms of trade |
| JEL: | F32 F41 F42 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11080&r=dge |
| By: | Luisito Bertinelli; Olivier Cardi; Romain Restout |
| Abstract: | This paper develops a tractable version of a two-sector open economy model with search frictions in order to account for the relative wage and the relative price effects of higher productivity growth in tradables relative to non tradables. Using a panel of eighteen OECD countries over the period 1970-2007, our estimates reveal that a 1 percentage point increase in the productivity differential between tradables and non tradables lowers the non traded wage relative to the traded wage (relative wage) by 0.22% and appreciates the relative price of non tradables by 0.64%. While the decline in the relative wage reveals the presence of mobility costs preventing wage equalization across sectors, the relative wage responses to a productivity differential display a large dispersion across countries, thus suggesting that labor market frictions vary substantially across OECD economies. Using a set of indicators capturing the heterogeneity of labor market frictions across economies, we find that the relative wage significantly declines more in countries where labor market regulation is more pronounced. These empirical findings can be rationalized in a two-sector open economy model with search in the labor market as long as we allow for an endogenous sectoral labor force participation decision. In line with our estimates, our quantitative analysis reveals that the relative wage falls more in countries where unemployment benefits are more generous, firing cost is high, the worker bargaining power is large. When calibrating the model to each OECD economy, our numerical results reveal that the model predicts the relative wage response fairly well, and to a lesser extent the relative price response. |
| Keywords: | Productivity growth; Sectoral wages; Relative price of non tradables; Search theory; Labor market institutions. |
| JEL: | E24 F16 F41 F43 J65 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2016-05&r=dge |
| By: | Fang, Hanming (University of Pennsylvania); Kim, You Suk (Board of Governors of the Federal Reserve System); Li, Wenli (Federal Reserve Bank of Philadelphia) |
| 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 o_ 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 London Interbank Offered Rate (LIBOR) 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 mortgages with cushions, 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 o_ than under the baseline, with lower delinquency and foreclosure rates. Our counterfactual analysis also suggests that limited commitment power on the part of the lenders regarding loan modification policies may be an important reason for the relatively low rate of modifications observed during the housing crisis. |
| Keywords: | Adjustable-rate mortgage; Default; Loan modification; Automatic modification mortgages with cushions |
| JEL: | D12 D14 G2 G21 G33 |
| Date: | 2016–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:16-2&r=dge |
| By: | Mauro Bambi; Alain Venditti |
| Abstract: | In this paper we study the dynamics of an economy with productive government spending under the assumption that the government balances its budget by levying endogenous non-linear consumption taxes. For standard specifcation of the utility function and production function, we prove that under counter-cyclical consumption taxes, while there exists a unique balanced growth path, sunspot equilibria based on self-fulfilling expectations occur through a form of global indeterminacy. |
| Keywords: | Endogenous growth, time-varying consumption tax, global indeterminacy, self-fulfilling expectations, sunspot equilibria. |
| JEL: | C62 E32 H20 O41 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:16/01&r=dge |
| By: | Luisito Bertinelli (CREA - Centre de recherche en épistémologie appliquée - CNRS - Centre National de la Recherche Scientifique - Polytechnique - X, Faculty of Law, Economics and Finance - University of Luxembourg [Luxembourg]); Olivier Cardi (Université François Rabelais - Tours, LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique); Romain Restout (BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique, UCL - Université Catholique de Louvain) |
| Abstract: | This paper investigates the relative wage and the relative price effects of higher productivity growth in tradables relative to non tradables in a two-sector open economy model with search unemployment. Applying cointegration methods to a panel of eighteen OECD countries over the period 1970-2007, our estimates reveal that a 1 percentage point increase in the productivity differential between tradables and non tradables lowers the non traded wage relative to the traded wage (relative wage) by 0.22% and appreciates the relative price of non tradables by 0.64%. While the decline in the relative wage reveals the presence of mobility costs preventing from the wage equalization across sectors, the relative wage responses to a productivity differential display a large dispersion across countries, thus suggesting that labor market frictions vary substantially across OECD economies. Using a set of indicators capturing the heterogeneity of labor market frictions across economies, we find that the relative wage significantly declines more in countries where labor market regulation is more pronounced. These empirical findings can be rationalized in a two-sector open economy model with search in the labor market and an endogenous labor force participation. In line with our estimates, our quantitative analysis reveals that the relative wage falls more in countries where unemployment benefits are more generous, firing cost is high, the worker bargaining power is large, and/or the labor force is less responsive at the extensive margin. When calibrating the model to each OECD economy, our numerical results reveal that the model predicts the relative wage response fairly well, and to a lesser extent the relative price response. |
| Keywords: | Productivity growth, Sectoral wages, Relative price of non tradables, Search theory, Unemployment |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01252508&r=dge |
| By: | Marco Caliendo; Deborah A. Cobb-Clark; Juliane Hennecke; Arne Uhlendorff |
| Abstract: | Internal migration can substantially improve labor market e ciency. Consequently, policy is often targeted towards reducing the barriers workers face in moving to new labor markets. In this paper we explicitly model internal migration as the result of a job search process and demonstrate that assumptions about the timing of job search have fundamental implications for the pattern of internal migration that results. Unlike standard search models, we assume that job seekers do not know the true job o er arrival rate, but instead form subjective beliefs { related to their locus of control { about the impact of their search e ort on the probability of receiving a job o er. Those with an internal locus of control are predicted to search more intensively (i.e. across larger geographic areas) because they expect higher returns to their search e ort. However, they are predicted to migrate more frequently only if job search occurs before migration. We then test the empirical implications of this model. We nd that individuals with an internal locus of control not only express a greater willingness to move, but also undertake internal migration more frequently. |
| Keywords: | Locus of Control, Internal Migration, Mobility, Job Search |
| JEL: | J61 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp818&r=dge |
| By: | Gabaix, Xavier |
| Abstract: | This paper proposes a tractable way to model boundedly rational dynamic programming. The agent uses an endogenously simplified, or "sparse," model of the world and the consequences of his actions and acts according to a behavioral Bellman equation. The framework yields a behavioral version of some of the canonical models in macroeconomics and finance. In the life-cycle model, the agent initially does not pay much attention to retirement and undersaves; late in life, he progressively saves more, generating realistic dynamics. In the consumption-savings model, the consumer decides to pay little or no attention to the interest rate and more attention to his income. Ricardian equivalence and the Lucas critique partially fail because the consumer may not pay full attention to taxes and policy changes. In a Mertonstyle dynamic portfolio choice problem, the agent endogenously pays limited or no attention to the varying equity premium and hedging demand terms. Finally, in the neoclassical growth model, agents act on a simplified model of the macroeconomy; in equilibrium, fluctuations are larger and more persistent. |
| Keywords: | Bounded rationality; inattention; simplification |
| JEL: | D03 E21 E6 G02 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11026&r=dge |
| By: | Correia, Isabel; De Fiore, Fiorella; Teles, Pedro; Tristani, Oreste |
| Abstract: | In a model with costly financial intermediation and financial disturbances, credit subsidies are desirable, irrespective of how they are financed. They are especially useful when the zero lower bound constraint is reached. They are superior to other credit policies such as direct lending. JEL Classification: E31, E40, E44, E52, E58, E62, E63 |
| Keywords: | banks, costly enforcement, credit policy, credit subsidies, monetary policy, zero-lower bound on nominal interest rates |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161877&r=dge |