|
on Dynamic General Equilibrium |
|
Issue of 2016‒02‒17
twenty-six papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Schulz, Bastian |
| Abstract: | This paper adds two-sided ex-ante heterogeneity and a production technology inducing sorting to the canonical Diamond-Mortensen-Pissarides (DMP) search and matching model. Ex-ante heterogeneity and sorting have important implications for the dynamic properties of the model. The modifications solve the problem that standard DMP models do not generate enough volatility in response to shocks, also known as the "Shimer Puzzle" (Shimer, 2005). Amplification to overcome the volatility puzzle stems from an endogenously generated wage rigidity, which is of reasonable magnitude given empirical evidence from the U.S. labor market. Additionally, endogenous matching sets fluctuate in response to shocks and amplify job-creation. Using a standard Nash sharing rule, I show that the surplus function of the model, which depends on both the workers' and the firms' outside option, exhibits an asymmetry in equilibrium that stems from unequal bargaining powers. Using the standard calibration of the model, the firms' matching sets are wider in equilibrium than the workers' matching sets and fluctuate more in response to shocks. |
| JEL: | E24 E32 J64 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112932&r=dge |
| By: | Ahrens, Steffen; Nejati, Nooshin; Pfeiffer, Philipp Ludwig |
| Abstract: | This paper studies the role of labor market institutions in business cycle fluctuations. We develop a DSGE model with search and matching frictions and incorporate a US unemployment insurance experience rating system. Layoff taxes based on experience rating finance the cost of unemployment benefits and create considerable employment adjustment costs. Our framework helps realign the search and matching model with the empirical properties of its most salient variables. The model reproduces the negative correlation between vacancies and unemployment, i.e., the Beveridge curve. Simulations show that the model generates more cyclical volatility in its key variable - the ratio of job vacancies to unemployment (labor market tightness). Moreover, layoff taxes reduce the excess sensitivity of job destruction found in Krause and Lubik (2007) and strengthen the negative correlation of job creation and job destruction. Thus, the model matches key labor market data while incorporating an important feature of the US labor market. |
| JEL: | E24 J64 J65 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112807&r=dge |
| By: | Balke, Neele; Ravn, Morten |
| Abstract: | The financial crisis led to severe crises in much of Southern Europe that generated deep economic problems that still have not been resolved. Many of these economies (Greece, Italy, Spain and Portugal) witnessed not only large drops in aggregate activity but also rising levels of debt and falling debt prices which made financing of deficits very costly and triggered concerns about sovereign defaults. A large literature has considered environments in which large negative shocks can generate risk of default because sovereign governments lack commitment to debt. However, much of this literature either assumes that government has commitment to all other fiscal instruments or that these are exogenously determined. Therefore, it is unclear whether adjustments of other instruments - for example cuts in public spending or tax hikes - may not be preferable to default. Moreover, this literature typically does not allow for feedback from the fiscal instruments to the state of the economy beyond those triggered by punishment mechanisms in case of a sovereign default. Thus, these models are not useful for understanding richer questions regarding the adjustment of fiscal policy in crisis times. This paper takes a first step in addressing these issues. We study a small open economy model in which a benevolent government aims at maximizing social welfare but lacks commitment to all its fiscal instruments. The economy consists of a government, households, firms and foreign lenders. Households derive utility from consumption of private goods, leisure and from government provided public goods. They differ in their labor market status because of matching frictions. Some households work and earn labor income. The government imposes a payroll tax on these households. Other households are unemployed but choose search effort. Households cannot purchase unemployment insurance contracts but receive government financed unemployment transfers. Firms post vacancies to hire workers and there is free entry. There is an aggregate productivity shock and wages are determined by a non-cooperative Nash bargaining game between firms and households. The government chooses payroll taxes, unemployment benefits, government spending and may be able to smooth the budget by international borrowing and lending. International lenders are risk neutral and charge an interest rate which takes into account that governments may choose to default. If a government defaults it is excluded from international financial markets for a stochastic number of periods and it may suffer a loss of productivity whilst excluded from international lending. The government in this economy faces several trade-offs. It would like to insure households against unemployment risk and against wage risk which occurs due to productivity shocks. However, more generous unemployment insurance gives households less incentive to search for jobs and therefore produces higher unemployment and a smaller tax base. In order to smooth employed households against wage risk, the government would like to cut payroll taxes when productivity falls but this implies rising debt. The government also attempts to equalize the marginal utility of private and public consumption but cannot do so perfectly because of household heterogeneity. In this economy, falling productivity produces difficult choices since it puts a pressure on the government budget due to rising unemployment and a smaller tax base which produces an incentive for increasing government borrowing. However, rising debt levels may eventually impact on the price of debt because lenders perceive a risk of a sovereign default. For that reason, the government will eventually have to make a hard choice about whether to default on its debt which means it will have to balance its budget (and possibly suffer a drop in productivity), cut unemployment transfers which harms the unemployed, increase payroll taxes which harms the employed and produces higher unemployment, or cut government spending which lowers utility of households. We derive optimal fiscal policies in this environment by studying Markov perfect equilibria. The model is calibrated to emulate the conditions of a typical Southern European economy. We show that the time-consistent policies involve countercyclical payroll taxes, constant unemployment benefits, and mildly procyclical government spending in normal times when the risk of default is negligible. In crisis times, the government is willing to further distort the economy by providing less insurance against unemployment, increasing payroll taxes and cutting public goods provision to limit rising debt. However, once a default becomes inevitable, the government partially lifts such austerity measures since it ceases to be concerned about honouring its outstanding debt. |
| JEL: | E62 F34 J64 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113071&r=dge |
| By: | Meyer-Gohde, Alexander |
| Abstract: | I construct risk-sensitive approximations of policy functions of DSGE models around the stochastic steady state and ergodic mean that are linear in the state variables. The method requires only the solution of linear equations using standard perturbation output to construct the approximation and is uniformly more accurate than standard linear approximations. In an application to real business cycles with recursive utility and growth risk, the approximation successfully estimates risk aversion using the Kalman filter, where a standard linear approximation provides no information and alternative methods require computationally intensive procedures such as particle filters. At the posterior mode, the model s market price of risk is brought in line with the postwar US Sharpe ratio without compromising the fit of the macroeconomy. |
| JEL: | C61 C63 E17 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113057&r=dge |
| By: | Hohberger, Stefan; Kraus, Lena |
| Abstract: | Large trade imbalances have emerged as major policy challenges for the euro area within the last decade. As fiscal policy is the major macroeconomic policy instrument left with the individual member countries of EMU, fiscal devaluation is a highly debated policy tool to mimic the effects of an external devaluation by implementing a budgetary-neutral tax shift from direct to indirect taxes. This paper uses a two-region two-sector DSGE model with nominal wage and price rigidities to analyse the welfare effects of fiscal devaluation understood as tax shift from social security contributions for employers to value-added tax in a small open economy in monetary union. This paper finds that fiscal devaluation can stabilise excessive trade balance fluctuations but implies welfare losses for the average household. The results are robust to several sensitivity checks. |
| JEL: | E62 F32 F41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113193&r=dge |
| By: | Studer, Sabrina; Falkinger, Josef; Zhao, Yingnan |
| Abstract: | This paper presents a 3x3 general equilibrium model of an OLG-economy with financial intermediaries, technological uncertainty, heterogeneous agents with quasi-homothetic preferences to analyze structural change between the real and the financial sector as well as within the financial sector. Besides the consumption and investment good two types of financial services are produced. The financial services support agents in choosing their investment strategy and managing their portfolios. The three factors of production are: Capital, skilled and unskilled labor. The financial market provides deposits and an incomplete set of securities. Payoffs of assets are determined by the future profitability of the technologies in which they are invested. We show that structural change is generated by rising per-capita income, by an increase in inequality, stronger market power of firms or directed technical change. In turn, structural change can raise inequality. We identify conditions under which a self-feeding circle between inequality and structural change with respect to finance emerges. |
| JEL: | O16 J31 D90 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113004&r=dge |
| By: | Burghaus, Kerstin; Dao, Thang Nguyen; Edenhofer, Ottmar |
| Abstract: | We consider, in a general equilibrium overlapping generations (OLG) model with environmental externalities, a contract between successive generations, whereby agents of the current working-age generation privately invest a share of their labor income in pollution mitigation in exchange for a transfer to their old-age capital income paid by the next generation. We analyze under which conditions there exist contracts which are Pareto-improving compared to an equilibrium without contract and characterize the set of Pareto-improving mitigation-transfer combinations, the Pareto frontier and the Nash bargaining solution. Further, we prove that steady state emissions under a Pareto-improving contract are lower than without a contract. In the second part of the paper, we study a non-cooperative setting, taking into account that credibly committing to a contract might not be possible. We show that there exists mitigation transfer schemes which are both Pareto-improving and give no generation an incentive to deviate from the provisions of the contract. |
| JEL: | Q52 D70 C72 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113135&r=dge |
| By: | Krause, Christopher; Klein, Mathias |
| Abstract: | In this study, the relation between consumer credit and real economic activity during the Great Moderation is studied in a dynamic stochastic general equilibrium model. Our model economy is populated by two different household types. Investors, who hold the economy's capital stock, own the firms and supply credit, and workers, who supply labor and demand credit to finance consumption. Furthermore, workers seek to minimize the difference between investors' and their own consumption level. Qualitatively, an income redistribution from labor to capital leads to consumer credit dynamics that are in line with the data. As a validation exercise, we simulate a three-shock version of the model and find that our theoretical set-up is able to reproduce important business cycle correlations. |
| JEL: | E21 E32 E44 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112816&r=dge |
| By: | Klein, Mathias; Krause, Christopher |
| Abstract: | Standard real business cycle models predict a rise in employment following a technology shock. In contrast, numerous empirical studies show that a technology shock leads to a decline in labor input. In this paper, we demonstrate that a flexible price model enriched with interpersonal comparison of consumption expenditures is able to generate a fall in employment in response to a technology shock. The negative labor response is robust to different values assigned to the inverse Frisch elastictiy of labor supply and integrating capital adjustment cost into the model. |
| JEL: | D62 E24 E32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113075&r=dge |
| By: | Mutschler, Willi |
| Abstract: | This note shows how to derive unconditional moments, cumulants and polyspectra of order higher than two for the pruned state-space of nonlinear DSGE models. Useful Matrix tools and computational aspects are also discussed. |
| JEL: | C10 C51 E10 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113138&r=dge |
| By: | Fürnkranz-Prskawetz, Alexia; Sanchez-Romero, Miguel; d'Albis, Hippolyte |
| Abstract: | This paper presents an analysis of the differential role of mortality for the optimal schooling and retirement age when the accumulation of human capital follows the so-called "Ben-Porath mechanism". We set up a life-cycle model of consumption and labor supply at the extensive margin that allows for endogenous human capital formation based on Card (2001). This paper makes two important contributions. First, we provide the conditions under which a decrease in mortality leads to a longer education period and an earlier retirement age. Second, those conditions are decomposed into a Ben-Porath mechanism and a lifetimehuman wealth effect vs. the years-to-consume effect. Finally, using Swedish data for cohorts born between 1865 and 2000, we show that our model can match the empirical evidence. |
| JEL: | J10 J24 J26 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112937&r=dge |
| By: | Wulff, Alexander; Heinemann, Maik |
| Abstract: | This paper examines the effects of financial market imperfections in the context of financial integration. We employ a general equilibrium model with heterogeneous entrepreneurs and address the question of cross-border capital flows from poor to rich as well as focus on aggregate capital accumulation, output and welfare. The motivation is based on the mixed results from the existing literature. We add to this debate by discussing the effects from a general perspective in an environment where entrepreneurs face capital risk, earn risky profits and receive riskless wage income. Moreover, borrowing constraints hinder consumption smoothing as well as restrict the access to external funds for scaling up individual production. In order to separate the distinct effects, we consider several scenarios. In the first scenario without binding borrowing constraints and no persistent effects of shocks, we overcome the restriction that no analytical solution is available by deriving two rules of thumb, predicting the outcome of the model with high accuracy. These rules explain under which condition the less financially developed country features lower levels of capital and output in the autarchic steady state, implying capital flows from poor to rich, as well as under which condition an increase in the interest rate implied by financial integration unambiguously leads to larger levels of capital and output in the integrated steady state. For plausible parametrizations, we find that both conditions are likely to hold. In the next steps, we add tight borrowing constraints and increase the persistence of shocks. Both changes strongly affect the results derived in the first scenario. |
| JEL: | F41 G11 D52 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113165&r=dge |
| By: | Strehl, Wolfgang; Engler, Philipp |
| Abstract: | We analyse the welfare properties of progressive income taxes in a stylized DSGE model of a currency union calibrated to the Eurozone. When the central bank follows a standard Taylor rule and volatility originates solely in productivity shocks, we find that considerable welfare gains can be achieved by introducing a progressive income tax schedule. The reason is that the slightly lower average levels of consumption and greater volatility of hours are more than offset in their effects on welfare by a significant reduction in consumption volatility. However, at the aggregate level this result is not robust to the introduction of rule-of-thumb households, but we find a positive welfare effect for the latter type of households while intertemporally optimizing households lose. Furthermore, under an optimal monetary policy, welfare falls even in the absence of rule-of-thumb households. When demand shocks are considered, progressive taxes cannot improve welfare. Increasing tax progression above the Eurozone average is a "beggar-thyself" policy for all specifications. |
| JEL: | E62 E52 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112823&r=dge |
| By: | Weder, Mark; Pavlov, Oscar |
| Abstract: | Recent empirical evidence suggests that product creation is procyclical and it occurs largely within existing fi rms. Motivated by these findings, the current paper investigates the role of intrafi rm product scope choice in a general equilibrium economy with oligopolistic producers. We show that the multi-product nature of fi rms makes the economy signifi cantly more susceptible to sunspot equilibria. The estimated indeterminate model generates artifi cial business cycles that closely resemble empirically observed fl uctuations. |
| JEL: | E30 E32 E37 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112942&r=dge |
| By: | Zaharieva, Anna; Stupnytska, Yuliia |
| Abstract: | This paper presents a search model with heterogeneous workers, social networks and endogenous search intensity. There are three job search channels available to the unemployed: costly formal applications and two costless informal channels - through family and professional networks. The gain from being employed is increasing in the productivity, so the lowest motivation for preparing formal applications is proved to be among the least productive worker types. We assume that professional contacts exhibit a strong degree of homophily, thus it is profitable for firms to direct their network search towards more productive incumbent employees. So the probability of a professional referral is increasing in the productivity of the worker, which mitigates the incentives to use the formal channel of search. Therefore, the model predicts that workers in the right (left) tail of the productivity distribution have the highest propensity of finding a job with a help of professional (family) contacts, whereas the formal channel of search is mostly utilized by workers in the middle range of the distribution. This explains the U-shaped referral hiring pattern in the model. Endogenous sorting of workers across channels also implies that professional (family) referrals are associated with wage premiums (penalties) compared to the formal channel of search. |
| JEL: | J23 J31 J64 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112992&r=dge |
| By: | Böhm, Sebastian; Grossmann, Volker; Steger, Thomas |
| Abstract: | The paper revisits the debate on trickle-down growth in view of the widely discussed evolution of the earnings and income distribution that followed a massive expansion of higher education. We propose a dynamic general equilibrium model to dynamically evaluate whether economic growth triggered by an increase in public education expenditure on behalf of those with high learning ability eventually trickles down to low-ability workers and serves them better than redistributive transfers. Our results suggest that, in the shorter run, low-skilled workers lose. They are better off from promoting equally sized redistributive transfers. In the longer run, however, low-skilled workers eventually benefit more from the education policy. Interestingly, although the expansion of education leads to sustained increases in the skill premium, income inequality follows an inverted U-shaped evolution. |
| JEL: | H20 J31 O30 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113220&r=dge |
| By: | Quint, Dominic; Tristani, Oreste |
| Abstract: | We study the macroeconomic consequences of the money market tensions associated with the financial crisis of 2008-2009. Our structural model includes the banking model of Gertler and Kyiotaki (2011) in the Smets and Wouters (2003) framework. We highlight two main results. First, a financial shock calibrated to account for the observed increase in spreads on the interbank market can account for one third of the observed, large fall in aggregate investment after the financial crisis of 2008. Second, the liqudity injected on the market by the ECB played an important role in attenuating the macroeconomic impact of the shock. In their absence, aggregate investment would have fallen much more--by between 50 and 70 percent. These effects are somewhat larger than estimated in other available studies. |
| JEL: | E58 E44 E52 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112974&r=dge |
| By: | Blagov, Boris; Funke, Michael |
| Abstract: | An estimated Markov-switching DSGE modelling framework that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent credibility of Hong Kong s linked exchange rate system. The model distinguishes two regimes with respect to the time-series properties of the risk premium. Regime-dependent impulse re- sponses to macroeconomic shocks reveal substantial differences in spreads. These findings contribute to efforts at modelling exchange rate regime credibility as a non-linear process with two distinct regimes. |
| JEL: | E32 F41 C51 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112819&r=dge |
| By: | Sachs, Dominik; Findeisen, Sebastian |
| Abstract: | We study optimal nonlinear taxation of labor income and linear taxation of capital income in a life-cycle framework with private information and idiosyncratic risk. We focus on simple history-independent tax instruments. We first analyze the welfare losses from this simplification as compared to optimal history-dependent policies. We find very small losses from restricting the complexity of savings wedges. Eliminating history dependence of labor wedges leads to larger welfare losses: moving from history dependence to age dependence yields approximately the same welfare losses as moving from age dependence to age independence and from nonlinear to linear income taxation. For optimal history- independent taxes, we provide a novel decomposition into a redistribution and an insurance component and a generalization of the top tax formula to dynamic environments. Capital taxation is desirable and yields sizable welfare gains, especially if labor income taxes are set below their optimal level. |
| JEL: | H21 H20 H23 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113099&r=dge |
| By: | Enders, Zeno; Peter, Alexandra |
| Abstract: | The global financial crisis of 2007-2009 spread through different channels from its origin in the United States to large parts of the world. In this paper we explore the financial and the trade channels in a unified framework and quantify their relative importance for this transmission. Specifically, we employ a DSGE model of an open economy with an internationally operating banking sector. We investigate the transmission of the crisis via the collapse of export demand and through losses in the value of cross-border asset holdings. Calibrated to German and UK data, the model attributes around half of the observed maximum output decline in Germany to these channels, and 87% for the UK. While the trade channel explains 30% of the empirical output decline in both countries, the financial channel plays a much larger role in the UK than in Germany. The UK's larger vulnerability to financial shocks is due to higher foreign-asset holdings, which simultaneously serve as an automatic stabilizer in case of plummeting foreign demand. The transmission via the financial channel triggers a much longer-lasting recession relative to the trade channel, resulting in larger cumulated output losses and a prolonged crisis particularly in the UK. Stricter bank capital regulations would have deepened the initial slump while simultaneously speeding up the recovery. |
| JEL: | F44 F41 E32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113022&r=dge |
| By: | Slavik, Ctirad; Yazici, Hakki |
| Abstract: | The U.S. wage and earnings distributions display significantly higher levels of inequality today compared to the late 1960's. The aim of this paper is twofold. First, we want to assess to what extent the observed changes in inequality can be explained by a model that incorporates the technology-education race model of Tinbergen (1974) into a standard incomplete markets model that macroeconomists use to study inequality. Second, we want to use this model to decompose the changes in the skill premium and in overall inequality into four components: skill-biased technical change, increase in the relative supply of skilled workers, increase in residual wage volatility, and changes in tax policy. We construct an incomplete markets model with capital-skill complementarity in which the wage distribution responds endogenously to technological changes. That is, technological advancements - modeled as a decline in the price of equipments - increase the amount of equipments in the economy which increases the skill premium endogenously. We calibrate the deep parameters of the model to late 1960's U.S. economy and find that the model matches well the inequality measures in the data. We find that our model overestimates somewhat the changes in both the skill premium and overall measures of inequality between the 1960's and the 2000's. We then decompose the change in inequality into changes in technology, relative supply of skilled workers, residual wage risk, and taxes. In line with Tinbergen's technology-education race theory, we find that the skill premium is most significantly affected by the changes in technology and supply of skilled workers. We also identify a mechanism not previously analyzed in the literature: an increase in residual wage risk leads to higher precautionary savings and thus to higher levels of aggregate capital. Due to capital-skill complementarities in the production function, this leads to an increase in the skill premium and thus to a further increase in inequality. |
| JEL: | E25 J31 O33 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113021&r=dge |
| By: | Kemptner, Daniel; Haan, Peter; Prowse, Victoria |
| Abstract: | In this paper, we analyze how life expectancy-driven redistribution of income through a defined pension benefit system impacts on inequality in annual consumption. Our analysis combines a methodology that quantifies life expectancy-driven redistribution through the pension system with a structural life-cycle model in which labor supply, retirement and consumption decisions respond to changes in the pension system. Based on the estimated model, we show that the German pension system induces a large regressive redistribution of life-time income, and this redistribution increases inequality in average annual consumption. Behavioral responses to the pension system matter for the results. Increasing progressivity in pension contributions or pension benefits only partially offsets the life expectancy-driven redistribution via the pension system. |
| JEL: | C61 D31 H55 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112867&r=dge |
| By: | Caliendo, Marco (University of Potsdam); Cobb-Clark, Deborah A. (University of Sydney); Hennecke, Juliane (Free University of Berlin); Uhlendorff, Arne (CREST) |
| Abstract: | Internal migration can substantially improve labor market efficiency. 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 offer arrival rate, but instead form subjective beliefs - related to their locus of control - about the impact of their search effort on the probability of receiving a job offer. 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 effort. 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 find 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: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9600&r=dge |
| By: | Gottlieb, Charles; Froemel, Maren |
| Abstract: | Transfers have recently become the most important fiscal policy tool of the U.S. Government. Moreover, within the transfer category, refundable tax credits have reached the same magnitude as unemployment insurance, yet little research documents the macroeconomic implications of tax credits. The existing literature on the effect of tax credits, abstract from behavioral responses to policy changes and are silent on potential general equilibrium effects. This paper fills this gap by addressing these two shortcomings of the existing literature, by modeling the Earned Income Tax Credits (EITC) in an infinite horizon economy with exogenously incomplete asset markets and heterogeneous agents. In particular, we assess the welfare effects of the EITC and analyze how effective targeted transfers are in alleviating distortions arising from incomplete financial markets, and contribute to the debate on labor supply responses to EITC. We also conduct two policy exercises. First, we evaluate the impact of a more generous targeted transfer program on welfare and aggregate outcomes, and thereby uncover the distributional properties of this fiscal policy tool. Secondly, we assess whether targeted transfers are a better policy tool than lump sum transfers and show that targeted transfers are indeed welfare enhancing as they achieve more redistribution at lower tax rates, but that they lead to a less efficient production at the aggregate level. |
| JEL: | B22 H23 H31 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113175&r=dge |
| By: | Finocchiaro, Daria (Research Department, Central Bank of Sweden); Mendicino, Caterina (Monetary Policy Research) |
| Abstract: | We show that in a model with equity and debt financing, the specfication of the borrowing constraint is crucial to generate empirically plausible responses of macro variables and asset prices to financial shocks. The interaction between financial frictions and labor demand, as in Jermann and Quadrini (2012), is key to the result. A collateral constraint a la Kiyotaki and Moore (1997) augmented with a working capital assumption generates similar results on impact. |
| Keywords: | liquidity shocks; collateral constraints; stock prices; comovement |
| JEL: | E32 E44 |
| Date: | 2015–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0314&r=dge |
| By: | Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin |
| Abstract: | In this paper, we assess the impact of major German structural reforms from 1999 to 2008 on key macroeconomic variables within a two-country monetary union DSGE model. By many, these reforms, especially the Hartz reforms on the labor market, are considered to be the root of thereafter observed imbalances in the Euro Area. We find that, in terms of German GDP, consumption, investment and (un)employment, the reforms were a clear success albeit the impact on the German current account was only minor. Most importantly, the rest of the Euro Area benefited from positive spillover effects. Hence, our analysis suggests that the reforms cannot be held responsible for the currently observed macroeconomic imbalances within the Euro Area. |
| JEL: | E62 E32 H20 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112960&r=dge |