|
on Dynamic General Equilibrium |
|
Issue of 2016‒02‒29
nineteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Aleksandar Vasilev (American University in Bulgaria, Department of Economics) |
| Abstract: | In this paper we investigate the quantitative importance of search and matching fric- tions in Bulgarian labor markets. This is done by augmenting an otherwise standard real business cycle model a la Long and Plosser (1983) with both a two-sided costly search and fiscal policy. This introduces a strong propagation mechanism that allows the model to capture the business cycles in Bulgaria better than earlier models. The model performs well vis-a-vis data, especially along the labor market dimension, and in addition dominates the market-clearing labor market framework featured in the stan- dard RBC model, e.g Vasilev (2009), as well as the indivisible labor extension used in Hansen (1985). |
| Keywords: | general equilibrium, unemployment and wages, business cycles, fiscal policy |
| JEL: | D51 E24 E32 J40 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:sko:wpaper:bep-2016-03&r=dge |
| By: | Waqas Ahmed (State Bank of Pakistan); Muhammad Jahanzeb Malik (State Bank of Pakistan); Muhammad Rehman (State Bank of Pakistan) |
| Abstract: | In this paper we use the Bayesian methodology to estimate the structural and shocks? parameters of the DSGE model in Ahmad et al. (2012). This model includes formal and informal firms both at intermediate and final goods production levels. Households derive utility from leisure, real money balances and consumption. Each household is treated as a unit of labor which is a composite of formal (skilled) and informal (unskilled) labor. The formal (skilled) labor is further divided into types “r” and households have monopoly over each type “r” labor which depends upon degree of education. We go a step further by converting the existing annually calibrated model to quarterly frequency. As a result our impulse response functions have more relevant and realistic policy implications. From the results we do find the shock absorbing role of the informal sector, however, with short term existence. The model estimation diagnostics also confirm robustness and reasonability of the estimation results. |
| Keywords: | Bayesian Estimation, DSGE Model, Shock Process |
| JEL: | E17 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:sbp:wpaper:68&r=dge |
| By: | Diercks, Anthony M. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | In this study I examine the welfare implications of monetary policy by constructing a novel New Keynesian model that properly accounts for asset pricing facts. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same model calibrated to a counterfactually low equity premium implies an optimal inflation rate close to zero and inflation volatility less than 10 basis points, consistent with much of the existing literature. Relatively higher optimal inflation is due to the greater welfare costs of recessions associated with matching the equity premium. Additionally, the second order approximation allows monetary policy to have positive welfare effects on the labor share of income. I show that this channel is generally absent in standard macroeconomic models that do not take risk into account. Furthermore, the interest rate rule that comes closest to matching the dynamics of the optimal Ramsey policy puts a sizable weight on capital growth along with the price of capital, as it emphasizes stabilizing the medium to long term over the very short run. |
| Keywords: | Asset Pricing; Long-run risk; Monetary policy |
| Date: | 2015–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-87&r=dge |
| By: | Monique Ebell; Angus Armstrong; Philip Davis |
| Abstract: | The Government has recently issued a consultation document which raises the possibility of a substantial change in the taxation of pensions. In this paper we assess the economic consequences of changing from the existing EET system (where pension savings and returns are exempt from income tax, but pension income is taxed) to a TEE system (pension savings would be from taxed income but with no further taxation thereafter), making use of two complementary approaches. First, we review the economic and empirical literature, and second we construct a general equilibrium overlapping generations (OLG) model parameterised to UK data and the progressive UK tax system. Both approaches lead to the same outcome: that changing from EET to TEE would lead to a fall in personal savings. Our OLG model also finds that this reduction in savings would have broader macroeconomic consequences including lower aggregate investment, a smaller steady state capital stock, lower productivity and output, lower real wages, lower aggregate consumption, and a higher real interest rate. We compare steady state outcomes for EET to TEE while allowing for pension subsidy rates (i.e. a top-ups on pension savings out of taxed income) of between 10% and 50%. In order for the macroeconomic outcomes under TEE to approach those under EET, a pension subsidy of at least 50% would be required. However, this high rate of TEE subsidy on pension savings would crowd out other forms of government spending as aggregate tax revenues would decline by 3.2%. |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:455&r=dge |
| By: | Davide Debortoli; Ricardo Nunes; Pierre Yared |
| Abstract: | This paper develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and cannot commit to fiscal policy. If the government can perfectly commit, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust to the introduction of lack of commitment. Under lack of commitment, large and tilted positions are very expensive to finance ex-ante since they exacerbate the problem of lack of commitment ex-post. In contrast, a flat maturity structure minimizes the cost of lack of commitment, though it also limits insurance and increases the volatility of fiscal policy distortions. We show that the optimal time-consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols. |
| Keywords: | public debt, optimal taxation, fiscal policy |
| JEL: | H63 H21 E62 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:867&r=dge |
| By: | Peterman, William B. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | This paper considers the impact of how human capital is accumulated on optimal capital tax policy in a life cycle model. In particular, it compares the optimal capital tax when human capital is accumulated exogenously, endogenously through learning-by-doing, and endogenously through learning-or-doing. Previous work demonstrates that in a simple two generation life cycle model with exogenous human capital accumulation, if the utility function is separable and homothetic in each consumption and labor, then the government has no motive to condition taxes on age or tax capital. In contrast, this paper demonstrates analytically that adding either form of endogenous human capital accumulation creates a motive for the government to use age-dependent labor income taxes. Moreover, if the government cannot condition taxes on age, then a capital tax can be optimal in order to mimic such taxes. This paper quantitatively explores the strength of this channel and finds that, including human capital accumulation with learning-by-doing, as opposed to exogenously, causes the optimal capital tax to increase by between 7.3 and 14.5 percentage points. In contrast, introducing learning-or-doing causes a much smaller increase in the optimal capital tax of between 0.7 and 3.7 percentage points. Taken as a whole, this paper finds that the specific formulation by which human capital is accumulated can have notable implications on the optimal capital tax. |
| Keywords: | Optimal Taxation; Capital Taxation; Human Capital |
| JEL: | E24 E62 H21 |
| Date: | 2015–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-117&r=dge |
| By: | Marsal, Ales; Kaszab, Lorant; Horvath, Roman |
| Abstract: | We examine the role of government spending in the dynamics of the term structure of interest rates. Is the quantity of risk related government spending important for the price of risk? How does it depend on monetary policy conduct? Can fiscal policy immunize its impact on the term structure of interest rates? To answer this questions, we explore asset pricing implications of fiscal policy in what become paradigm in dynamic general equilibrium macro-finance literature. We break down the transmission of the government spending to macroeconomic attributes driving the dynamic response of the yield curve, both analytically and numerically. The novelty of our approach lies in the way we quantify the decomposition of pricing kernel. We find that rise in fiscal uncertainty amplifies the hedging property of bonds against real and nominal risks. Depending on the size of uncertainty monetary policy drives up the price of nominal risk. Spending reversals break the link between quantity and price of fiscal risk. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fmpwps:56&r=dge |
| By: | Alessandro Bucciol (Department of Economics (University of Verona)); Laura Cavalli (Department of Economics (University of Verona)); Igor Fedotenkov (Department of Economics (University of Verona)); Paolo Pertile (Department of Economics (University of Verona)); Veronica Polin (Department of Economics (University of Verona)); Nicola Sartor (Department of Economics (University of Verona)); Alessandro Sommacal (Department of Economics (University of Verona)) |
| Abstract: | The paper presents a large scale overlapping generation model with heterogeneous agents, where the family is the decision unit. We model a large number of tax and public expenditure (cash and in kind) programmes, so that the equity and efficiency implications of public sector intervention may be assessed in its complexity. We do this for three european countries that show remarkable differences in the design of most of these programmes: France, Italy and Sweden. We show that the model is able to match relevant aggregate and distributional statistics of the three countries we analyse. To illustrate the working of the model, we provide examples of policy experiments that can be simulated. That is, we compare our model economies featuring the current set of public policies implemented in France, Italy and Sweden, with alternative economies where some (all) public finance programs are absent. The comparison is done, looking at the effects on both inequality and individual welfare. |
| Keywords: | Redistribution, Fiscal policy, Computable OLG models |
| JEL: | H2 H3 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:07/2014&r=dge |
| By: | Pablo Guerron-quintana (Federal Reserve Bank of Philadelphia); Atsushi Inoue (Vanderbilt University); Lutz Kilian (University of Michigan) |
| Abstract: | One of the leading methods of estimating the structural parameters of DSGE mod- els is the VAR-based impulse response matching estimator. The existing asymptotic theory for this estimator does not cover situations in which the number of impulse response parameters exceeds the number of VAR model parameters. Situations in which this order condition is violated arise routinely in applied work. We establish the consistency of the impulse response matching estimator in this situation, we derive its asymptotic distribution, and we show how this distribution can be approximated by bootstrap methods. Our methods of inference remain asymptotically valid when the order condition is satisfied, regardless of whether the usual rank condition for the application of the delta method holds. Our analysis sheds new light on the choice of the weighting matrix and covers both weakly and strongly identified DSGE model parameters. We also show that under our assumptions special care is needed to ensure the asymptotic validity of Bayesian methods of inference. A simulation study suggests that the frequentist and Bayesian point and interval estimators we propose are reasonably accurate in finite samples. We also show that using these methods may affect the substantive conclusions in empirical work. |
| Keywords: | Structural estimation, DSGE, VAR, impulse response, nonstandard asymptotics, bootstrap, weak identification, robust inference |
| JEL: | C3 C5 |
| Date: | 2014–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-14-00014&r=dge |
| By: | Ronaldo Carpio (School of Business and Finance, University of International Business and Economics); Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan) |
| Abstract: | We propose an algorithm, which we call "Fast Bellman Iteration" (FBI), to compute the value function of a deterministic infinite-horizon dynamic programming problem in discrete time. FBI is an efficient algorithm applicable to a class of multidimensional dynamic programming problems with concave return (or convex cost) functions and linear constraints. In this algorithm, a sequence of functions is generated starting from the zero function by repeatedly applying a simple algebraic rule involving the Legendre-Fenchel transform of the return function. The resulting sequence is guaranteed to converge, and the Legendre-Fenchel transform of the limiting function coincides with the value function. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2016-04&r=dge |
| By: | Duncan, Roberto (Ohio University) |
| Abstract: | The canonical neoclassical model is insufficient to understand business cycle fluctuations in emerging market and developing economies (EMDEs). I reformulate the models proposed by Aguiar and Gopinath (2007) and Neumeyer and Perri (2005) in simple settings that can be used to do back-of-the-envelope analysis and teach business cycle macroeconomics for EMDEs at the undergraduate level. The simplified models are employed for qualitatively explaining facts such as the countercyclicality of the trade balance and the real interest rate, and the higher volatility of output, consumption, and real wages compared with those observed in advanced countries. Simple extensions can be used to understand other empirical facts such as large capital outflows and output drops, small government spending he cyclical behavior of prices, and the negative association between currency depreciations and output. |
| JEL: | A22 E32 F32 |
| Date: | 2015–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:252&r=dge |
| By: | Orazio P. Attanasio; Andrea Bonfatti; Sagiri Kitao; Guglielmo Weber |
| Abstract: | This paper studies the effect of demographic transitions on the economy of Latin America and the Caribbean (LAC). The paper builds a model of multi-regions of the world and derives the path of macroeconomic variables including aggregate output, capital, labor and the saving rate as economies face a rapid shift in demographics. The timing and the extent of the demographic transition differ across regions. The model is simulated under both closed economy and open economy assumptions to quantify the roles played by factor mobility across regions in shaping capital accumulation and equilibrium factor prices. |
| Keywords: | Economic Development & Growth, Income, Consumption & Saving, Interest rates, Wages, Social Security, Capital flows, Capital flows, Demographic trends, Latin America and the Caribbean (LAC) |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:89358&r=dge |
| By: | Holden, Tom D. |
| Abstract: | We present the first necessary and sufficient conditions for the existence of a unique perfect-foresight solution, returning to a given steady-state, in an otherwise linear model with occasionally binding constraints. We derive further conditions on the existence of a solution in such models, and provide a proof of the inescapability of the “curse of dimensionality” for them. We also construct the first solution algorithm for these models that is guaranteed to return a solution in finite time, if one exists. When extended to allow for other non-linearities and future uncertainty, our solution algorithm is shown to produce fast and accurate simulations. In an application, we show that widely used New Keynesian models with endogenous states possess multiple perfect foresight equilibrium paths when there is a zero lower bound on nominal interest rates. However, we show that price level targeting is sufficient to restore determinacy in these situations. |
| Keywords: | occasionally binding constraints,zero lower bound,existence,uniqueness,price targeting,DSGE,linear complementarity problem |
| JEL: | C61 C62 C63 E17 E3 E4 E5 |
| Date: | 2016–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:127430&r=dge |
| By: | Bianchi, Javier (Federal Reserve Bank of Minneapolis) |
| Abstract: | We develop a quantitative equilibrium model of financial crises to assess the interaction between ex-post interventions in credit markets and the buildup of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. We find that moral hazard effects are limited if bailouts are systemic and broad-based. If bailouts are idiosyncratic and targeted, however, this makes the economy significantly more exposed to financial crises. |
| Keywords: | Bailouts; Moral hazard; Credit crunch; Financial shocks; Macroprudential policy |
| JEL: | E32 E44 F40 G18 |
| Date: | 2016–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:730&r=dge |
| By: | Kakar, Venoo |
| Abstract: | This paper analyzes the redistributional effects of long-run inflation on income, wealth and consumption in the United States in a model economy with heterogeneous agents where money is introduced via a cash-in-advance constraint. A calibrated version of our model is able to generate patterns of income inequality that are very similar to those observed in the United States. On an aggregate level, the cost of 5% inflation is 2.5% consumption. On an disaggregate level, uniform monetary transfers by the central bank result in inflation acting as a progressive tax on consumption. |
| Keywords: | Consumption, Inequality, Inflation, Heterogeneity |
| JEL: | E21 E31 E4 E5 E52 |
| Date: | 2014–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69513&r=dge |
| By: | Prescott, Edward C. (Federal Reserve Bank of Minneapolis) |
| Abstract: | This essay reviews the development of neoclassical growth theory, a unified theory of aggregate economic phenomena that was first used to study business cycles and aggregate labor supply. Subsequently, the theory has been used to understand asset pricing, growth miracles and disasters, monetary economics, capital accounts, aggregate public finance, economic development, and foreign direct investment. {{p}} The focus of this essay is on real business cycle (RBC) methodology. Those who employ the discipline behind the methodology to address various quantitative questions come up with essentially the same answer—evidence that the theory has a life of its own, directing researchers to essentially the same conclusions when they apply its discipline. Deviations from the theory sometimes arise and remain open for a considerable period before they are resolved by better measurement and extensions of the theory. Elements of the discipline include selecting a model economy or sometimes a set of model economies. The model used to address a specific question or issue must have a consistent set of national accounts with all the accounting identities holding. In addition, the model assumptions must be consistent across applications and be consistent with micro as well as aggregate observations. Reality is complex, and any model economy used is necessarily an abstraction and therefore false. This does not mean, however, that model economies are not useful in drawing scientific inference. {{p}} The vast number of contributions made by many researchers who have used this methodology precludes reviewing them all in this essay. Instead, the contributions reviewed here are ones that illustrate methodological points or extend the applicability of neoclassical growth theory. Of particular interest will be important developments subsequent to the Cooley (1995) volume, Frontiers of Business Cycle Research. The interaction between theory and measurement is emphasized because this is the way in which hard quantitative sciences progress. |
| Keywords: | Neoclassical growth theory; Aggregate economic theory; RBC methodology; Aggregation; Business cycle fluctuations; Development; Aggregate financial economics; Prosperities; Depressions |
| JEL: | B40 C10 E00 E13 E32 E60 |
| Date: | 2016–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:527&r=dge |
| By: | Han Han (School of Economics Peking University); Benoit Julien (UNSW Australia); Asgerdur Petursdottir (University of Bath); Liang Wang (University of Hawaii at Manoa) |
| Abstract: | In a New Monetarist framework, we study the trade of indivisible goods under credit, divisible money and divisible asset in a frictional market. We show how indivisibility on the goods side, instead of the money or asset side, matters for equilibria. The bargaining solution generates a price that is independent of nominal interest rate, dividend value of the asset, or the number of active buyers carrying the asset for liquidity purposes. To reestablish this link, we consider price posting with competitive search. We derive conditions under which stationary equilibrium exists. With asset and bargaining, we find that for negative dividend value on the asset, multiple equilibria occur. Otherwise, in all possible combinations of liquidity and price mechanisms, including positive dividend value under asset, the equilibrium is unique or generically unique. |
| Keywords: | Nash Bargaining; Competitive Search; Indivisibility; Multiplicity; Uniqueness |
| JEL: | D51 E40 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201601&r=dge |
| By: | Philippe Bich (Paris School of Economics - Centre d'Economie de la Sorbonne); Jean-Pierre Drugeon (Paris School of Economics); Lisa Morhaim (Université Paris 2 Panthéon-Assas - Centre de recherche en économie et droit (CRED)) |
| Abstract: | In the tradition of Irving Fisher, the current article advocates an approach to dynamic programming that is based upon elementary aggregating functions where current action and future expected payoff combine to yield overall current payoff. Some regularity properties are provided on the aggregator which allow for establishing the existence, the uniqueness and the computation of the Bellman equation. Some order-theoretic foundations for such aggregators are also established. The aggregator line of argument encompasses and generalizes many previous results based upon additive or non-additive recursive payoff functions |
| Keywords: | Dynamic Programming; Aggregators; Intertemporal Choice |
| JEL: | C61 D90 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:15053&r=dge |
| By: | Davide Debortoli (UPF and Barcelona GSE); Jinill Kim (Department of Economics, Korea University, Seoul, Republic of Korea); Jesper Linde (Sveriges Riksbank, Stockholm School of Economics and CEPR); Ricardo Nunes (Federal Reserve Bank of Boston) |
| Abstract: | Yes, it makes a lot of sense. Using the Smets and Wouters (2007) model of the U.S. economy, we ?nd that the role of the output gap should be equal to or even more important than that of annualized in?ation when designing a simple loss function to represent household welfare. The high weight on the output gap is driven by several important characteristics in the estimated model, including a low elasticity of substitution between monopolistic goods, price indexation, and sticky wages. Moreover, we document that a loss function with nominal wage in?ation and the hours gap provides an even better approximation of the true welfare function than a standard objective based on in?ation and the output gap. Our results hold up when we introduce interest rate smoothing in the simple mandate to capture the observed gradualism in policy behavior and to ensure that the probability of the federal funds rate hitting the zero lower bound is negligible. |
| Keywords: | Central banks' objectives, simple loss function, monetary policy design, Smets-Wouters model |
| JEL: | C32 E58 E61 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:1601&r=dge |