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on Dynamic General Equilibrium |
|
Issue of 2016‒03‒10
seventeen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Andrew Binning (Norges Bank (Central Bank of Norway)); Junior Maih (Norges Bank (Central Bank of Norway) and BI Norwegian Business School) |
| Abstract: | The Zero Lower Bound (ZLB) on policy rates is one of the key monetary policy issues du jour. In this paper we investigate the problem of modelling and estimating the ZLB in a simple New Keynesian model with regime switches. The key features of the model include switches in the time preference shock, productivity growth rate and the steady state rate of inflation leading to two steady states: a normal steady state and a ZLB steady state. The model is tted to US data using Bayesian methods and is found to match the US experience over the great moderation and the ZLB periods very well. The key features of the model allow us to test competing theories about the determinants of the ZLB steady state. Our results suggest that the ZLB steady state is driven by precautionary savings behavior. It is also found that expectations over different regimes crucially matter for the dynamics of the system. |
| Keywords: | Zero Lower Bound, Regime-switching, DSGE, Bayesian Estimation |
| Date: | 2016–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2016_03&r=dge |
| By: | Markus Kirchner; Rodrigo Tranamil |
| Abstract: | Most existing DSGE models used for monetary policy analysis and forecasting assume that the labor market always clears at a sticky nominal wage (`a la Calvo) through variations along the intensive margin of labor supply (i.e. hours), with no role for the extensive margin (i.e. employment). The latter contrasts with research on the macroeconomics of labor markets that has emphasized the relevance of the extensive margin and employment fluctuations using search and matching theory. Against this background, in this paper we conduct a horse race of a labor market specification with Calvo wages versus a search and matching specification with endogenous separations in an otherwise standard New Keynesian small open economy model, estimated with Chilean data. We conclude that the search and matching specification “wins” by a wide margin as it significantly improves the model’s ability to explain and predict both labor market data and other macroeconomic variables |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:778&r=dge |
| By: | Takaaki Morimoto (Graduate School of Economics, Osaka University); Yuta Nakabo (Graduate School of Economics, Osaka University); Ken Tabata (School of Economics, Kwansei Gakuin University) |
| Abstract: | This paper examines how pay-as-you-go (PAYG) pension reform from a defined-benefit scheme to a defined-contribution scheme affects fiscal sustainability and economic growth in an overlapping generations model with endogenous growth. We show that in economies in which the old-age dependency ratio is high and the size of pension benefits under a defined-benefit scheme is large, such a pension reform mitigates the negative effect of population aging on fiscal sustainability and economic growth. However, we also show that this type of pension reform entails an intergenerational conflict of interest between current and future generations. Population aging might exacerbate the extent of this conflict. |
| Keywords: | Population aging, PAYG pensions, Defined-benefit schemes, Definedcontribution schemes, Fiscal sustainability |
| JEL: | D91 H55 O41 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:140&r=dge |
| By: | Frederic Boissay; Fabrice Collard; Frank Smets |
| Abstract: | Banking crises are rare events that break out in the midst of credit intensive booms and bring about particularly deep and long-lasting recessions. This paper attempts to explain these phenomena within a textbook DSGE model that features a non-trivial banking sector. In the model, banks are heterogeneous with respect to their intermediation skills, which gives rise to an interbank market. Moral hazard and asymmetric information in this market may lead to sudden interbank market freezes, banking crises, credit crunches and severe recessions. Those "financial" recessions follow credit booms and are not triggered by large exogenous adverse shocks. |
| Keywords: | moral hazard, asymmetric information, saving glut, lending boom, credit crunch, banking crisis |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:545&r=dge |
| By: | Marc-André Letendre; Joel Wagner |
| Abstract: | We add agency costs as in Carlstrom and Fuerst (1997) into a two-country, two-good international business-cycle model. In our model, changes in the relative price of investment arise endogenously. Despite the fact that technology shocks are uncorrelated across countries, the relative price of investment is positively correlated across countries in our model, much as it is in detrended U.S./euro area data. We also find that the financial frictions tend to increase the volatility of the terms of trade and the international correlations of consumption, hours worked, output and investment. We then compare this model to an alternative model that also includes risk shocks à la Christiano, Motto and Rostango (2014). We use credit spread data (for the United States) to calibrate the AR(1) process for risk shocks. We find that risk shocks are too small to significantly impact the model’s dynamics. |
| Keywords: | Business fluctuations and cycles, International topics |
| JEL: | E22 E32 E44 F44 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:16-2&r=dge |
| By: | PESTIEAU, P. (Université de Liège, CORE, PSE and CEPR); PONTHIERE, G. (Universite Paris East and PSE) |
| Abstract: | In the so-called Rapport Sauvy (1962), the French demographer Alfred Sauvy argued that Wallonia’s fertility rate was socially suboptimal, and recommended a 20 % rise of fertility, on the grounds that a society with too low a fertility leads to a low-productive economy composed of old workers having old ideas. This paper examines how Sauvy’s intuition can be incorporated in the seminal Samuelsonian optimal fertility model (Samuelson 1975). For that purpose, we build a 4-period OLG model with physical capital and with two generations of workers (young and old), the skills of the latter being subject to some form of decay. We characterize the optimal fertility rate, and show that this equalizes, at the margin, the sum of the capital dilution effect (Solow effect) and the labor age-composition effect (Sauvy effect) with the intergenerational redistribution effect (Samuelson effect). Finally, we develop a numerical example, and examine how Sauvy’s recommendation can be reconcilied with facts. |
| Keywords: | optimal fertility, age structure, overlapping generations, social optimum |
| JEL: | E13 E21 J24 |
| Date: | 2015–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2015043&r=dge |
| By: | Álvaro Hurtado Rendón |
| Abstract: | Abstract: The main contribution of this work is the discussion about the widespread of the data from the economic experiments. Particularly, in regards with those that research about the discounting rate of the agents, where we suggest using the Dynamic Stochastic General Equilibrium models (DSGE) under a Bayesian approach. Besides, the inclusion of the entrepreneurs in the economic experiments in order to establish which are the long and short discounting rate is also mentioned. In this way, in order to reach what was said before, both a Neoclassic and a Neo Keynesian standard model were used to contrast the parameters robustness. Finally, it is showed that both the short and long term discounting rates after using Bayesian estimation are more consistent with the experiments carried out with entrepreneurs than those with students. |
| Keywords: | Models and applications, Intertemporal Consumer Choice, Bayesian econometrics. |
| JEL: | E37 D91 E32 |
| Date: | 2016–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:col:000122:014250&r=dge |
| By: | Robert Kollmann; Beatrice Pataracchia; RAFAL Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel |
| Abstract: | The global financial crisis (2008-09) led to a sharp contraction in both Euro Area (EA) and US real activity, and was followed by a long-lasting slump. However, the post-crisis adjustment in the EA and the US shows striking differences—in particular, the EA slump has been markedly more protracted. We estimate a three-region (EA, US and Rest of World) New Keynesian DSGE model (using quarterly data for 1999-2014) to quantify the drivers of the divergent EA and US adjustment paths. Our results suggest that financial shocks were key drivers of the 2008-09 Great Recession, for both the EA and the US. The post-2009 slump in the EA mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment, linked to the continuing poor health of the EA financial system. Adverse financial shocks were less persistent for the US. The financial shocks identified by the model are consistent with observed performance indicators of the EA and US banking systems. |
| Keywords: | post-crisis slump; euro area; united states; estimated DSGE model; demand and supply shocks and financial shocks |
| JEL: | F40 F30 E20 E30 E50 E60 C50 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/227474&r=dge |
| By: | Diana Alessandrini (Department of Economics, Auburn University); Stephen Kosempel (Department of Economics and Finance, University of Guelph); Alessandra Pelloni (Department of Economics, University of Rome ``Tor Vergata''); Thanasis Stengos (Department of Economics and Finance, University of Guelph) |
| Abstract: | We investigate the relationship between short run macroeconomic conditions and earnings inequality. In our empirical work we establish a set of stylized facts: (1) earnings inequality is counter-cyclical; (2) the bottom quintile of the earnings distribution is the most volatile; (3) business cycles have a low or no impact on wage inequality, but they have a strong impact on hours worked inequality; and (4) the impact of an economic contraction on inequality is weaker in economies with higher levels of education. Then, to explain these observations we develop a stochastic Ben-Porath model of human capital accumulation with life cycle dynamics. |
| Keywords: | Inequality; Business cycles; Human capital accumulation |
| JEL: | I24 E32 E24 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2016-02&r=dge |
| By: | Pietro Garibaldi (Collegio Carlo Alberto); Tito Boeri; Espen R Moen (Norwegian Business School) |
| Abstract: | All OECD countries have either legally mandated severance pay or compensations imposed by industry-level bargaining in case of employer initiated job separations. In the literature such transfers are either ineffective or less efficient than unemployment benefits in providing insurance against labor market risk. The paper shows that mandatory severance is optimal in presence of wage deferrals induced by workers' moral hazard. We also establish a link between optimal severance and efficiency of the legal system and characterize the effects of shifting the burden of proof from the employer to the worker. Quantitatively, the welfare effects of suboptimal severance payments vary in general equilibrium between 1 and 3 percent. The model accounts also for two neglected features of the legislation. The first is the discretion of judges in declaring the nature, economic vs. disciplinary, of the layoff. The second feature is that compensation for dismissal is generally increasing with tenure. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/7hh2up94ii8d2rg9pa9vg9eh3t&r=dge |
| By: | Marika Santoro |
| Abstract: | In this paper, I study the potential economic impact of the 2015-18 structural reform agenda in Chile, using the IMF dynamic general equilibrium model (GIMF). I find that the agenda has the potential to significantly increase Chile’s long-run GDP, although it may have some negative effects in the short term. Ensuring a smooth transition to a higher productive potential depends on three key dimensions: the credibility of the reforms, their effectiveness in closing structural gaps, and their speed of implementation. Badly designed reforms that remove only a very small fraction of the existing structural gaps, at a slow speed, and with little credibility, can greatly reduce the positive impact of the reform agenda on GDP. |
| Keywords: | Human capital;Infrastructure;Chile;Western Hemisphere;structural reforms, macroeconomic analysis, capital, income, gdp, consumption, Infrastructures, macroeconomic analysis., |
| Date: | 2015–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/282&r=dge |
| By: | Stefano Bosi (EPEE, University of Evry); David Desmarchelier (ECONOMIX, University of Paris Ouest); Lionel Ragot (ECONOMIX, University of Paris Ouest and CEPII) |
| Abstract: | We consider a competitive Ramsey economy where a pollution externality affects both consumption demand and labor supply, and we assume the stock of pollution to be persistent over time. Surprisingly, when pollution jointly increases the consumption demand (compensation effect) and lowers the labor supply (leisure effect), multiple equilibria arise near the steady state (local indeterminacy) through a Hopf bifurcation (limit cycle). This result challenges the standard view of pollution as a flow to obtain local indeterminacy, and depends on the leisure effect which renders the pollution accumulation process more volatile. |
| Keywords: | Pollution, Endogenous labor supply, Limit cycle, Ramsey model |
| JEL: | E32 O44 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:fae:wpaper:2016.03&r=dge |
| By: | Robert Kollmann; Beatrice Pataracchia; Rafal Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel |
| Abstract: | The global financial crisis (2008-09) led to a sharp contraction in both Euro Area (EA) and US real activity, and was followed by a long-lasting slump. However, the post-crisis adjustment in the EA and the US shows striking differences -in particular, the EA slump has been markedly more protracted. We estimate a three-region (EA, US and Rest of World) New Keynesian DSGE model (using quarterly data for 1999-2014) to quantify the drivers of the divergent EA and US adjustment paths. Our results suggest that financial shocks were key drivers of the 2008-09 Great Recession, for both the EA and the US. The post-2009 slump in the EA mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment, linked to the continuing poor health of the EA financial system. Adverse financial shocks were less persistent for the US. The financial shocks identified by the model are consistent with observed performance indicators of the EA and US banking systems. |
| Keywords: | Post-crisis slump, Euro Area, United States, estimated DSGE model, demand and supply shocks and financial shocks |
| JEL: | F4 F3 E2 E3 E5 E6 C5 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-10&r=dge |
| By: | Kim, Jinyoung (Korea University); Lee, Jong-Wha (Asiatic Research Institute, Korea University); Shin, Kwanho (Department of Economics, Korea University) |
| Abstract: | This paper introduces a model of gender inequality and economic growth that focuses on the determination of women’s time allocation among market production, home production, child rearing, and child education. The theoretical model is based on Agénor (2012), but differs in several important dimensions. The model is calibrated using microlevel data of Asian economies, and numerous policy experiments are conducted to investigate how various aspects of gender inequality are related to the growth performance of the economy. The analysis shows that improving gender equality can contribute significantly to economic growth by changing females’ time allocation and promoting accumulation of human capital. We find that if gender inequality is completely removed, aggregate income will be about 6.6% and 14.5% higher than the benchmark economy after one and two generations, respectively, while corresponding per capita income will be higher by 30.6% and 71.1% in the hypothetical gender-equality economy. This is because fertility and population decrease as women participate more in the labor market. |
| Keywords: | economic growth; gender inequality; human capital accumulation; labor market; overlapping generations model |
| JEL: | E24 E60 J13 J71 |
| Date: | 2016–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0475&r=dge |
| By: | Konstantin Egorov (Department of Economics, Pennsylvania State University); Michal Fabinger (Faculty of Economics, The University of Tokyo) |
| Abstract: | We present a tractable, quantitative model of sovereign borrowing that delivers empirically relevant regularities, such as graduation from default, sovereign debt spreads that may be high for an extended period of time, high debt-to-GDP ratios, and high default rates. The model is an asymmetric-information extension of otherwise standard models of endogenous default on sovereign debt, with borrowing levels determined in equilibrium. Governments could be of different types based on their level of responsibility (cost of default as perceived by the politicians). Only the governments observe their level of responsibility. International investors try to infer the unobserved types based on the history of all observable actions, which gives irresponsible politicians an incentive to choose the same actions as responsible ones would. Governments could tolerate periods of high interest rates without defaulting to signal that they are of better type and to gain good reputation. This leads to lower interest rates during future recessions. For the same reason, even responsible governments should pay at first high interest rates in order to signal their type and thus “graduate from default†afterwards. A calibrated version of the model features these regularities, matches standard business cycle moments, and leads to a more realistic default rate in equilibrium, with parameter values same as in the existing literature. |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2016cf999&r=dge |
| By: | Schipper, Tyler |
| Abstract: | This paper investigates how the ability to innovate affects firms' decisions to operate informally and the aggregate consequences of their sectoral choice. I embed a sectoral choice model, where firms choose to operate in the formal or informal economy, into a richer general equilibrium environment to analyze the aggregate effects of firm-level decisions in response to government taxation. I calibrate the model and conduct simulations to quantify the impacts on the aggregate economy. I find that a change in tax rates from 50% to 60% leads to a 20.9% reduction in the size of the formal sector. This change is accompanied by a 0.07 percentage point reduction in TFP growth per year. Given that countries like Mali, Mexico, and Sri Lanka impose total tax rates near 50%, these findings have significant and applicable policy implications across a broad range of lesser developed countries. Even at lower tax rates, for instance 10%, a 10% increase, decreases the size of the formal sector by more than 7.7%. |
| Keywords: | Informality, Innovation, Productivity Growth, TFP |
| JEL: | H32 O17 O31 O41 |
| Date: | 2014–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69647&r=dge |
| By: | Diego Anzoategui; Mali Chivakul; Wojciech Maliszewski |
| Abstract: | Widespread implicit guarantees and interest ceilings were major distortions in China’s financial system, contributing to a misallocation of resources. We analyze the impact of removing such frictions in a general equilibrium setting. The results show that comprehensive reforms generate better outcomes than partial ones: removing the deposit rate ceiling alone increases output, but the efficiency of capital allocation does not improve. Removing implicit guarantees improves output through lower cost of capital for private companies and better resource allocation. |
| Keywords: | Asia and Pacific;China;China, People's Republic of;Financial distortions, interest rate liberalization, implicit government guarantees, interest, guarantees, deposit, implicit guarantees, deposits, General, Asia including Middle East, Government Policy and Regulation, |
| Date: | 2015–12–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/274&r=dge |