nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2016‒04‒09
thirty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. How accounting accuracy affects DSGE models By Kim, Minseong
  2. Tractable Likelihood-Based Estimation of Non-Linear DSGE Models Using Higher-Order Approximations By Robert Kollmann
  3. The Discounted Euler Equation: A Note By Alisdair McKay; Emi Nakamura; Jón Steinsson
  4. Life-Cycle Saving, Bequests, and the Role of Population in R&D-based Growth By Bharat Diwakar; Gilad Sorek
  5. Limited Liability, Asset Price Bubbles and the Credit Cycle: The Role of Monetary Policy By Jakub Mateju; Michal Kejak
  6. Search frictions and (in)efficient vocational training over the life-cycle By Arnaud Cheron; Anthony Terriau
  7. Demographics and Real Interest Rates: Inspecting the Mechanism By Carlos Viana de Carvalho; Andrea Ferrero; Fernanda Necchio
  8. Fiscal austerity in ambiguous times By Ferrière, Axelle; Karantounias, Anastasios G.
  9. Education policy and intergenerational transfers in equilibrium By Brant Abbott; Giovanni Gallipoli; Costas Meghir; Gianluca Violante
  10. Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India By Rahul Anand; Purva Khera
  11. VAR Information and the Empirical Validation of DSGE Models By Forni, Mario; Gambetti, Luca; Sala, Luca
  12. Endogenous Procyclicality of Labor Productivity, Employment, Real Wages and Effort in Conditionally Heteroskedastic Sunspots Unemployment Business Cycles with Negishi-Solow Efficiency Wages By Jean-Michel Grandmont
  13. International Business Cycles and Risk Sharing with Uncertainty Shocks and Recursive Preferences By Robert Kollmann
  14. Innovation, Growth and Optimal Monetary Policy By Barbara Annicchiarico; Alessandra Pelloni
  15. Optimal Disability Insurance and Unemployment Insurance With Cyclical Fluctuations By Hsuan-Chih (Luke) Lin
  16. Animal Spirits in a Monetary Model By Farmer, Roger E A; Platonov, Konstantin
  17. Investment-specific shocks, business cycles, and asset prices By Curatola, Giuliano; Donadelli, Michael; Grüning, Patrick; Meinerding, Christoph
  18. The Theory of Unconventional Monetary Policy By Roger Farmer; Pawel Zabczyk
  19. On the Optimal Inflation Rate By Markus K. Brunnermeier; Yuliy Sannikov
  20. Search and matching frictions and business cycle fluctuations in Bulgaria: Technical Appendix By Vasilev, Aleksandar
  21. Securitization and Aggregate Investment Efficiency By Afrasiab Mirza; Eric Stephens
  22. Neoclassical Models in Macroeconomics By Gary D. Hansen; Lee E. Ohanian
  23. Aging, international capital flows and long-run convergence By Frederic Ganon; Gilles Le Garrec; Vincent Touzé
  24. The Theory of Unconventional Monetary Policy By Roger Farmer; Pawel Zabczyk
  25. The Theory of Unconventional Monetary Policy By Farmer, Roger E A; Zabczyk, Pawel
  26. Existence and uniqueness of solutions to dynamic models with occasionally binding constraints. By Holden, Thomas
  27. Smart-Dating in Speed-Dating: How a Simple Search Model Can Explain Matching Decisions By Lucas Herrenbrueck; Xiaoyu Xia; Paul Eastwick; Eli Finkel; Chin Ming Hui
  28. Labor Markets in Heterogenous Sectors By Sergio A. Lago Alves
  29. Numerical approximation of a cash-constrained firm value with investment opportunities By Erwan Pierre; St\'ephane Villeneuve; Xavier Warin
  30. Banking Limits on Foreign Holdings: Disentangling the Portfolio Balance Channel By Pamela Cardozo; Fredy Gamboa; David Perez-Reyna; Mauricio Villamizar-Villegas

  1. By: Kim, Minseong
    Abstract: This paper explores how accounting consistency affects DSGE models. As many DSGE models descended from real business cycle models, I explore a simple labor-only RBC model with an exogenous external sector introduced. The conclusion reached in this paper is that once an external sector is introduced, DSGE models may suffer from accounting inconsistency, unless disequilibrium or some non-orthodox theory of price level, real monetary supply or bonds is accepted.
    Keywords: accounting consistency, DSGE, external sector, fiscal deficit
    JEL: B41 E13 E62 F41
    Date: 2016–03–29
  2. By: Robert Kollmann
    Abstract: This paper discusses a tractable approach for computing the likelihood function of non-linear Dynamic Stochastic General Equilibrium (DSGE) models that are solved using second- and third order accurate approximations. By contrast to particle filters, no stochastic simulations are needed for the method here. The method here is, hence, much faster and it is thus suitable for the estimation of medium-scale models. The method assumes that the number of exogenous innovations equals the number of observables. Given an assumed vector of initial states, the exogenous innovations can thus recursively be inferred from the observables. This easily allows to compute the likelihood function. Initial states and model parameters are estimated by maximizing the likelihood function. Numerical examples suggest that the method provides reliable estimates of model parameters and of latent state variables, even for highly non-linear economies with big shocks.
    Keywords: likelihood-based estimation of non-linear DSGE models; higher-order approximations; pruning; latent state variables
    JEL: C63 C68 E37
    Date: 2016–03
  3. By: Alisdair McKay; Emi Nakamura; Jón Steinsson
    Abstract: We present a simple model with unemployment risk and borrowing constraints which yields a "discounted Euler equation." This feature of the model mutes the extent to which news about far future real interest rates (i.e., forward guidance) affects current outcomes. We show that this simple model approximates the outcomes of a rich model with uninsurable income risk and borrowing constraints in response to a forward guidance shock. The model is simple enough to be easily incorporated into standard DSGE models. We illustrate this with an application to the zero lower bound.
    JEL: E21 E40 E50
    Date: 2016–03
  4. By: Bharat Diwakar; Gilad Sorek
    Abstract: This study shows how the two alternative saving motives, life-cycle consumption smoothing and parental bequests, determine the relation between population growth and R&D-based economic growth, i.e. the sign of the "weak scale-effect". We take a textbook R&D-based growth model of infinitely living agents with no weak-scale effect, and analyze it in an Overlapping Generations framework - with and without bequest saving-motive. We show how the different saving motives determine the relation between population growth and per-capita income growth, which proves to be ambiguous in general, and may also be non-monotonic. Hence, we conclude that the counterfactual weak-scale effect that is present in the second and third generations of R&D-based growth models of infinitely-living agents depends on their specific demographic structure, and thus is not inherent to R&D-based growth theory itself.
    Keywords: R&D-based Growth, Weak Scale Effect, Overlapping Generations
    JEL: O31 O40
    Date: 2016–03
  5. By: Jakub Mateju; Michal Kejak
    Abstract: This paper suggests that the dynamics of the non-fundamental component of asset prices are one of the drivers of the credit cycle. The presented model builds on the financial accelerator literature by including a stock market where investors with limited liability trade stocks of productive firms with stochastic productivities. Investors borrow funds from the banking sector and can go bankrupt. Their limited liability induces a moral hazard problem which shifts demand for risk and drives prices of risky assets above their fundamental value. Embedding the contracting problem in a New Keynesian general equilibrium framework, the model shows that expansionary monetary policy induces loose credit conditions and leads to a rise in both the fundamental and non-fundamental components of stock prices. A positive shock to the non-fundamental component triggers a credit cycle: collateral value rises, and lending and default rates decrease. These effects reverse after several quarters, inducing a credit crunch. The credit boom lasts only while stock market growth maintains sufficient momentum. However, monetary policy does not reduce the volatility of inflation and the output gap by reacting to asset prices.
    Keywords: Credit cycle, limited liability, monetary policy, non-fundamental asset pricing
    JEL: E32 E44 E52 G10
    Date: 2015–12
  6. By: Arnaud Cheron (IGDR - Institut de Génétique et Développement de Rennes - UR1 - Université de Rennes 1 - Biosit - Structure Fédérative de Recherche en Biologie-Santé de Rennes - UR1 - Université de Rennes 1 - INSERM - INSERM - CNRS - Centre National de la Recherche Scientifique - CNRS - Centre National de la Recherche Scientifique); Anthony Terriau (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Université du Maine)
    Abstract: This paper examines life cycle vocational training investments in the context of a model with search frictions. We emphasize that related externalities are agedependent, and this can require an hump-shaped subsidy rate of training costs to restore social efficiency. These results are illustrated using a calibration on the french economy
    Keywords: life cycle, search frictions, vocational training
    Date: 2015–11
  7. By: Carlos Viana de Carvalho (Department of Economics PUC-Rio); Andrea Ferrero (University of Oxford); Fernanda Necchio (FRB San Francisco)
    Abstract: The demographic transition can affect the equilibrium real interest rate through three channels. An increase in longevity - or expectations thereof - puts downward pressure on the real interest rate, as agents build up their savings in anticipation of a longer retirement period. A reduction in the population growth rate has two counteracting effects. On the one hand, capital per-worker rises, thus inducing lower real interest rates through a reduction in the marginal product of capital. On the other hand, the decline in population growth eventually leads to a higher dependency ratio (the fraction of retirees to workers). Because retirees save less than workers, this compositional effect lowers the aggregate savings rate and pushes real rates up. We calibrate a tractable life-cycle model to capture salient features of the demographic transition in developed economies, and find that its overall effect is a reduction of the equilibrium interest rate by at least one and a half percentage points between 1990 and 2014. Demographic trends have important implications for the conduct of monetary policy, especially in light of the zero lower bound on nominal interest rates. Other policies can offset the negative effects of the demographic transition on real rates with different degrees of success.
    Date: 2016–03
  8. By: Ferrière, Axelle (European University Institute); Karantounias, Anastasios G. (Federal Reserve Bank of Atlanta)
    Abstract: How should public debt be managed when uncertainty about the business cycle is widespread and debt levels are high, as in the aftermath of the last financial crisis? This paper analyzes optimal fiscal policy with ambiguity aversion and endogenous government spending. We show that, without ambiguity, optimal surplus-to-output ratios are acyclical and that there is no rationale for either reduction or further accumulation of public debt. In contrast, ambiguity about the cycle can generate optimal policies that resemble "austerity" measures. Optimal policy prescribes front-loaded fiscal consolidations and convergence to a balanced primary budget in the long run. This is the case when interest rates are sufficiently responsive to cyclical shocks; that is, when the intertemporal elasticity of substitution is sufficiently low.
    Keywords: endogenous government expenditures; distortionary taxes; balanced budget; austerity; fiscal consolidation; martingale; ambiguity aversion; multiplier preferences
    JEL: D80 E62 H21 H63
    Date: 2016–03–01
  9. By: Brant Abbott (Institute for Fiscal Studies); Giovanni Gallipoli (Institute for Fiscal Studies and University of British Columbia); Costas Meghir (Institute for Fiscal Studies and Yale University); Gianluca Violante (Institute for Fiscal Studies)
    Abstract: This paper examines the equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Driven by both altruism and paternalism, parents make inter vivos transfers to their children. Both cognitive and non-cognitive skills determine the non-pecuniary cost of schooling. Labor supply during college, government grants and loans, as well as private loans, complement parental resources as means of funding college education. We find that the current financial aid system in the U.S. improves welfare, and removing it would reduce GDP by 4-5 percentage points in the long-run. Further expansions of government-sponsored loan limits or grants would have no salient aggregate effects because of substantial crowding-out: every additional dollar of government grants crowds out 30 cents of parental transfers plus an equivalent amount through a reduction in student’s labor supply. However, a small group of high-ability children from poor families, especially girls, would greatly benefit from more generous federal aid.
    Keywords: Education, Financial Aid, Intergenerational Transfers, Altruism, Paternalism, Credit Constraints, Equilibrium.
    JEL: E24 I22 J23 J24
    Date: 2016–03
  10. By: Rahul Anand; Purva Khera
    Abstract: This paper investigates the implications of lowering formal regulations in labor and product markets on informality and macroeconomic outcomes in India. We estimate a DSGE model with an informal sector, and rigidities in the formal labor and product markets. Along with increasing GDP and employment, deregulation also leads to lower informality and greater product market competition. Slow reallocation of resources between the formal and informal sectors leads to some adverse impacts in the short run that can be minimized by implementing a combined package of reforms. These impacts are shown to be greater in an economy with a larger informal sector.
    Keywords: Labor market reforms;India;Labor markets;Products;Unemployment;Informal sector;Hiring;Labor market regulations;structural reforms, product market deregulation, labor market deregulation, unemployment, wage bargaining, informality, DSGE, Indian economy, Bayesian estimation
    Date: 2016–03–02
  11. By: Forni, Mario; Gambetti, Luca; Sala, Luca
    Abstract: A shock of interest can be recovered, either exactly or with a good approximation, by means of standard VAR techniques even when the structural MA representation is non- invertible. We propose a measure of how informative a VAR model is for a specific shock of interest. We show how to use such a measure for the validation of shocks' transmission mechanism of DSGE models through VARs. In an application, we validate a theory of news shocks. The theory does fairly well for all variables, but understates the long-run effects of technology news on TFP.
    Date: 2016–03
  12. By: Jean-Michel Grandmont (CREST (EXCESS, UMR CNRS 9194), Paris)
    Abstract: This work introduces a new mechanism that is able to generate procyclical comovements of aggregate labor productivity, employment and real wages, through endogenous variations of workers’ effort, in a simple model involving structural unemployment, efficiency wages, financial market imperfections and expectations driven conditionally heteroskedastic sunspots business cycles, near a locally indeterminate steady state. Owing to imperfect effort monitoring, workers’ effort level equates their disutility of effort to their expected utility gain of not shirking, in terms of their earned real income, and of the resulting anticipated random consumption. A positive current (consumption) sunspot shock generates a countercyclical uncertainty shock, i.e. a drecrease of the anticipated sunspot volatility, and makes risk averse workers more willing to provide ”precautionary effort” by increasing their expected utility gain of not shirking. If workers’ relative prudence is small and decreasing fast near the steady state, profit maximizing firms’ choice of efficiency wage contracts generates significant endogenous procyclical variations of effort and employment, in particular when the capital-efficient labor elasticity of substitution is smaller than 1.
    Keywords: efficiency wages, unemployment, expectation driven business cycles, conditionally heteroskedastic sunspots, countercyclical uncertainty shocks, prudence, procyclical labor effort and productivity
    JEL: E00 E24 E32 J41
    Date: 2016
  13. By: Robert Kollmann
    Abstract: This paper analyzes the effects of output volatility shocks on the dynamics of consumption, trade flows and the real exchange rate, in a two-country, two-good world with consumption home bias, recursive preferences, and complete financial markets. When the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity, then an exogenous rise in a country’s output volatility triggers a wealth transfer to that country, to compensate for the greater riskiness of the country’s output stream. This risk sharing transfer raises the country’s consumption, lowers its trade balance and appreciates its real exchange rate. In the recursive preferences framework here, volatility shocks account for a non-negligible share of the fluctuations of net exports, net foreign assets and the real exchange rate. These shocks help to explain the high empirical volatility of the real exchange rate and the disconnect between relative consumption and the real exchange rate.
    Keywords: international business cycles; international risk sharing; external balance; exchange rate; volatility; consumption-real exchange rate anomaly
    JEL: F31 F32 F36 F41 F43
    Date: 2016–03
  14. By: Barbara Annicchiarico (DEF, University of Rome "Tor Vergata"); Alessandra Pelloni (DEF, Università di Roma "Tor Vergata")
    Abstract: This paper studies the effects of several tax reforms in an economy in which taxes are partially evaded by means of undeclared work. To this purpose, we consider a two-sector dynamic general equilibrium model calibrated to Italy which explicitly accounts for underground production. We construct various tax reform scenarios, such as deductibility of labor costs from business tax, ex-ante budget-neutral tax shifts from direct to indirect taxes, and various tax cuts financed by decreases of government spending. We find the following results. First, neglecting the existence of the underground sector may lead to severely miscalculate the macroeconomic impact effects of tax reforms, especially in the short run, where policy interventions produce direct and indirect effects on the markup. Second, partial deductibility of labor costs from the business tax base proves to be highly expansionary and highly detrimental to the size of the underground sector. Third, the dimension of the underground sector is permanently and considerably reduced by changes in the tax mix that diminish the labor tax wedge. Finally, all the considered tax reforms take the public-debt-to-output ratio toward a prolonged downward path.
    Keywords: Endogenous Growth, R&D, Optimal Monetary Policy, Ramsey Problem
    JEL: E32 E52 O42
    Date: 2016–04–01
  15. By: Hsuan-Chih (Luke) Lin (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: This paper studies the optimal joint design of disability insurance and unemployment insurance in an environment with moral hazard, when an individual’s health status is private information, taking into account cyclical fluctuations. I first show how disability benefits and unemployment benefits vary with aggregate economic conditions in an optimal contract that resolves this information problem. I then consider a calibrated version of the model and study the quantitative implications of changing from the current system to the optimal one. Last, in a special case, I demonstrate that the optimal joint insurance system can be implemented using a relatively simple model: by allowing workers to save or borrow using a bond and by providing flow payments and lump-sum transfers/payments, where the interest rates and the amounts paid/transferred depend on the employment or health status of the agent and the state of the economy. In the optimal system, disability benefits are designed such that the system punishes workers who stay unemployed for a long time, reducing the unemployment rate by roughly 40 percent and incurring substantial cost savings from resolving incentive problems. Using the model to implement the optimal system, I am able to analyze in details the driving forces behind the differences between the current system and the optimal system Under the optimal joint design of these insurance programs, disability insurance serves as an additional tool for the government to provide incentives for the job search. Reductions in unemployment rates and substantial cost savings can be achieved if the optimal system is adopted.
    Date: 2016–03
  16. By: Farmer, Roger E A; Platonov, Konstantin
    Abstract: We integrate Keynesian economics with general equilibrium theory in a new way. Our approach differs from the prevailing New Keynesian paradigm in two ways. First, our model displays steady state indeterminacy. This feature allows us to explain persistent unemployment which we model as movements among the steady state equilibria of our model. Second, our model displays dynamic indeterminacy. This feature allows us to explain the real effects of nominal shocks by selecting a dynamic equilibrium where prices are slow to respond to unanticipated money supply disturbances. Price rigidity arises as part of a rational expectations equilibrium in which the equilibrium is selected by beliefs. To close our model, we introduce a new fundamental that we refer to as the belief function.
    Keywords: animal spirits; belief function; Keynesian economics; Unemployment
    JEL: E12 E3 E4
    Date: 2016–03
  17. By: Curatola, Giuliano; Donadelli, Michael; Grüning, Patrick; Meinerding, Christoph
    Abstract: We introduce long-run investment productivity risk in a two-sector production economy to explain the joint behavior of macroeconomic quantities and asset prices. Long-run productivity risk in both sectors, for which we provide economic and empirical justification, acts as a substitute for shocks to the marginal efficiency of investments in explaining the equity premium and the stock return volatility differential between the consumption and the investment sector. Moreover, adding moderate wage rigidities allows the model to reproduce the empirically observed positive co-movement between consumption and investment growth.
    Keywords: general equilibrium asset pricing,production economy,long-run risk,investment-specific shocks,nominal rigidities
    JEL: E32 G12
    Date: 2016
  18. By: Roger Farmer (Department of Economics University of California-Los Angeles (UCLA)); Pawel Zabczyk (Bank of England; CCBS; Centre for Macroeconomics (CFM))
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    Date: 2016–03
  19. By: Markus K. Brunnermeier; Yuliy Sannikov
    Abstract: In our incomplete markets economy financial frictions affect the optimal inflation target. Households choose portfolios consisting of risky (uninsurable) capital and money. Money is a bubbly store of value. The market outcome is constrained Pareto inefficient due to a pecuniary externality. Each individual agent takes the real interest rate as given, while in the aggregate it is driven by the economic growth rate, which in turn depends on individual portfolio decisions. Higher inflation due to higher money growth lowers the real interest rate (on money) and tilts the portfolio choice towards physical capital investment. The optimal inflation target boosts growth and welfare and is higher for emerging market economies.
    JEL: E44 E51 E52
    Date: 2016–03
  20. By: Vasilev, Aleksandar
    Keywords: general equilibrium,unemployment and wages
    JEL: D51 E24
    Date: 2016–02–22
  21. By: Afrasiab Mirza (Birmingham Business School, University of Birmingham); Eric Stephens (Department of Economics, Carleton University)
    Abstract: This paper studies the welfare properties of competitive equilibria in an economy with incomplete markets subject to idiosyncratic and aggregate shocks. We focus on the role of securitization, whereby borrowers can reduce idiosyncratic asset risk, which enables increased leverage and investment. In the absence of frictions in the securitization process, we show that the ability to securitize assets completes markets. When there are frictions in the market for securitized assets, requiring originators to hold some skin-in-the-game, markets remain incomplete and risk-sharing is limited. In this case, fire-sales are required to repay debt and finance new investments when the economy is hit by a negative shock. Moreover, the equilibrium may be constrained inefficient due to the existence of a pecuniary externality that can result in over or under-investment. In the over-investment case, the imposition of a leverage restriction generates a Pareto improvement by raising prices in the event of a fire-sale. Forcing originators to hold additional skin-in-the-game can also increase prices in a fire-sale, however such a policy is shown to reduce welfare.
    Keywords: Securitization, pecuniary externalities, collateral constraints, financial frictions, macroprudential regulation, fire-sales, incomplete markets
    JEL: D52 D53 E44 G18 G23
    Date: 2016–03–25
  22. By: Gary D. Hansen; Lee E. Ohanian
    Abstract: This chapter develops a toolkit of neoclassical macroeconomic models, and applies these models to the U.S. economy from 1929 through 2014. We first filter macroeconomic time series into business cycle and long-run components, and show that the long-run component is typically much larger than the business cycle component. We argue that this empirical feature is naturally addressed within neoclassical models with long-run changes in technologies and government policies. We construct two classes of models that we compare to raw data, and also to the filtered data: simple neoclassical models, which feature standard preferences and technologies, rational expectations, and a unique, Pareto-optimal equilibrium, and extended neoclassical models, which build in government policies and market imperfections. We focus on models with multiple sources of technological change, and models with distortions arising from regulatory, labor, and fiscal policies. The models account for much of the relatively stable postwar U.S. economy, and also for the Great Depression and World War II. The models presented in this chapter can be extended and applied more broadly to other settings. We close by identifying several avenues for future research in neoclassical macroeconomics.
    JEL: E13 E2 E6
    Date: 2016–03
  23. By: Frederic Ganon (University of Le Havre - EDEHN); Gilles Le Garrec (OFCE Sciences PO); Vincent Touzé (OFCE, Sciences Po)
    Abstract: This paper analyses how the economic, demographic and institutional differences between two regions -one developed and called the North, the other emerging and called the South- drive the international capital flows and explain the world economic equilibrium. To this end, we develop a simple two-period OLG model. We compare closed-economy and open-economy equilibria. We consider that openness facilitates convergence of South’s characteristics towards North’s. We examine successively the consequences of a technological catching-up, a demographic transition and an institutional convergence of pension schemes. We determine the analytical solution of the dynamics of the world interest rate and deduce the evolution of the current accounts. These analytical results are completed by numerical simulations. They show that the technological catching-up alone leads to a welfare loss for the North in reason of capital flows towards the South. If we add to this first change a demographic transition, the capital demand is reduced in the South whereas its saving increases in reason of a higher life expectancy. These two effects contribute to reduce the capital flows from the North to the South. Finally, an institutional convergence of the two pension schemes reduces the South’s saving rate which increases the capital flow from the North to the South.
    Keywords: International Capital flows, OLG, Economic convergence, demographic transition
    JEL: D91 F40 J10 O33
    Date: 2016–03
  24. By: Roger Farmer; Pawel Zabczyk
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    JEL: E02 E6 G11 G21
    Date: 2016–03
  25. By: Farmer, Roger E A; Zabczyk, Pawel
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    Keywords: Qualitative Easing; Sunspots; Unconventional Monetary Policy
    JEL: E02 E6 G11 G21
    Date: 2016–03
  26. By: Holden, Thomas
    Abstract: We present the first necessary and sufficient conditions for there to be a unique perfect-foresight solution to an otherwise linear dynamic model with occasionally binding constraints, given a fixed terminal condition. We derive further conditions on the existence of a solution in such models. These results give determinacy conditions for models with occasionally binding constraints, much as Blanchard and Kahn (1980) did for linear models. 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, even when agents believe that the central bank will eventually attain its long-run, positive inflation target. This illustrates that a credible long-run inflation target does not render the Taylor principle sufficient for determinacy in the presence of the zero lower bound. However, we show that price level targeting does restore determinacy in these situations.
    Keywords: occasionally binding constraints,zero lower bound,existence,uniqueness,price targeting,Taylor principle,linear complementarity problem
    JEL: C62 E3 E4 E5
    Date: 2016–04–04
  27. By: Lucas Herrenbrueck (Simon Fraser University); Xiaoyu Xia (Chinese University of Hong Kong); Paul Eastwick (University of Texas); Eli Finkel (Northwestern University); Chin Ming Hui (Chinese University of Hong Kong)
    Abstract: How do people in a romantic matching situation choose a potential partner? We study this question in a new model of matching under search frictions, which we estimate using data from an existing speed dating experiment. We find that attraction is mostly in the eye of the beholder and that the attraction between two potential partners has a tendency to be mutual. These results are supported by a direct measure of subjective attraction. We also simulate the estimated model, and it predicts rejection patterns, matching rates, and sorting outcomes that fit the data very well. Our results are consistent with the hypothesis that people in a romantic matching situation act strategically and have at least an implicit understanding of the nature of the frictions and of the strategic equilibrium.
    Keywords: Search and matching theory; heterogeneous preferences; decisions under uncertainty; attraction and attractiveness
    JEL: D83 J12
    Date: 2016–03–25
  28. By: Sergio A. Lago Alves
    Abstract: I expand the standard model with labor frictions and matching function, to account to the endogenous decision to either leave the labor market or migrate to a different sector, after a stochastic training period. Sectors (manufacturing and services) are asymmetric, firms are subject to price stickiness, have specific labor force, post vacancies advertisement and explore both the intensive as the extensive margin of labor. After estimating the model with 13 quarterly data from the goods and labor market, from 2003:Q1 to 2014:Q4, I show that the estimated version of this model is able to account for the heterogeneous dynamics of the labor and goods market in Brazil
    Date: 2016–03
  29. By: Erwan Pierre; St\'ephane Villeneuve; Xavier Warin
    Abstract: We consider a singular control problem with regime switching that arises in problems of optimal investment decisions of cash-constrained firms. The value function is proved to be the unique viscosity solution of the associated Hamilton-Jacobi-Bellman equation. Moreover, we give regularity properties of the value function as well as a description of the shape of the control regions. Based on these theoretical results, a numerical deterministic approximation of the related HJB variational inequality is provided. We finally show that this numerical approximation converges to the value function. This allows us to describe the investment and dividend optimal policies.
    Date: 2016–03
  30. By: Pamela Cardozo (Banco de la República de Colombia); Fredy Gamboa (Banco de la República de Colombia); David Perez-Reyna (Universidad de los Andes); Mauricio Villamizar-Villegas (Banco de la República de Colombia)
    Abstract: In this paper we analyze the effects of financial constraints on the exchange rate through the portfolio balance channel. Our contribution is twofold: First, we construct a tractable two-period general equilibrium model in which financial constraints inhibit capital flows. Hence, departures from the uncovered interest rate parity condition are used to explain the effects of sterilized foreign exchange intervention. Second, using high frequency data during 2004-2015, we use a sharp policy discontinuity within Colombian regulatory banking limits to empirically test for the portfolio balance channel. Consistent with our model's postulations, our findings suggest that the effects on the exchange rate are short-lived, and significant only when banking constraints are binding. Classification JEL:C14, C21, C31, E58, F31
    Keywords: Sterilized foreign exchange intervention, portfolio balance channel, uncovered interest rate parity, financial constraints, regression discontinuity design
    Date: 2016–03

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