nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2016‒04‒30
eighteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Life-Cycle Saving, Bequests, and the Role of Population in R&D-based Growth By Bharat Diwakar; Gilad Sorek
  2. Trade and Labor Market Dynamics By Lorenzo CALIENDO; Maximiliano DVORKIN; Fernando PARRO
  3. One EMU Fiscal Policy for the EURO By Alexandre Lucas Cole; Chiara Guerello; Guido Traficante
  4. Misallocation, Establishment Size, and Productivity By Pedro Bento; Diego Restuccia
  5. Search and matching frictions and business cycle fluctuations in Bulgaria: Technical Appendix By Vasilev, Aleksandar
  6. Optimal Trade Policy, Equilibrium Unemployment and Labor Market Inefficiency By Wisarut Suwanprasert
  7. Business cycle asymmetries and the labor market By Kohlbrecher, Britta; Merkl, Christian
  8. Real-Time Forecasting for Monetary Policy Analysis: The Case of Sveriges Riksbank By Iversen, Jens; Laséen, Stefan; Lundvall, Henrik; Söderström, Ulf
  9. On the limits of macroprudential policy By Marcin Kolasa
  10. Noisy Fiscal Policy By Fève, Patrick; Pietrunti, Mario
  11. Inflation and the growth rate of money in the long run and the short run By Díaz-Giménez, Javier; Kirkby, Robert
  12. Real and Nominal Equilibrium Yield Curves: Wage Rigidities and Permanent Shocks By Hsu, Alex; Li, Erica X. N.; Palomino, Francisco J.
  13. 地域DSGEモデルの応用可能性:家計の異質性を考慮して By Daisuke IDA; Yoichi MATSUBAYASHI
  14. Evaluation of unconventional monetary policy in a small open economy By Martin Pietrzak
  15. Incidence of Corporate Income Tax and Optimal Capital Structure: A dynamic analysis By DOI Takero
  16. Internal Migration, Structural Change, and Economic Growth By Saracoglu, Durdane Sirin; Roe, Terry L.
  17. Dynamic Debt Deleveraging and Optimal Monetary Policy By Benigno, Pierpaolo; Eggertsson, Gauti; Romei, Federica
  18. Optimal Reserves in Financially Closed Economies By Jeanne, Olivier; Sandri, Damiano

  1. 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
  2. By: Lorenzo CALIENDO; Maximiliano DVORKIN; Fernando PARRO
    Abstract: We develop a dynamic trade model where production and consumption take place in spatially distinct labor markets with varying exposure to domestic and international trade. The model recognizes the role of labor mobility frictions, goods mobility frictions, geographic factors, and input-output linkages in determining equilibrium allocations. We show how to solve the equilibrium of the model without estimating productivities, migration frictions, or trade costs, which are usually difficult to identify. We calibrate the model to 38 countries, 50 U.S. states, and 22 sectors, and use the rise in China's import competition to quantify the effects across more than 1,000 U.S. labor markets. We find that China's trade shock resulted in a loss of 800,000 U.S. manufacturing jobs, about 50% of the change in the manufacturing employment share unexplained by a secular trend. We find aggregate welfare gains, but, due to trade and migration frictions, the welfare and employment effects vary across U.S. labor markets. Estimated transition costs to the new long-run equilibrium are also heterogeneous and reflect the importance of accounting for labor dynamics.
    Date: 2016–03
  3. By: Alexandre Lucas Cole (LUISS "Guido Carli" University); Chiara Guerello (LUISS "Guido Carli" University); Guido Traficante (European University of Rome)
    Abstract: We build a Two-Country Open-Economy New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties of different degrees of fiscal policy coordination, in a setting where the union-wide monetary policy affects fiscal policies and viceversa, because of price rigidities and distortionary taxation. We calibrate the model to represent two groups of countries in the European Economic and Monetary Union and run numerical simulations of the model under a range of alternative shocks and under alternative scenarios for fiscal policy. We also compare welfare under the different scenarios, bringing to policy conclusions for the proper macroeconomic management of a Currency Union. We find that: a) coordinating fiscal policy by targeting net exports, rather than output, produces more stable dynamics, b) consolidating government budget constraints across countries and moving tax rates jointly provides greater stabilization, c) taxes on wage income are exponentially more distortionary than taxes on firm sales. Our policy prescriptions for the Eurozone are then to use fiscal policy to reduce international demand imbalances, either by stabilizing trade fl ows across countries or by creating some form of fiscal union or both, while avoiding the excessive use of labour taxes, in favour of sales taxes.
    Keywords: Fiscal Policy, International Policy Coordination, Monetary Union, New Keynesian.
    JEL: E62 E63 F42 F45 E12
    Date: 2016
  4. By: Pedro Bento; Diego Restuccia
    Abstract: We construct a new dataset using census, survey, and registry data from hundreds of sources to document a clear positive relationship between development and average establishment size in manufacturing across 134 countries. We rationalize this relationship using a standard model of heterogeneous production units that features endogenous entry and productivity investment. The model connects small operational scales to the prevalence in poor countries of higher productivity elasticities of distortions. The model also rationalizes the finding in poor countries of low establishment-level productivity and low aggregate productivity investment. The model provides a tractable framework to decompose the importance of factor misallocation, life-cycle productivity investment, and entry-level productivity in accounting for aggregate productivity differences across countries. A calibrated version of the model implies that when the productivity elasticity of distortions increases from 0.09 in the U.S. to 0.5 in India, aggregate productivity falls by 53 percent and average establishment size by 86 percent. Establishment productivity at entry and factor misallocation roughly account equally for the entire reduction in aggregate productivity, whereas the reduction in life-cycle productivity growth is fully offset by its effect on establishment entry.
    Keywords: misallocation, establishment size, productivity, investment, idiosyncratic distortions.
    JEL: O1 O4
    Date: 2016–04–06
  5. By: Vasilev, Aleksandar
    Keywords: general equilibrium,unemployment and wages
    JEL: D51 E24
    Date: 2016–02–22
  6. By: Wisarut Suwanprasert
    Abstract: Abstract Why do politicians advocate trade protections to save domestic jobs when neoclassical trade models suggest that small open economies should implement free trade? The novel insight of this paper is that trade protections can be rationalized as a second-best policy that improves the domestic welfare when the equilibrium unemployment is different from the constrain-efficient unemployment. To understand the puzzle, I incorporate a Diamond-Mortensen-Pissarides frictional labor market into the standard Heckscher-Ohlin model of international trade. The model offers four main findings. First, when the relative price of the labor (capital)-intensive good increases, equilibrium unemployment decreases (increases). Second, a labor market in a competitive equilibrium is constrained-efficient when the Hosios condition is satisfied. Third, a capital-abundant country with inefficiently high unemployment may experience welfare losses from trade. Conditional on having the same observed trade share, a labor-abundant country with inefficiently high unemployment have extra welfare gains from international trade. Finally and importantly, when the labor market in a small open economy generates inefficiently high equilibrium unemployment, the optimal trade policy is to raise the domestic price of its labor-intensive goods (an import tariff in a capital-abundant country and an export subsidy in a labor-abundant country). Free trade is optimal only when a labor market is initially efficient. The model predictions are supported by patterns of tariffs in WTO member countries.
    JEL: F11 F13 F16 F66
    Date: 2016–04–19
  7. By: Kohlbrecher, Britta; Merkl, Christian
    Abstract: This paper shows that the matching function and the Beveridge curve in the United States exhibit strong nonlinearities over the business cycle. These patterns can be replicated by enhancing a search and matching model with idiosyncratic productivity shocks for new contacts. Large negative aggregate shocks move the hiring cutoff point into a part of the idiosyncratic density function with higher density and thereby generate large, asymmetric job-finding rate and unemployment reactions. Our proposed mechanism is of high relevance as it leads to time varying effects of certain policy interventions.
    Keywords: business cycle asymmetries,matching function,Beverdige curve,job-finding rate,unemployment,effectiveness of policy
    JEL: E24 E32 J63 J64
    Date: 2016
  8. By: Iversen, Jens (Monetary Policy Department, Central Bank of Sweden); Laséen, Stefan (IMF); Lundvall, Henrik (National Institute of Economic Research (NIER)); Söderström, Ulf (Monetary Policy Department, Central Bank of Sweden)
    Abstract: We evaluate forecasts made in real time to support monetary policy decisions at Sveriges Riksbank (the central bank of Sweden) from 2007 to 2013. We compare forecasts made with a DSGE model and a BVAR model with judgemental forecasts published by the Riksbank, and we evaluate the usefulness of conditioning information for the model-based forecasts. We also study the perceived usefulness of model forecasts for central bank policymakers when producing the judgemental forecasts.
    Keywords: Real-time forecasting; Forecast evaluation; Monetary policy; Inflation targeting
    JEL: E37 E52
    Date: 2016–03–01
  9. By: Marcin Kolasa
    Abstract: This paper studies how macroprudential policy tools can complement the interest rate-based monetary policy in achieving a selection of dual stabilization objectives. We show analytically in a canonical New Keynesian model with collateral constraints that using the loan-to-value ratio as an additional policy instrument does not resolve the in flation-output volatility tradeoff. Perfect targeting of in ation and either credit or house prices with monetary and macroprudential policy is possible only if the role of credit in the economy is suciently small. Any of these three dual stabilization objectives can be achieved with the monetary-fiscal policy mix. The identifed limits to the LTV ratio-based policy are related to its predominantly intertemporal effect on decisions made by financially constrained agents.
    Keywords: macroprudential policy, monetary policy, stabilization tradeoffs
    JEL: E32 E58 E63 G21 G28
    Date: 2016–03
  10. By: Fève, Patrick; Pietrunti, Mario
    Abstract: This paper investigates the macroeconomic effects of fiscal policy in a setting in which private agents receive noisy signals about future shocks to government expenditures. We show how to empirically identify the relative weight of news and noise shocks to government spending and compute the level of noise for Canada, the UK and the US.We then investigate the quantitative implications of imperfect fiscal policy information using a medium-scale DSGE model. We find that when the government seeks to implement a persistent change in expected public spending, the existence of noise (as estimated using actual data) implies a sizable difference in fiscal multipliers compared to the perfect fiscal foresight case.
    Keywords: Government spending, Noisy Information, DSGE Models
    Date: 2016–03
  11. By: Díaz-Giménez, Javier; Kirkby, Robert
    Abstract: Between 1960 and 2013, in the United States the inflation rate was essentially proportional to the growth rate of money in the long run, but that relationship did not hold in the short run. We ask whether three standard monetary model economies from the Cash-in-Advance, the New-Keynesian, and the Search-Money frameworks replicate these two facts. We find that all three deliver the first fact, but that they fail to deliver the second fact, since in all three of them the inflation rate is proportional to the growth rate of money both in the long run and in the short run. This is because in all three model economies the price level responds too quickly to changes in the growth rate of money.
    Keywords: Monetary Economics, Quantity Theory of Money, Cash-in-Advance, New-Keynesian, Search-Money,
    Date: 2016
  12. By: Hsu, Alex; Li, Erica X. N.; Palomino, Francisco J.
    Abstract: The links between real and nominal bond risk premia and macroeconomic dynamics are explored quantitatively in a model with nominal rigidities and monetary policy. The estimated model captures macroeconomic and yield curve properties of the U.S. economy, implying significantly positive real term and inflation risk bond premia. In contrast to previous literature, both premia are positive and generated by wage rigidities as a compensation for permanent productivity shocks. Stronger policy-rule responses to inflation (output) increase (decrease) both premia, while policy surprises generate negligible risk premia. Empirical evidence of the economic mechanism is provided.
    Keywords: Term structure of interest rates ; bond risk premia ; monetary policy ; nominal rigidities
    JEL: D51 E43 E44 E52 G12
    Date: 2016–04–12
  13. By: Daisuke IDA (Asia Pacific Institute of Research); Yoichi MATSUBAYASHI (Asia Pacific Institute of Research)
    Abstract: 本稿の目的は、Okano et al. (2015)の地域版の動学的一般均衡(DSGE)モデルにGali et al. (2007)の流動性制約家計を考慮することで地域DSGEの応用可能性を探ることである。本稿の分析からは以下のことが確認された。まず、政府支出の増大は実質金利の上昇を通じて非耐久財投資を減少させるが(クラウディング・アウト効果)、一方で、政府支出増の耐久財投資増加の効果によって耐久財需要が増大する。総需要はこの両者の相対関係で決定されるが、ベンチマーク経済では、政府支出増の耐久財投資増の効果がクラウディング・アウト効果を上回るので、政府支出は総需要の拡大を促す。流動性制約家計の導入に加え、Blanchard (1985)の「視野の有限性」を考慮すると、関西と関東の住宅投資の違いを上手く説 明することができた。よって、関西と関東の住宅投資の違いをみるには、流動性家計の存 在に加えて、視野の有限性を考慮することが必要であることが示唆された。
    Keywords: DSGEモデル, 関西経済, 住宅投資, 視野の有限性
    JEL: E27 E32 O18 R13
    Date: 2015–02
  14. By: Martin Pietrzak
    Abstract: This paper shows what are the consequences of omitting international dimension issues like international trade and financial channels when modeling the effects of unconventional monetary policy tools. To evaluate the size of discrepancies between consequences of a large-scale asset purchase program in a small open economy and a closed one, we extend one of the existing models analyzing a large-scale asset purchases by adding small open economy features. Finally we compare it with the original version. We find that previous studies might overestimate the extent to what large-scale asset purchases affect real activity. Allowing agents to trade internationally with goods as well as saving via foreign, currency denominated deposits leads to a leakages that result in substantial differences between large-scale asset purchases in a small open economy and an autarky. Moreover, our results show that negative supply side shocks have less severe consequences in a small open economy comparing to an autarky, because they are offset by the real exchange rate depreciation which boosts competitiveness.
    Keywords: unconventional monetary policy, financial frictions, small open economy
    JEL: E52 F41
    Date: 2016–03
  15. By: DOI Takero
    Abstract: In this study, we analyze the incidence of corporate income tax using a dynamic general equilibrium model. The dynamic macroeconomic model enables us to analyze both the instantaneous and the intertemporal incidence of corporate income tax. We include capital structure (i.e., choices of equity, debt, and retained earnings) in the proposed model in order to implement investment. The model also includes a progressively increasing per unit agency cost on debt. We implement a simulation based on the dynamic model, and measure the incidence of corporate income tax on labor income, when the (effective) corporate income tax rate decreases from 34.62% to 29.74% in Japan. We find that the percentage of the incidence on labor income is about 20%-60%, in the short term (one year), and the percentage of the incidence on capital income is about 40%-80%. In the long term, about 90% of the incidence is on labor income. Thus, almost all of the incidence shifts to labor income in the long term. In contrast, in a neo-classical dynamic general equilibrium model, the entire incidence shifts to labor income in the long term. The difference between these results is caused by the inclusion of the agency cost on debt.
    Date: 2016–03
  16. By: Saracoglu, Durdane Sirin; Roe, Terry L.
    Abstract: Structural change or the change in the sectoral composition of output is a common component in the growth process in developing economies. Not recognized in previous models of this process is the households' choice of urban - rural residency which not only alters the demand for regionally specific goods (e.g., housing, education, health), and hence the cost of living, but also the stock of rural - urban labor and the rate of growth and structural change. We investigate the relationship between GDP growth, regional imbalances, and rural-urban migration using a neoclassical multi-region-sector growth model. The household decision for migration is dependent on the cost-of living differentials implied by the relative changes in regional home goods prices across regions as capital deepening occurs and the capital stock within each region evolves. Results show that allowing for residency choice provides a much richer explanation of the forces of structural change and growth.
    Keywords: Rural-urban migration, structural transformation, growth, residency choice, multi-sector modeling, general equilibrium, Community/Rural/Urban Development, Public Economics, O41, R13, R23, C61,
    Date: 2015
  17. By: Benigno, Pierpaolo; Eggertsson, Gauti; Romei, Federica
    Abstract: This paper studies optimal monetary policy under dynamic debt deleveraging once the zero bound is binding. Unlike much of the existing literature, the natural rate of interest is endogenous and depends on macroeconomic policy. We provide microfoundation for debt deleveraging based both on household over accumulation of debt and leverage constraint on banks; and show that they are isomorphic in our proposed post-crisis New Keynesian model, thus integrating two popular narrative for the crisis. Optimal monetary policy successfully raises the natural rate of interest by creating an environment that speeds up deleveraging, thus endogenously shortening the duration of the crisis and a binding zero bound. Inflation should be front loaded. Fiscal-policy multipliers can be even higher than in existing models, but depend on the way in which public spending is financed.
    Date: 2016–03
  18. By: Jeanne, Olivier; Sandri, Damiano
    Abstract: Financially closed economies insure themselves against current-account shocks using international reserves. We characterize the optimal management of reserves using an open-economy model of precautionary savings and emphasize several results. First, the welfare-based opportunity cost of reserves differs from the measures often used by practitioners. Second, under plausible calibrations the model is consistent with the rule of thumb that reserves should be close to three months of imports. Third, simple linear rules can capture most of the welfare gains from optimal reserve management. Fourth, policymakers should place more emphasis on how to use reserves in response to shocks than on the reserve target itself.
    Keywords: current account; Official reserves; precautionary savings
    JEL: F32 F41
    Date: 2016–03

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