|
on Dynamic General Equilibrium |
|
Issue of 2016‒05‒08
twenty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Cole, Stephen |
| Abstract: | Central bank forward guidance emerged as a pertinent tool for monetary policymakers since the Great Recession. Nevertheless, the effects of forward guidance remain unclear. This paper investigates the effectiveness of forward guidance while relaxing two standard macroeconomic assumptions: rational expectations and frictionless financial markets. Agents forecast future macroeconomic variables via either the rational expectations hypothesis or a more plausible theory of expectations formation called adaptive learning. A standard Dynamic Stochastic General Equilibrium (DSGE) model is extended to include the financial accelerator mechanism. The results show that the addition of financial frictions amplifies the differences between rational expectations and adaptive learning to forward guidance. The macroeconomic variables are overall more responsive to forward guidance under rational expectations than under adaptive learning. During a period of economic crisis (e.g. a recession), output under rational expectations displays more favorable responses to forward guidance than under adaptive learning. These differences are exacerbated when compared to a similar analysis without financial frictions. Thus, monetary policymakers should consider the way in which expectations and credit frictions are modeled when examining the effects of forward guidance. |
| Keywords: | Forward Guidance, Monetary Policy, Adaptive Learning, Expectations, Financial Frictions |
| JEL: | D84 E30 E44 E50 E52 E58 E60 |
| Date: | 2016–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70862&r=dge |
| By: | Nikola Bokan (European Central Bank); Andrea Gerali (Bank of Italy); Sandra Gomes (Bank of Portugal); Pascal Jacquinot (European Central Bank); Massimiliano Pisani (Bank of Italy) |
| Abstract: | We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross-country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate whereas firmsuse both domestic real estate and physical capital as a collateral. These features – together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks – allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector could amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union. |
| Keywords: | Banks, DSGE models, econometric models, financial frictions, open-economy macroeconomics, policy analysis |
| JEL: | E51 E32 E44 F45 F47 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1064_16&r=dge |
| By: | Tamon Asonuma |
| Abstract: | Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign’s large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation. |
| Keywords: | Sovereign debt defaults;Real exchange rates;Exchange rate depreciation;Argentina;Debt burden;Debt service payments;External debt;Econometric models;Sovereign Defaults, External Debt, Real Exchange Rate, Currency Composition of Debt, Bond Spreads, exchange, default, exchange rate, defaults, International Lending and Debt Problems, Asset Pricing, All Countries, |
| Date: | 2016–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/37&r=dge |
| By: | Alessandro Gavazza |
| Abstract: | I estimate a search-and-bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations, asset prices and welfare, and to quantify the effects of intermediaries that facilitate trade. Using business-aircraft data, I find that, relative to the Walrasian benchmark, 18.3 percent of the assets are misallocated; prices are 19.2-percent lower; and the aggregate welfare losses equal 23.9 percent. Dealers play an important role in reducing trading frictions: In a market with no dealers, a larger fraction of assets would be misallocated, and prices would be higher. However, dealers reduce aggregate welfare because their operations are costly, and they impose a negative externality by decreasing the number of agents’ direct transactions. |
| JEL: | J1 R14 J01 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:66234&r=dge |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/228794&r=dge |
| By: | Punnoose Jacob; Anella Munro |
| Abstract: | The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. A similar regulation has been in place in New Zealand since 2010. This paper introduces the stable funding requirement (SFR) into a DSGE model featuring a banking sector with richly-specified liabilities, and estimates the model for New Zealand. We then evaluate the implications of an SFR for monetary policy trade-offs. Altering the steadystate SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifies the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth. |
| Keywords: | DSGE models, prudential policy, monetary policy, small open economy, sticky interest rates, banks, wholesale funding |
| JEL: | E31 E32 E44 F41 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-23&r=dge |
| By: | Tilak, Doshi; Fred, Joutz; Lakuma, Corti Paul; Lwanga, Musa; Baltasar, Manzano |
| Abstract: | Recent natural resource discoveries in East Africa provide an enormous opportunity for development. We focus on oil discoveries in Uganda and their expected impact on government revenues. We analyze alternative spending policies of natural resource revenues using a calibrated dynamic, stochastic, general equilibrium model (DSGE). We use detailed publicly-available information on the upstream oil sector and the fiscal regime to derive realistic cost and government revenue profiles across a range of oil price scenarios. This enables us to project annual production, fixed and variable costs, and government revenues for given global oil price paths. We compare the potential effects of income transfers versus public investment spending, as well as front-loaded versus gradual public investment policies. We also assess the impacts of alternative assumptions on the efficiency of public investment due to constraints on absorptive capacity. In terms of economic welfare, income transfers dominate public investments (whether gradual or front-loaded) given the typically low discount factors for households in low-income developing countries. Similarly, front-loaded investment policies dominate gradual investment policies given the low discount factors. However, our simulations show that as individuals care more about the future (i.e. have a lower discount rate), the welfare order of policies change, as the productivity effect of public investment produces a higher increase in consumption and welfare even though this increase is lagged in time. |
| Keywords: | Environmental Economics and Policy, Farm Management, Land Economics/Use, Research and Development/Tech Change/Emerging Technologies, |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eprcrs:234556&r=dge |
| By: | Tatsuyoshi Matsumae,Ryo Hasumi |
| Abstract: | Can fiscal stimulus improve unemployment? If so, to what extent does an increase in government spending improve unemployment? These answers are still ambiguous since opposite empirical evidences are shown (for instance, Monacelli et al. 2010, and Bruckner and Pappa 2012). This paper examines the effect of government spending on unemployment in the Japanese economy, introducing unemployment in a fashion of Gali et al. (2012) into a medium-scale DSGE model with the effect of government consumption to stimulate private consumption and the effect of government investment to improve temporarily productivity of private firms through the accumulation of public capital. Our study shows that both government consumption and investment improve unemployment and the channel of reducing unemployment is mainly attributed to the traditional effect through an increase in aggregate demand. On the other hand, the effect of government consumption to induce private consumption is small. We also find the temporal effect of government investment to the productivity of private firms raises real wage but does not have much influence on unemployment variations. It should be noted that our results might come from modeling unemployment based on the market power of workers. Finally, our results are robust whether the estimation period includes or excludes zero interest rate periods. |
| Keywords: | Fiscal Policy, Unemployment, DSGE Model JEL Classification Numbers: E6, E2, H3 |
| URL: | http://d.repec.org/n?u=RePEc:esj:esridp:329&r=dge |
| By: | Matthew Chambers (Department of Economics, Towson University); Carlos Garriga (Federal Reserve Bank of St. Louis); Don E. Schlagenhauf (Federal Reserve Bank of St. Louis) |
| Abstract: | The post-WorldWar II witnessed the largest housing boom in recent history. The objective of this paper is to develop a quantitative equilibrium model of tenure choice to analyze the key determinants in the co-movement between home ownership and house prices over the period 1940 to 1960. The parameterized model is consistent with key aggregate and distributional features observed in the 1940 U.S. economy and is capable of accounting for the observed postwar housing boom. The paper shows, both theoretically and quantitatively, that the key to explaining the co- movement is an asymmetric productivity change that favors the goods sector relative to the construction sector. Other factors such as demographics, income risk, and government policy are important determinants of the home ownership rate but have relatively small e¤ects on housing prices. |
| Keywords: | Housing Finance, first-time buyers, life-cycle. |
| JEL: | E2 E6 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2016-07&r=dge |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70356&r=dge |
| By: | Michal Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski |
| Abstract: | This paper checks how international spillovers of shocks and policies are modified when banks are foreign owned. To this end we build a two-country macroeconomic model with banking sectors that are owned by residents of one (big and foreign) country. Consistently with empirical findings, in our model foreign ownership of banks amplifies spillovers from foreign shocks. It also strenghtens the international transmission of monetary and macroprudential policies. We next use the model to replicate the financial crisis in the euro area and show how, by preventing bank capital out ow in 2009, the Polish regulatory authorities managed to reduce its contagion to Poland. We also find that under foreign bank ownership such policy is strongly prefered to a recapitalization of domestic banks. |
| Keywords: | foreign-owned banks, monetary and macroprudential policy, international spillovers, DSGE models with banking |
| JEL: | E32 E44 E58 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2016003&r=dge |
| By: | Kollmann, Robert |
| 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: | C6 E3 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70350&r=dge |
| By: | Daniel Borowcyzk-Martins; Etienne Lalé |
| Abstract: | We extend a standard incomplete-market model featuring unemployment risk by allowing for an additional risk of involuntary part-time employment. A calibration of the model consistent with U.S. institutions and labor market dynamics shows that involuntary part-time work entails lower welfare losses relative to unemployment. This finding relies critically on the premium enjoyed by part-time workers in returning to full-time work. |
| Keywords: | Involuntary part-time work, Unemployment, Welfare |
| JEL: | E21 E32 J21 |
| Date: | 2016–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:16/673&r=dge |
| By: | Pierre, Erwan; Villeneuve, Stéphane; Warin, Xavier |
| 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. |
| Keywords: | Investment, dividend policy, singular control, viscosity solution, nonlinear PDE |
| JEL: | C61 C62 G35 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:30396&r=dge |
| By: | Lagos, Ricardo (Federal Reserve Bank of Minneapolis); Zhang, Shengxing (London School of Economics) |
| Abstract: | We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence. |
| Keywords: | Asset prices; Liquidity; Monetary policy; Monetary transmission |
| JEL: | D83 E52 G12 |
| Date: | 2016–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:734&r=dge |
| By: | Bönke, Timm; Kemptner, Daniel; Lüthen, Holger |
| Abstract: | In aging societies, information on how to reform pension systems is essential to policy makers. This study scrutinizes effects of early retirement disincentives on retirement behavior, individual welfare, pensions and public budget. We employ administrative pension data and a detailed model of the German tax and social security system to estimate a structural dynamic retirement model. We find that labor market participation and retirement behavior in general are strongly influenced by the level of disincentives. Further, disincentives come at the cost of increasing inequality and individual welfare losses. Still, net public returns are more than five times as high as monetarized individual welfare losses. Our estimates also suggest that similar levels of net public returns achieved by indiscriminating pension cuts are associated with individual welfare losses that are at least twice as high. |
| Keywords: | dynamic discrete choice,retirement,tax and pension system,pension reform |
| JEL: | C61 H55 J26 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:20162&r=dge |
| By: | Alessio Moro; Solmaz Moslehi; Satoshi Tanaka |
| Abstract: | Using new home production data for the U.S., we estimate a model of structural transformation with a home production sector, allowing for both non-homotheticity of preferences and differential productivity growth in each sector. We report two main findings. First, the estimation results show that home services have a lower income elasticity than market services. Second, the slowdown in home labor productivity, started in the late 70s, is a key determinant of the rise of market services. Our counterfactual experiment shows that, without the slowdown, the share of market services would be lower by 5.8% in 2010. |
| Keywords: | Structural Change, Home Production, Services Sector |
| JEL: | E20 E21 L16 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-19&r=dge |
| By: | Fried, Stephie; Novan, Kevin; Peterman, William B. |
| Abstract: | This paper examines the non-environmental welfare effects of introducing a revenue- neutral carbon tax policy. Using a life cycle model, we find that the welfare effects of the policy differ substantially for agents who are alive when the policy is enacted compared to those who are born into the new steady state with the carbon tax in place. Consistent with previous studies, we demonstrate that, for those born in the new steady state, the welfare costs are always lower when the carbon tax revenue is used to reduce an existing distortionary tax as opposed to being returned in the form of lump-sum payments. In contrast, during the transition, we find that rebating the revenue with a lump sum transfer is less costly than using the revenue to reduce the distortionary labor tax. Additionally, we find that the tax policy is substantially more regressive over the transition than in the steady state, regardless of what is done with the revenue. Overall, our results demonstrate that estimates of the non-environmental welfare costs of carbon tax policies that are based solely on the long-run, steady state outcomes may ultimately paint too rosy of a picture. Thus, when designing climate policies, policymakers must pay careful attention to not only the long-run outcomes, but also the transitional welfare costs and regressivity of the policy. |
| Keywords: | Carbon taxation ; overlapping generations |
| JEL: | E62 H21 H23 |
| Date: | 2016–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-38&r=dge |
| By: | Givens, Gregory |
| Abstract: | This paper checks whether the coefficient estimates of a famous DSGE model are robust to macroeconomic data revisions. The effects of revisions are captured by rerunning the estimation on a real-time data set compiled using the latest time series available each quarter from 1997 through 2015. Results show that point estimates of the structural parameters are generally robust to changes in the data that have occurred over the past twenty years. By comparison, estimates of the standard errors are relatively more sensitive to revisions. The latter implies that judgements about the statistical significance of certain parameters depend on which data vintage is used for estimation. |
| Keywords: | Data Revisions, Real-Time Data, DSGE Estimation |
| JEL: | C32 C82 E32 E52 |
| Date: | 2016–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70932&r=dge |
| By: | Pedro Bento (Texas A&M University, Department of Economics) |
| Abstract: | I develop a general equilibrium model in which patent protection can increase or decrease the costs of sequential innovation, original innovation, and imitation. Depending on these relative effects, protection can in theory increase or decrease markups, imitation, innovation, growth, and aggregate productivity. I discipline the model using data from several different sources, and find that weakening protection in the U.S. would lead to no change in markups and imitation, no change in long-run growth, a more than doubling of the number of firms, and an increase in aggregate productivity of 9 percent. |
| Keywords: | patent protection, firm size, productivity, innovation, imitation, competition |
| JEL: | O1 O3 O4 |
| Date: | 2016–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:txm:wpaper:20160411-001&r=dge |
| By: | Lommerud, Kjell Erik; Straume, Odd Rune; Vagstad, Steinar |
| Abstract: | We analyse the effects of different labour market policies - employment protection, unemployment benefts and payroll taxes - on job creation and technology choices in a model where firms are randomly matched with workers of different productivity and wages are determined by ex-post bargaining. The model is characterised by two intertwined sources of inefficiency, namely a matching externality and a hold-up externality associated with workers' bargaining strength. Results depend on the relative importance of the two externalities and on worker risk aversion. "Flexicurity", meaning low employment protection and generous unemployment insurance, can be optimal if the hold-up problem is relatively important and workers greatly value income security. |
| Keywords: | Technology adoption; job creation; employment protection; unemployment in- |
| JEL: | H21 J38 J65 O31 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11192&r=dge |