|
on Dynamic General Equilibrium |
| By: | Tatiana Kirsanova; Charles Nolan; Maryam Shafiei Deh Abad |
| Abstract: | This paper studies the conditions under which a ‘modest’ financial shock can trigger a deep recession with a prolonged period of slow recovery. We suggest that two factors can generate such a profile. The first is that the economy has accumulated a moderately high level of private debt by the time the adverse shock occurs. The second factor is when monetary policy is restricted by the zero lower bound. When present, these factors can result in a sharp contraction in output followed by a slow recovery. Perhaps surprisingly, we use a standard DSGE model with financial frictions along the lines of Jermann and Quadrini (2012) to demonstrate this result and so do not need to rely on dysfunctional interbank markets. |
| Keywords: | financial frictions, credit boom, stagnation, ZLB |
| JEL: | E23 E32 E44 G01 G32 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2016_11&r=dge |
| By: | Irina Merkurieva (University of St Andrews) |
| Abstract: | This paper provides an empirical analysis of the effect of involuntary job loss on the lifetime income and labor supply of older workers. I develop and estimate a dynamic programming model of retirement and savings with costly job search and exogenous layoffs. The structural estimates from the Health and Retirement Study data show that older displaced workers lose up to one and a half years of pre-displacement earnings over the remaining lifetime. Most of this loss (80%) is due to the permanent wage penalty following displacement, while the rest is explained by search frictions. Involuntary job loss makes an average worker retire fifteen months earlier. However, workers who were approaching retirement at the onset of the Great Recession will increase their labor supply by approximately five months in response to the joint impact of changes in the value of household assets and the probabilities of losing and finding a job. |
| Keywords: | retirement, life-cycle labor supply, layoff cost, saving, cyclical unemployment |
| JEL: | J14 J26 J64 |
| Date: | 2016–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1606&r=dge |
| By: | Punnoose Jacob; Anella Munro (Reserve Bank of New Zealand) |
| 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. This paper introduces a stable funding requirement (SFR) into a small open economy DSGE model featuring a banking sector with richly-specified liabilities. We estimate the model for New Zealand, where a similar requirement was adopted in 2010, and evaluate the implications of an SFR for monetary policy trade-offs. Altering the steady-state 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 amplifes 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. |
| JEL: | E31 E32 E44 F41 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2016/04&r=dge |
| By: | Anson T. Y. Ho; Jie Zhou |
| Abstract: | Assets in tax-deferred retirement accounts (TDA) and housing are two major components of household portfolios. In this paper, we develop a life-cycle model to examine the interaction between households’ use of TDA and their housing decisions. The model generates life-cycle patterns of home ownership and the composition of net worth that are broadly consistent with the data from the Survey of Consumer Finances. We find that TDA promotes home ownership, as households take advantage of the preferential tax treatments for both TDA and home ownership. They substitute TDA assets for home equity by accumulating wealth in TDA and making smaller down payments (taking out bigger mortgages); consequently, they become homeowners earlier in their lives. On the other hand, housing-related policies, such as a minimum down payment requirement and mortgage interest deductibility, affect households’ housing decisions more than their use of TDA. |
| Keywords: | Economic models, Housing |
| JEL: | C61 D14 D91 E21 H24 R21 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:16-24&r=dge |
| By: | Marco Cozzi (University of Victoria); Giulio Fella (Queen Mary University of London) |
| Abstract: | This paper is a quantitative, equilibrium study of the insurance role of severance pay when workers face displacement risk and markets are incomplete. A key feature of our model is that, in line with an established empirical literature, job displacement entails a persistent fall in earnings upon re-employment due to the loss of tenure. The model is solved numerically and calibrated to the US economy. In contrast to previous studies that have analyzed severance payments in the absence of persistent earning losses, we find that the welfare gains from the insurance against job displacement afforded by severance pay are sizable. |
| Keywords: | Severance payments, Incomplete markets, Welfare |
| JEL: | E24 D52 D58 J65 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp795&r=dge |
| By: | Tayler, William (Lancaster University); Zilberman , Roy (Lancaster University) |
| Abstract: | We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords in alleviating the output-inflation trade-off faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of financial distress. |
| Keywords: | Basel III — macroprudential policy; bank capital; monetary policy; borrowing cost channel; welfare |
| JEL: | E32 E44 E52 E58 G28 |
| Date: | 2016–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0599&r=dge |
| By: | Roger E.A. Farmer |
| Abstract: | This paper constructs a general equilibrium model with two types of people where asset price fluctuations are caused by random shocks to the price level that reallocate consumption across generations. In this model, asset prices are volatile, and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption and financial assets across types. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset prices. |
| JEL: | E0 G12 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22228&r=dge |
| By: | Antoine Le Riche (University of Maine, Aix-Marseille University (Aix-Marseille School of Economics), GAINS, CNRS, GREQAM, EHESS & CAC); Francesco Magris (LEO, University "François Rabelais" of Tours and CAC); Antoine Parent (Sciences Po Lyon, LAET CNRS 5593) |
| Abstract: | We study a productive economy with safe government bonds and fractional cash-in-advance constraint on consumption expenditures. Government issues bonds and levies taxes to finance public expenditures, while the Central Bank follows a feedback Taylor rules by pegging the nominal interest rate. We show that when the nominal interest rate is bound to be non-negative, under active policy rules a liquidity trap steady state does emerge besides the Leeper (1991) equilibrium. The stability of the two steady states depends, in turns, upon the amplitude of the liquidity constraint. When the share of consumption to be paid cash is set lower than one half, the liquidity trap equilibrium is unstable. The stability of Leeper equilibrium too depends dramatically upon the amplitude of the liquidity constraint. Policy and Taylor rules are thus theoretically rehabilitated since their targets, by contrast with a vast literature, may be now stable. We also show that a relaxation of the liquidity constraint is Pareto-improving and that the liquidity trap equilibrium Pareto-dominates the Leeper one, in view of the zero cost of money. |
| Keywords: | Cash-in-Advance; Liquidity Trap; Monetary Policy; Multiple Equilibria. |
| JEL: | E31 E41 E43 E58 |
| Date: | 2016–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1617&r=dge |
| By: | Robert E. Hall; Andreas I. Mueller |
| Abstract: | We use a rich new body of data on the experiences of unemployed job-seekers to determine the sources of wage dispersion and to create a search model consistent with the acceptance decisions the job-seekers made. From the data and the model, we identify the distributions of four key variables: offered wages, offered non-wage job values, the value of the job-seeker's non-work alternative, and the job-seeker's personal productivity. We find that, conditional on personal productivity, the dispersion of offered wages is moderate, accounting for 21 percent of the total variation in observed offered wages, whereas the dispersion of the non-wage component of offered job values is substantially larger. We relate our findings to an influential recent paper by Hornstein, Krusell, and Violante who called attention to the tension between the fairly high dispersion of the values job-seekers assign to their job offers–which suggest a high value to sampling from multiple offers–and the fact that the job-seekers often accept the first offer they receive. |
| JEL: | J31 J32 J64 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:15119&r=dge |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22122&r=dge |
| By: | Roger E.A. Farmer; Konstantin Platonov |
| 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. |
| JEL: | E12 E3 E4 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22136&r=dge |
| By: | Ábrahám, Árpád; Laczó, Sarolta |
| Abstract: | We extend the model of risk sharing with limited commitment (Kocherlakota, 1996) by introducing both a public and a private (unobservable and/or non-contractible) storage technology. Positive public storage relaxes future participation constraints, hence it can improve risk sharing, contrary to the case where hidden income or effort is the deep friction. The characteristics of constrained-efficient allocations crucially depend on the storage technology’s return. In the long run, if the return on storage is (i) moderately high, both assets and the consumption distribution may remain time-varying; (ii) sufficiently high, assets converge almost surely to a constant and the consumption distribution is time-invariant; (iii) equal to agents’ discount rate, perfect risk sharing is self-enforcing. Agents never have an incentive to use their private storage technology, i.e., Euler inequalities are always satisfied, at the constrained-efficient allocation of our model, while this is not the case without optimal public asset accumulation. We compare the dynamics of consumption in simulated data and data from Indian villages, and find that past incomes matter in a similar way in our model with storage and the data but not in the basic limited-commitment model. |
| Keywords: | Risk Sharing, LC, Hidden Storage, Dynamic Contracts |
| JEL: | E20 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2016/06&r=dge |
| By: | Lucia Granelli (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | This paper assesses quantitatively the effect of family fiscal policies on fertility, labour supply and parental childcare using a general equilibrium model with dynastic households. The introduction of time allocation decisions in the original Barro-Becker framework allows to reconcile the conclusion of the micro-econometric literature on pro-nativist fiscal policies, where such policies have a small effect on fertility, and the theoretical macroeconomic literature, where fertility is deemed to be elastic with respect to macroeconomic shocks. The use of indirect inference for calibrating the elasticity of fertility to fiscal subsidies enables the model to reproduce what observed in US data over the period 1905-2005. |
| Date: | 2016–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2016010&r=dge |
| By: | Johnson, Christopher |
| Abstract: | Liquidity considerations are important in understanding the relationship between asset prices and monetary policy. Differences of opinion regarding the future value of an asset can affect liquidity of not only the underlying asset, but also of competing media of exchange, such as money. I consider a monetary search framework in which money and risky assets can facilitate trade, but where the asset is an opinion-sensitive medium of exchange in that traders may disagree on its future price. A pecking-order theory of payments is established between money and risky assets, which can go in either direction depending on the respective beliefs of both agents in a bilateral trade. In short, optimists prefer to use money over assets, whereas pessimists prefer to use assets over money. In contrast to a majority of the differences of opinion literature, not only do pessimists actively participate in the purchasing of assets, but in some cases their demand coincides with that of optimists. Additionally, in support of Bernanke and Gertler (2000), I find that monetary policy aimed at reducing asset price volatility need not be welfare-maximizing. Instead, the Friedman rule is welfare-maximizing. |
| Keywords: | liquidity, monetary policy, asset pricing, differences of opinion |
| JEL: | E4 E5 |
| Date: | 2016–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70951&r=dge |
| By: | Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School); Xu, Yongdeng (Cardiff Business School) |
| Abstract: | Indirect inference testing can be carried out with a variety of auxiliary models. Asymptotically these different models make no difference. However, in small samples power can differ. We explore small sample power with three different auxiliary models: a VAR, average Impulse Response Functions and Moments. The latter corresponds to the Simulated Moments Method. We find that in a small macro model there is no difference in power. But in a large complex macro model the power with Moments rises more slowly with increasing misspecification than with the other two which remain similar. |
| Keywords: | : Indirect Inference; DGSE model; Auxiliary Models; Simulated Moments Method |
| JEL: | C12 C32 C52 E1 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2016/5&r=dge |
| By: | Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young |
| Abstract: | A new theoretical literature studies the use of capital controls to prevent financial crises in models in which pecuniary externalities justify government intervention. Within the same theoretical framework, we show that when ex-post policies such as defending the exchange rate can contain or resolve financial crises, there is no need to intervene ex-ante with capital controls. On the other hand, if crises management policies entail some efficiency costs, then crises prevention policies become part of the optimal policy mix. In the standard model economy used in the literature with costly crisis management policies, the optimal policy mix combines capital controls in tranquil times with support for the real exchange rate to limit its depreciation during crises times. The optimal policy mix yields more borrowing and consumption, a lower probability of financial crisis, and twice as large welfare gains than in the socially planned equilibrium with capital controls alone. |
| JEL: | E52 F38 F41 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22224&r=dge |
| By: | Martin M. Andreasen (Aarhus University and CREATES); Kasper Jørgensen (Aarhus University and CREATES) |
| Abstract: | This paper extends the class of Epstein-Zin-Weil preferences with a new utility kernel that disentangles uncertainty about the consumption trend (long-run risk) from short-term variation around this trend (cyclical risk). Our estimation results show that these preferences enable the long-run risk model to explain asset prices with a low relative risk aversion (RRA) of 9.8 and a low intertemporal elasticity of substitution (IES) of 0:11. We also show that the proposed preferences allow an otherwise standard New Keynesian model to match the equity premium, the bond premium, and the risk-free rate puzzle with a low IES of 0:07 and a low RRA of 5. |
| Keywords: | Bond premium puzzle, Equity premium puzzle, Long-run risk, Perturbation Approximation, Risk-free rate puzzle. |
| JEL: | E44 G12 |
| Date: | 2016–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2016-16&r=dge |
| By: | Miguel Leon-Ledesma; Alessio Moro |
| Abstract: | We use a two-sector model of structural transformation and balanced growth to show that the real interest rate, measured as the return on capital in units of GDP or in units of aggregate consumption, declines as income grows. This is due to the differential TFP growth in the goods producing sector relative to the services sector. This differential drives a relative price change that triggers a steady decline in the rate of return on capital along the growth path. We calibrate the model to U.S. data to reproduce the behavior of GDP, the share of services in consumption, the relative price goods/services and the investment/output ratio in the period 1950-2015. We find that the calibrated model displays a decline of the real interest rate of 36% in terms of units of GDP and of 43% in terms of units of aggregate consumption during the period considered. |
| Keywords: | Structural transformation; productivity of capital; two-sector model |
| JEL: | E22 E24 E31 O41 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1604&r=dge |
| By: | Sultanum, Bruno (Federal Reserve Bank of Richmond) |
| Abstract: | This paper studies the interaction between financial fragility and over-the-counter markets. In the model, the financial sector is composed of a large number of investors divided into different groups, which are interpreted as financial institutions, and a large number of dealers. Financial institutions and dealers trade assets in an over-the-counter market à la Duffie et al. (2005) and Lagos and Rocheteau (2009). Investors are subject to privately observed preference shocks, and financial institutions use the balanced team mechanism, proposed by Athey and Segal (2013), to implement an efficient risk-sharing arrangement among its investors. I show that when the market is more liquid, in the sense that the searchfriction is mild, the economy is more likely to have a unique equilibrium and, therefore, is not fragile. However, when the search friction is severe, I provide examples with run equilibria—where investors announce low valuation of assets because they believe everyone else in their financial institution is doing the same. In terms of welfare, I find that, conditional on bank runs existing, the welfare impact of the search friction is ambiguous. The reason is that, during runs, trade is inefficient and, as a result, a friction that reduces trade during runs has the potential to improve welfare. This result is in sharp contrast with the existing literature which suggests that search friction has a negative impact on welfare. |
| JEL: | D82 E58 G01 G21 |
| Date: | 2016–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:16-04&r=dge |
| By: | Julio Garín; Robert Lester; Eric Sims |
| Abstract: | Increasing the inflation target in a textbook New Keynesian (NK) model may require increasing, rather than decreasing, the nominal interest rate in the short run. We refer to this positive short run co-movement between the nominal interest rate and inflation conditional on a nominal shock as Neo-Fisherianism. We show that the NK model is more likely to be Neo-Fisherian the more persistent is the change in the inflation target and the more flexible are prices. Neo-Fisherianism is driven by the forward-looking nature of the model. Modifications which make the framework less forward-looking make it less likely for the model to exhibit Neo-Fisherianism. As an example, we show that a modest and empirically realistic fraction of "rule of thumb" price-setters may altogether eliminate Neo-Fisherianism in the textbook model. |
| JEL: | E31 E43 E52 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22177&r=dge |
| By: | Farooq Akram; Andrew Binning; Junior Maih |
| Abstract: | In this paper we address the issue of assessing and communicating the joint probabilities implied by density forecasts from multivariate time series models. We focus our attention in three areas. First, we investigate a new method of producing fan charts that better communicates the uncertainty present in forecasts from multivariate time series models. Second, we suggest a new measure for assessing the plausibility of non-central point forecasts. And third, we describe how to use the density forecasts from a multivariate time series model to assess the probability of a set of future events occurring. An additional novelty of this paper is our use of a regime-switching DSGE model with an occasionally binding zero lower bound constraint, estimated on US data, to produce the density forecasts. The tools we offer will allow practitioners to better assess and communicate joint forecast probabilities, a criticism that has been leveled at central bank communications. |
| Keywords: | Monetary Policy, Fan charts, DSGE, Zero Lower Bound, Regime-switching, Bayesian Estimation |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0045&r=dge |
| By: | Jakub Steiner; Colin Stewart; Filip Matejka |
| Abstract: | We solve a general class of dynamic rational-inattention problems in which an agent repeatedly acquires costly information about an evolving state and selects actions. The solution resembles the choice rule in a dynamic logit model, but it is biased towards an optimal default rule that is independent of the realized state. The model provides the same fit to choice data as dynamic logit, but, because of the bias, yields different counterfactual predictions. We apply the general solution to the study of (i) the status quo bias; (ii) inertia in actions leading to lagged adjustments to shocks; and (iii) the tradeoff between accuracy and delay in decision-making. |
| Keywords: | Rational inattention; stochastic choice; dynamic logit; information acquisition |
| JEL: | D81 D83 D90 |
| Date: | 2016–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-559&r=dge |
| By: | Sebastian Acevedo Mejia; Aliona Cebotari; Kevin Greenidge; Geoffrey N. Keim |
| Abstract: | The paper investigates whether the macroeconomic effects of external devaluations have systematically different effects in small states, which are typically more open and less diversified than larger peers. Through several analytical approaches -- DSGE model, event study, and regression analysis -- it finds that the effects of devaluation on growth and external balances are not significantly different between small and large states, with both groups equally likely to experience expansionary or contractionary outcomes. However, the transmission channels are different: devaluations in small states are more likely to affect demand through expenditure compression, rather than expenditure-switching channels. In particular, consumption tends to fall more sharply in small states due to adverse income effects, thereby reducing import demand. Policy conclusions point to the importance of social safety nets, complementary wage and antiinflation policies, investment-boosting reforms, and attention to potential adverse balance sheet effects to ensure positive outcomes. |
| Keywords: | Foreign exchange;Small states;external devaluation, devaluations, exchange rate, devaluation, currency, consumption, Studies of Particular Policy Episodes, Economic Growth of Open Economies, All Countries, |
| Date: | 2015–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/240&r=dge |
| By: | Robert E. Hall |
| Abstract: | In modern economies, sharp increases in unemployment from major adverse shocks result in long periods of abnormal unemployment and low output. This chapter investigates the processes that account for these persistent slumps. The data are from the economy of the United States, and the discussion emphasizes the financial crisis of 2008 and the ensuing slump. The framework starts by discerning driving forces set in motion by the initial shock. These are higher discounts applied by decision makers (possibly related to a loss of confidence), withdrawal of potential workers from the labor market, diminished productivity growth, higher markups in product markets, and spending declines resulting from tighter lending standards at financial institutions. The next step is to study how driving forces influence general equilibrium, both at the time of the initial shock and later as its effects persist. Some of the effects propagate the effects of the shock---they contribute to poor performance even after the driving force itself has subsided. Depletion of the capital stock is the most important of these propagation mechanisms. I use a medium-frequency dynamic equilibrium model to gain some notions of the magnitudes of responses and propagation. |
| JEL: | E24 E32 J21 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22230&r=dge |
| By: | Tiago Berriel (Department of Economics PUC-Rio); Rodrigo Abreu (EPGE-FGV) |
| Abstract: | This paper explores the interaction between a credit crunch and the maturityof government debt, focusing on its impacts on an economy with heterogeneoushouseholds. We nd that an increase in debt maturity helps softening the economicslump that follows a credit crisis. We show that, immediately after the credit shock,there is an output drop of nearly 1% when the asset available has on average onequarter of maturity, while a contraction of only 0.6% follows when debt durationhas three quarters. The rise of asset duration indirectly enhances the income eectsunleashed by general equilibrium price dynamics, which benets bondholders andthus softens the recession. On the other hand, an increase on debt duration impairsthe improvement of wealth distribution on the long run. The main contributionthis paper paper is to show that debt maturity is a key element to understand themagnitude of a recession driven by credit and its welfare consequences. |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:644&r=dge |
| By: | Acikgoz, Omer |
| Abstract: | I prove existence of stationary recursive competitive equilibrium in Bewley economies with production under specifications in which (i) utility function is allowed to be unbounded, and (ii) the underlying discrete idiosyncratic productivity process can take any form, aside from mild restrictions. Some of the intermediate results provide theoretical basis for assumptions often made in the quantitative macroeconomics literature. By providing an example, I illustrate that equilibrium is not necessarily unique, even under typical specifications of the model, and discuss the underlying reasons for multiplicity. |
| Keywords: | Recursive Competitive Equilibrium, Bewley/Huggett/Aiyagari model, Existence, Uniqueness |
| JEL: | C62 E00 E21 |
| Date: | 2015–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71066&r=dge |
| By: | Sami Alpanda; Alexander Ueberfeldt |
| Abstract: | Should monetary policy lean against housing market booms? We approach this question using a small-scale, regime-switching New Keynesian model, where housing market crashes arrive with a logit probability that depends on the level of household debt. This crisis regime is characterized by an elevated risk premium on mortgage lending rates, and, occasionally, a binding zero lower bound on the policy rate, imposing large costs on the economy. Using our set-up, we examine the optimal level of monetary leaning, introduced as a Taylor rule response coefficient on the household debt gap. We find that the costs of leaning in regular times outweigh the benefits of a lower crisis probability. Although the decline in the crisis probability reduces volatility in the economy, this is achieved by lowering the average level of debt, which severely hurts borrowers and leads to a decline in overall welfare. |
| Keywords: | Economic models, Financial stability, Housing, Monetary policy framework |
| JEL: | E44 E52 G01 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:16-19&r=dge |
| By: | Farooq Akram (Norges Bank (Central Bank of Norway)); Andrew Binning (Norges Bank (Central Bank of Norway)); Junior Maih (BI Norwegian Business School) |
| Abstract: | In this paper we address the issue of assessing and communicating the joint probabilities implied by density forecasts from multivariate time series models. We focus our attention in three areas. First, we investigate a new method of producing fan charts that better communicates the uncertainty present in forecasts from multivariate time series models. Second, we suggest a new measure for assessing the plausibility of non-central point forecasts. And third, we describe how to use the density forecasts from a multivariate time series model to assess the probability of a set of future events occurring. An additional novelty of this paper is our use of a regime-switching DSGE model with an occasionally binding zero lower bound constraint, estimated on US data, to produce the density forecasts. The tools we off er will allow practitioners to better assess and communicate joint forecast probabilities, a criticism that has been leveled at central bank communications. |
| Keywords: | Monetary Policy, Fancharts, DSGE, Zero Lower Bound, Regime-switching, Bayesian Estimation |
| JEL: | C6 C11 C53 E1 E5 E37 |
| Date: | 2016–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2016_07&r=dge |