nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2016‒06‒04
thirteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Limits of Central Bank Forward Guidance under Learning By Cole, Stephen J.
  2. Persistent Government Spending and Fiscal Multipliers: the Investment-Channel By Dupaigne, Martial; Fève, Patrick
  3. Present Bias, Temptation and Commitment Over the Life-Cycle: Estimating and Simulating Gul-Pesendorfer Preferences By Agnes Kovacs
  4. Matching and credit frictions in the housing market By Eerola, Essi; Määttänen, Niku
  5. Inequality and Education Choice By Tetsuo Ono; Yuki Uchida
  7. Macroeconomic Policy in DGSE and Agent-Based Models Redux: New Developments and Challenges Ahead By Giorgio Fagiolo; Andrea Roventini
  8. Dynamic Bargaining over Redistribution with Endogenous Distribution of Political Power By Saito, Yuta
  9. Fiscal Multipliers in the 21st century By Pedro brinca; Hans A. Holter; Per Krusell; Laurence Malafry
  10. Fiscal Buffers, Private Debt, and Stagnation; The Good, the Bad and the Ugly By Nicoletta Batini; Giovanni Melina; Stefania Villa
  11. Monetary policy and the current account; theory and evidence By Hjortsoe, Ida; Weale, Martin; Wieladek, Tomasz
  12. Macroeconomic Dimensions of Public-Private Partnerships By Edward F. Buffie; Michele Andreolli; Bin Grace Li; Luis-Felipe Zanna
  13. Does Easing Monetary Policy Increase Financial Instability? By Ambrogio Cesa-Bianchi; Alessandro Rebucci

  1. By: Cole, Stephen J. (Department of Economics Marquette University)
    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
  2. By: Dupaigne, Martial; Fève, Patrick
    Abstract: This paper inspects the mechanism shaping government spending multipliers in various smallscale DSGE setups with endogenous labor supply and capital accumulation. We analytically characterize the short-run investment multiplier, which in equilibrium can be either positive or negative. The investment multiplier increases with the persistence of the exogenous government spending process. The response of investment to government spending shocks strongly affects short-run multipliers on output and consumption.
    Keywords: Government Spending Multipliers, DSGE models, Capital Accumulation, Labor Supply, Market Imperfections.
    JEL: E32 E62
    Date: 2016–05
  3. By: Agnes Kovacs
    Abstract: Abstract: This paper provides a quantitative assessment of the ‘temptation preferences' of Gul and Pesendorfer (2001) for understanding consumer life-cycle choices. I first confirm the empirical relevance of these preferences. I then show that they provide rational and straightforward explanations for many life-cycle features that appear to be inconsistent with standard preferences. These include the puzzle of ‘excess sensitivity' in consumption; the ‘retirement-consumption puzzle'; the demand for commitment devices; and the slow downsizing in housing towards the end of the life-cycle.
    Keywords: life-cycle models, temptation preferences, housing; estimating Euler-Equations
    JEL: D12 D91 E21 G11 R21
    Date: 2016–05–02
  4. By: Eerola, Essi; Määttänen, Niku
    Abstract: ​We study the interaction of matching and credit frictions in the housing market. In the model, risk-averse households may save or borrow in order to smooth consumption over time and finance owner housing. Prospective sellers and buyers meet randomly and bargain over the price. We analyze how borrowing constraints influence house price determination in the presence of matching frictions. We also show that credit frictions greatly magnify the effects of matching frictions. For instance, in the presence of matching frictions, a moderate tightening of the borrowing constraint increases idiosyncratic price dispersion and the average time-on-the-market substantially.
    Keywords: housing, borrowing constraint, matching
    JEL: E21 R21 C78
    Date: 2015–10–05
  5. By: Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Graduate School of Economics, Osaka University)
    Abstract: This study presents a two-class, overlapping-generations model with human cap- ital accumulation and the choice to opt out of public education. The model demon- strates the mutual interaction between inequality and education choice and shows that the interaction leads to two, locally stable steady-state equilibria. The exis- tence of multiple stable equilibria implies a negative correlation between inequality and enrollment in public education, which is consistent with evidence from OECD countries. This study also presents a welfare analysis using data from OECD coun- tries and shows that introducing a compulsory public education system leaves the rst generation worse off, though improves welfare for future generations of the lower-class individuals. The results also suggest that the two equilibria are not Pareto-ranked.
    Keywords: Public education, opting out, inequality
    JEL: D70 H52 I24
    Date: 2016–05
    Date: 2016
  7. By: Giorgio Fagiolo (Laboratory of Economics and Management (LEM)); Andrea Roventini (Laboratory of Economics and Management (Pisa) (LEM))
    Abstract: The Great Recession seems to be a natural experiment for economic analysis, in that it has shown the inadequacy of the predominant theoretical framework | the New Neoclassical Synthesis (NNS) | grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a more fruitful research avenue should escape the strong theoretical requirements of NNS models (e.g., equilibrium, rationality, representative agent, etc.) and consider the economy as a complex evolving system, i.e. as an ecology populated by heterogeneous agents, whose far-from-equilibrium interactions continuously change the structure of the system. This is indeed the methodological core of agent-based computational economics (ACE), which is presented in this paper. We also discuss how ACE has been applied to policy analysis issues, and we provide a survey of macroeconomic policy applications ( fiscal and monetary policy, bank regulation, labor market structural reforms and climate change interventions). Finally, we conclude by discussing the methodological status of ACE, as well as the problems it raises.
    Keywords: Economic policy; New neoclassical synthesis; New keynesian models; Agent based computational economics; Agent based models; Complexity theory; Great recession; Crisis
    JEL: B41 B50 E32 E52
    Date: 2016–04
  8. By: Saito, Yuta
    Abstract: This paper investigates a dynamic capital taxation (and redistribution) problem with an endogenous political power balance. It is shown that the current redistribution, which reduces the future inequality, decreases the future needs for redistribution if the bargaining power is (at least partly) endogenized.
    Keywords: Legislative bargaining; Wealth inequality; Redistribution; Capital taxation
    JEL: E60 E62 H20 H30
    Date: 2016
  9. By: Pedro brinca (Nova School of Business and Economics, Universidade Nova de Lisboa, Portugal; Centro de Economia e Finanças, Universidade do Porto, Portugal; Robert Schuman Centre for Advanced Studies, European University Institute, Italy); Hans A. Holter (Department of Economics, University of Oslo, Norway); Per Krusell (Institute for International Economic Studies, Stockholm University, Sweden); Laurence Malafry (Department of Economics, Stockholm University, Sweden)
    Abstract: Fiscal multipliers appear to vary greatly overtime and space. Based on VARs for a large number of countries, we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers. In an attempt to account for this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of OECD economies, including the distribution of wages and wealth, social security, taxes, and government debt and study how a fiscal multiplier depends on various country characteristics. We find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also to the average wealth level in the economy. These findings together help us generate across-country pattern of multipliers that is quite similar to that in the data.
    Keywords: Fiscal multipliers, Wealth inequality, Government spending, Taxation
    JEL: E62 H21
    Date: 2015–09
  10. By: Nicoletta Batini; Giovanni Melina; Stefania Villa
    Abstract: We revisit the empirical relationship between private/public debt and output, and build a model that reproduces it. In the model, the government provides financial assistance to credit-constrained agents to mitigate deleveraging. As we observe in the data, surges in private debt are potentially more damaging for the economy than surges in public debt. The model suggests two policy implications. First, capping leverage leads to milder recessions, but also implies more muted expansions. Second, with fiscal buffers, financial assistance to credit-constrained agents helps avoid stagnation. The growth returns from intervention decline as the government approaches the fiscal limit.
    Date: 2016–05–23
  11. By: Hjortsoe, Ida (Monetary Policy Committee Unit, Bank of England); Weale, Martin (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England)
    Abstract: Does the current account improve or deteriorate following a monetary policy expansion? We examine this issue theoretically and empirically. We show that a standard open economy DSGE model predicts that the current account response to a monetary policy shock depends on the degree of economic regulation in different markets. In particular, financial (product market) liberalisation makes it more likely that the current account deteriorates (improves) following a monetary expansion. We test these theoretical predictions with a varying coefficient Bayesian panel VAR model, where the coefficients are allowed to vary as a function of the degree of financial, product and labour market regulation on data from 1976 Q1–2006 Q4 for 19 OECD countries. Our empirical results support the theory. We therefore conclude that following a monetary policy expansion, the current account is more likely to go into deficit (surplus) in countries with more liberalised financial (product) markets.
    Keywords: Balance of payments; current account; Bayesian panel VAR; economic liberalisation; monetary policy
    JEL: C11 C23 E52 F32
    Date: 2016–03–04
  12. By: Edward F. Buffie; Michele Andreolli; Bin Grace Li; Luis-Felipe Zanna
    Abstract: The voluminous literature comparing public-private partnerships (P3s) and own-investment (OI) by the public sector is dominated by contributions from microeconomic theory. This paper gives macroeconomics a voice in the debate by investigating the repercussions of P3 vs. OI in a dynamic general equilibrium model featuring private capital accumulation and involuntary unemployment with efficiency wages. Typically P3s cost more but produce higher-quality infrastructure and boast a better on-time completion record than OI; consequently, they are comparatively more effective in reducing underinvestment in private capital, underinvestment in infrastructure, unemployment and poverty. The asymmetric impact on macro externalities raises the social return in the P3 2 - 9 percentage points relative to the social return to OI, depending on whether the externalities operate singly or in combination and on whether P3 enjoys an advantage in speed of construction.
    Keywords: Public-private partnership;Infrastructure;Public sector;Welfare;Private sector;Capital accumulation;Unemployment;Econometric models;Public-private Partnerships, Unemployment, Underinvestment, Welfare.
    Date: 2016–03–24
  13. By: Ambrogio Cesa-Bianchi; Alessandro Rebucci
    Abstract: This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policy and to the role of U.S. monetary and regulatory policy in the run up to the Great Recession. There are two main results. First, real interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective second policy instrument aimed at preserving financial stability.
    JEL: E44 E52 E58 E65
    Date: 2016–05

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