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on Dynamic General Equilibrium |
| By: | Drautzburg, Thorsten (Federal Reserve Bank of Philadelphia) |
| Abstract: | This version: March 28, 2016 First version: February 2014 {{p}} Structural DSGE models are used both for analyzing policy and the sources of business cycles. Conclusions based on full structural models are, however, potentially affected by misspecification. A competing method is to use partially identified VARs based on narrative shocks. This paper asks whether both approaches agree. First, I show that, theoretically, the narrative VAR approach is valid in a class of DSGE models with Taylor-type policy rules. Second, I quantify whether the two approaches also agree empirically, that is, whether DSGE model restrictions on the VARs and the narrative variables are supported by the data. To that end, I first adapt the existing methods for shock identification with external instruments for Bayesian VARs in the SUR framework. I also extend the DSGE-VAR framework to incorporate these instruments. Based on a standard DSGE model with fiscal rules, my results indicate that the DSGE model identification is at odds with the narrative information as measured by the marginal likelihood. I trace this discrepancy to differences both in impulse responses and identified historical shocks. |
| Keywords: | Fiscal policy; Monetary policy; DSGE model; Bayesian estimation; Narrative shocks; Bayesian VAR |
| JEL: | C32 E32 E52 E62 |
| Date: | 2016–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:16-11&r=dge |
| By: | Silvio Michael de Azevedo Costa |
| Abstract: | This paper builds and estimates a structural growth model with micro-founded specifications of trends and cycles to allow a consistent multivariate filtering of key macroeconomic variables. Emerging countries like Brazil show expressive trend dynamics that can blur the vectors determining real business cycles, but most models cannot consider this additional complexity, and so they usually throw out meaningful dynamics of scarce data. Our basic DSGE model cares for the raw data dynamics and aims to disentangle endogenously trends and cycles and unveil the underlying growth vectors. Thereby, historical interpretation and forecasts can hold internal consistency, which improves storytelling and calls for an in-depth forecasting. We report model evaluation summaries to support fully integrated models as a highly valuable tool for applied macro exercises and policy advising. Yet, we present an application for the measurement of potential output and the output gap |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:434&r=dge |
| By: | Zuzana Mucka (Council for Budget Responsibility) |
| Abstract: | The paper sets out a multiple-trend DSGE model designed, calibrated and estimated to match key stylized facts about the Slovak economy. The model includes a detailed fiscal policy block that allows a thorough analysis of fiscal policy measures and evaluate country’s fiscal policy credibility using interest rate spreads. The estimated model is firstly employed to identify the structural economic shocks that drive the economy and determine the sources of the forecast uncertainty. The empirical analysis emphasizes the importance of the foreign shocks on domestic GDP, trade and employment growth and high influence of productivity shocks on inflation and labour market dynamics. Next, using the model we study the response of the economy to a technology shock and to a foreign demand shock under alternative fiscal adjustment scenarios. We find that a well-designed programme involving increases in transfers as well as tax cuts can stabilize the economy in the short run and improve longer-term growth prospects following a shock with adverse fiscal implications. We analyse the consequences of fiscal policy shocks in and away from the steady state of the model. The exercise yields implied fiscal multipliers that are in line with standard literature. Raising capital and labour tax especially is particularly bad for the real economy, mainly in the long run. On the other hand, cutting subsidies and unproductive government consumption are the least harmful way of reducing spending, while reduction in the public wage bill and public investment has negative implications on household consumption and wealth. |
| Keywords: | dynamic stochastic general equilibrium model, simulations, fiscal rules, fiscal multipliers, fiscal consolidation |
| JEL: | E32 C61 C63 D58 E62 H63 H5 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:cbe:dpaper:201601&r=dge |
| By: | Victor Aguirregabiria; Arvind Magesan (University of Calgary) |
| Abstract: | This paper extends the Euler Equation (EE) representation of dynamic decision problems to a general class of discrete choice models and shows that the advantages of this approach apply not only to the estimation of structural parameters but also to the computation of a solution and to the evaluation of counterfactual experiments. We use a choice probabilities representation of the discrete decision problem to derive marginal conditions of optimality with the same features as the standard EEs in continuous decision problems. These EEs imply a Â…fixed point mapping in the space of conditional choice values, that we denote the Euler equation-value (EE-value) operator. We show that, in contrast to Euler equation operators in continuous decision models, this operator is a contraction. We present numerical examples that illustrate how solving the model by iterating in the EE-value mapping implies substantial computational savings relative to iterating in the Bellman equation (that requires a much larger number of iterations) or in the policy function (that involves a costly valuation step). We deÂ…fine a sample version of the EE-value operator and use it to construct a sequence of consistent estimators of the structural parameters, and to evaluate counterfactual experiments. The computational cost of evaluating this sample-based EE-value operator increases linearly with sample size, and provides an unbiased (in fiÂ…nite samples) and consistent estimator the counterfactual. As such there is no curse of dimensionality in the consistent estimation of the model and in the evaluation of counterfactual experiments. We illustrate the computational gains of our methods using several Monte Carlo experiments. |
| Date: | 2016–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:clg:wpaper:2016-32&r=dge |
| By: | Arbex, Marcelo (University of Windsor); O'Dea, Dennis (University of Washington); Wiczer, David (Federal Reserve Bank of St. Louis) |
| Abstract: | We introduce an irregular network structure into a model of frictional, on-the-job search in which workers find jobs through their network connections or directly from firms. We show that jobs found through network search have wages that stochastically dominate those found through direct contact. Because we consider irregular networks, heterogeneity in the worker's position within the network leads to heterogeneity in wage and employment dynamics: better connected workers climb the job ladder faster and do not fall off it as far. These workers also pass along higher quality referrals, which benefits their connections. Despite this rich heterogeneity from the network structure, the mean-field approach allows the problem of our workers to be formulated tractably and recursively. We then calibrate and study the wage and employment dynamics coming from our job ladder with network heterogeneity. This quantitative version of our mechanism is consistent with several features of empirical studies on networks and labor markets: jobs found through networks have higher wages and last longer. |
| Keywords: | Labor Markets; Social networks; Job search; Unemployment; Wages dispersion. |
| JEL: | D83 D85 E24 J31 J64 |
| Date: | 2016–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2016-009&r=dge |
| By: | Haavio, Markus; Ripatti, Antti; Takalo, Tuomas |
| Abstract: | We build a dynamic stochastic general equilibrium model, where the balance sheets of both banks and non-financial firms play a role in macro-financial linkages. We show that in equilibrium bank capital tends to be scarce, compared with firm capital. We study public funding of banks and firms in times of crisis. Government capital injections can be useful as a shock cushion, but they distort incentives. Small capital injections benefit banks more than firms but the relative benefit is declining in the injection size. Government should first recapitalize banks, and if resources are large enough, lend to firms too. |
| Keywords: | financial frictions, bank capitalization, public funding of non-financial firms |
| JEL: | E44 G21 G28 G38 |
| Date: | 2016–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_012&r=dge |
| By: | Schorfheide, Frank; Cuba-Borda, Pablo; Aruoba, S. Boragan |
| Abstract: | We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium a sunspot shock can move the economy from a regime in which inflation is close to the central bank's target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A nonlinear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s transitioned to a deflation regime. The results are somewhat sensitive to the model specification, but on balance, the answer is affirmative for Japan and negative for the U.S. |
| Keywords: | Deflation ; DSGE Models ; Japan ; Multiple Equilibria ; Nonlinear Filtering ; Nonlinear Solution Methods ; Sunspots ; U.S. ; ZLB |
| JEL: | C5 E4 E5 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1163&r=dge |
| By: | Jinyoung Kim; Jong-Wha Lee; Kwanho Shin |
| Abstract: | This paper introduces a model of gender inequality and economic growth that focuses on the determination of women's time allocation among market production, home production, child rearing, and child education. The theoretical model is based on Agenor (2016), but differs in several important dimensions. The model is calibrated using microlevel data of Asian economies, and numerous policy experiments are conducted to investigate how various aspects of gender inequality are related to the growth performance of the economy. The analysis shows that improving gender equality can contribute significantly to economic growth by changing females' time allocation and promoting accumulation of human capital. We find that if gender inequality is completely removed, aggregate income will be about 6.6% and 14.5% higher than the benchmark economy after one and two generations respectively, while corresponding per capita income will be higher by 30.6% and 71.1% in the hypothetical gender-equality economy. This is because fertility and population decrease as women participate more in the labor market. |
| Keywords: | gender inequality, economic growth, overlapping generations model, labor market, human capital accumulation |
| JEL: | E24 E60 J13 J71 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-29&r=dge |
| By: | Honkapohja, Seppo |
| Abstract: | Many central banks have lowered their interest rates close to zero in response to the crisis since 2008. In standard monetary models the zero lower bound (ZLB) constraint implies the existence of a second steady state in addition to the inflation-targeting steady state. Large scale asset purchases (APP) have been used as a tool for easing of monetary policy in the ZLB regime. I provide a theoretical discussion of these issues using a stylized general equilibrium model in a global nonlinear setting. I also review briefly the empirical literature about effects of APP’s. |
| Keywords: | adaptive learning, monetary policy, inflation targeting, zero interest rate lower bound |
| JEL: | E63 E52 E58 |
| Date: | 2015–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2015_018&r=dge |
| By: | Katerina Lisenkova; Miguel Sanchez-Martinez |
| Abstract: | This paper looks at the possible scenarios of migration policy should the UK leave the EU. The paper uses an OLG model which brings together labour market, fiscal and other macroeconomic effects in one framework. It also adds a dynamic perspective, differentiates between natives and different categories of immigrants and captures age and qualification compositional effects. The paper compares the two migration scenarios: Leave and Remain. By 2065, in the Leave scenario, aggregate GDP and GDP per person are 9% and 1% respectively lower compared to Remain scenario. Reduced migration after leaving the EU has a negative impact on the public finances, because of higher dependency ratio. This requires an increase in taxation of about £400 per person (2014 pounds) in 2065. The results are sensitive to the assumptions that change productivity of the labour force and dependency ratio. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:460&r=dge |
| By: | François Le Grand (EMLyon Business School); Xavier Ragot (OFCE) |
| Abstract: | We analyze derivative asset trading in an economy in which agents face both aggregate and uninsurable idiosyncratic risks. Insurance markets are incomplete for idiosyncratic risk and, possibly, for aggregate risk as well. However, agents can exchange insurance against aggregate risk through derivative assets such as options. We present a tractable framework, which allows us to characterize the extent of risk sharing in this environment. We show that incomplete insurance markets can explain some properties of the volume of traded derivative assets, which are difficult to explain in complete market economies. |
| Keywords: | Incomplete markets; Heterogeneous agent models; Imperfect risk sharing; Derivative assets |
| JEL: | G1 G12 E44 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/1p7ctioc2n80gp0icks5dssdsa&r=dge |
| By: | Adriano A. Rampini; S. Viswanathan |
| Abstract: | Households' insurance against shocks to income, health and other non-discretionary expenditures, and asset values (that is, household risk management) is limited, especially for poor households. We argue that a trade-off between intertemporal financing needs and insurance across states explains this basic insurance pattern. In a model with limited enforcement, we show that household risk management is increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods and collateral constraints, and durable goods price risk, under quite general conditions and, remarkably, risk aversion is sufficient and prudence is not required. In equilibrium, collateral scarcity results in a lower interest rate, reduced insurance, and increased inequality. |
| JEL: | D14 D91 E21 G22 I13 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22293&r=dge |
| By: | Urmee Khan (Department of Economics, University of California Riverside); Maxwell B Stinchcombe (UT, Austin) |
| Abstract: | Ethical social welfare functions treat generations equally and respect Pareto improvements to non-null sets of generations. There are ‘perfect’ optima for such preferences: generations facing the same circumstances choose the same actions; and all circumstances are treated as possible. If each stationary policy determines a unique long-run distribution that is independent of the starting point, then there is a recursive formulation of policies that are simultaneously optimal for all of the preferences studied here. When the ergodic distribution can depend on early events (hysteresis), the curvature of the social welfare function determines the risks that society is willing to undertake and leads to a variant of the precautionary principle. |
| Keywords: | Intergenerational equity and Pareto responsiveness; long-run optimality in Markovian decision problems |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:201608&r=dge |
| By: | Gornemann, Nils; Kuester, Keith; Nakajima, Makoto |
| Abstract: | We build a New Keynesian business-cycle model with rich household heterogeneity. A central feature is that matching frictions render labor-market risk countercyclical and endogenous to monetary policy. Our main result is that a majority of households prefer substantial stabilization of unemployment even if this means deviations from price stability. A monetary policy focused on unemployment stabilization helps \Main Street" by providing consumption insurance. It hurts \Wall Street" by reducing precautionary saving and, thus, asset prices. On the aggregate level, household heterogeneity changes the transmission of monetary policy to consumption, but hardly to GDP. Central to this result is allowing for self-insurance and aggregate investment. |
| Keywords: | Monetary Policy ; Unemployment ; Search and Matching ; Heterogeneous Agents ; General Equilibrium |
| JEL: | E12 E21 E24 E32 E52 J64 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1167&r=dge |
| By: | Stefano Bosi (EPEE - Université d'Evry); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics, IPAG Business School); Ngoc-Sang Pham (EPEE - Université d'Evry and LEM - Université de Lille 3) |
| Abstract: | This paper considers rational land and housing bubbles in an infinite-horizon general equilibrium model. Their demands rest on two different grounds: the land is an input to produce while the house may be consumed. Our work differs from the existing literature in two respects. First, dividends on both these long-lived assets are endogenous and their sequences are computed. Second, we introduce and study different concepts of bubbles, including individual and strong bubbles |
| Keywords: | infinite horizon; general equilibrium; land bubble; housing bubble |
| JEL: | C62 D51 D9 G13 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:16027&r=dge |
| By: | Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan) |
| Abstract: | This paper shows that regime-switching sunspot equilibria easily arise in a one-sector growth model with aggregate decreasing returns and arbitrarily small externalities. We construct a regime-switching sunspot equilibrium under the assumption that the utility function of consumption is linear. We also construct a stochastic optimal growth model whose optimal process turns out to be a regime-switching sunspot equilibrium of the original economy under the assumption that there is no capital externality. We illustrate our results with numerical examples. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2016-21&r=dge |