nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2016‒06‒25
twenty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Housing Market Spillovers in South Africa: Evidence from an Estimated Small Open Economy DSGE Model By Rangan Gupta; Xiaojin Sun
  2. The labor market channel of macroeconomic uncertainty By Elisa Guglielminetti
  3. No Man is an Island : the Impact of Heterogeneity and Local Interactions on Macroeconomic Dynamics By Mattia GUERINI; Mauro Napoletano; Andrea Roventini
  4. Risky Banks and Macroprudential Policy for Emerging Economies By Nuguer Victoria; Cuadra Gabriel
  5. Unemployment Fluctuations, Match Quality, and the Wage Cyclicality of New Hires By Gertler, Mark; Huckfeldt, Christopher; Trigari, Antonella
  6. Aging, Pensions, and Growth By Tetsuo Ono
  7. A Contagious Malady? Open Economy Dimensions of Secular Stagnation By Gauti B. Eggertsson; Neil R. Mehrotra; Sanjay R. Singh; Lawrence H. Summers
  8. Capital Accumulation and the Dynamics of secular stagnation By Gilles Le Garrec; Vincent Touze
  9. Trade, firm selection, and innovation: the competition channel By Giammario Impullitti; Omar Licandro
  10. Job Creation in a Multi-Sector Labor Market Model for Developing Economies By Basu, Arnab K.; Chau, Nancy; Fields, Gary S.; Kanbur, Ravi
  11. 'Growth and Welfare Effects of Macroprudential Regulation' By Pierre-Richard Agénor
  12. Testing for Non-Fundamentalness By Hamidi Sahneh, Mehdi
  13. Optimal Automatic Stabilizers By Alisdair McKay; Ricardo Reis
  14. Sovereign Risk, Bank Funding and Investors' Pessimism By Faia, Ester
  15. Credibility of History-Dependent Monetary Policies and Macroeconomic Instability By Cateau, Gino; Shukayev, Malik
  16. Trade Finance Affects Trade Dynamics By Marta Arespa; Diego Gruber
  17. What Businesses Attract Unions? Unionization over the Life-Cycle of U.S. Establishments By Emin Dinlersoz; Jeremy Greenwood; Henry Hyatt
  18. Labour Supply: the Roles of Human Capital and the Extensive Margin By Michael P. Keane; Nada Wasi
  19. The Integration of Search in Macroeconomics: Interviews with David Andolfatto, Peter Diamond and Monika Merz By Samuel Danthine; Michel De Vroey
  20. Competitive Search with Ex-post Opportunism By Pere Gomis-Porqueras; Benoit Julien; Liang Wang

  1. By: Rangan Gupta (Department of Economics, University of Pretoria); Xiaojin Sun (Department of Economics and Finance, University of Texas at El Paso)
    Abstract: This paper evaluates, for the first time, the impact of housing market spillovers on a small open economy, namely South Africa, using a small-open economy new Keynesian dynamic stochastic general equilibrium model (SOE-NKDSGE) which explicitly incorporates a housing sector. Using quarterly data covering the period of 1971:Q1-2015:Q3, we obtain the following set of results: (a) Over the business cycle, the housing preference shock and the technology shock in the consumption sector drive most of the fluctuations of real house price; (b) The spillover effects of the housing market to the boarder economy are not negligible; (c) The central bank of South Africa has actively responded to house price movements over the past 45 years; and (d) The flexible exchange rate policy has helped South Africa maintain the macroeconomic stability to a large extent.
    Keywords: Housing Market, Spillovers, Monetary Policy, Dynamic Stochastic General Equilibrium Model, South Africa
    JEL: E21 E32 E44 E52 R31
    Date: 2016–05
  2. By: Elisa Guglielminetti (Bank of Italy)
    Abstract: Uncertainty has recently become a major concern for policymakers and academics. Spikes in uncertainty are often associated with recessions and have detrimental effects on the aggregate economy. This paper analyzes the effects of uncertainty on firms' hiring and investment decisions, both empirically and theoretically. Empirically, VAR estimates show the negative effects of uncertainty on economic performance and in particular on the labor market. Counterfactual experiments highlight the significant role of hiring decisions as a transmission channel for uncertainty. The empirical findings are rationalized through a DSGE model with search and matching frictions in the labor market and stochastic volatility. The model is able to replicate the observed co-movement among consumption, investment, output and labor market outcomes generated by an uncertainty shock. Price stickiness greatly amplifies the reaction of the economy. Simulations show that monetary policy can mitigate the adverse effects of uncertainty by adopting a strong anti-inflationary policy.
    Keywords: uncertainty shocks, labor market, search, DSGE model, business cycle, survey data
    JEL: E21 E22 E23 E24 E32
    Date: 2016–06
  3. By: Mattia GUERINI (Scuola Superiore Sant'Anna); Mauro Napoletano (OFCE); Andrea Roventini (Laboratory of Economics and Management (Pisa) (LEM))
    Abstract: We develop an agent-based model in which heterogeneous firms and households interact in labor and good markets according to centralized or decentralized search and matching protocols. As the model has a deterministic backbone and a full-employment equilibrium, it can be directly compared to Dynamic Stochastic General Equilibrium (DSGE) models. We study the effects of negative productivity shocks by way of impulse-response func- tions (IRF). Simulation results show that when search and matching are centralized, the economy is always able to return to the full employment equilibrium and IRFs are similar to those generated by DSGE models. However, when search and matching are local, co- ordination failures emerge and the economy persistently deviates from full employment. Moreover, agents display persistent heterogeneity. Our results suggest that macroeco- nomic models should explicitly account for agents’ heterogeneity and direct interactions
    Keywords: Agent-based model; Local interactions; Heterogenous agents; DGSE Model
    JEL: E3 E32 E37
    Date: 2016–06
  4. By: Nuguer Victoria; Cuadra Gabriel
    Abstract: We develop a two-country DSGE model with global banks to analyze the role of cross-border banking flows on the transmission of a quality of capital shock in the United States to emerging market economies (EMEs). Banks face a moral hazard problem for borrowing from households. EME's banks might be risky: they can also be constrained to borrow from U.S. banks. A negative quality of capital shock in the United States generates a global financial crisis. EME's macroprudential policy that targets non-core liabilities makes the domestic economy resilient to the volatility of cross-border banking flows and makes EME's households better-off.
    Keywords: Global banking; emerging market economies; financial frictions; macroprudential policy.
    JEL: G28 E44 F42 G21
    Date: 2016–06
  5. By: Gertler, Mark; Huckfeldt, Christopher; Trigari, Antonella
    Abstract: Macroeconomic models often incorporate some form of wage stickiness to help account for employment fluctuations. However, a recent literature calls into question this approach, citing evidence of new hire wage cyclicality from panel data studies as evidence for contractual wage flexibility for new hires, which is the relevant margin for employment volatility. We analyze data from the SIPP and find that the wages for new hires coming from unemployment are no more cyclical than those of existing workers, suggesting wages are sticky at the relevant margin. The new hire wage cyclicality found in earlier studies instead appears to reflect cyclical average wage gains of workers making job-to-job transitions, which we interpret as evidence of procyclical match quality for new hires from employment. We then develop a quantitative general equilibrium model with sticky wages via staggered contracting, on-the-job search, and variable match quality, and show that it can account for both the panel data evidence and aggregate labor market regularities. An additional implication of the model is that a sullying effect of recessions emerges, along the lines originally suggested by Barlevy (2002).
    Date: 2016–06
  6. By: Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study presents an endogenous growth, overlapping-generations model fea- turing probabilistic voting over public pensions. The analysis shows that (i) the pension-GDP ratio increases as life expectancy increases in the presence of an an- nuity market, while it may show a hump-shaped pattern in its absence; (ii) the growth rate is higher in the presence of the annuity market than its absence, but the presence implies an intergenerational trade-off in terms of utility.
    Keywords: Economic Growth; Population Aging; Probabilistic Voting; Public Pension; Annuity Market
    JEL: D70 E24 H55
    Date: 2014–04
  7. By: Gauti B. Eggertsson; Neil R. Mehrotra; Sanjay R. Singh; Lawrence H. Summers
    Abstract: Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.
    JEL: E31 E32 E52 F33
    Date: 2016–06
  8. By: Gilles Le Garrec (OFCE); Vincent Touze (OFCE)
    Abstract: We characterize the dynamics of secular stagnation as a permanent regime switching from a full employment equilibrium to an underemployment equilibrium. In the latter, the natural interest rate is negative, and the economy is in deáation. Due to the non negativity condition imposed on policy rate, the zero lower bond (ZLB) applies which prevents targeting ináation. The secular stagnation equilibrium is achieved in a standard overlapping generations model with capital accumulation where two market imperfections are introduced: credit rationing and downward nominal wage rigidity. To Ögure out how to escape the secular stagnation trap, we study the impact of various macroeconomic policies. Raising the ináation target is only e§ective if the central bank has enough credibility. By supporting aggregate demand, Öscal policy can help the economy get out of the secular stagnation trap. However, this policy reduces the incentive to accumulate capital: there is a trade-o§ between exiting secular stagnation and depressing potential GDP. Dynamic multi- pliers are upper than one unless the Öscal stimilus is too strong. We also shed light on an asymmetry in the dynamics: recovery takes longer than falling into recession.
    Keywords: Secular stagnation; Capital accumulation; Zero lower Bound
    JEL: D91 E31 E52
    Date: 2016–06
  9. By: Giammario Impullitti; Omar Licandro
    Abstract: We study the welfare gains originating from pro-competitive effects of trade liberalization in an economy with heterogeneous firms, variable markups and endogenous growth. Variable markups arise from oligopoly trade in similar goods, and cost-reducing innovation is the engine of sustained productivity growth. Trade liberalization stiffens product market competition by reducing markups, generating tougher firm selection and increasing the aggregate productivity level. Market share reallocations triggered by selection increase firms’ incentives to innovate, thereby leading to a higher aggregate productivity growth rate. Endogenous productivity growth boosts the selection gains from trade, leading to substantial welfare improvements. A calibrated version of the model shows that growth doubles the gains from trade obtainable in models with static firm-level productivity.
    Keywords: Endogenous Growth, Heterogeneous Firms, Oligopoly, Variable Markups, Dynamic Gains from Trade.
    Date: 2016
  10. By: Basu, Arnab K. (Cornell University); Chau, Nancy (Cornell University); Fields, Gary S. (Cornell University); Kanbur, Ravi (Cornell University)
    Abstract: This paper proposes an overlapping generations multi‐sector model of the labor market for developing countries with three heterogeneities – heterogeneity within self‐employment, heterogeneity in ability, and heterogeneity in age. We revisit an iconic paradox in a class of multi‐sector labor market models in which the creation of high‐wage employment exacerbates unemployment. Our richer setting allows for generational differences in the motivations for job search to be reflected in two distinct inverted U‐shaped relationships between unemployment and high‐wage employment, one for youth and a different one for adults. In turn, the relationship between overall unemployment and high‐wage employment is shown to be non‐monotonic and multi‐peaked. The model also sheds light on the implications of increasing high‐wage employment on self‐employed workers, who make up most of the world's poor. Non‐monotonicity in unemployment notwithstanding, increasing high‐wage employment has an unambiguous positive impact on high‐paying self‐employment, and an unambiguous negative impact on free‐entry (low‐wage) self‐employment.
    Keywords: multisector labor market, overlapping generations, poverty reduction, Harris‐Todaro model
    JEL: O17 I32
    Date: 2016–05
  11. By: Pierre-Richard Agénor
    Abstract: This paper studies the growth and welfare effects of macroprudential regulation in an overlapping generations model of endogenous growth with banking and agency costs. Indivisible investment projects combine with informational imperfections to create a double moral hazard problem à la Holmström-Tirole and a role for bank monitoring. When the optimal monitoring intensity is endogenously determined, an increase in the reserve requirement rate (motivated by systemic risk considerations) has conflicting effects on investment and growth. The trade-off between ensuring financial stability and promoting economic growth can be internalized by choosing the reserve requirement rate that maximizes growth and welfare. However, the risk of disintermediation means that financial supervision may also need to be strengthened, and the perimeter of regulation broadened, if the optimal required reserve ratio is too high.
    Date: 2016
  12. By: Hamidi Sahneh, Mehdi
    Abstract: Non-fundamentalness arises when observed variables do not contain enough information to recover structural shocks. This paper propose a new test to empirically detect non-fundamentalness, which is robust to the conditional heteroskedasticity of unknown form, does not need information outside of the specified model and could be accomplished with a standard F-test. A Monte Carlo study based on a DSGE model is conducted to examine the finite sample performance of the test. I apply the proposed test to the U.S. quarterly data to identify the dynamic effects of supply and demand disturbances on real GNP and unemployment.
    Keywords: Non-Fundamentalness; Invertibility; Vector Autoregressive.
    JEL: C32 C5 E3
    Date: 2016–06–01
  13. By: Alisdair McKay; Ricardo Reis
    Abstract: Should the generosity of unemployment benefits and the progressivity of income taxes depend on the presence of business cycles? This paper proposes a tractable model where there is a role for social insurance against uninsurable shocks to income and unemployment, as well as inefficient business cycles driven by aggregate shocks through matching frictions and nominal rigidities. We derive an augmented Baily-Chetty formula showing that the optimal generosity and progressivity depend on a macroeconomic stabilization term. Using a series of analytical examples, we show that this term typically pushes for an increase in generosity and progressivity as long as slack is more responsive to social programs in recessions. A calibration to the U.S. economy shows that taking concerns for macroeconomic stabilization into account raises the optimal unemployment benefits replacement rate by 13 percentage points but has a negligible impact on the optimal progressivity of the income tax. More generally, the role of social insurance programs as automatic stabilizers affects their optimal design.
    JEL: E62 H21 H30
    Date: 2016–06
  14. By: Faia, Ester
    Abstract: Data show that sovereign risk reduces liquidity, increases funding cost and risk of banks highly exposed to it. A feedback loop exists between sovereign and bank risk. I build a model that rationalizes those links. Banks act as delegated monitors and invest in risky projects and in risky sovereign bonds. As investors hear rumors of increased sovereign risk, they run the bank (via global games). Banks could rollover liquidity in repo market using government bonds as collateral, but as sovereign risk raises collateral values shrink. Overall banks' liquidity falls (its cost increases) and so does banks' credit. In this context noisy news (announcements with signal extraction) of consolidation policy are recessionary in the short run, as they contribute to investors and banks pessimism, and mildly expansionary in the medium run. The banks liquidity channel plays a major role in the fiscal transmission.
    Keywords: banks' funding costs; feedback loops; liquidity risk; repo freezes.; sovereign risk
    JEL: E5 E6 G3
    Date: 2016–06
  15. By: Cateau, Gino (Bank of Canada); Shukayev, Malik (University of Alberta, Department of Economics)
    Abstract: This paper evaluates the desirability of history-dependent policy frameworks when the central bank cannot perfectly commit to maintain a level target path. Specifically, we consider a central bank that seeks to implement optimal policy under commitment in a simple New Keynesian model via a price-level (or nominal GDP level) target rule. However, the central bank retains the option to reset its target path if the social cost of not doing so exceeds a certain threshold. We find that endowing the central bank with the discretion to optimally reset its target path weakens the effectiveness of the history dependent framework to stabilize the economy through expectations. The endogenous nature of credibility brings novel results relative to models where the timing of target resets is exogenous. First, the central bank needs a high degree of policy credibility to realize the stabilization benefits associated with committing to a price-level target. In our benchmark calibration, the price-level target must be expected to last for 10 years to bridge three quarters of the welfare gap between discretion and full commitment. Second, there is a possibility of multiple equilibria. Indeed, it is possible to have a high credibility equilibrium where the probability of resetting the target is small. But it is also possible to have a low credibility equilibrium where the target is reset much more frequently leading inflation and output to be permanently more volatile.
    Keywords: monetary policy commitment; price-level targeting; nominal-income targeting; multiple equilibria; policy credibility
    JEL: E31 E52
    Date: 2016–06–08
  16. By: Marta Arespa (Universitat de Barcelona); Diego Gruber (Kernel Analytics)
    Abstract: Existent literature is by no means conclusive on the effects of trade finance on trade and the economy. We propose a suitable framework to explore the linkages between international trade and finance based on an international real business cycle model where firms require external finance to import and can be financially constrained. We find that credit shocks do affect the dynamic properties of the economy and they have the potential to cause significant deviations in trade and economic performance. The trade-to-GDP ratio falls following a negative credit shock, as the shock reduces the capability of firms to purchase foreign intermediate goods, thereby reducing efficiency and production. However, it forces a demand substitution towards domestic intermediate goods that limits GDP deterioration. We also find that financially developed countries trade more, are richer and more stable in terms of GDP and consumption, consistent with the empirical evidence. Finally, the model sheds light on persistent contradictions between theoretical business-cycle and their empirical counterparts, namely, the consumption/output anomaly and the volatility of consumption, imports and terms of trade relative to GDP.
    Keywords: Trade finance, credit constraint, great trade collapse, RBC
    JEL: E3 F1 F4 G1
    Date: 2016
  17. By: Emin Dinlersoz (Center for Economic Studies, U.S. Census Bureau); Jeremy Greenwood (University of Pennsylvania); Henry Hyatt (Center for Economic Studies, U.S. Census Bureau, and IZA)
    Date: 2016–06
  18. By: Michael P. Keane (University of Oxford and University of New South Wales); Nada Wasi (University of Michigan, Survey Research Center)
    Abstract: In this paper we specify and estimate a life-cycle labour supply model that expands on earlier work by simultaneously including human capital accumulation, saving and bequests, an active extensive margin, a realistic specification of the Social Security system, an accounting for private pensions and health expenditures, and a realistic specification of the progressive tax structure. By accounting for all these features, we develop new insights into how taxes affect life-cycle labour supply. For instance, we find that labour supply elasticities vary in important ways with age, education and the tax structure itself. We also show how human capital affects elasticities on the intensive vs. extensive margins.
    Date: 2015–08–05
  19. By: Samuel Danthine (CREST-ENSAI,); Michel De Vroey (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Peter Diamond, Monika Merz, and David Andolfatto must all three be credited for having integrated a search perspective in macroeconomic theory. In a previous paper, “The Integration of Search in Macroeconomics: Two Alternative Paths”, we set ourselves the task of analyzing and comparing their respective contributions. To support our study, we conducted interviews with them. The present paper is an edited transcript of these three interviews.
    Keywords: Search and matching models, Diamond, Lucas, Andolfatto, Merz, Real Business Cycle models, Matching function, Unemployment
    JEL: B21 B40 D83 E24 J64
    Date: 2016–05–31
  20. By: Pere Gomis-Porqueras (Deakin University); Benoit Julien (UNSW Australia); Liang Wang (University of Hawaii Manoa)
    Abstract: We consider a frictional market where buyers are uncoordinated and sellers cannot commit ex-ante to either a per-unit price or quantity of a divisible good. Sellers then can exploit their local monopoly power by adjusting prices or quantities once the local demand is realized. We find that when sellers can adjust quantities ex-post, there exists a unique symmetric equilibrium where the increase in the buyer-seller ratio leads to higher quantities and prices in equilibrium. When sellers post ex-ante quantities and adjust prices ex-post, a symmetric equilibrium does not exist.
    Keywords: Competitive Search, Price Posting, Quantity Posting
    JEL: D40 L10

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