|
on Dynamic General Equilibrium |
|
Issue of 2016‒07‒30
forty-five papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Ellen McGrattan (University of Minnesota) |
| Abstract: | Because firms invest heavily in R&D, software, brands, and other intangible assets—at a rate close to that of tangible assets—changes in measured GDP, which does not include all intangible investments, understate the actual changes in total output. If changes in the labor input are more precisely measured, then it is possible to observe little change in measured total factor productivity coincidentally with large changes in hours and investment. This mismeasurement leaves business cycle modelers with large and unexplained labor wedges accounting for most of aggregate fluctuations. Intangible investments are introduced in a multi-sector general equilibrium model with income and cost shares matched to data from the U.S. input and output tables, which now include some intangible investments along with final goods and services. I use MLE methods and observations on sectoral business receipts and per capita hours to estimate processes for latent sectoral TFPs--that have common and idiosyncratic components—-and a time-varying labor wedge. I find that the model’s common TFP component accounts for most of the variation in the observed series, including the downturn of 2008–2009, while the time-varying labor wedge accounts for almost none. The correlation of the model’s common TFP component and measured U.S. TFP is roughly zero. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:62&r=dge |
| By: | Eric Jondeau (University of Lausanne; Swiss Finance Institute); Michael Rockinger (University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute) |
| Abstract: | This paper investigates the ability of a fully structural macro-finance model to forecast long-term financial returns. We estimate a Dynamic Stochastic General Equilibrium (DSGE) model that describes the dynamics of the U.S. economy. The model includes government bond and stock market returns, which allows us to describe bond and stock risk premia. We first show that these risk premia are fundamentally related to other shocks in the economy. Second, the DSGE model reproduces the mean reversion in the term structure of risks for bond and stock returns. It also generates long-term forecasts of financial returns that outperform unrestricted VAR models. |
| Keywords: | DSGE model, VAR model, Financial returns, Long-term forecast |
| JEL: | C11 E44 E47 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1613&r=dge |
| By: | Yi Wen (Federal Reserve Bank of St. Louis); Xiaochuan Xing (Tsinghua University); Patrick Pintus (Banque de France) |
| Abstract: | The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates forecast booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when business-cycle movements are driven, in a significant way, by animal spirit shocks to credit-financed investment demand. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the loan has a variable-rate component. In addition, Bayesian estimation of our benchmark DSGE model on US data 1975-2010 shows that movements in investment driven by animal spirits are quantitatively important and result in a better fit to the data than both standard RBC models and Kiyotaki-Moore type models with unique equilibrium. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:293&r=dge |
| By: | Mathieu Taschereau-Dumouchel (University of Pennsylvania Wharton School); Edouard Schaal (New York University) |
| Abstract: | We introduce a standard aggregate demand externality into the Mortensen-Pissarides benchmark model of equilibrium unemployment. Because firms worry about the demand for their products, an increase in unemployment lowers the incentives to post vacancies which further increase unemployment. This positive feedback creates a coordination problem among firms and naturally leads to multiple equilibria. To handle this indeterminacy, we show that the economy features a unique equilibrium for a small departure from common knowledge. The unique equilibrium exhibits interesting dynamic properties. In particular, the influence of the mechanism on the economy grows with the size and duration of shocks, such that multiple stationary points in the dynamics of unemployment can exist. We calibrate the model to the U.S. economy and show that the aggregate demand channel generates substantial additional volatility and persistence in labor market variables. In particular, the model generates deep, long-lasting recessions. We document features of the U.S. dataWe should do the VAR exercise we did in uncertainty traps. that are consistent with the unusual dynamic properties of the model. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:232&r=dge |
| By: | Lindé, Jesper; Smets, Frank; Wouters, Rafael |
| Abstract: | In this paper we discuss a number of challenges for structural macroeconomic models in the light of the Great Recession and its aftermath. It shows that a benchmark DSGE model that shares many features with models currently used by central banks and large international institutions has difficulty explaining both the depth and the slow recovery of the Great Recession. In order to better account for these observations, the paper analyses three extensions of the benchmark model. First, we estimate the model allowing explicitly for the zero lower bound constraint on nominal interest rates. Second, we introduce time-variation in the volatility of the exogenous disturbances to account for the non-Gaussian nature of some of the shocks. Third and finally, we extend the model with a financial accelerator and allow for time-variation in the endogenous propagation of financial shocks. All three extensions require that we go beyond the linear Gaussian assumptions that are standard in most policy models. We conclude that these extensions go some way in accounting for features of the Great Recession and its aftermath, but they do not suffice to address some of the major policy challenges associated with the use of non-standard monetary policy and macroprudential policies. |
| Keywords: | and VAR models; DSGE; Financial Frictions; great recession; macroprudential policy; Monetary policy; Open economy.; Regime-Switching; zero lower bound |
| JEL: | E52 E58 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11405&r=dge |
| By: | Juergen Jung; Chung Tran; Matthew Chambers |
| Abstract: | We quantify the effects of population aging on the US healthcare system. Our analysis is based on a stochastic general equilibrium overlapping generations model of endogenous health accumulation calibrated to match pre-2010 U.S. data. We find that population aging not only leads to large increases in medical spending but also a large shift in the relative size of public vs. private insurance. Without the Affordable Care Act (ACA), aging itself leads to a 36:6 percent increase in health expenditures by 2060 and a 5 percent increase in GDP which is driven by the expansion of the healthcare sector. The group-based health insurance (GHI) market shrinks, while the individual-based health insurance (IHI) market and Medicaid expand significantly. Additional funds equivalent to roughly 4 percent of GDP are required to finance Medicare in 2060 as the elderly dependency ratio increases. The introduction of the ACA increases the fraction of insured workers to 99 percent by 2060, compared to 81 percent without the ACA. This additional increase is mainly driven by the further expansion of Medicaid and the IHI market and the stabilization of the GHI market. Interestingly, the ACA reduces aggregate health care spending by enrolling uninsured workers into Medicaid which pays lower prices for medical services. Overall, the ACA adds to the fiscal cost of population aging mainly via the Medicare and Medicaid expansion. |
| Keywords: | Population aging, calibrated general equilibrium OLG model, health expenditures, Medicare & Medicaid, Affordable Care Act 2010, Grossman model of health capital, endogenous health spending and financing. |
| JEL: | H51 I13 J11 E21 E62 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2016-641&r=dge |
| By: | Anthony Diercks (Federal Reserve Board) |
| Abstract: | In this study I examine the welfare implications of monetary policy by constructing a novel production-based asset pricing New Keynesian model. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same model calibrated to a counterfactually low equity premium implies an optimal inflation rate close to zero and inflation volatility less than 10 basis points, consistent with much of the existing literature. Relatively higher optimal inflation is due to the greater welfare costs of recessions associated with matching the equity premium. The standard optimal policy that focuses on stabilizing inflation tends to amplify long-run risk. Furthermore, the interest rate rule that comes closest to matching the dynamics of the optimal Ramsey policy puts a sizable weight on capital growth along with the price of capital, as it emphasizes reducing long-run risk. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:207&r=dge |
| By: | Moon, Weh-Sol |
| Abstract: | Macroeconomic models of the economy with rigid wage structures tend to predict unrealistically volatile labor hours and countercyclical productivity. This study extends the Cho--Cooley model by incorporating labor market frictions and efficient bargaining as an alternative contracting scheme in which contracts are forward looking and specify labor hours and wage rates. By accounting for search frictions and realistic contractual schemes, the extended model overcomes two counterfactual predictions: (1) excess volatility of employment and output and (2) countercyclical productivity. |
| Keywords: | Business Cycles, Search Frictions, Nominal Wage Contracts, Efficient Bargaining |
| JEL: | E24 E32 |
| Date: | 2016–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72666&r=dge |
| By: | Laura Alfaro (Harvard Business School) |
| Abstract: | We provide a quantitative analysis of fiscal rules in a standard model of sovereign debt accumulation and default, modified to incorporate quasi-hyperbolic preferences. Due to the aggregation of citizens’ preferences or to political economy reasons, government preferences are present biased, and results in over accumulation of debt. In a quantitative exercise calibrated to Brazil, we obtain that the welfare gains of the optimal fiscal policy are economically substantial, and that the optimal rule does not entail a countercyclical fiscal policy. We also analyze the cases of a simple debt rule limiting the maximum amount of debt and compare it to that of a simple deficit rule, which limits the maximum amount of deficit per period. Whereas the deficit rule does not perform well, the debt rule results in welfare gains virtually equal to the optimal rule. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:209&r=dge |
| By: | Philippe BACCHETTA (University of Lausanne and Swiss Finance Institute); Kenza BENHIMA (University of Lausanne and CEPR) |
| Abstract: | In this paper, we examine theoretically how corporate saving in emerging markets is contributing to global rebalancing. We consider a two-country dynamic general equilibrium model, based on Bacchetta and Benhima (2014), with a Developed and an Emerging country. Firms need to save in liquid assets to finance their production projects, especially in the Emerging country. In this context, we examine the impact of a credit crunch in the Developed country and of a growth slowdown in both countries. These three shocks imply smaller global imbalances and a positive output comovement, but have a different impact on interest rates. Contrary to common wisdom, a slowdown in the Emerging market implies a trade balance improvement in the Developed country. |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1435&r=dge |
| By: | Yasin Kursat Onder |
| Abstract: | No, at least for a rich parameter space. A common view within the class of sovereign default models is they are subject to multiple equilibria. This paper quantitatively analyzes such claims by using the model and the extensions of Eaton and Gersovitz (1981); a benchmark sovereign default model for quantitative investigation of endogenous default risks. It is shown that within the confines of a rich parameter space the issue of multiplicity never arises in the model simulations when the government debt has one-period or long-term maturity. This paper also shows that inclusion of renegotiation process for endogenous debt recovery to these models as well as inflation and non-defaultable debt along with non-state contingent defaultable debt do not generate multiplicity. This paper sharpens our understanding of such models and presents that the quantitative implications of the literature following these models are not byproduct of bad equilibrium selection. |
| Keywords: | Sovereign default, Multiple equilibria |
| JEL: | E58 D71 D78 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1610&r=dge |
| By: | Nakajima, Makoto (Federal Reserve Bank of Philadelphia) |
| Abstract: | A life-cycle model with equilibrium default in which agents with and without temptation coexist is constructed to evaluate the 2005 bankruptcy law reform. The calibrated model indicates that the 2005 reform reduces bankruptcies, as seen in the data, and improves welfare, as lower default premia allows better consumption smoothing. A counterfactual reform of changing income garnishment rate is also investigated. Interesting contrasting welfare effects between two types of agents emerge. Agents with temptation prefer a lower garnishment rate as tighter borrowing constraint prevents them from over-borrowing, while those without prefer better consumption smoothing enabled by a higher garnishment rate. (First draft: May 23, 2008) |
| Keywords: | Consumer Bankruptcy; Debt; Default; Borrowing Constraint; Temptation and Self-Control; Hyperbolic Discounting; Heterogeneous Agents; Incomplete Markets |
| JEL: | D91 E21 E44 G18 K35 |
| Date: | 2016–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:16-21&r=dge |
| By: | Olivier Loisel (CREST) |
| Abstract: | In a broad class of locally linearizable dynamic stochastic rational-expectations models, I consider various alternative observation sets for the policy maker, each of them made of the history of some endogenous variables or exogenous shocks until some current or past date. For each observation set, I characterize, within the set of feasible paths (paths that can be obtained as one local equilibrium under a policy-instrument rule consistent with this observation set), the subset of implementable paths (paths that can be obtained, in a minimally robust way, as the unique local equilibrium under such a rule). In two applications, I show that, for relevant observation sets, optimal feasible monetary policy may not be implementable in the basic New Keynesian model, even when the number of observed variables largely exceeds the number of unobserved shocks; while debt-stabilizing feasible tax policy is, contrary to conventional wisdom, implementable in the standard real-business-cycle model, even in the presence of policy-implementation lags of any length. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:16&r=dge |
| By: | Moyen, Stephane; Stähler, Nikolai; Winkler, Fabian |
| Abstract: | We discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model with incomplete financial markets and frictional labor markets where the unemployment insurance scheme operates across both countries. Cross-country insurance through the unemployment insurance system can be achieved without affecting unemployment outcomes. The Ramsey-optimal policy however prescribes a more countercyclical replacement rate when international risk sharing concerns enter the unemployment insurance trade-off. We calibrate our model to Eurozone data and find that optimal stabilizing transfers through the unemployment insurance system are sizable and mainly stabilize consumption in the periphery countries, while optimal replacement rates are countercyclical overall. Moreover, we find that debt-financed national policies are a poor substitute for fiscal transfers. |
| Keywords: | Fiscal Union ; International Business Cycles ; International Risk Sharing ; Unemployment Insurance |
| JEL: | E32 E62 H21 J64 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-54&r=dge |
| By: | Gonul Sengul |
| Abstract: | This paper develops a model of search by employers in which search to fill a vacancy affects firms' probability of hiring, duration of the employment relationship, cost of a vacancy and the expected productivity of the job. I employ a model with uncertainty about the quality of a match: it could be of good or bad quality. Firms conduct interviews where they learn the probability of the match being of good quality and select the worker with the highest probability. Hence, more interviews increase the chance of getting a good quality match thereby reducing separations. I find that firms mostly adjust the number of interviews they conduct when labor market policies are introduced to the model. Counterfactual exercises where firms cannot adjust the number of interviews reveal that selection channel mostly mitigates the effect of policy on unemployment rate. |
| Keywords: | Labor market search, Unemployment, Search by employer, Labor market policies |
| JEL: | E24 J64 J63 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1607&r=dge |
| By: | Semyon MALAMUD (Ecole Polytechnique Federale de Lausanne and Swiss Finance Institute) |
| Abstract: | I develop a dynamic general equilibrium model of exchange traded funds (ETFs) that accounts for the two-tier ETF market structure with both a centralized exchange (secondary market) and a creation/redemption mechanism (primary market) operating through market-making firms known as Authorized Participants (APs). The model is tractable and allows for any number of ETFs and basket securities. I show that the creation/redemption mechanism serves as a shock propagation channel through which temporary demand shocks may have long-lasting impacts on future prices. In particular, they may lead to a momentum in asset returns and a persistent ETF pricing gap. Improving liquidity in the primary market stimulates creation/redemption and therefore strengthens the shock propagation channel. As a result, it may amplify the volatility of both the underlying assets and the ETF pricing gap. At the same time, introducing new ETFs may reduce both the volatility and co-movement in the returns and may improve the liquidity of the underlying securities. |
| Keywords: | exchange-traded funds, liquidity, volatility, co-movement, mis-pricing |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1537&r=dge |
| By: | Luca Sala (Universita' Bocconi); Luca Gambetti (Universitat Autonoma de Barcelona); Mario Forni (Università di Modena e Reggio Emilia) |
| Abstract: | A shock of interest can be recovered, either exactly or with a good approximation, by means of standard VAR techniques even when the structural MA representation is noninvertible or nonfundamental, possibly because it has more shocks than variables. We propose a measure of how informative a VAR model is for a specific shock, or a subset of shocks, of interest. We show how to use such a measure for the validation of shocks’ transmission mechanism of DSGE models through VARs. In an application, we validate a theory of news shocks. The theory does remarkably well for all variables, except for consumption and output, for which the model over-predicts the effects of news shocks. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:260&r=dge |
| By: | Alex Clymo (University of Amsterdam, the Netherlands); Andrea Lanteri (Duke University, United States) |
| Abstract: | We consider models where the Ramsey-optimal fiscal policy under Full Commitment (FC) is time-inconsistent and define a new notion of optimal policy, Limited-Time Commitment (LTC). Successive one-period lived governments can commit to future plans over a finite horizon. We provide a sufficient condition on the mapping from finite policy sequences to allocations, such that LTC and FC lead to the same outcomes. We then show that this condition is verified in several existing models, allowing FC Ramsey plans to be supported with a finite commitment horizon (often a single period). We relate the required degree of commitment to the economic environment: in economies without capital, the minimum degree of commitment required is given by the government debt maturity; in economies with capital and government balanced-budget constraints, the required commitment is given by the horizon over which the budget has to be balanced. Finally, we solve numerically for the LTC equilibrium of an economy where the equivalence result fails and show that a single year of commitment to capital taxes provides substantial welfare gains relative to the No-Commitment time-consistent policy. |
| Keywords: | Optimal fiscal policy; time-inconsistency; limited commitment |
| JEL: | E61 E62 H21 H63 |
| Date: | 2016–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20160056&r=dge |
| By: | Philippe BACCHETTA (University of Lausanne and Swiss Finance Institute); Kenza BENHIMA (University of Lausanne and CEPR); Céline POILLY (University of Lausanne) |
| Abstract: | In the aftermath of the U.S. financial crisis, both a sharp drop in employment and a surge in corporate cash have been observed. In this paper, based on U.S. data, we document that the negative relationship between the corporate cash ratio and employment is systematic, both over time and across firms. We develop a dynamic general equilibrium model where heterogenous firms need cash in their production process and where financial shocks are made of both credit and liquidity shocks. We show that external liquidity shocks generate a negative comovement between the cash ratio and employment. We analyze the dynamic impact of aggregate shocks and the cross-firm impact of idiosyncratic shocks. With a calibrated version of the model, the model yields a negative comovement that is close to the data. |
| Keywords: | working capital, liquidity shocks, cash management |
| JEL: | E24 E44 G32 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1401&r=dge |
| By: | Venky Venkateswaran (New York University); Laura Veldkamp (New York University Stern School of Busi); Julian Kozlowski (New York University) |
| Abstract: | The Great Recession was a deep downturn with long-lasting effects on credit markets, labor markets and output. We explore a simple explanation: This recession has been more persistent than others because it was perceived as an extremely unlikely event before 2007. Observing such an episode led all agents to re-assess macro risk, in particular, the probability of tail events. Since changes in beliefs endure long after the event itself has passed and through its effects on prices and choices, it produces long-lasting effects on investment, employment and output. To model this idea, we study a production economy with agents who use standard econometric tools to estimate the distribution of aggregate shocks. When they observe a new shock, they re-estimate the distribution from which it was drawn. Even transitory shocks have persistent effects because, once observed, they stay forever in the agents’ data set. We feed a time-series of US macro data into our model and show that our belief revision mechanism can explain the 12% downward shift in US trend output. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:245&r=dge |
| By: | Huseyin Murat Ozbilgin |
| Abstract: | [TR] Bu calisma son donemde kamu yatirimlarinin tamamlanma suresinde gozlemlenen kisalmanin sosyal refah uzerine yaptigi etkiyi olcmeyi amaclamaktadir. Bu amac dogrultusunda kamu yatirimlarinin kamu sermaye stokuna donusmesinin zaman aldigi bir reel is cevrimleri modeli insa edilmistir. Modele göre Turkiye ekonomisinin yakin donem tecrubesindeki gibi kamu yatirimlarinin tamamlanma suresinin yaklasik 9 yildan 4 yila dusurulmesi uzun vadeli etkiler gerceklestiginde tuketimde her donem ve kosulda yuzde 0,69 oraninda bir artisa tekabul etmektedir. Bu onemli refah kazanimlari, reformun kamu yatirimlarina olan talebi artirmasi, artan talebin ozel yatirimlari da yukseltmesi ve nihayette ekonomi genelinde sermaye stokunun daha yuksek bir degere ulasmasi sonucu gerceklesmektedir. [EN] This study aims to measure the welfare impact of the recent improvement in the duration of completion of the public investment projects in the Turkish economy. For this purpose, a real business cycle model is constructed in which the public capital is subject to a time-to-build constraint. The model is utilized to study a reform that mimics the recent Turkish experience, namely, shortening the completion duration to 4 years from roughly 9 years. The model implies that such a reform, when all the long-run effects are realized, leads to significant welfare gains corresponding to a 0.69 percent increase in consumption in all future states and time. These remarkable welfare gains are brought about by a higher economy-wide capital stock that is facilitated by an increased demand for public investment, and the accompanying upswing in the private investment. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:econot:1617&r=dge |
| By: | Roys, Nicolas (Federal Reserve Bank of St. Louis) |
| Abstract: | This paper proposes a theoretical and quantitative analysis of the reallocation of labor across firms in response to idiosyncratic shocks of different persistence. Creating and destroying jobs is costly and workers are paid a share of the value of the marginal worker. The model predicts that employment and labor costs react differently to transitory shocks and permanent shocks. Quantitative evaluation of the model on a panel of French firms shows the model’s performance. Modest adjustment costs are needed to reproduce observed job reallocation and inaction rates. Removing adjustment costs leads to productivity gains of 1% at the steady state. These gains are 50% larger in a economy with only transitory shocks and an order of magnitude lower in an economy with only permanent shocks. Bargaining dampens the reallocation of labor across firms, leading to larger efficiency losses from adjustment costs. |
| Keywords: | Firm Dynamics; Adjustment Costs; Misallocation; Persistence of Shocks |
| JEL: | E24 J21 J23 |
| Date: | 2016–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2016-014&r=dge |
| By: | Yasin Kursat Onder |
| Abstract: | This paper delivers a framework to quantitatively investigate the introduction of liquidity lines during a liquidity crisis. In an endogenous sovereign default model, I quantify the gains of arranging such lines by comparing simulations of the model with the simulations found when the government issues only non-state contingent bonds. I find that liquidity lines mitigate the borrowing costs and generate gains both for the government and its creditors. I also show that when the liquidity lines are introduced and the sovereign is committed not to exceed its mean debt-to-income ratio prior to liquidity lines being established, then the gains are significantly larger. These findings shed light on the current policy discussions for the utilization of liquidity lines. |
| Keywords: | Sovereign default, Liquidity shocks, Swap lines, Global safety nets, FCL, PLL |
| JEL: | F30 F34 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1536&r=dge |
| By: | Johanna Etner (University Paris Ouest Nanterre la Défense, EconomiX and Climate Economics Chair); Natacha Raffin (University Paris Ouest Nanterre la Défense, EconomiX and Climate Economics Chair); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics)-CNRS-EHESS) |
| Abstract: | We develop an overlapping generations model of growth, in which agents differ through their ability to procreate. Based on epidemiological evidence, we assume that pollution is a cause of this health heterogeneity, affecting sperm quality. Nevertheless, agents with impaired fertility may incur health treatments in order to increase their chances of parenthood. In this set-up, we analyse the dynamic behaviour of the economy and characterise the situation reached in the long run. Then, we determine the optimal solution that prevails when a social planner maximises a Millian utilitarian criterion and propose a set of available economic instruments to decentralise the optimal solution. We underscore that to correct for both the externalities of pollution and the induced-health inefficiency, it is necessary to tax physical capital while it requires to overall subsidy mostly harmed agents within the economy. Hence, we argue that fighting against the sources of an altered reproductive health is more relevant than directly inciting agents to incur health treatments. |
| Keywords: | Pollution; Growth; Fertility; Health. |
| JEL: | O44 Q56 I18 |
| Date: | 2016–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1625&r=dge |
| By: | Enoch Hill (Wheaton College); Kai Ding (University of Minnesota) |
| Abstract: | There have been significant changes in the cyclicality of US labor productivity since the early 1990s. Previously, labor productivity was largely procyclical but beginning with the recession of the early 1990s labor productivity rises immediately following a recession before returning to prerecession levels. In this paper we develop a dynamic general equilibrium model in which a change in the importance of firm specificc human capital can explain the new pattern in labor productivity as well as partially account for the decrease in the rate of employment recovery (jobless recoveries) observed in the most recent three recessions. Additionally, we present empirical support that the importance of rm specificc human capital has in fact increased for recent recessions. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:291&r=dge |
| By: | Pontus Rendahl (University of Cambridge); Michal Kobielarz (Tilburg University); Wouter Den Haan (London School of Economics) |
| Abstract: | This paper proposes an algorithm that finds model solutions at a particular point in the state space by solving a simple system of equations. The key step is to characterize future behavior with a Taylor series expansion of the current period's behavior around the contemporaneous values for the state variables. Since current decisions are solved from the original model equations, the solution incorporates nonlinearities and uncertainty. The algorithm is used to solve the model considered in Coeurdacier, Rey, and Winant (2011), which is a challenging model because it has no steady state and uncertainty is necessary to keep the model well behaved. We show that our algorithm can generate accurate solutions even when the model series are quite volatile. The solution generated by the risky-steady-state algorithm proposed in Coeurdacier, Rey, and Winant (2011), in contrast, is shown to be not accurate. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:272&r=dge |
| By: | Broer, Tobias; Harbo Hansen, Niels-Jakob; Krusell, Per; Öberg, Erik |
| Abstract: | We argue that a 2-agent version of the standard New Keynesian model - where a 'worker' receives only labor income and a'capitalist' only profit ncome - offers insights about how income inequality affects the monetary transmission mechanism. Under rigid prices, monetary policy affects the distribution of consumption, but it has no effect on output as workers choose not to change their hours worked in response to wage movements. In the corresponding representativeagent model, in contrast, hours do rise after a monetary policy loosening due to a wealth effect on labor supply: profits fall, thus reducing the representative worker's income. If wages are rigid too, however, the monetary transmission mechanism is active and resembles that in the corresponding representative-agent model. Here, workers are not on their labor supply curve and hence respond passively to demand, and profits are procyclical. |
| Keywords: | Heterogeneous Agents; inequality; Monetary Transmission; New Keynesian Model |
| JEL: | E31 E32 E52 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11382&r=dge |
| By: | Roman Sustek (Queen and Mary University of London); Peter Rupert (University of California, Santa Barbara) |
| Abstract: | The mechanism of a standard New-Keynesian model is laid out. A particular focus is on cap- ital accumulation, the key ingredient in the transition from the basic framework to medium- scale DSGE models. The widely held view that monetary policy affects output and inflation in these models through a real interest rate channel is misguided. A decline in output and inflation is consistent with a decline, increase, or no change in the real rate. The expected path of Taylor rule shocks and the New-Keynesian Phillips Curve are key for inflation and output; the real rate largely reflects consumption smoothing. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:201&r=dge |
| By: | Serife Genc Ileri |
| Abstract: | This paper uses a quantitative general equilibrium model to analyze the impacts of selective immigration policy targeting skilled immigrants on the college attainment rate, earnings inequality and welfare of natives. 1981-2008 period is analyzed in Canada, which is a country with a unique immigration policy explicitly targeting highly educated individuals. The results from the quantitative analysis reveal that the increase in the share of highly skilled immigrants generates a 7 percentage points lower college attainment rate among natives. The size and compositional changes in the immigrant population together lead to a 2.15 percentage points higher growth rate of college premium during this period. This increase is mainly driven by the rise in the relative size of the foreign-born labor force. An analysis of the long-run compensating differentials reveals that immigration generates a loss that corresponds to 3.59 to 4.45 percent permanent reduction in the consumption of natives. The increase in the relative share of immigrants is the main reason for this welfare loss. On the other hand, the compositional change towards college graduates benefits natives at the bottom and middle of the ability distribution. |
| Keywords: | International Migration, Aggregate Factor Income Distribution, Human capital, Wage differentials by Skill |
| JEL: | F22 E25 J24 J31 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1529&r=dge |
| By: | Arnab K. Basu (Cornell University); Nancy H. Chau (Cornell University and Centro Studi Luca d’Agliano); Gary S. Fields (Cornell University); Ravi Kanbur (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†age 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: | 2016–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:csl:devewp:395&r=dge |
| By: | Eric JONDEAU (University of Lausanne and Swiss Finance Institute); Amir KHALILZADEH (University of Lausanne) |
| Abstract: | We describe a general equilibrium model with a banking system in which the deposit bank collects deposits from households and the merchant bank provides funds to firms. Merchant banks borrow collateralized short-term funds from deposit banks. In a financial downturn, as the value of collateral decreases, the merchant bank must sell assets on short notice, reinforcing the crisis, and default if their cash buffer is insufficient. The deposit bank suffers from loss because of the depreciated assets. If the value of the deposit bank’s assets is insufficient to cover deposits, it also defaults. Deposits are insured by the government. The premium paid by the deposit bank is its expected loss on the deposits. We define the bank’s capital shortfall in the crisis as the expected loss on deposits under stress. We calibrate the model on the U.S. economy and show how this measure of stressed expected loss behaves. In the absence of regulation, a 40% decline of the securities market would induce a loss of 17.8% in the ex-ante value of the assets or 80.7% of the ex-ante value of the equity. |
| Keywords: | Real business cycle model, Capital shortfall, Systemic risk, Collateral, Leverage |
| JEL: | D5 E2 E32 E44 G2 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1524&r=dge |
| By: | Brian Bolarinwa Ogundairo; Mauro Rodrigues |
| Abstract: | This paper studies how Brazil’s high real interest rate is related to the country’s pay-as-you-go (PAYG) pension system, which features exceptionally large expenses. We use a standard version of the overlapping generations model, with a mixed pension system (part PAYG part fully funded). We calibrate the model to the Brazilian economy between 2000 and 2014. We consider a steady state which reproduces the average real interest rate in this period, with a PAYG system. We then simulate a pension reform to replicate Chile’s pension expenses. Like Brazil, Chile is a Latin American middle income country, but its pension system is mostly of the fully-funded type. In our preferred specification, the model predicts a 1 percentage point decrease in the long-run annual real interest rate. This corresponds to 18% of the average interest differential between Brazil and Chile during the 2000-2014 period. |
| Keywords: | real interest rate, pensions, Brazil, overlapping generations |
| JEL: | E21 E43 H55 |
| Date: | 2016–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2016wpecon11&r=dge |
| By: | Mindy X. Zhang (University of Texas at Austin); Qi Sun (Shanghai University of Finance and Economics) |
| Abstract: | Firms nance intangible investment through employee compensation contracts. In a dynamic model in which intangible capital is embodied in a rm's employees, we analyze the rm's optimal decisions of intangible investment, employee compensation contracts, and nancial leverage. Employee nancing is achieved by delaying wage payments in the form of future claims. We document that intangible capital investment is highly correlated with employee nancing, but not with debt issuance or regular equity renancing. In the quantitative analysis, we show that this new channel of employee nancing can explain the cross-industry dierences in leverage and nancing patterns. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:230&r=dge |
| By: | Randall Wright (University of Wisconsin); Cathy Zhang (Purdue University); Guillaume Rocheteau (University of California, Irvine) |
| Abstract: | This paper provides a theory of external and internal finance where entrepreneurs finance random investment opportunities with fiat money, bank liabilities, or trade credit. Loans are distributed in an over-the-counter credit market where the terms of the loan contract, including size, rate, and down payment, are negotiated in a decentralized fashion subject to pledgeability constraints. The model has implications for the cross-sectional distribution of corporate loan rates and loan sizes, interest rate pass-through, and the transmission of monetary policy (described either as money growth or open market operations) with or without liquidity requirements. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:97&r=dge |
| By: | Ronald Wolthoff (University of Toronto); Benjamin Lester (Federal Reserve Bank of Philadelphia) |
| Abstract: | This paper studies the effect of screening costs on the equilibrium allocation of workers with different productivities to firms with different technologies. In the model, a worker's type is private information, but can be learned by the firm during a costly screening or interviewing process. We characterize the planner's problem in this environment and determine its solution. A firm may receive applications from workers with different productivities, but should in general not interview them all. Once a sufficiently good applicant has been found, the firm should instead make a hiring decision immediately. We show that the planner's solution can be decentralized if workers direct their search to contracts posted by firms. These contracts must include the wage that the firm promises to pay to a worker of a particular type, as well as a hiring policy which indicates which types of workers will be hired immediately, and which types will lead the firm to keep interviewing additional applicants. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:221&r=dge |
| By: | Larry Jones (University of Minnesota); Alice Schoonbrodt (University of Iowa) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:15-111&r=dge |
| By: | Chuku Chuku; Paul Middleditch |
| Abstract: | Using conventional rules to characterize policy behaviour in emerging market economies requires innovations capable of capturing distinctive structural characteristics. We examine the extent to which commodity price fluctuations matter for monetary and fiscal policy formulation in high primary commodity export economies. Markov mixture specifications of monetary and fiscal policy rules stylized to account for commodity price slacks are estimated using specifically designed Bayesian techniques. We find that policy authorities indeed respond to commodity price slacks but with variations depending on the policy regime in place and country. The results hold implications for the correct specification of policy rules and interactions in DSGE models for such economies. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:222&r=dge |
| By: | Per Krusell (Stockholm University); Timo Boppart (IIES, Stockholm University) |
| Abstract: | We argue that a stable utility function of consumption and hours worked for which income effects are slightly stronger than substitution effects can rationalize the long-run data for the main macroeconomic quantities. In these long-run data, in the U.S. as well as in other countries, as productivity grows at a steady rate, hours worked fall slowly and at an approximately constant rate. We narrow down the set of preferences consistent with balanced growth under constant (negative) hours growth. The resulting class amounts to a slight enlargement of the well-known “balanced-growth preferences†that dominate the macro literature and are based on requiring constant hours worked. Thus, hours falling at a constant rate is not inconsistent with the remaining balanced-growth facts but merely requires a slight broadening of the preference class considered. The broadening of the preference class introduces some well-known cases not previously thought to be consistent with balanced growth. From our perspective, we interpret the recent decades of stationary hours worked in the U.S. as a temporary departure from a long-run pattern, and to the extent productivity will keep growing, we predict that hours will fall further. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:261&r=dge |
| By: | Luigi Iovino (Bocconi University); Jennifer La'O (Columbia University); George-Marios Angeletos (M.I.T.) |
| Abstract: | This paper studies how the endogeneity of information affects the efficiency of the business cycle and the nature of optimal policy. The business cycle is found to be excessively noisy. Optimal taxes and optimal monetary policy are shown to be countercyclical. Such policies incentivize agents to make their choices more sensitive to their idiosyncratic sources of information, which in turn improves the informativeness of market signals and macro statistics. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:229&r=dge |
| By: | Pashchenko, Svetlana; Porapakkarm, Ponpoje |
| Abstract: | A major source of insurance coverage for non-elderly adults in the US is the employer-based health insurance market. Every participant in this market receives a tax subsidy because premiums are excluded from taxable income. However, people have different incentives to participate in the employer-based pool - since premiums are independent of individual risk, high-risk individuals receive implicit cross-subsidies from low-risk individuals. In this paper, we explore several ways to reform the tax subsidy by taking this implicit cross- subsidization into account. Using a general equilibrium heterogeneous agents model, we find that even though the complete elimination of the tax subsidy leads to the unraveling of the employer-based pool, there is still room for substantial savings by targeting the tax subsidy. More specifically, the same level of risk-sharing in the employer-based market can be achieved at one- third of the current costs if i) the tax subsidy is targeted only towards low- risk individuals who have weak incentives to participate in the pool, and ii) employer-based insurance premiums become age-adjusted. To improve the welfare outcome of this reform, the modified tax subsidy should also be targeted to low-income individuals. |
| Keywords: | health insurance, tax subsidies, tax deductions, general equilibrium, life-cycle, health reform |
| JEL: | D52 D91 E2 E21 E65 H20 I10 |
| Date: | 2013–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72671&r=dge |
| By: | Vincent Maurin (European University Institute) |
| Abstract: | This paper shows that lemon markets exhibit liquidity fluctuations whereby the ease to sell an asset varies endogenously over time. In the model, agents meet in a decentralized market and bargain under asymmetry of information about the quality of the asset. Liquidity increases with the average quality of the pool of sellers but the composition of the pool responds negatively to past liquidity. When this effect is strong, cyclical equilibria arise where prices and volume of trade oscillate without aggregate shocks. These fluctuations are generally inefficient and call for policy interventions. When the economy is in a cycle, a revertible asset purchase program can jump-start the market and smooth out fluctuations. Finally, I show that increasing market centralization harms liquidity provision and may be undesirable. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:218&r=dge |
| By: | Julian Neira (University of Exeter) |
| Abstract: | Using a harmonized dataset constructed from national statistical agencies' data for a sample of OECD countries, I document a systematic positive relationship between i) aggregate productivity, ii) the employment share by large firms and iii) the proportion of large firms in the economy. I propose that differences in bankruptcy procedures can explain this relationship. In a model of financial intermediation and informational frictions, I show that as bankruptcy procedures worsen --- measured by the amount a lender can recover from bankrupt borrowers --- lenders respond by shifting their portfolio of loans to smaller (less productive) enterprises. This finding is supported by empirical evidence: across countries, efficient bankruptcy procedures are associated with a higher proportion of new bank loans allocated to large firms. In the model, moving the level of recovery rate from the U.S. level to that of the lowest recovery rate country in the OECD sample reduces TFP by 30%. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:228&r=dge |
| By: | John Coleman (Duke University) |
| Abstract: | This paper develops a model in which a rapid expansion of the quality frontier by rich countries pushes poorer countries down the quality ladder and thereby leads to a widening dispersion of quality around the world as well as sluggish growth in poorer countries. This paper documents these features in the data, such as a recent rise in the dispersion of quality exported around the world between rich countries on the one hand and either poor countries or countries stuck in a middle-income trap on the other hand, as well as a widening dispersion of per-capita income among these groups. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:206&r=dge |
| By: | Robert Ready (University of Rochester); Mariano Croce (University of North Carolina at Chapel H); Federico Gavazzoni (INSEAD); Riccardo Colacito (University of North Carolina, Chapel Hil) |
| Abstract: | Focusing on the ten most-traded currencies, we provide empirical evidence about a significant heterogenous exposure to global growth news shocks. We incorporate this empirical fact in a frictionless risk-sharing model with recursive preferences, multiple countries, and multiple consumption goods whose supply features both global and local short- and long-run shocks. Since news shocks are priced, heterogenous exposure to global long-lasting growth shocks results in a relevant reallocation of international resources and currency adjustments. Our unified framework replicates the properties of the HML-FX and HML-NFA carry trade strategies studied by Lustig et al. (2011) and Della Corte et al. (2013). |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:297&r=dge |
| By: | Nataliya Klimenko (University of Zurich); Sebastian Pfeil (University of Bonn); Jean-Charles Rochet (University of Zurich, University of Toulouse I and Swiss Finance Institute); Gianni De Nicolo (International Monetary Fund and CESifo) |
| Abstract: | We develop a novel dynamic model of banking showing that aggregate bank capital is an important determinant of bank lending. In our model commercial banks finance their loans with deposits and equity, while facing equity issuance costs. Because of this financial friction, banks build equity buffers to absorb negative shocks. Aggregate bank capital determines the dynamics of lending. Notably, the equilibrium loan rate is a decreasing function of aggregate capitalization. The competitive equilibrium is constrained inefficient, because banks do not internalize the consequences of individual lending decisions for the future loss-absorbing capacity of the banking sector. In particular, we find that unregulated banks lend too much. Imposing a minimum capital ratio helps tame excessive lending, which enhances stability of the banking system. |
| Keywords: | macro-model with a banking sector, aggregate bank capital, pecuniary externality, capital requirements |
| JEL: | E21 E32 F44 G21 G28 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1642&r=dge |