|
on Dynamic General Equilibrium |
|
Issue of 2016‒08‒21
thirty-two papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Nicolas Coeurdacier (SciencesPo) |
| Abstract: | The neoclassical growth model predicts large capital flows towards fast-growing emerging countries. We show that incorporating fertility and longevity into a lifecycle model of savings changes the standard predictions when countries differ in their ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers capital flows from emerging to developed countries, and countries’ current account positions respond to growth adjusted by current and expected demographic composition. Data on international capital flows are broadly supportive of the theory. The fact that fast-growing emerging countries are also aging faster, while having less developed credit markets and pension systems, explains why they are more likely to export capital. Our quantitative multi-country overlapping generations model explains a significant fraction of the patterns of capital flows, across time and across developed and emerging countries. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:442&r=dge |
| By: | Pablo D'Erasmo; Enrique G. Mendoza |
| Abstract: | Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a “forgotten history” in Macroeconomics. We propose a heterogeneous-agents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous default costs due to the value of debt for self-insurance, liquidity and risk-sharing. The government's aim to redistribute resources across agents and through time in response to uninsurable shocks produces a rich dynamic feedback mechanism linking debt issuance, the distribution of government bond holdings, the default decision, and risk premia. Calibrated to Spanish data, the model is consistent with key cyclical co-movements and features of debt-crisis dynamics. Debt exhibits protracted fluctuations. Defaults have a low frequency of 0.93 percent, are preceded by surging debt and spreads, and occur with relatively low external debt. Default risk limits the sustainable debt and yet spreads are zero most of the time. |
| JEL: | E6 E62 F34 G01 H63 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22509&r=dge |
| By: | Christoph Görtz; John D. Tsoukalas |
| Abstract: | This paper examines the dynamic eects and empirical role of aggregate and sectoral TFP news shocks in the context of frictions in nancial markets. Financial frictions result in credit spreads that contain important information about expectations of future economic activity. A TFP news shock identied from the VAR model generates a signicant decline in the corporate bond spread and a broad based expansion in activity in anticipation of a future TFP improvement. A DSGE model enriched with a nancial sector of the Gertler-Kiyotaki type generates very similar quantitative dynamics and shows that strong linkages between leveraged equity and capital prices are critical for the amplication of TFP news shocks. The consistent assessment from both methodologies provides support for the traditional `news view' of aggregate uctuations. The analysis sheds light on important dierences in the propagation of sectoral TFP news shocks. |
| Keywords: | News shocks, Business cycles, DSGE, VAR, Bayesian estimation |
| JEL: | E2 E3 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2016_15&r=dge |
| By: | Pablo Ottonello (University of Michigan); Ignacio Presno (Universidad de Montevideo); Javier Bianchi (Federal Reserve Bank of Minneapolis) |
| Abstract: | Is fiscal stimulus desirable when financing the government spending might imply a surge in borrowing costs and potentially lead to a sovereign debt crisis? This paper studies the optimal fiscal policy for a small open economy in a currency union in which the government cannot commit. In our two-sector dynamic model, the presence of downward nominal wage rigidity coupled with financial frictions may give rise to the welfare-improving effects of an expansionary fiscal policy. The government is confronted with a trade-off between the benefits of reducing unemployment and the financial costs of increasing external borrowing. A quantitative analysis is conducted to assess the desirability of austerity plans and stimulus programs in the context of the ongoing European debt crisis. In our theoretical framework, the response of the economic activity to government expenditures is highly nonlinear in the stock of external debt and the magnitude of the shocks. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:459&r=dge |
| By: | Patrick Feve (University of Toulouse); Martial Dupaigne (Toulouse School of Economics) |
| Abstract: | This paper inspects the mechanism shaping government spending multipliers in various small-scale DSGE setups with endogenous labor supply and capital accumulation. We analytically characterize the short-run investment multiplier, which in equilibrium can be either positive or negative. The investment multiplier increases with the persistence of the exogenous government spending process. The response of investment to government spending shocks strongly affects short-run multipliers on output and consumption. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:408&r=dge |
| By: | Olivier Blanchard (Peterson Institute for International Economics) |
| Abstract: | Dynamic stochastic general equilibrium (DSGE) models have come to play a dominant role in macroeconomic research. Some see them as the sign that macroeconomics has become a mature science, organized around a microfounded common core. Others see them as a dangerous dead end. This Policy Brief argues that the current DSGE models are seriously flawed, but they are eminently improvable and central to the future of macroeconomics. To improve, however, they have to become less insular, by drawing on a much broader body of economic research. They also have to become less imperialistic and accept to share the scene with other types of general equilibrium models. |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb16-11&r=dge |
| By: | Sajawal Khan (State Bank of Pakistan); Farooq Pasha (State Bank of Pakistan); Muhammad Rehman (State Bank of Pakistan); Muhammad Ali Choudhary (State Bank of Pakistan) |
| Abstract: | In this paper, we analyse the pressure fiscal expansion exerts on the economy via credit markets in Pakistan. We extend Melina and Villa (2014) by allowing government to compete with the private borrowers (firms) for the bank credit in monopolistically competitive banking industry to the extent that it can come to dominate banks balance-sheets, a feature observed in Pakistan following 2008 Global Financial Crisis. Our DSGE model captures the counter cyclical behavior of government borrowings that leads to counter cyclical spreads in loans market. Furthermore, we also find that consumption tax is the preferable policy instrument to address the fiscal deficit in bad times rather than resorting to the dominant borrower behaviour. |
| Keywords: | DSGE, Commercial Banks, Government Borrowing, Business Cycles, Emerging Economies |
| JEL: | E3 E52 E6 H2 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:sbp:wpaper:77&r=dge |
| By: | Attinasi, Maria-Grazia; Prammer, Doris; Stähler, Nikolai; Tasso, Martino; Van Parys, Stefan |
| Abstract: | Budget-neutral tax wedge reductions rank high in the policy agenda of several EMU member states. Using a New Keynesian DSGE model of a monetary union with a complex labour market structure and a comprehensive public sector, we evaluate the macroeconomic and welfare effects of reducing the firms' and workers' labour tax rates under alternative financing instruments. Overall, a tax wedge reduction is beneficial in terms of both welfare and output, as long as the financing measure does not harm private-sector productivity and/or the incentive for private capital investments over-proportionately. While financing the labour tax wedge reduction by an increase in consumption taxation yields most favourable output effects, financing it by a reduction in government spending is more beneficial in terms of welfare as the latter does not imply a policy-induced increase in private consumption costs. We also show that, when we assume that firms can adjust the ex- and intensive labour margin in response to policy changes, a reduction in the workers' and not the firms' burden is most beneficial. |
| Keywords: | Fiscal Policy,Tax Reforms,DSGE Modelling,Macroeconomics |
| JEL: | H2 J6 E32 E62 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:262016&r=dge |
| By: | Joao Cocco (London Business School); Nuno Clara (London Business School) |
| Abstract: | We solve a quantitative dynamic model of borrower behavior, whose income is subject to individual specific and aggregate shocks. Lenders provide loans competitively. Recessions are characterized by lower expected earnings growth and a higher likelihood of a large drop in earnings. The model generates procyclical credit demand and countercyclical default. We analyze alternative debt restructuring policies aimed at reducing default during recessions: (i) interest rate reduction; (ii) maturity extension; and (iii) refinancing. Outcomes are best for the maturity extension policy that allows borrowers to temporarily make interest-only payments on the loan. Not all borrowers exercise the option. The maturity extension policy leads to lower default rates, higher consumer welfare, and a smaller drop in consumption during recessions, without significantly increasing cash-flow risk for lenders. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:480&r=dge |
| By: | Pieter Gautier (VU University Amsterdam, the Netherlands); Bo Hu (VU University Amsterdam, the Netherlands); Makoto Watanabe (VU University Amsterdam, the Netherlands) |
| Abstract: | This paper develops a model in which market structure is determined endogenously by the choice of intermediation mode. We consider two representative business modes of intermediation that are widely used in real-life markets: one is a middleman mode by which an intermediary holds inventories which he stocks from sellers for the purpose of reselling to buyers; the other is a market-making mode by which an intermediary offers a platform for buyers and sellers to trade with each other. In our model, buyers and sellers can simultaneously search in an outside market and use the intermediation service. We show that a marketmaking middleman, who adopts the mixture of these two intermediation modes, can emerge in a directed search equilibrium. |
| Keywords: | Middlemen; Marketmakers; Platform; Directed Search |
| JEL: | D4 G2 L1 L8 R1 |
| Date: | 2016–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20160060&r=dge |
| By: | Kan Chen; Mario Crucini |
| Abstract: | Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach. |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-50&r=dge |
| By: | Josef Hollmayr (Deutsche Bundesbank); Michael Kuehl (Deutsche Bundesbank) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| URL: | http://d.repec.org/n?u=RePEc:red:append:15-131&r=dge |
| By: | Fang Yang (Louisiana State University); Mariacristina De Nardi (Federal Reserve Bank of Chicago) |
| Abstract: | Marriage is an institution that also helps insure shocks. Despite this and the prevalence of marriage, very little is known on how effectively marriage insures households against income or health risks and how being married affects labor supply and savings. We develop a framework with both single and married people, in which single people meet partners and everyone experiences labor productivity shocks, medical costs shocks, life span risk, and married people also experience divorce risk. People can self-insure by saving and by choosing their labor supply. We also allow for reversibility of social security and pension payments to the surviving spouse in case of death of one of the spouses and for differential tax treatment of married and single people. In this framework, we study the insurance benefits of marriage, both at the individual and at the aggregate level. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:427&r=dge |
| By: | Vasilev, Aleksandar |
| Abstract: | This paper aims to shed light on the importance of health considerations for business cycle fluctuations and the effect of health status on labor productivity and availability of labor input for productive use. To this end, Grossman's (2000) partial-equilibrium framework with endogenous health is incorporated in an otherwise standard Real- Business-Cycle (RBC) model. Health status in this setup is modelled as a utility-enhancing, intangible, and non-transferrable capital stock, which depreciates over time. The household can improve their health ("produce health") through investment using a health-recovery technology. The main results are: (i) overall, the model compares well vis-a-vis data; (ii) the behavior of the price of healthcare is adequately approximated by the shadow price of health in the model; (iii) the model-generated health variable exhibits moderate- to high correlation with a large number of empirical health indicators. |
| Keywords: | real business cycles,health status,health investment |
| JEL: | E32 E37 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:144584&r=dge |
| By: | Stephen Williamson (Federal Reserve Bank of St. Louis) |
| Abstract: | A two-sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention. Only retail banks can hold reserves, and these banks are also subject to a capital requirement, which creates "balance sheet costs" of holding reserves. An increase in the interest rate on reserves has very different qualitative effects from a reduction in the central bank's balance sheet. Increases in the central bank's balance sheet can have redistributive effects, and can reduce welfare. A reverse repo facility at the central bank puts a floor under the interbank interest rate, and is always welfare improving. However, an increase in reverse repos outstanding can increase the margin between the interbank interest rate and the interest rate on government debt. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:428&r=dge |
| By: | Chen, Yongmin; Pan, Shiyuan; Zhang, Tianle |
| Abstract: | We present a model of cumulative innovation where firms can conduct R&D in both a safe and a risky direction. Innovations in the risky direction produce quality improvements with higher expected sizes and variances. As patentability standards rise, an innovation in the risky direction is less likely to receive a patent that replaces the current technology, which decreases the static incentive for new entrants to conduct risky R&D, but increases their dynamic incentive because of the longer duration---and hence higher reward---for incumbency. These, together with a strategic substitution and a market structure effect, result in an inverted-U shape in the risky direction but a U shape in the safe direction for the relationship between R&D intensity and patentability standards. There exists a patentability standard that induces the efficient innovation direction, whereas R&D is biased towards (against) the risky direction under lower (higher) standards. The optimal patentability standard may distort the R&D direction to increase the industry innovation rate that is socially deficient. |
| Keywords: | cumulative innovation, patentability standards, R&D intensity, R&D direction, rate of innovation, innovation direction |
| JEL: | L1 O3 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73180&r=dge |
| By: | Vincent Maurin (European University Institute); Cyril Monnet (Universitat Bern); Piero Gottardi (European University Institute) |
| Abstract: | We study repurchase agreements starting from first principles. We show that repo contracts trade-off the borrower’s desire to augment its consumption today with the lender’s desire to hedge against future market risk. As a result, safer assets will command a lower haircut and a higher liquidity premium relative to riskier assets. Haircuts can also be negative. We extend the basic model with the possibility to re-use collateral and we show that, absent default, re-use is always desirable. We show that haircuts decrease with re-use. Finally, chains of repos, where some agents are repos intermediaries, can endogenously arise. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:417&r=dge |
| By: | David Baqaee (London School of Economics and Political Science) |
| Abstract: | I show how the extensive margin of firm entry and exit can greatly amplify idiosyncratic shocks in an economy with a production network. I show that input-output models with entry and exit behave very differently to models without this margin. In particular, in such models, sales provide a very poor measure of the systemic importance of firms or industries. I derive a new notion of systemic influence called exit centrality that captures how exits in one industry will affect equilibrium output. I show that exit centrality need not be related to an industry’s sales, size, or prices. Unlike the relevant notions of centrality in standard input-output models, exit centrality depends on the industry’s role as both a supplier and as a consumer of inputs, as well as market structure. I show that, unlike competitive models, vanishingly small industries can have arbitrarily large effects on equilibrium outcomes. In this sense, the network can amplify shocks in a way that standard input-output models cannot. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:402&r=dge |
| By: | Marc Dordal-i-Carreras; Olivier Coibion; Yuriy Gorodnichenko; Johannes Wieland |
| Abstract: | Countries rarely hit the zero-lower bound on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to jointly incorporate into macroeconomic models using typical representations of shock processes. We introduce a regime switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. We discuss what different calibrations of this model imply for optimal inflation rates. |
| JEL: | E3 E4 E5 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22510&r=dge |
| By: | andrea prestipino (Federal Reserve Board); Nobuhiro Kiyotaki (Princeton University); Mark Gertler (New York University) |
| Abstract: | In the Great Recession, a gradual weakening of the banking system induced a kind of slow run on shadow banks that culminated in an overall collapse following the Lehmann Brothers bankruptcy. We develop a macroeconomic model with banking and bank runs that captures this slow run behavior and the transition to fast runs. In the model, a weakening of banks' balance sheets leads agents to rationally increase their assessment of the probability of a run and hence to withdraw funds from the financial system. These slow runs have harmful effects on the economy and set the stage for fast runs. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:430&r=dge |
| By: | Lukas Schmid (Duke University); Andres Schneider (UCLA); Mikhail Chernov (UCLA) |
| Abstract: | Premiums on US sovereign CDS have risen to persistently elevated levels since the financial crisis. In this paper, we ask whether these premiums reflect the probability of a US \emph{fiscal default}, namely a state in which budget balance can no longer be restored by further raising taxes or eroding the real value of debt by raising inflation. To that end, we develop a tractable equilibrium macrofinance model of the US economy, in which the fiscal and monetary policy stance jointly endogenously determine nominal debt, taxes, inflation and growth. While US CDS cannot be valued using standard replication arguments, we show how in our equilibrium model, CDS premiums reflect endogenous risk adjusted fiscal default probabilities. A calibrated version of the model is quantitatively consistent with high premiums on US sovereign CDS. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:432&r=dge |
| By: | McGrattan, Ellen R. (Federal Reserve Bank of Minneapolis); Prescott, Edward C. (Federal Reserve Bank of Minneapolis) |
| Abstract: | Many countries are facing challenging fiscal financing issues as their populations age and the number of workers per retiree falls. Policymakers need transparent and robust analyses of alternative policies to deal with demographic changes. In this paper, we propose a simple framework that can easily be matched to aggregate data from the national accounts. We demonstrate the usefulness of our framework by comparing quantitative results for our aggregate model with those of a related model that includes within-age-cohort heterogeneity through productivity differences. When we assess proposals to switch from the current tax and transfer system in the United States to a mandatory saving-for-retirement system with no payroll taxation, we find that the aggregate predictions for the two models are close. |
| Keywords: | Taxation; Retirement; Social Security; Medicare |
| JEL: | E13 H55 I13 |
| Date: | 2016–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:534&r=dge |
| By: | Mitsuru Katagiri (Bank of Japan) |
| Abstract: | Abstract: In this paper, I construct a two-period general equilibrium model and describe price competition among monopolistically competitive firms as a coordination game. While the model has multiple equilibria with different levels of inflation (positive or zero), the equilibrium selection in line with global games implies that the economy with a high natural interest rate, i.e., high expected productivity growth, tends to move into the equilibrium with positive inflation. The policy analyses indicate that monetary policy measures such as an increase in the target inflation rate and a decrease in the lower bound of nominal interest rates can prevent the economy from moving into the zero inflation equilibrium even in the face of low expected productivity growth. |
| Keywords: | Inflation Indeterminacy; Effective Lower Bound; Global Games |
| JEL: | D82 E31 E52 |
| Date: | 2016–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp16e12&r=dge |
| By: | D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia); Mendoza, Enrique G. (University of Pennsylvania, National Bureau of Economic Research,) |
| Abstract: | Europe’s debt crisis resembles historical episodes of outright default on domestic public debt about which little research exists. This paper proposes a theory of domestic sovereign default based on distributional incentives affecting the welfare of risk-averse debt and non-debtholders. A utilitarian government cannot sustain debt if default is costless. If default is costly, debt with default risk is sustainable, and debt falls as the concentration of debt ownership rises. A government favoring bondholders can also sustain debt, with debt rising as ownership becomes more concentrated. These results are robust to adding foreign investors, redistributive taxes, or a second asset. |
| Keywords: | Public debt; Sovereign default; European debt crisis |
| JEL: | E44 E6 F34 H63 |
| Date: | 2016–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:16-23&r=dge |
| By: | Vasilev, Aleksandar |
| Abstract: | This paper focuses on explaining the economic fluctuations in Bulgaria after the introduction of the currency board arrangement in 1997, the period of macroeconomic stability that ensued, the EU accession, and the episode of the recent global financial crisis. This paper follows Chari et al. (2002) and performs business cycle accounting (BCA) for Bulgaria during the period 1999-2014. As in Cavalcanti (2007), who studies the Portuguese business cycles, most of the volatility in output per capita in Bulgaria over the period is due to variations in the efficiency and labor wedges. |
| Keywords: | Business Cycle Accounting,Bulgarian economy,efficiency and labor wedges |
| JEL: | E32 E37 O47 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:144816&r=dge |
| By: | Tumen, Semih (Central Bank of Turkey) |
| Abstract: | This paper develops a model of sequential job search to understand the factors determining the effect of tax and enforcement policies on the size (i.e., employment share) of the informal sector. The focus is on the role of informal sector as a stepping stone to formal jobs. I argue that the stepping-stone role of informal jobs is an important concept determining how strongly government policies affect the size of informal sector. I measure the extent of the stepping-stone role with the intensity of skill accumulation in the informal sector. If informal jobs help workers acquire skills, gain expertise, and build professional networks for boosting the chances to switch to a formal job, then the size of the informal sector is less sensitive to government policy. In this case, the option value of a job in the informal sector will be high and a worker with an informal job will not rush to switch to a formal job when a policy encouraging formal employment is in effect. If, on the other hand, the informal sector does not provide satisfactory training opportunities, then the size of the informal sector becomes more sensitive to government policy. Calibrating the model to the Brazilian data, I perform numerical exercises confirming that the effect of government policy on the size of the informal sector is a decreasing function of the intensity of skill acquisition in the informal sector. |
| Keywords: | informal sector, stepping stone, government policy, job search, human capital, option value |
| JEL: | E26 J24 J38 J64 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10116&r=dge |
| By: | Vasilev, Aleksandar |
| Abstract: | This paper utilizes an otherwise standard micro-founded general-equilibrium setup, which is augmented with a revenue-extraction mechanism to assess the magnitude of VAT evasion. The model is calibrated to Bulgaria after the introduction of the currency board (1999-2014), as one of the very few countries in Europe with a non-differentiated consumption tax rate, and an economy where VAT revenue makes almost half of total government tax revenue. A computational experiment performed within this setup estimates that on average, the size of evaded VAT is a bit more than one-fourth of output, an estimate which is in line with the figures provided in both Philip (2014) and the European Commission (2014). In addition, model-based simulations suggest that increases in spending on law and order could generate substantial welfare gains by decreasing VAT evasion. |
| Keywords: | VAT evasion,general equilibrium,Bulgaria |
| JEL: | D58 E26 H26 K42 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:144817&r=dge |
| By: | Antonio Mele (University of Surrey); Radoslaw Stefanski (University of St Andrews) |
| Abstract: | Monetary velocity declines as economies grow. We argue that this is due to the process of structural transformation - the shift of workers from agricultural to non-agricultural production associated with rising income. A calibrated, two-sector model of structural transformation with monetary and non-monetary trade accurately generates the long run monetary velocity of the US between 1869 and 2013 as well as the velocity of a panel of 92 countries between 1980 and 2010. Three lessons arise from our analysis: 1) Developments in agriculture, rather than non-agriculture, are key in driving monetary velocity; 2) Inflationary policies are disproportionately more costly in richer than in poorer countries; and 3) Nominal prices and inflation rates are not `always and everywhere a monetary phenomenon': the composition of output influences money demand and hence the secular trends of price levels. |
| Keywords: | structural transformation, monetary shares, velocity, agricultural productivity, nonmonetary exchange 1 We would like to thank Martin Ellison, Alexander Berentsen, Fernando Martin, Domenico Ferraro, B |
| JEL: | O1 O4 E4 E5 N1 |
| Date: | 2016–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1610&r=dge |
| By: | Thierry Magnac (Toulouse School of Economics); Pierre Dubois (Toulouse School of Economics) |
| Abstract: | We construct a tractable structural dynamic model of consumption, purchase and stocks by consumers for whom stockpiling is unobserved and for whom preferences are isolastic and affected by independent and identically distributed shocks. Consumers purchase in stores which they meet randomly and which are supposed to maximize short run profits. We show that a two-price mixed strategy by stores satisfies conditions for an equilibrium in which consumers and stores coordinate their expectations on this stationary solution. We derive a simple and tractable estimation method using log linearized demand equations and equilibrium conditions. We estimate parameters using scanner data registering soda purchases by French consumers during 2005-2007. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:451&r=dge |
| By: | Dmitriy Sergeyev (Bocconi University) |
| Abstract: | I solve for optimal macroprudential and monetary policies for members of a currency union in an open economy model with nominal price rigidities, demand for safe as- sets, and collateral constraints. Monetary policy is conducted by a single central bank, which sets a common interest rate. Macroprudential policy is set at a country level through the choice of reserve requirements. I emphasize two main results. First, with asymmetric countries and sticky prices, the optimal macroprudential policy has a country-specific stabilization role beyond optimal regulation of financial sectors. This result holds even if optimal fiscal transfers are allowed among the union members. Second, there is a role for global coordination of country-specific macroprudential policies. This is true even when countries have no monopoly power over prices of internationally traded goods or assets. These results build the case for coordinated macroprudential policies that go beyond achieving financial stability objectives. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:463&r=dge |
| By: | Derek Neal (University of Chicago); Gadi Barlevy (Federal Reserve Bank of Chicago) |
| Abstract: | In many professional service firms, new associates work long hours while competing in up-or-out promotion contests. Our model explores why these firms require young professionals to take on heavy work loads while facing significant risks of dismissal. We argue that the productivity of skilled partners in professional service firms, e.g. law, consulting, investment banking, public accounting, etc, is quite large relative to the productivity of their peers who are competent and experienced but not well-suited to the partner role. Therefore, these firms adopt personnel policies that facilitate the identi- fication of new partners. In our model, both heavy work loads and up-or-out rules serve this purpose. Market participants learn more about new workers who perform more tasks, and when firms replace experienced associates with new less productive workers, they gain the opportunity to identify talented professionals who will have long careers as partners. Both of these personnel practices are costly. However, when the gains from increasing the number of talented partners exceed these costs, firms employ both practices in tandem. We present evidence on life-cycle patterns of hours and earnings among lawyers that support our claim that both heavy work loads and up-or-out rules are screening mechanisms. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:492&r=dge |
| By: | Stephane Verani (Federal Reserve Board); Borghan Narajabad (Federal Reserve Board); Nathan Foley-Fisher (Federal Reserve Board) |
| Abstract: | The interaction of worsening fundamentals and strategic complementarities among investors renders identification of self-fulfilling runs challenging. We propose a dynamic model to show how exogenous variation in firms’ liability structures can be exploited to obtain variation in the strength of strategic complementarities. Applying this identification strategy to puttable securities offered by U.S. life insurers, we find that 40 percent of the $18 billion run on life insurers by institutional investors during the summer of 2007 was due to self-fulfilling expectations. Our findings suggest that other contemporaneous runs in shadow banking by institutional investors may have had a self-fulfilling component. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:414&r=dge |