|
on Dynamic General Equilibrium |
| By: | Parantap Basu (Durham Business School); Shesadri Banerjee (National Council of Applied Economic Research (NCAER)) |
| Abstract: | A striking stylized fact of the Indian economy is the increasing predominance of the investment speciÖc technology shocks (IST) as opposed to total factor productivity (TFP) shocks in determining the GDP áuctuations during the post liberalization era. A concurrent phenomenon is the stark increase in the relative import content in the consumption basket vis-a-vis investment. We develop an open economy dynamic stochastic general equilibrium (DSGE) model to understand the determinants of the relative importance of IST and TFP shocks. The model has standard frictions which include price stickiness, external habit formation, investment adjustment cost, and transaction cost of foreign bond holding. We Önd that the relative share of import content in consumption over investment and nominal friction are crucial determinants of the relative importance of these two technology shocks. |
| Keywords: | Business cycles, IST and TFP Shocks, DSGE Modeling. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:dur:cegapw:2015_04&r=dge |
| By: | Tatiana Damjanovic (Durham Business School); Dudley Cooke (University of Exeter) |
| Abstract: | This paper develops a general equilibrium model of firm entry and financial frictions.Movements in the volatility of firm-level shocks and aggregate productivity generate procyclical entry and a countercyclical firm default rate. We derive analytical results for optimal fiscal policy and show that the government faces two trade-offs. The first arises from a profit destruction and a consumer surplus effect when firm entry is endogenous. The second arises because financial frictions reduce firm entry and default is costly. We also study the optimal mix of taxes on labor-income and firm profits in a quantitative version of the model. We find that a countercyclical labor-income tax is always part of the optimal fiscal policy, whereas the cyclicality of the profit tax is sensitive to the source of aggregate fluctuations. |
| Keywords: | Firm Entry, Financial Frictions, Optimal Fiscal Policy |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:dur:cegapw:2016_02&r=dge |
| By: | Maurizio MOTOLESE; NAKATA Hiroyuki |
| Abstract: | This paper examines the relationship between the aggregate output level and social welfare in an overlapping generations (OLG) model of a financial economy with heterogeneous beliefs by focusing on the case of rational beliefs in the sense of Kurz (1994). The aggregate output level is affected by the endogenously determined net supply of the riskless asset, which in turn is affected by the distribution of beliefs; thus, there is a coordination issue. To measure the social welfare, we adopt a measure that is based on the ex post social welfare concept in the sense of Hammond (1981), instead of the standard ex ante criterion to reflect the heterogeneous beliefs. Simulation results indicate that there may be an inverse relationship between the aggregate output and the social welfare. The results suggest that commonly used macroeconomic variables such as gross domestic product (GDP) may not be a very appropriate measure when making policy recommendations. |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:16082&r=dge |
| By: | Fernanda Nechio (Federal Reserve Bank of San Francisco); Andrea Ferrero (University of Oxford); Carlos Carvalho (PUC-Rio) |
| Abstract: | The demographic transition can affect the equilibrium real interest rate through three channels. An increase in longevity---or expectations thereof---puts downward pressure on the real interest rate, as agents build up their savings in anticipation of a longer retirement period. A reduction in the population growth rate has two counteracting effects. On the one hand, capital per-worker rises, thus inducing lower real interest rates through a reduction in the marginal product of capital. On the other hand, the decline in population growth eventually leads to a higher dependency ratio (the fraction of retirees to workers). Because retirees save less than workers, this compositional effect lowers the aggregate savings rate and pushes real rates up. We calibrate a tractable life-cycle model to capture salient features of the demographic transition in developed economies, and find that its overall effect is a reduction of the equilibrium interest rate by at least one and a half percentage points between 1990 and 2014. Demographic trends have important implications for the conduct of monetary policy, especially in light of the zero lower bound on nominal interest rates. Other policies can offset the negative effects of the demographic transition on real rates with different degrees of success. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:717&r=dge |
| By: | Francis X. Diebold; Frank Schorfheide; Minchul Shin |
| Abstract: | Recent work has analyzed the forecasting performance of standard dynamic stochastic general equilibrium (DSGE) models, but little attention has been given to DSGE models that incorporate nonlinearities in exogenous driving processes. Against that background, we explore whether incorporating stochastic volatility improves DSGE forecasts (point, interval, and density). We examine real-time forecast accuracy for key macroeconomic variables including output growth, inflation, and the policy rate. We find that incorporating stochastic volatility in DSGE models of macroeconomic fundamentals markedly improves their density forecasts, just as incorporating stochastic volatility in models of financial asset returns improves their density forecasts. |
| JEL: | E17 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22615&r=dge |
| By: | Patrick Kehoe; Elena Pastorino; Virgiliu Midrigan |
| Abstract: | During the Great Recession, regions of the United States that experienced the largest declines in household debt also experienced the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector and for firms that were facing the worst credit conditions. Motivated by these findings, we develop a search and matching model with credit frictions that affect both consumers and firms. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job finding rates and employment. Two key features of our model, on-the-job human capital accumulation and consumer-side credit frictions, are critical to generating sizable drops in employment. On-the-job human capital accumulation makes the flows of benefits from posting vacancies long-lived and so greatly amplifies the sensitivity of such investments to credit frictions. Consumer-side credit frictions further magnify these effects by leading wages to fall only modestly. We show that the model reproduces well the salient cross-regional features of the U.S. data during the Great Recession. |
| JEL: | E21 E24 E32 J21 J64 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22614&r=dge |
| By: | Liang Wang (Assistant Professor at the University of Hawaii Manoa; University of Hawaii at Manoa, Department of Economics, University of Hawaii Economic Research Organization) |
| Abstract: | This paper studies the welfare cost of ináation in a frictional monetary economy with endogenous consumer search. Equilibrium entails price dispersion, where sellers compete for buyers by posting prices. We identify three channels through which inflation affects welfare. The real balance channel is the source of welfare loss. Its interaction with the price posting channel generates a welfare cost larger than Lucas (2000). The search channel reduces the welfare cost by more than one half through general equilibrium effect. The aggregate effect of these three channels on welfare is non-monotonic. Additionally, the welfare cost of ináation áuctuations is negligible. |
| Keywords: | Consumer Search, Inflation, Price Dispersion, Welfare |
| JEL: | E31 E40 E50 D83 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201616&r=dge |
| By: | Povilas Lastauskas (Bank of Lithuania); Julius Stakenas (Bank of Lithuania) |
| Abstract: | This paper builds a theoretical model that introduces frictional unemployment in a multisectoral heterogeneous firms model. We allow for multi-worker firms and dynamic matching process. In doing so, we have a rich environment that combines product, labour, and international markets. The focus is on unemployment benefits and employment contingent subsidies. We establish a mechanism, which is different from the standard search and matching model. A change in labour market policies due to the feedback from labour market tightness to wages transforms the share of exporters and affects average productivity. Partial equilibrium effects are overturned for subsidies in general equilibrium due to sectoral arbitrage condition. We address the following questions in the quantitative exercise: How does trade along intensive and extensive margins evolve with changes in labour market policies? How do firms’ profitabilities and thus reallocations across exporters/non-exporters react to labour market institu-tions? What are the differences between a domestic and a trade-bloc wide shock? In addition to the theory contribution, we find that unemployment benefits bear differ-ent policy implications with regards to international coordination than employment subsidies. |
| Keywords: | labour market institutions, heterogeneous multi-worker firms, dynamic matching, openness |
| JEL: | E24 F12 F16 |
| Date: | 2016–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:33&r=dge |
| By: | Anurag Banerjee (Durham Business School); Parantap Basu (Durham Business School); Elisa Keller (University of Exeter) |
| Abstract: | Although the ratio of higher educated lifetime earnings relative to primary-educated lifetime earnings (skill premium) is higher in poor than rich countries, poor countries have a substantially lower fraction of individuals with higher education (skilled individuals). Why? In a sample of 52 countries, we document that the unemployment rate of the skilled net of that of the unskilled decreases with a country’s level of development. We argue that the cost of opening and operating a business is a first order determinant of these unemployment rates and can reconcile a lower skill acquisition in front of a higher skill premium in poor compared to rich countries. To formalize our argument, we write and quantify a matching model of endogenous occupational choice and skill acquisition. A country’s business cost, schooling cost and skill-productivity profile determine its fraction of skilled individuals, skill premium and unemployment rates by skill level. We infer a higher business cost for poor countries and, via counterfactual experiments, find that disparities in the business cost account for about one third of the cross-country correlation between skill premium and fraction of skilled individuals |
| Keywords: | Skill acquisition. Unemployment. Business cost. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:dur:cegapw:2016_01&r=dge |
| By: | Jean-Christophe Poutineau (CREM - Centre de Recherche en Economie et Management - UR1 - Université de Rennes 1 - Université de Caen Basse-Normandie - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (PSL - PSL Research University, LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine) |
| Abstract: | In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries. |
| Keywords: | Bayesian Estimation,DSGE Two-Country Model,Macroprudential policy,Euro Area,Financial Accelerator |
| Date: | 2016–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01315085&r=dge |
| By: | Junichi Fujimoto (National Graduate Institute for Policy Studies); Junsang Lee (Sungkyunkwan University) |
| Abstract: | This paper examines efficient risk sharing under limited commitment and search frictions. The model features a social planner and a continuum of risk-averse workers, where the planner is able to provide consumption only to workers matched with the planner and faces an aggregate resource constraint, while workers can walk away from the match in any period and search for a new match. The formation of new matches and the exogenous destruction of existing ones substantially expand the set of feasible stationary allocations, providing a role for the social welfare function. In the benchmark case of the Benthamite social welfare function, we find that the efficient stationary allocation exhibits novel consumption dynamics: Consumption begins at a relatively low level, converges toward a certain level when the participation constraint is slack, and jumps up when it binds. We then explore the role of limited commitment in generating such rich consumption dynamics. |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:ngi:dpaper:16-15&r=dge |
| By: | Daniel Baksa (Central European University); Zsuzsa Munkacsi (Bank of Lithuania) |
| Abstract: | Southern Europe is currently experiencing a double-whammy: high levels of government debt coupled with a rapidly aging population. Thus, the consolidation of (pension) budgets seems inevitable. In this paper we examine the short- and long-run macroeconomic e ects of public old-age pension reforms and other scal policies under conditions of population aging. To do so, we calibrate OGRE, a New Keynesian model with overlapping generations, unemployment and an underground sector to match annual data on Portugal and Spain. Our main nding is that a retirement-age increase is the least harmful policy with respect to long-run output. However, we raise some doubts about the feasibility of implementing this policy. |
| Keywords: | population aging, public old-age pension reforms, pay-as-you-go, fully funded, shadow economy, informal employment, government debt, New Keynesian model, overlapping generations, demography, unemployment, retirement ageLength: 71 pages |
| JEL: | E24 E26 H55 J11 J46 |
| Date: | 2016–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:32&r=dge |
| By: | Lucas Herrenbrueck (Simon Fraser University) |
| Abstract: | How do central bank purchases of illiquid assets affect interest rates and the real economy? In order to answer this question, I construct a parsimonious and very flexible general equilibrium model of asset liquidity. In the model, households are heterogeneous in their asset portfolios and demand for liquidity, and asset trade is subject to frictions. I find that open market purchases of illiquid assets are fundamentally different from helicopter drops: asset purchases stimulate private demand for consumption goods at the expense of demand for assets and investment goods, while helicopter drops do the reverse. A temporary program of quantitative easing can therefore cause a "hangover" of elevated yields and depressed investment after it has ended. When assets are already scarce, further purchases can crowd out the private flow of funds and cause high real yields and disinflation, resembling a liquidity trap. In the long term, lowering the stock of government debt reduces the supply of liquidity but increases the capital-output ratio, with ambiguous consequences for output itself. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:767&r=dge |
| By: | Alina Arefeva (Stanford) |
| Abstract: | I develop a tractable dynamic model of the housing market where the prices are determined in auctions rather than by Nash bargaining as in the standard housing search model. Markets that use auctions mimic actual housing markets, in that the model can portray a ``hot" market where numerous buyers flock to each new house on the market and a ``cold" market, where numerous houses are on the market and a buyer has a wide choice without competing directly with other buyers. In the auction model prices are higher, the inventory is bigger and waiting times are longer in the steady state compared to the standard model. The dynamic response of prices to shocks is larger in the auction model than in the bargaining model. Auctions amplify the response of house prices to shocks because prices respond more to changes in the present value of the housing services, and the option value to sell is more sensitive to the state of the housing market. The equilibrium allocations of the auction and Nash bargaining model are not socially efficient, so the government interventions are desirable. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:714&r=dge |
| By: | Yiannis Vailakis (University of Glasgow); V. Filipe Martins-da-Rocha (FGV) |
| Abstract: | How domestic costs of default do interact with the threat of exclusion from credit markets to determine interest rates and sovereign debt sustainability? In this paper, we address this question in the context of a stochastic general equilibrium model with lack of commitment and self-enforcing debt in which default has two consequences: loss of access to international borrowing and output costs. In contrast to Bulow and Rogoff (1989), we show that part of the ability to borrow is merely attributed to the threat of credit exclusion, or equivalently, to the loss of the sovereign's reputation. Apart from the limit case--analyzed by Hellwig and Lorenzoni (2009)--where output costs are absent, equilibrium interest rates are always higher than growth rates, implying that the way "reputation for repayment" supports debt does not depend on whether debt limits allow agents to exactly roll over existing debt period by period. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:706&r=dge |
| By: | Guido Menzio (University of Pennsylvania); Mikhail Golosov (Princeton University) |
| Abstract: | We propose a new business cycle theory. Firms need to randomize over firing or keeping workers who have performed poorly in the past, in order to give them an ex-ante incentive to exert effort. Firms have an incentive to coordinate the outcome of their randomizations, as coordination allows them to load the firing probability on states of the world in which it is costlier for workers to become unemployed and, hence, allows them to reduce overall agency costs. In the unique robust equilibrium, firms use a sunspot to coordinate the randomization outcomes and the economy experiences endogenous, stochastic aggregate fluctuations. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:740&r=dge |
| By: | Shuhei Takahashi (Kyoto University); Tomoyuki Nakajima (Kyoto University) |
| Abstract: | We analyze lump-sum transfers financed through consumption taxes in a heterogeneous-agent model with uninsured idiosyncratic wage risk and endogenous labor supply. The model is calibrated to the U.S. economy. We find that consumption inequality and uncertainty decrease with transfers much more substantially under divisible than indivisible labor. Increasing transfers by raising the consumption tax rate from 5% to 35% decreases the consumption Gini by 0.04 under divisible labor, whereas it has almost no effect on the consumption Gini under indivisible labor. The divisibility of labor also affects the relationship among consumption-tax financed transfers, aggregate saving, and the wealth distribution. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:797&r=dge |
| By: | Daniel Baksa (Central European University); Zsuzsa Munkacsi (Bank of Lithuania) |
| Abstract: | In this paper we present the structure of OGRE, a dynamic general equilib-rium model with overlapping generations, unemployment and a shadow economy. Based on a parametrized version of the model, we examine the impacts of aging and calculate multipliers of public pension and other fiscal policies. Also, we contrast macroeconomic reactions with pay-as-you-go and fully funded pension plans. Lastly, we highlight the role of unemployment and that of the underground sector in the framework. |
| Keywords: | population aging, public old-age pension reforms, pay-as-you-go, fully funded, shadow economy, informal employment, government debt, New Keynesian model, overlapping generations, demography, unemployment, retirement age |
| JEL: | E24 E26 H55 J11 J46 |
| Date: | 2016–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:31&r=dge |
| By: | Robert Kollmann (ECARES, Université Libre de Bruxelles & CEPR) |
| Abstract: | This paper analyzes the effects of output volatility shocks and of risk appetite shocks on the dynamics of the real exchange rate, consumption and net foreign assets, in a two country world with recursive preferences and complete financial markets. When the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity, then an exogenous rise in a country’s output volatility triggers a wealth transfer to that country, in equilibrium; this raises its consumption, lowers its trade balance and appreciates its real exchange rate. The effects of risk appetite shocks resemble those of volatility shocks. In a recursive preferences-complete markets framework, volatility and risk appetite shocks account for a noticeable share of the fluctuations of the real exchange rate, net exports and net foreign assets. These shocks help to explain the high empirical volatility of the real exchange rate and the disconnect between relative consumption growth and the real exchange rate. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:721&r=dge |
| By: | Froemel, M.; Gottlieb, C. |
| Abstract: | In this paper, we quantify the effects of the Earned Income Tax Credit (EITC) from a macroeconomic perspective. We use an incomplete markets model to analyze jointly the labor supply and saving responses to changes in tax credit generosity and their aggregate and distributional implications. In line with existing literature, our results show that the EITC is an effective policy instrument to raise labor force participation and provide insurance to working poor households. However, we show that the EITC also disincentivizes private savings for a large part of the population, except for the poorest transfer recipients. Furthermore, since unskilled labor supply reacts more strongly than skilled workers’ labor supply, wages for low skilled workers fall relative to high skilled workers. Whilst reducing post-tax earnings inequality, the EITC contributes to both a higher skill premium and wealth inequality. Finally, our welfare analysis suggests that EITC expansions are welfare improving for the majority of the population, both ex ante and when accounting for transitional dynamics. |
| Date: | 2016–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1651&r=dge |
| By: | Leduc, Sylvain; Moran, Kevin; Vigfusson, Robert J. |
| Abstract: | We show that a model where investors learn about the persistence of oil-price movements accounts well for the fluctuations in oil-price futures since the late 1990s. Using a DSGE model, we then show that this learning process alters the impact of oil shocks, making it time-dependent and consistent with the muted impact oil-price changes had on macroeconomic outcomes during the early 2000s and again over the past two years. The Spring 2008 increase in oil prices had a larger impact because market participants considered that it was likely driven by permanent shocks. |
| Keywords: | Kalman filter ; Time-variation ; Inventories ; Conditional response |
| JEL: | E32 E37 Q43 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1179&r=dge |
| By: | Farmer, Roger (UCLA, Department of Economics); Zabczyk, Pawel (Bank of England) |
| Abstract: | This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing. |
| Keywords: | Unconventional monetary policy; qualitative easing; central bank balance sheet; portfolio balance effects |
| JEL: | E02 G11 G21 |
| Date: | 2016–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0613&r=dge |
| By: | Adrian Pagan (Sydney Uni) |
| Abstract: | This note shows that the common practice of adding on measurement errors or "errors in variables" when estimating DSGE models can imply that there is a lack of co-integration between model and data variables and also between data variables themselves. An analysis is provided of what the nature of the measurement error would be if it was desired to ensure co-integration. It is very unlikely that it would be the white noise shocks that are commonly used. |
| Keywords: | DSGE models, shocks |
| Date: | 2016–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2016_05&r=dge |
| By: | Aloisio Araujo (IMPA); Juan Pablo Gama-Torres (IMPA); Rodrigo Novinski (Faculdades Ibmec); Mario Pascoa (University of Surrey) |
| Abstract: | Wary agents tend to neglect gains at distant dates but not the losses that occur at those far away dates. For these agents, Ponzi schemes are not the only improving schemes compatible with non-arbitrage pricing. However, ecient allocations can be sequentially implemented by allocating money and then, at subsequent dates, taxing savings plans whose open end bene ts to wary agents outweigh the cost of carrying on cash. The allocative role of money does not disappear over time and the transversality condition allows for consumers to have limiting long positions. Money supply does not have to go to zero and, actually, there are equilibria where it does not. We address also why at money does not lose its value when Lucas trees are available. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0416&r=dge |
| By: | Stefano Bosi (EPEE - Centre d'Etudes des Politiques Economiques - Université d'Evry-Val d'Essonne); Cuong Le Van (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, IPAG BUSINESS SCHOOL - IPAG BUSINESS SCHOOL PARIS, PSE - Paris School of Economics); Ngoc-Sang Pham (EPEE - Centre d'Etudes des Politiques Economiques - Université d'Evry-Val d'Essonne, LEM - Lille - Economie et Management - Université de Lille, Sciences et Technologies - Fédération Universitaire et Polytechnique de Lille - Université de Lille, Sciences Humaines et Sociales - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper considers rational land and housing bubbles in an infinite-horizon general equilibrium model. Their demands rest on two different grounds: the land is an input to produce while the house may be consumed. Our work differs from the existing literature in two respects. First, dividends on both these long-lived assets are endogenous and their sequences are computed. Second, we introduce and study different concepts of bubbles, including individual and strong bubbles. |
| Keywords: | housing bubble,infinite horizon,general equilibrium,land bubble |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01314609&r=dge |
| By: | Stefano Bosi (EPEE - Centre d'Etudes des Politiques Economiques - Université d'Evry-Val d'Essonne); Cuong Le Van (IPAG BUSINESS SCHOOL - IPAG BUSINESS SCHOOL PARIS, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Ngoc-Sang Pham (LEM - Lille - Economie et Management - Université de Lille, Sciences et Technologies - Fédération Universitaire et Polytechnique de Lille - Université de Lille, Sciences Humaines et Sociales - CNRS - Centre National de la Recherche Scientifique, EPEE - Centre d'Etudes des Politiques Economiques - Université d'Evry-Val d'Essonne) |
| Abstract: | We consider a multi-sector infinite-horizon general equilibrium model. Asset supply is endogenous. The issues of equilibrium existence, efficiency, and bubble emergence are addressed. We show how different assets give rise to very different rational bubbles. We also point out that efficient bubbly equilibria may exist. |
| Keywords: | infinite-horizon,general equilibrium,aggregate good bubble,capital good bubble,efficiency |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01316876&r=dge |
| By: | Ryan Michaels; David Ratner (Federal Reserve Board); Michael Elsby (University of Edinburgh) |
| Abstract: | Replacement hiring—recruitment that seeks to replace positions vacated by workers who quit—is a prominent feature of empirical firm dynamics. We document this phenomenon by establishing a set of novel facts: 1) many establishments exhibit no net change in employment over time, despite nontrivial quit rates; 2) higher quit rates are associated with lower degrees of net inaction; and 3) rates of inaction over net changes decay slowly by frequency (quarterly, yearly, bi-yearly etc.) suggesting that high-frequency net changes are exactly reversed at lower frequencies. A model of replacement hiring that is calibrated to match these empirical facts reveals a novel positive feedback channel through which an initial rise in vacancy posting in an expansion induces still more vacancy posting to replace employees who are poached. This vacancy chain in turn induces volatile responses of vacancies, and thereby unemployment, to cyclical shocks. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:753&r=dge |
| By: | Carlos Garriga; Finn E. Kydland; Roman Šustek |
| Abstract: | Standard models used for monetary policy analysis rely on sticky prices. Recently, the literature started to explore also nominal debt contracts. Focusing on mortgages, this paper compares the two channels of transmission within a common framework. The sticky price channel is dominant when shocks to the policy interest rate are temporary, the mortgage channel is important when the shocks are persistent. The first channel has significant aggregate effects but small redistributive effects. The opposite holds for the second channel. Using yield curve data decomposed into temporary and persistent components, the redistributive and aggregate consequences are found to be quantitatively comparable. |
| JEL: | E32 E52 G21 R21 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22613&r=dge |
| By: | KITAO Sagiri |
| Abstract: | Japan is going through rapid and significant demographic aging. Fertility rates have been below replacement level for four decades, and life expectancy has increased by 30 years since the 1950s. The pension reform of 2004 is expected to reduce the replacement rate, but there is much uncertainty as to when and whether the adjustment will be complete. The normal retirement age of 65 will be the lowest among major developed countries. This paper simulates pension reform to reduce the replacement rate by 20% and raise the retirement age by three years gradually over a 30-year period. We consider three scenarios that differ in timing to initiate reform and let the consolidation start in 2020, 2030, and 2040, respectively. A delay would suppress economic activities, lowering output by up to 4% and raising the tax burden by more than eight percentage points of total consumption. Delaying reform also implies a major tradeoff across generations and deteriorates the welfare of future generations by up to 3% in consumption equivalence. |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:16077&r=dge |
| By: | Lee, Seungduck |
| Abstract: | This paper examines the effect of monetary policy on the liquidity premium, i.e., the market value of the liquidity services that financial assets provide. To guide the empirical analysis, I set up a monetary search model in which bonds provide liquidity services in addition to money. The theory predicts that money supply and the nominal interest rate are positively correlated with the liquidity premium, but the latter is negatively correlated with the bond supply. The empirical analysis over the period from 1946 and 2008 confirms the theoretical findings. This indicates that liquid bonds are substantive substitutes for money and the opportunity cost of holding money plays a key role in asset price determination. The model can rationalize the existence of negative nominal yields, when the nominal interest rate is low and liquid bond supply decreases. |
| Keywords: | asset price, money search model, liquidity, liquidity premium, money supply |
| JEL: | E31 E41 E51 E52 G12 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73707&r=dge |
| By: | Chao Fu (University of Wisconsin - Madison); Naoki Aizawa (University of Minnesota) |
| Abstract: | We study the heterogeneous impacts of the Affordable Care Act (ACA) across households, firms and local labor markets. We develop and estimate a competitive labor market equilibrium model, with rich heterogeneities across local markets, workers and firms. We estimate the model via indirect inference, exploring variations in the policy environments across markets and across policy eras (before/after ACA). We use the estimated model to study the counterfactual changes in various components of the ACA. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:726&r=dge |
| By: | Marie-Louise Leroux; Grégory Ponthiere |
| Abstract: | The family plays a central role in decisions relative to the provision of long term care (LTC). We develop a model of family bargaining to study the impact of the distribution of bargaining power within the family on the choices of nursing homes, and on the location and prices chosen by nursing homes in a Hotelling economy. We show that, if the dependent parent only cares about the distance, whereas his child cares also about the price, the mark up rate of nursing homes is increasing in the bargaining power of the dependent parent. We contrast the laissez-faire with the social optimum, and we show how the social optimum can be decentralized in a first-best setting and in a second-best setting (i.e. when the government cannot force location). Finally, we explore the robustness of our results to considering families with more than one child, and to introducing a wealth accumulation motive within a dynamic OLG model, which allows us to study the joint dynamics of wealth and nursing home prices. We show that a higher capital stock raises the price of nursing homes through higher mark up rates. |
| Keywords: | Family bargaining, long term care, nursing homes, spacial competitition, optimal policy, OLG models. |
| JEL: | D10 I11 I18 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:criacr:1604&r=dge |
| By: | Pablo Winant (Bank of England); Jonathan Ostry (International Monetary Fund); Atish Ghosh (International Monetary Fund); Suman Basu (International Monetary Fund) |
| Abstract: | We analyze the optimal intervention policy for an emerging market central bank which wishes to stabilize the exchange rate in response to a capital outflow shock, but possesses limited reserves. Using a stylized framework which nests various forms of limited capital mobility, we derive a time inconsistency problem, and we compare outcomes under full, zero and partial commitment. A central bank with full commitment achieves a gentle exchange rate depreciation to the pure float level by promising a path of sustained intervention, including a commitment to exhaust reserves after particularly adverse shocks. A central bank without commitment intervenes less, wishing instead to preserve at least some reserves forever, and suffers a larger exchange rate depreciation. For more persistent shocks, the time inconsistency problem is larger, and simple intervention rules can achieve welfare gains relative to discretion. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:756&r=dge |
| By: | George Alogoskoufis (Athens University of Economics and Business) |
| Abstract: | This paper puts forward an alternative “new Keynesian” dynamic stochastic general equilibrium model of aggregate fluctuations. The model is characterized by one period nominal wage contracts and endogenous persistence of deviations of unemployment from its natural rate. Aggregate fluctuations are analyzed under both a Taylor nominal interest rate rule and under the assumption of optimal discretionary monetary policy. Under both types of monetary policy, the persistence of unemployment results in persistent inflation as the central bank responds to deviations of unemployment from its natural rate. Econometric evidence from the United States since the 1890s cannot reject the main predictions of the model. |
| Keywords: | Aggregate Fluctuations, Unemployment Persistence, Inflation, Monetary Policy, Insiders Outsiders, Natural Rate |
| JEL: | E3 E4 E5 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:aeb:wpaper:201604&r=dge |
| By: | Miles Kimball (University of Michigan); Christopher House (University of Michigan); Christoph Boehm (University of Michigan); Robert Barsky (Department of Economics) |
| Abstract: | We analyze monetary policy in a New Keynesian model with durable and non-durable goods, each with a separate degree of price rigidity. Durability has profound implications for the business cycle properties of the model and its response to interest rate interventions. Since utility depends on the service flow from the stock of durables, the flow demand for new durables is inherently sensitive to temporary changes in the relevant real interest rate. For a sufficiently long-lived “ideal†durable, we obtain an intriguing variant of the well-known “divine coincidence —in this case, the output gap depends only on inflation in the durable goods sector. We use numerical methods to verify the robustness of this analytical result for a broader class of model parameterizations. We then analyze the optimal Taylor rule for this economy. If the monetary authority places a high weight on stabilizing aggregate inflation then it is optimal to respond to sectoral inflation in direct proportion to the sectoral shares of economic activity. However, if the monetary authority wants to stabilize the aggregate output gap, it puts disproportionate weight on inflation in durable goods prices. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:745&r=dge |
| By: | Nancy L Stokey (Department of Economics) |
| Abstract: | This paper studies the wage structure in a simple general equilibrium model with heterogeneous workers and technologies. The main contribution is to characterize the effects of improvements in a limited set of technolgies. Such changes have employment, output, price and wage effects that "ripple out" through the whole economy. Output increases and price falls for products/tasks that are directly affected. Employment at these tasks expands to a group of more skilled workers. Tasks higher up the technology ladder engage in "skill upgrading," but employment falls, so output declines, and prices and wages rise. Under a mild restriction, all of theses effects are mirrored at tasks farther down the technology ladder, where "skill downgrading" occurs. The output, price and wage changes are damped for more distant tasks, both above and below the set that is directly affected. A large technology boost for a small set of tasks at the top of the distribution produces wage effects that are qualitatively similar to those seen in the U.S. over the period 1982-2012. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:750&r=dge |
| By: | Pierlauro Lopez (Banque de France) |
| Abstract: | The welfare cost of economic uncertainty has a term structure that is a simple transformation of the term structures of the equity premium and interest rates. Twenty years of financial market data suggest a term structure of welfare costs that is downward-sloping on average and during downturns. This evidence offers guidance in selecting a model to study the benefits of greater consumption stability from a structural perspective. A model with nominal rigidities and nonlinear external habits can rationalize the evidence and motivates the competitive level and volatility of consumption as inefficient. The model is observationally equivalent to a standard New Keynesian model with CRRA utility but the optimal policy prescription is overturned; in the model the central bank should focus on removing consumption volatility rather than on filling the gap between consumption and its flexible-price counterpart. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:742&r=dge |
| By: | Chenyu Yang (University of Michigan, Ann Arbor); Ying Fan (University of Michigan) |
| Abstract: | We develop and estimate a structural model of the U.S. smartphone market. Based on the estimates, we study (1) whether there are too few or too many products in the market from a welfare point of view; and (2) how competition affects product offerings in the market. We find that there are too few products and a reduction in competition further decreases the product offerings. These results suggest that merger policies should be stricter when we take into account the effect of merger on firms' product choices in addition to its effect on prices. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:758&r=dge |