nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2016‒10‒16
twenty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Macroprudential and Monetary Policies Interactions in a DSGE Model for Sweden By Francesco Columba; Jaqian Chen
  2. Modest Macroeconomic Effects of Monetary Policy Shocks during the Great Moderation: An Alternative Interpretation By Efrem Castelnuovo
  3. Precautionary Savings and Pecuniary Externalities: Analytical Results for Optimal Capital Income Taxation By Alexander Ludwig; Dirk Krueger
  4. Does the Foreign Income Shock in a Small Open Economy DSGE Model Fit Croatian Data? By Vladimir Arčabić; Tomislav Globan; Ozana Nadoveza; Lucija Rogić Dumančić; Josip Tica
  5. Differential Mortality and the Progressivity of Social Security By Shantanu Bagchi
  6. Aggregate Recruiting Intensity By Alessandro Gavazza; Simon Mongey; Giovanni L. Violante
  7. Reputation Cycles By Boyan Jovanovic; Julien Prat
  8. Learning in the Oil Futures Markets: Evidence and Macroeconomic Implications By Sylvain Leduc; Kevin Moran; Robert J. Vigfusson
  9. Macroeconomic Effects of Productivity Shocks – A VAR Model of a Small Open Economy By Vladimir Arčabić; Tomislav Globan; Ozana Nadoveza; Lucija Rogić Dumančić; Josip Tica
  10. «The Falling Sperm Counts Story»: A Limit to Growth? By Johanna Etner; Natacha Raffin; Thomas Seegmuller
  11. Self-Fulfilling Debt Crises: A Quantitative Analysis By Luigi Bocola; Alessandro Dovis
  12. The Effects of Oil Price Shocks in a New-Keynesian Framework with Capital Accumulation By Verónica Acurio Vásconez; Gaël Giraud; Florent Mc Isaac; Ngoc-Sang Pham
  13. Interpreting Volatility Shocks as Preference Shocks By Shaofeng Xu
  14. On the optimal provision of social insurance By Krueger, Dirk; Ludwig, Alexander
  15. Secular Stagnation, Rational Bubbles, and Fiscal Policy By Coen N. Teulings
  16. The effects of government bond purchases on leverage constraints of banks and non-financial firms By Kühl, Michael
  17. Monetary policy for a bubbly world By Vladimir Asriyan; Luca Fornaro; Alberto Martin; Jaume Ventura
  18. Optimal Policy with General Signal Extraction By Esther Hauk; Andrea Lanteri; Albert Marcet
  19. Structural changes in the labor market and the rise of early retirement in Europe By Anna Batyra; David de la Croix; Olivier Pierrard; Henri Sneessens
  20. A Demand Theory of the Price Level By Marcus Hagedorn

  1. By: Francesco Columba (Bank of Italy); Jaqian Chen (IMF)
    Abstract: We analyse the effects and the interactions of macroprudential and monetary policies with an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden. Households are constrained by a loan-to-value ratio and mortgages are amortized. Government grants mortgage interest payment deductions. Lending rates are affected by mortgage risk weights. We find that to curb the household debt-to-income ratio demand-side macroprudential measures are more effective and less costly in terms of foregone consumption than monetary policy. A tighter macroprudential stance is also welfare improving, by promoting lower consumption volatility in response to shock, especially when combining different instruments, whose sequence of implementation is key.
    Date: 2016
  2. By: Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; Department of Economics, The University of Melbourne; and Department of Economics and Management, University of Padova)
    Abstract: Cholesky-VAR impulse responses estimated with post-1984 U.S. data predict modest macroeconomic reactions to monetary policy shocks. We interpret this evidence by employing an estimated medium-scale DSGE model of the business cycle as a DataGenerating Process in a Monte Carlo exercise in which a Cholesky-VAR econometrician is asked to estimate the effects of an unexpected, temporary increase in the policy rate. Our structural DSGE model predicts conventional macroeconomic reactions to a policy shock. In contrast, our Monte Carlo VAR results replicate our evidence obtained with actual U.S. data. Hence, modest macroeconomic effects may very well be an artifact of Cholesky-VARs. A combination of supply and demand shocks may be behind the inability of Cholesky-VARs to replicate the actual macroeconomic responses. The difference in the VAR responses obtained with Great Inflation vs. Great Moderation data may be due to instabilities in the parameters related to households’ and firms’ programs, more than to a more aggressive systematic monetary policy. A Monte Carlo assessment of sign restrictions as an alternative identification strategy is also proposed.
    Keywords: Monetary policy shocks, Cholesky identification, VARs, Dynamic Stochastic General Equilibrium models, Monte Carlo simulations
    JEL: C3 E3
    Date: 2016–10
  3. By: Alexander Ludwig (Goethe University Frankfurt); Dirk Krueger (University of Pennsylvania)
    Abstract: We develop an analytically tractable overlapping generations model with idiosyncratic earnings risk to study optimal capital income taxes. We derive simple closed form expressions for optimal taxes along the transition towards a new long-run equilibrium. We emphasize the important interplay between a precautionary savings motive and pecuniary externalities which the planner takes into account when determining optimal taxes.
    Date: 2016
  4. By: Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb); Tomislav Globan (Faculty of Economics and Business, University of Zagreb); Ozana Nadoveza (Faculty of Economics and Business, University of Zagreb); Lucija Rogić Dumančić (Faculty of Economics and Business, University of Zagreb); Josip Tica (Faculty of Economics and Business, University of Zagreb)
    Abstract: The paper compares theoretical impulse response functions from a DSGE model for a small open economy with an empirical VAR model estimated for the Croatian economy. The theoretical model fits the data well as long as monetary policy is modelled as a fixed exchange rate regime. The paper considers only a foreign output gap shock. A positive foreign shock increases domestic GDP and prices and decreases terms of trade, which is in compliance with theoretical assumptions. Interest rates behave differently than suggested by the estimated DSGE model, which could be explained with an unconventional interest rate transmission channel in Croatia.
    Keywords: DSGE, foreign income shocks, exchange rate, Croatia, gross domestic product, Eurozone
    JEL: E32 F41
    Date: 2016–09–21
  5. By: Shantanu Bagchi (Towson University)
    Abstract: I examine if the positive correlation between wealth and survivorship has any implications for the progressivity of Social Security’s current benefit-earnings rule. Using a general-equilibrium macroeconomic model calibrated to the U.S. economy, I show that the optimal benefit-earnings link for Social Security is largely insensitive to wealth-dependent mortality risk. This is because while a more progressive benefit-earnings rule provides increased insurance for households with relatively unfavorable earnings histories, and therefore lower savings and survivorship, their relatively high mortality risk heavily discounts the utility from old-age consumption. I find that these two effects roughly offset each other, yielding nearly identical optimal benefit-earnings rules both with and without differential mortality.
    Keywords: differential mortality, Social Security, mortality risk, labor income risk, incomplete markets, social insurance; general equilibrium
    JEL: E21 E62 H55
    Date: 2016–09
  6. By: Alessandro Gavazza; Simon Mongey; Giovanni L. Violante
    Abstract: We develop a model of firm dynamics with random search in the labor market where hiring firms exert recruiting effort by spending resources to fill vacancies faster. Consistent with micro evidence, in the model fast-growing firms invest more in recruiting activities and achieve higher job-filling rates. In equilibrium, individual decisions of hiring firms aggregate into an index of economy-wide recruiting intensity. We use the model to study how aggregate shocks transmit to recruiting intensity, and whether this channel can account for the dynamics of aggregate matching efficiency around the Great Recession. Productivity and financial shocks lead to sizable pro-cyclical fluctuations in matching efficiency through recruiting effort. Quantitatively, the main mechanism is that firms attain their employment targets by adjusting their recruiting effort as labor market tightness varies. Shifts in sectoral composition can have a sizable impact on aggregate recruiting intensity. Fluctuations in new-firm entry, instead, have a negligible effect despite their contribution to aggregate job and vacancy creations.
    Keywords: aggregate matching efficiency, firm dynamics, macroeconomic shocks, recruiting intensity, unemployment, vacancies
    Date: 2016–10
  7. By: Boyan Jovanovic; Julien Prat
    Abstract: This paper shows that endogenous cycles can arise when contracts between firms and their customers are incomplete and when products are experience goods. Then firms invest in the quality of their output in order to establish a good reputation. Cycles arise because investment in reputation causes self-fulfilling changes in the discount factor. Cycles are more likely to occur when information diffuses slowly and consumers exhibit high risk aversion. A rise in idiosyncratic uncertainty is of two kinds that work in opposite ways: Noise in observing effort is contractionary as it generally is in agency models. But a rise in the variance of the distribution of abilities is expansionary. A calibrated version produces realistic fluctuations in terms of peak-to-trough movements in consumption and the spacing of time between recessions.
    JEL: E32
    Date: 2016–09
  8. By: Sylvain Leduc; Kevin Moran; Robert J. Vigfusson
    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.
    Date: 2016–10–06
  9. By: Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb); Tomislav Globan (Faculty of Economics and Business, University of Zagreb); Ozana Nadoveza (Faculty of Economics and Business, University of Zagreb); Lucija Rogić Dumančić (Faculty of Economics and Business, University of Zagreb); Josip Tica (Faculty of Economics and Business, University of Zagreb)
    Abstract: The paper compares theoretical impulse response functions from a DSGE model for a small open economy with an empirical five variable VAR model estimated for the Croatian economy. In the paper we analyse the impact of productivity shock on the selected macroeconomic variables: domestic output gap, nominal interest rate, CPI inflation and terms of trade. The impulse responses from the empirical VAR model do not resemble those from the theoretical one for all the variables in any proposed monetary regimes. Results of modelling simultaneous interrelationships between variables also support the results that the productivity shocks do not play a significant role in determining the variation of selected macroeconomic variables in the case of the Croatian economy.
    Keywords: DSGE, productivity shocks, small open economy, exchange rate, Croatia
    JEL: D24 E32 F41
    Date: 2016–09–21
  10. By: Johanna Etner (EconomiX - UPOND - Université Paris Ouest Nanterre La Défense - CNRS - Centre National de la Recherche Scientifique, Climate Economics Chair - University Paris Dauphine); Natacha Raffin (EconomiX - UPOND - Université Paris Ouest Nanterre La Défense - CNRS - Centre National de la Recherche Scientifique, Climate Economics Chair - University Paris Dauphine); Thomas Seegmuller (AMSE - Aix-Marseille School of Economics - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - EHESS - École des hautes études en sciences sociales)
    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
    Date: 2016–07
  11. By: Luigi Bocola; Alessandro Dovis
    Abstract: This paper uses the information contained in the joint dynamics of government’s debt maturity choices and interest rate spreads to quantify the importance of self-fulfilling expectations in sovereign bond markets. We consider a model of sovereign borrowing featuring endogenous debt maturity, risk averse lenders and self-fulfilling rollover crises á la Cole and Kehoe (2000). In this environment, interest rate spreads are driven by economic fundamentals and by expectations of future self-fulfilling defaults. These two sources of default risk have contrasting implications for the debt maturity choices of the government. Therefore, they can be indirectly inferred by tracking the evolution of the maturity structure of debt during a crisis. We fit the model to the Italian debt crisis of 2008-2012, finding that 12% of the spreads over this episode were due to rollover risk. Our results have implications for the effects of the liquidity provisions established by the European Central Bank during the summer of 2012.
    JEL: E44 F34 G12 G15
    Date: 2016–09
  12. By: Verónica Acurio Vásconez (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Gaël Giraud (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Florent Mc Isaac (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Ngoc-Sang Pham (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The economic implications of oil price shocks have been extensively studied since the 1970s'. Despite this huge literature, no dynamic stochastic general equilibrium model was available that captures two well-known stylized facts: 1) the stagflationary impact of an oil price shock, together with 2) the influence of the energy productivity of capital on the depth and length of this impact. We build, estimate and simulate a New-Keynesian model with capital accumulation, which takes the case of an economy where oil is imported from abroad, and where these stylized facts can be accounted for. Moreover, the Bayesian estimation of the model on the US economy (1984-2007) suggests that the output elasticity of oil might have been above 10%, stressing the role of oil use in US growth at this time. Finally, our simulations confirm that an increase in energy efficiency significantly attenuates the effects of an oil shock —a possible explanation of why the third oil shock (1999-2008) did not have the same macro-economic impact as the first two ones.
    Abstract: Les conséquences économiques des chocs pétroliers ont été très étudiés depuis les années 1970. En dépit d'une abondante littérature, aucun modèle d'équilibre général dynamique stochastique n'était à ce jour disponible, qui captura les deux faits stylisés bien connus suivants : 1) l'impact stagflationniste d'un choc sur le prix du pétrole et 2) l'influence de la productivité énergétique du capital sur la profondeur et la longueur du dit impact. Nous construisons, estimons et simulons un modèle Néo-keynésien avec accumulation du capital, adapté à une économie importatrice de pétrole, où ces faits stylisés peuvent être retrouvés. De plus, l'estimation bayésienne du modèle sur les données des Etats-Unis (1984-2007) suggère que l'élasticité d'output du pétrole pourrait être supérieure à 10%, soulignant le rôle du pétrole dans la croissance des Etats-Unis sur cette période. Enfin, nos simulations confirment qu'une augmentation de l'efficacité énergétique atténue de manière significative les effets du choc —ce qui livre une explication possible au fait que le troisième choc pétrolier (1999-2008) n'a pas eu le même impact macro-économique que les deux premiers.
    Keywords: New-Keynesian model,DSGE,oil,capital accumulation,stagflation,energy productivity,productivité énergétique,modèle néo-keynesien,équilibre général dynamique stochastique,pétrole,accumulation du capital
    Date: 2014–12
  13. By: Shaofeng Xu
    Abstract: This paper examines the relationship between volatility shocks and preference shocks in an analytically tractable endogenous growth model with recursive preferences and stochastic volatility. I show that there exists an explicit mapping between volatility shocks and preference shocks, and a rise in volatility generates the same impulse responses of macroeconomic aggregates as a negative preference shock.
    Keywords: Business fluctuations and cycles, Economic models
    JEL: E2 E3
    Date: 2016
  14. By: Krueger, Dirk; Ludwig, Alexander
    Abstract: In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.
    Keywords: Progressive Taxation,Education Subsidy,Transitional Dynamics
    JEL: E62 H21 H24
    Date: 2015
  15. By: Coen N. Teulings (Centre for Macroeconomics (CFM); University of Cambridge)
    Abstract: It is well known that rational bubbles can be sustained in balanced growth path of a deterministic economy when the return to capital r is equal to the growth rate g. When there is a lack of stores of value, bubles can implement an efficient allocation. This paper considers a world where r fluctuates over time due to shocks to the marginal productivity of capitol. Then, bubbles further efficiency, though they cannot implement first best. While bubbles can only be sustained when r = g in a deterministic economy, r > g "on average" in a schotastic economy. Fiscal policy improves welfare by adding an extra asset. Where only the elderly contribute to shifting resources between investment and consumption in a bubble economy, fiscal policy allows part of that burden to be shifted to the young. Contrary to common wisdom, trade in bubbly assets implements intergenerational transfers, while fiscal policy implements intragenerational transfers. Hence, while bubbles and fiscal policy are perfect substitutes in the deterministic economy, fiscal policy dominates bubbles in a stochastic economy. For plausible parameter values, a higher degree of dynamic inefficiency should lead to a higher soverign debt.
    Keywords: Rational bubbles, Fiscal policy, Secular stagnation
    JEL: E44 E62
    Date: 2016–07
  16. By: Kühl, Michael
    Abstract: This paper investigates how government bond purchases affect leverage-constrained banks and non-financial firms by utilising a stochastic general equilibrium model. My results indicate that government bond purchases not only reduce non-financial firms' borrowing costs, amplified through a reduction in expected defaults, but also lower banks' profit margins. In an economy in which loans priced at par dominate in banks' balance sheets - as a reflection of the euro area's structure - the leverage constraint of non-financial firms is relaxed while that of banks tightens. I show that the leverage constraint in the non-financial sector plays an essential role in transmitting the impulses of government bond purchases to the real economy.
    Keywords: DSGE Model,Financial Frictions,Banking Sector,Portfolio Rebalancing Channel,Government Bond Purchases
    JEL: E44 E58 E61
    Date: 2016
  17. By: Vladimir Asriyan; Luca Fornaro; Alberto Martin; Jaume Ventura
    Abstract: We propose a model of money, credit and bubbles, and use it to study the role of monetary policy in managing asset bubbles. In this model, bubbles pop up and burst, generating fluctuations in credit, investment and output. Two key insights emerge from the analysis. First, the growth rate of bubbles, which is driven by agents' expectations, can be set in real or in nominal terms. This gives rise to a novel channel of monetary policy, as changes in the in ation rate affect the real growth rate of bubbles and their effect on economic activity. Crucially, this channel does not rely on contract incompleteness or price rigidities. Second, there is a natural limit on monetary policy's ability to control bubbles: the zero-lower bound. When a bubble crashes, the economy may enter into a liquidity trap, a regime in which agents shift their portfolios away from bubbles - and the credit that they sustain - to money, reducing intermediation, investment and growth. We explore the implications of the model for the conduct of "conventional" and "unconventional" monetary policy, and we use the model to provide a broad interpretation of salient macroeconomic facts of the last two decades.
    Keywords: bubbles, monetary policy, liquidity traps, financial frictions.
    JEL: E32 E44 O40
    Date: 2016–07
  18. By: Esther Hauk; Andrea Lanteri; Albert Marcet
    Abstract: This paper studies optimal policy with partial information in a general setup where observed signals are endogenous to policy. In this case, signal extraction about the state of the economy cannot be separated from the determination of the optimal policy. We derive a non-standard first order condition of optimality from first principles and we use it to find numerical solutions. We show how previous results based on linear methods, where separation or certainty equivalence obtains, arise as special cases. We use as an example a model of fiscal policy and show that optimal taxes are often a very non-linear function of observed hours, calling for tax smoothing in normal times, but for a strong fiscal reaction to output when a recession is quite certain and the economy is near the top of the Laffer curve or near a debt limit.
    Keywords: optimal policy; partial information; separation; calculus of variations; fiscal policy
    JEL: C63 D82 E60 H60
    Date: 2016–10
  19. By: Anna Batyra (Bogazici University); David de la Croix (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Olivier Pierrard (Banque centrale du Luxembourg); Henri Sneessens (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Université du Luxembourg, CREA)
    Abstract: The rise of early retirement in Europe is typically attributed to the European system of taxes and transfers. Contrary to a purely neoclassical framework, a model with imperfectly competitive labor market also allows to consider the effect of the bargaining power of labor and matching efficiency on preretirement. We find that lower bargaining power of workers and less efficient labor markets characterized by the declining matching efficiency have been an important determinant of early retirement in France and Germany. These structural changes, combined with early-retirement transfers and population ageing, are also consistent with the joint evolution of employment and unemployment rates, the labor share and the seniority premium.
    Keywords: Overlapping Generations, Search Unemployment, Labor Force Participation, Aging, Labor Market Policy and Institutions
    JEL: E24 H55 J26 J64
    Date: 2016–03–31
  20. By: Marcus Hagedorn (Universitetet i Oslo)
    Abstract: In this paper I propose a theory of a globally unique price level based on the simple idea that the price equates demand with supply in the goods market. Monetary policy through setting nominal interest rates, e.g. an interest rate peg, and fiscal policy, which satisfies the present value budget constraint at all times, jointly determine the price level. In contrast to the conventional view the long run inflation rate is, in the absence of output growth, equal to the growth rate of nominal government spending which is controlled by fiscal policy. This new theory where nominal government spending anchors aggregate demand and therefore current and future prices suggests a different perspective on the fiscal and monetary transmission mechanism, on policy coordination, on policies at the zero-lower bound and on U.S. inflation history.
    Date: 2016

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