nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2016‒11‒27
53 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Hiring Frictions and Price Frictions Nexus in Business Cycle Models By Faccini, Renato; Yashiv, Eran
  2. Search, Matching and Training By Christopher Flinn; Ahu Gemici; Steven Laufer
  3. Aggregate Fluctuations in a Quantitative Overlapping Generations Economy with Unemployment Risk By Aubhik Khan
  4. Gender, Marriage, and Life Expectancy By Margherita Borella; Mariacristina De Nardi; Fang Yang
  5. Changes in nominal rigidities in Poland - a regime switching DSGE perspective By Paweł Baranowski; Zbigniew Kuchta
  6. Sovereign Risk and Bank Risk-Taking By Anil Ari
  7. "Forecasting the Forecasts of Others:" Expectational Heterogeneity and Aggregate Dynamics By Antulio N. Bomfim
  8. Financial Regulation in a Quantitative Model of the Modern Banking System By Tim Landvoigt; Juliane Begenau
  9. Macroeconomics with endogenous markups and optimal taxation By Federico Etro
  10. Misallocation Cycles By Lars Kuehn; David Schreindorfer; Cedric Ehouarne
  11. Optimal Taxation with Risky Human Capital By Marek Kapicka; Julian Neira
  12. Variety and Quality in Trade Dynamics By Hamano Masashige
  13. The Effects of Secondary Markets and Unsecured Credit on Inflation Dynamics By Dominguez, Begona; Gomis-Porqueras, Pedro
  14. Buffer stock savings in a New-Keynesian business cycle model By Rabitsch, Katrin; Schoder, Christian
  15. Business Cycles, Asset Prices, and the Frictions of Capital and Labor By Hirokazu Mizobata; Hiroki Toyoda
  16. Regulation and Rational Banking Bubbles in Infinite Horizon By Claire Océane Chevallier; Sarah El Joueidi
  17. Time-Consistent Fiscal Policy in a Debt Crisis By Balke, Neele Lisabet; Ravn, Morten O
  18. Project Heterogeneity and Growth: The Impact of Financial Selection on Firm Entry By Felipe Saffie; Sina Ates
  19. Beyond the Liquidity Trap: the Secular Stagnation of Investment By Virgiliu Midrigan; Thomas Philippon; Callum Jones
  20. Corporate Debt Structure, Precautionary Savings, and Investment Dynamics By Xiao, J.
  21. The U.S. Job Ladder and the Low-Wage Jobs of the New Millennium By Nellie Zhao; Henry Hyatt; Isabel Cairo
  22. Borrower heterogeneity within a risky mortgage-lending market By Punzi, Maria Teresa; Rabitsch, Katrin
  23. Optimal fiscal policy in the presence of VAT evasion: the case of Bulgaria By Vasilev, Aleksandar
  24. Taxation of Temporary Jobs: Good Intentions With Bad Outcomes ? By Benghalem, Hélène; Cahuc, Pierre; Charlot, Olivier; Limon, Emeline; Malherbet, Franck
  25. Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited By Schmitt-Grohé, Stephanie; Uribe, Martin
  26. Optimal fiscal substitutes for the exchange rate in a monetary union By Kaufmann, Christoph
  27. Job Prospects and Pay Gaps: Theory and Evidence on the Gender Gap from U.S. Cities By Ben Sand; Chris Bidner
  28. Is Optimal Capital-Control Policy Countercyclical In Open-Economy Models With Collateral Constraints? By Schmitt-Grohé, Stephanie; Uribe, Martin
  29. Dampening General Equilibrium: From Micro Elasticities to Macro Effects By Chen Lian; George-Marios Angeletos
  30. Job Search Behavior among the Employed and Non-Employed By Giorgio Topa; Aysegul Sahin; Andreas Mueller; Jason Faberman
  31. The Persistence of Financial Distress By Juan Sanchez; Jose Mustre-del-Rio; Kartik Athreya
  32. Signaling Effects of Monetary Policy By Melosi, Leonardo
  33. Money, Credit and Banking and the Cost of Financial Activity By Boel, Paola; Camera, Gabriele
  34. Putting the Cycle Back into Business Cycle Analysis By Paul Beaudry; Dana Galizia; Franck Portier
  35. Online Appendix to "Optimal Government Spending at the Zero Lower Bound: A Non-Ricardian Analysis" By Taisuke Nakata
  36. Optimal Financial Aid Policies for Students By Dominik Sachs; Sebastian Findeisen
  37. Endogenous Debt Maturity: Liquidity Risk vs. Default Risk By Juan Sanchez; Rodolfo Manuelli
  38. Monetary Policy Rule, Exchange Rate Regime, and Fiscal Policy Cyclicality in a Developing Oil Economy By Aliya Algozhina
  39. Endogenous Price Stickiness and Business Cycle Persistence By Michael T. Kiley
  40. Fiscal Requirements for Price Stability in Economies with Private Provision of Liquidity and Unemployment By Pedro, Gomis-Porqueras
  41. Capital Flows to Developing Countries: Is There an Allocation Puzzle? By Josef Schroth
  42. Constrained Discretion and Central Bank Transparency By Bianchi, Francesco; Melosi, Leonardo
  43. On uniqueness of time-consistent Markov policies for quasi-hyperbolic consumers under uncertainty By Lukasz Balbus; Kevin Reffett; Lukasz Wozny
  44. Taxation, Sorting and Redistribution: Theory and Evidence By Arash Nekoei; Ali Shourideh; Mikhail Golosov
  45. Tuning in RBC Growth Spectra By Szilard Benk; Tamas Csabafi; Jing Dang; Max Gillman; Michal Kejak
  46. Optimal Joint Bond Design By Charles-Henri Weymuller; Eduardo Davila
  47. Nominal Rigidity and the Idiosyncratic Origin of Aggregate Fluctuations By Raphael Schoenle; Michael Weber; Ernesto Pasten
  48. Local labor market effects of public employment By Jordi Jofre-Monseny; José I. Silva; Javier Vázquez-Grenno
  49. When the Central Bank Meets the Financial Authority: Strategic Interactions and Institutional Design By Victoria Nuguer; Jessica Roldan-Pena; Enrique Mendoza; Julio Carrillo
  50. The Dynamics of Multinational Activity: Evidence from U.S. Firms By Natalia Ramondo; Lindsay Oldenski; Stefania Garetto
  51. Politically Feasible Public Bailouts By Octavia Foarta
  52. Government Spending and Consumption at the Zero Lower Bound: Evidence from Household Retail Purchase Data By Marios Karabarbounis; Marianna Kudlyak; M. Saif Mehkari; Bill Dupor
  53. Government Debt and the Returns to Innovation By Thien Nguyen; Steve Raymond; Lukas Schmid; Mariano Croce

  1. By: Faccini, Renato; Yashiv, Eran
    Abstract: We study the interactions between hiring frictions and price frictions in business cycle models. We find that these interactions matter in a significant way for business cycle fluctuations and for labor market outcomes. Using a simple DSGE business-cycle model with Diamond-Mortensen-Pisssarides (DMP) elements, we derive two main results. First, introducing hiring frictions into a New Keynesian model offsets the effects of price frictions. As a result, some business cycle outcomes are actually close to the frictionless New Classical-type outcomes; namely, with moderate hiring frictions the response of employment to technology shocks is positive, and the effects of monetary policy shocks are small, if not neutral. Moreover, it generates endogenous wage rigidity. Second, introducing price frictions into a DMP setting generates amplification of employment and unemployment responses to technology shocks, as well as hump-shaped dynamics. Both results arise through the confluence of frictions. We offer an explanation of the mechanisms underlying them.
    Keywords: hiring frictions; price frictions; business cycles; New Classical model; Mortensen and Pissarides (DMP) model; technology shocks; monetary policy shocks; endogenous wage rigidity.; New- Keynesian model; Diamond
    JEL: E22 E24 E32 E52
    Date: 2016–11
  2. By: Christopher Flinn (New York University); Ahu Gemici (Royal Holloway, University of London); Steven Laufer (Federal Reserve Board)
    Abstract: We estimate a partial and general equilibrium search model in which firms and workers choose how much time to invest in both general and match-specific human capital. To help identify the model parameters, we use NLSY data on worker training and we match moments that relate the incidence and timing of observed training episodes to outcomes such as wage growth and job-to-job transitions. We use our model to offer a novel interpretation of standard Mincer wage regressions in terms of search frictions and returns to training. Finally, we show how a minimum wage can reduce training opportunities and decrease the amount of human capital in the economy.
    Keywords: wage regression, Mincer, minimum wage, training
    JEL: J24 D58 D83
    Date: 2016–11
  3. By: Aubhik Khan (Ohio State University)
    Abstract: We explore business cycles in a quantitative overlapping generations economy where households face both unemployment risk and, conditional on employment, income risk. In this environment, we examine the effect of aggregate shocks on the distribution of consumption, income and wealth across households and how this distribution shapes the aggregate response to these shocks. While TFP fell relatively little, in the recent US recession, there was a large fall in hours worked. Consistency with these observations, in the model, requires a substantial and persistent increase in unemployment risk that disproportionately affects younger working households. Conversely, explaining the reduction in aggregate consumption implies a financial shock to households' net return on assets. This drives a non-monotonic welfare cost of the recession, over generations, varying by the share of income derived from capital and labour. Overall, young workers, and older workers near retirement, suffer the most from the increase in unemployment and the fall in the return on wealth, respectively. Inequality in wealth also shapes the aggregate response of the economy. Aggregate investment falls by more when households face little income risk, holds less precautionary savings, and are more responsive to changes in real interest rates.
    Date: 2016
  4. By: Margherita Borella; Mariacristina De Nardi; Fang Yang
    Abstract: Wages and life expectancy, as well as labor market outcomes, savings, and consumption, differ by gender and marital status. In this paper we compare the aggregate implications of two dynamic structural models. The first model is a standard, quantitative, life-cycle economy, in which people are only heterogenous by age and realized earnings shocks, and is calibrated using data on men, as typically done. The second model is one in which people are also heterogeneous by gender, marital status, wages, and life expectancy, and is calibrated using data for married and single men and women. We show that the standard life-cycle economy misses important aspects of aggregate savings, labor supply, earnings, and consumption. In contrast, the model with richer heterogeneity by gender, marital status, wage, and life expectancy matches the observed data well. We also show that the effects of changing life expectancy and the gender wage gap depend on marital status and gender, and that it is essential to not only model couples, but also the labor supply response of both men and women in a couple.
    JEL: D1 E1 E21
    Date: 2016–11
  5. By: Paweł Baranowski (University of Lodz); Zbigniew Kuchta (University of Lodz)
    Abstract: We estimate a dynamic stochastic general equilibrium model that allows for regimes Markov switching (MS-DSGE). Existing MS-DSGE papers for the United States focus on changes in monetary policy or shocks volatility, contributing the debate on the Great Moderation and/or Volcker disinflation. However, Poland which here serves as an example of a transition country, faced a wider range of structural changes, including long disinflation, EU accession or tax changes. The model identifies high and low rigidity regimes,with the timing consistent with menu cost explanation of nominal rigidities. Estimated timing of the regimes captures the European Union accession and indirect tax changes. The Bayesian model comparison results suggest that model with switching in both analyzed rigidities is strongly favored by the data in comparison with switching only in prices or in wages. Moreover, we find significant evidence in support of independent Markov chains.
    Keywords: nominal rigidities, Markov switching DSGE models, bayesian model comparison
    JEL: C11 E31 J30
  6. By: Anil Ari
    Abstract: In European countries recently hit by a sovereign debt crisis, banks have sharply raised their holdings of domestic sovereign debt, reduced credit to firms, and faced rising financing costs, raising concerns about economic and financial resilience. This paper develops a general equilibrium model with optimizing banks and depositors to account for these facts and provide a framework for policy assessment. Under-capitalized banks in default-risky countries have an incentive to gamble on domestic sovereign bonds. Unless there is perfect transparency of bank balance sheets, the optimal reaction by depositors to bank insolvency risk leaves the economy susceptible to self-fulfilling shifts in sentiments. In a bad equilibrium, sovereign risk shocks lead to a prolonged period of financial fragility and a persistent drop in output. The model is quantified using Portuguese data and generates similar dynamics to those observed in the Portuguese economy during the debt crisis. Policy interventions face a trade-off between alleviating funding constraints and strengthening incentives to gamble. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.
    JEL: E44 E58 F34 G21 H63
    Date: 2016–11–21
  7. By: Antulio N. Bomfim
    Abstract: I construct a dynamic general equilibrium model where agents differ in the way they form expectations. Sophisticated agents form model-consistent expectations. Rule-of-thumb agents' expectations are based on an intuitive forecasting rule. All agents solve standard dynamic optimization problems and face strategic complementarity in production. Extending the work of Haltiwanger and Waldman (1989), I show that even a minority of rule-of-thumb forecasters can have a significant effect on the aggregate properties of the economy. For instance, as agents try to forecast each others' behavior they effectively strengthen the internal propagation mechanism of the economy. I solve the model by assuming a hierarchical information structure similar to the one in Townsend's (1983) model of informationally dispersed markets. The quantitative results are obtained by calibrating the model and running a battery of sensitivity tests on key parameters. The analysis highlights the role of strategic complementarity in the heterogeneous expectations literature and precisely quantify many qualitative claims about the aggregate implications of expectational heterogeneity.
    Keywords: Business cycles ; expectatations ; strategic complementarity ; bounded rationality
  8. By: Tim Landvoigt (University of Texas Austin); Juliane Begenau (Harvard Business School)
    Abstract: This paper builds a quantitative general equilibrium model with commercial banks and shadow banks to study the unintended consequences of capital requirements. In particular, we investigate how the shadow banking system responds to capital regulation changes for traditional banks. A key feature of our model are defaultable bank liabilities that provide liquidity services to households. In case of default, commercial bank debt is fully insured and thus provides full liquidity services. In contrast, shadow banks are only randomly bailed out. Thus, shadow banks' liquidity services also depend on their default rate. Commercial banks are subject to a capital requirement. Tightening the requirement from the status quo, leads households to substitute shadow bank liquidity for commercial bank liquidity and therefore to more shadow banking activity in the economy. But this relationship is non-monotonic due to an endogenous leverage constraint on shadow banks that limits their ability to deliver liquidity services. The basic trade-off of a higher requirement is between bank liquidity provision and stability. Calibrating the model to data from the Financial Accounts of the U.S., the optimal capital requirement is around 20\%.
    Date: 2016
  9. By: Federico Etro (Ca Foscari University of Venice, Department of Economics)
    Abstract: The neoclassical macroeconomic framework is extended to general preferences over a variety of goods supplied under monopolistic, Bertrand or Cournot competition to derive implications for business cycle, market inefficiencies and optimal corrective taxation. When markups are endogenously countercyclical the impact of shocks on consumption and labor supply is magnified through new intertemporal substitution mechanisms, and the optimal fiscal policy requires a countercyclical labor income subsidy and a capital income tax that is positive along the growth path and converging to zero in the long run. With an endogenous number of goods and strategic interactions, entry affects markups and the optimal fiscal policy requires also a tax on profits. We characterize the equilibrium dynamics and derive explicit tax rules for a variety of intratemporal preference aggregators including the quadratic, directly additive, indirectly additive and homothetic classes.
    Keywords: Monopolistic competition, variable markups, optimal taxation, business cycles
    JEL: E1 E2 E3
    Date: 2016
  10. By: Lars Kuehn (Carnegie Mellon University); David Schreindorfer (Arizona State University); Cedric Ehouarne (Carnegie Mellon University)
    Abstract: We estimate a general equilibrium model with firm heterogeneity and a representative household with Epstein-Zin preferences. Firms face investment frictions and permanent shocks, which feature time-variation in common idiosyncratic skewness. Quantitatively, the model replicates well the cyclical dynamics of the cross-sectional output growth and investment rate distributions. Economically, the model generates business cycles through inefficiencies in the allocation of capital across firms. These cycles arise because (i) permanent Gaussian shocks give rise to a power law distribution in firm size and (ii) rare negative Poisson shocks cause time-variation in common idiosyncratic skewness. Despite the absence of firm-level granularity, a power law in the firm size distribution implies that idiosyncratic Poisson shocks have a large effect on the dynamics of aggregate consumption and wealth. In addition, shocks to aggregate wealth spill over to all firms in the economy because of Epstein-Zin preferences.
    Date: 2016
  11. By: Marek Kapicka; Julian Neira
    Abstract: We study optimal tax policies in a life-cycle economy with risky human capital and permanent ability differences. The optimal policies balance redistribution across agents, insurance against human capital shocks, and incentives to learn and work. In the optimum, i) if utility is separable in labor and learning effort, the inverse labor wedge follows a random walk, ii) if the utility is not separable then the “no distortion at the top” result does not apply, and iii) quantitatively, high-ability agents face very risky consumption while lowability agents are insured. The welfare gains from switching to an optimal tax system are large.
    Keywords: optimal taxation; income taxation; human capital;
    JEL: E6 H2
    Date: 2015–11
  12. By: Hamano Masashige (Sophia University, Tokyo)
    Abstract: This paper provides a simple two-country DSGE model that includes endoge- nous determination of both the number of traded varieties and the traded products quality with heterogeneous firms. By introducing product quality explicitly, the theo- retical model sheds light on the cyclical properties of quality in international trade. We find that aggregate product quality of exports and imports are both negatively correlated with real exports and imports in the US data. Our model can replicate a wedge-shaped pattern of cross-correlations, together with a number of statistics on US trade dynamics. We also perform several impulse response analyses and find that trade liberalization induces quality downgrading of exports and imports, which negatively impacts consumer welfare.
    Keywords: product quality, product variety, firm entry, firm heterogeneity
    JEL: F12 F41 F43
    Date: 2016
  13. By: Dominguez, Begona; Gomis-Porqueras, Pedro
    Abstract: We consider an environment with stochastic trading opportunities and incomplete markets and analyze how trading in secondary markets for government debt and access to unsecured credit affect inflation. When secondary markets are not active, {there exists} a unique monetary steady state where public debt does not affect inflation dynamics. In contrast, we find that when agents trade in secondary markets, agents are buying government bonds above their fundamental value. As a result, Ricardian equivalence does not hold and multiple steady states can not be ruled out as government bonds generate a liquidity premium. In particular, we find that the gross interest payment on public debt is non-linear in bond holdings. {Because of this liquidity premium, real government bonds matter for inflation.} To rule out real indeterminacies, we show that active monetary policy is more likely to deliver a unique monetary steady state regardless the stance of fiscal policy. Moreover, trading in secondary markets further amplify the effectiveness of active monetary policies in reducing steady state inflation. Finally, we show that a spread-adjusted Taylor rule delivers a unique steady state, thus ruling out real indeterminacies.
    Keywords: taxes; inflation; secondary markets, liquidity premium
    JEL: E4 E61 E62 H21
    Date: 2016–11
  14. By: Rabitsch, Katrin; Schoder, Christian
    Abstract: We introduce the tractable buffer stock savings setup of Carroll and Toche (2009 NBER Working Paper) into an otherwise conventional New-Keynesian dynamic stochastic general equilibrium model with financial frictions. The introduction of a precautionary saving motive arising from an uninsurable risk of permanent income loss, affects the model's properties in a number of interesting ways: it produces a more hump-shaped reaction of consumption in response to both supply (technology) and demand (monetary) shocks, and more pronounced reactions in response to demand shocks. Adoption of the buffer stock savings setup thus offers a more microfounded way, compared to, e.g., habit preferences in consumption, to introduce Keynesian features into the model, serving as a device to curbing excessive consumption smoothing, and to attributing a higher role to demand driven fluctuations. We also discuss steady state effects, determinacy properties as well as other practical issues.
    Date: 2016
  15. By: Hirokazu Mizobata (Faculty of Economics, Tezukayama University); Hiroki Toyoda (Institute of Economic Research, Kyoto University)
    Abstract: We propose a simple real business cycle model to explain two of the most important aspects of macroeconomics: business cycle facts and the asset pricing mechanism. Based on US and Japanese quarterly data, we estimate the model with capital and labor adjustment costs. Our analysis reveals that this simple model can explain the key business cycle facts, even without other frictions such as sticky prices, sticky wages, and search and matching frictions. Furthermore, this simple model also has explanatory power for whether a stock price will increase or decrease. However, this feature of the model is weaker for the Great Recession in the US economy.
    Keywords: Adjustment costs, DSGE model, Bayesian estimation, Stock price forecasting
    JEL: C32 E13 E32 E37
    Date: 2016–11
  16. By: Claire Océane Chevallier (CREA, Université du Luxembourg); Sarah El Joueidi (CREA, Université du Luxembourg)
    Abstract: This paper develops a dynamic stochastic general equilibrium model in infinite horizon with a regulated banking sector where stochastic banking bubbles may arise endogenously. We analyze the conditions under which stochastic bubbles exist and their impact on macroeconomic key variables. We show that when banks face capital requirements based on Value-at- Risk, two different equilibria emerge and can coexist: the bubbleless and the bubbly equilibria. Alternatively, under a regulatory framework where capital requirements are based on credit risk only, as in Basel I, bubbles are explosive and, as a consequence, cannot exist. The stochastic bubbly equilibrium is characterized by positive or negative bubbles depending on the tightness of capital requirements based on Value-at-Risk. We find a maximum value of capital requirements under which bubbles are positive. Below this threshold, the stochastic bubbly equilibrium provides larger wel- fare than the bubbleless equilibrium. In particular, our results suggest that a change in banking policies might lead to a crisis without external shocks.
    Keywords: Banking bubbles; banking regulation; DSGE; infinitely lived agents; multiple equilibria; Value-at-Risk
    JEL: E2 E44 G01 G20
    Date: 2016
  17. By: Balke, Neele Lisabet; Ravn, Morten O
    Abstract: We analyze time-consistent fiscal policy in a sovereign debt model. We consider a production economy that incorporates feedback from policy to output through employment, features inequality though unemployment, and in which the government lacks a commitment technology. The government's optimal policies play off wedges due to the lack of lump-sum taxes and the distortions that taxes and transfers introduce on employment. Lack of commitment matters during a debt crises -- episodes where the price of debt reacts elastically to the issuance of new debt. In normal times, the government sets procyclical taxes, transfers and public goods provision but in crisis times it is optimal to implement austerity policies which minimize the distortions deriving from default premia. Could a third party provide a commitment technology, austerity is no longer optimal.
    Keywords: austerity; debt crisis; inequality; Sovereign debt; Time-consistent fiscal policy
    JEL: E20 E62 F34 F41
    Date: 2016–11
  18. By: Felipe Saffie (University of Maryland); Sina Ates (Federal Reserve Board)
    Abstract: In the classical literature of innovation-based endogenous growth, the engine of long-run economic growth is firm entry. Nevertheless, when projects are heterogeneous, and good ideas are scarce, a mass-composition trade-off emerges in this link: larger cohorts have lower average quality. As one of the roles of the financial system is to screen the quality of projects, the ability of financial intermediaries to detect promising projects shapes the strength of this trade-off. We build a general equilibrium endogenous growth model with project heterogeneity and financial screening to study this relationship. We use two quantitative experiments to illustrate the relevance of our analytic results. First, we show that accounting for heterogeneity and selection allows the model to conciliate two well-known and apparently contradictory effects of corporate taxation. Corporate taxation has a strong detrimental effect on firm entry while affecting the long-run growth only mildly. A second illustration studies the effects of financial development on growth. This experiment shows that size-based measures of financial development (e.g. domestic credit over GDP) are not good proxies for the ability of the financial system to select the most promising projects. Finally, we propose a novel firm-level measure to assess the accuracy of financial selection across countries.
    Date: 2016
  19. By: Virgiliu Midrigan (New York University); Thomas Philippon (NEW YORK UNIVERSITY); Callum Jones (New York University)
    Abstract: We propose an alternative view of the weak recovery of the U.S. economy in the aftermath of the Great Recession. Using a New Keynesian model with capital accumulation and an occasionally binding zero lower bound constraint on nominal interest rates, we find that the slow recovery of the U.S. economy is not driven by weak consumption and depressed asset prices as the standard liquidity trap theory would predict. Instead, the slow recovery is explained by a persistent decline in corporate investment despite favorable economic conditions, as measured by Tobin’s Q, profit rates, and funding costs. Taking into account general equilibrium effects, we show that, if investment had followed its traditional pattern, the economy would have escaped the zero lower bound by the end of 2012.
    Date: 2016
  20. By: Xiao, J.
    Abstract: Micro-level evidence indicates that firms which substituted bank loans with bond issues during the Great Recession did not experience a large contraction in their total borrowing, but they have been hoarding more cash and investing less than firms that did not substitute. This suggests that firms’ balance sheet adjustment played a key role in the transmission of aggregate shocks. To evaluate the importance of this mechanism in the propagation of the Great Recession, I build a quantitative general equilibrium model of firm dynamics that jointly endogenizes the composition of borrowing on the liability-side, and the portfolio allocation between savings and investment on the asset-side. Bond issuances have lower intermediation costs than bank debt, but the latter can be restructured when firms are in financial distress. In response to a contraction in bank credit supply, firms substitute bank loans with bond issues and thus become more exposed to the risk of financial distress. This strengthens firms’ precautionary incentive to increase cash holdings at the expense of investment, as they optimally trade-off growth against self-insurance via cash holdings. Model simulations suggest that this “precautionary savings” channel can account for 40 percent of the decline in aggregate investment in the first two years of the Great Recession, and more than one-half of the decline in the following five years.
    Date: 2016–11–22
  21. By: Nellie Zhao (Cornell University); Henry Hyatt (US Census Bureau); Isabel Cairo (Board of Governors of the Federal Reserve System)
    Abstract: In the years following 2000, the U.S. economy has exhibited relatively strong growth in lower-paying jobs. Previous studies have put this growth in the context of shocks to particular higher-paying industries or occupations. In this study, we consider the implications of a ``job ladder'' in the context of labor market downturns associated with the 2001 and 2007-2009 recessions. We propose and estimate a model of on-the-job search, which allows us to explore the effects of aggregate demand shocks on the composition of employment. When aggregate labor market conditions are weak, the least productive employers lose workers through poaching to more productive employers at a slower rate. Our empirical analysis links the slowdown in the job ladder with the buildup in low-paying jobs.
    Date: 2016
  22. By: Punzi, Maria Teresa; Rabitsch, Katrin
    Abstract: We propose a model of a risky mortgage-lending market in which we take explicit account of heterogeneity in household borrowing conditions, by introducing two borrower types: one with a low loan-to-value (LTV) ratio, one with a high LTV ratio, calibrated to U.S. data. We use such framework to study a deleveraging shock, modeled as an increase in housing investment risk, that falls more strongly on, and produces a larger contraction in credit for high-LTV type borrowers, as in the data. We find that this deleveraging experience produces significant aggregate effects on output and consumption, and that the contractionary effects are orders of magnitudes higher in a model version that takes account of borrower heterogeneity, compared to a more standard model version with a representative borrower.
    Keywords: Borrowing Constraints,Loan-to-Value ratio,Heterogeneity,Financial Amplification
    JEL: E23 E32 E44
    Date: 2016
  23. By: Vasilev, Aleksandar
    Abstract: This paper explores the effects of fiscal policy in an economy based on indirect taxes, and in the presence of VAT evasion channel. In addition, the government is taxing all income at the same rate. The focus of the paper to compare and contrast two regimes - the exogenous (observed) vs. optimal (Ramsey) policy case. The results are evaluated in light of consumption vs. income taxation debate, the issue of optimal provision of valuable public services, and the effect of fiscal policy on the size of VAT evasion. To this end, a Real-Business-Cycle model, calibrated to Bulgarian data (1999-2014), is augmented with a government sector. Bulgarian economy was chosen as a case study due to its dependence on consumption taxation as a source of tax revenue, and the prevalence of VAT evasion. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the utility- enhanc- ing public services, which are now three times lower; (iii) The optimal steady-state consumption tax needed to finance the optimal level of government spending is twice lower, as compared to the exogenous policy case.
    Keywords: consumption tax,income tax,VAT evasion,general equilibrium,fiscal policy,Bulgaria
    JEL: D58 H26
    Date: 2016
  24. By: Benghalem, Hélène; Cahuc, Pierre; Charlot, Olivier; Limon, Emeline; Malherbet, Franck
    Abstract: This paper analyzes the consequences of the taxation of temporary jobs recently introduced in several European countries to induce firms to create more open-ended contracts and to increase the duration of jobs. The estimation of a job search and matching model on French data shows that the taxation of temporary jobs does not reach its objectives: it reduces the mean duration of jobs and decreases job creation, employment and welfare of unemployed workers. We find that a reform introducing an open-ended contract without layoff costs for separations occurring at short tenure would have opposite effects.
    Keywords: Employment protection legislation; taxation; Temporary jobs
    JEL: J63 J64 J68
    Date: 2016–11
  25. By: Schmitt-Grohé, Stephanie; Uribe, Martin
    Abstract: This paper establishes the existence of multiple equilibria in infinite-horizon open-economy models in which the value of tradable and nontradable endowments serves as collateral. In this environment, the economy displays self-fulfilling financial crises in which pessimistic views about the value of collateral induces agents to deleverage. The paper shows that under plausible calibrations, there exist equilibria with underborrowing. This result stands in contrast to the overborrowing result stressed in the related literature. Underborrowing emerges in the present context because in economies that are prone to self-fulfilling financial crises, individual agents engage in excessive precautionary savings as a way to self-insure.
    Keywords: capital controls.; Collateral constraints; Financial crises; overborrowing; Pecuniary externalities; underborrowing
    JEL: E44 F41 G01 H23
    Date: 2016–11
  26. By: Kaufmann, Christoph
    Abstract: This paper studies Ramsey-optimal monetary and fiscal policy in a New Keynesian 2-country open economy framework, which is used to assess how far fiscal policy can substitute for the role of nominal exchange rates within a monetary union. Giving up exchange rate flexibility leads to welfare costs that depend significantly on whether the law of one price holds internationally or whether firms can engage in pricing-tomarket. Calibrated to the euro area, the welfare costs can be reduced by 86% in the former and by 69% in the latter case by using only one tax instrument per country. Fiscal devaluations can be observed as an optimal policy in a monetary union: if a nominal devaluation of the domestic currency were optimal under flexible exchange rates, optimal fiscal policy in a monetary union is an increase of the domestic relative to the foreign value added tax.
    Keywords: Monetary union,Optimal monetary and fiscal policy,Exchange rate
    JEL: F41 F45 E63
    Date: 2016
  27. By: Ben Sand (York University); Chris Bidner (Simon Fraser University)
    Abstract: Are differences in the quality of workers' prospects outside of their current employment relationship influential in generating pay differentials? We consider the role of an economy's industrial structure in generating differences in outside prospects, and apply our analysis to the gender pay gap in the U.S. during the 1980-2010 period. We develop a formal search and matching model that connects outside prospects, industrial structure and wage gaps and use it to guide our subsequent empirical analysis of local labor markets. Our results suggest that an economy's within-industry gender pay gap-which also controls for human capital characteristics-is substantially influenced by gender differences in the quality of outside prospects generated by the economy's industrial structure. Our analysis reveals that the relatively sharp narrowing of the gender pay gap during the 1980s is accounted for by the relatively sharp decline in the outside prospects of men during this period.
    Keywords: Gender Pay Gap, Search Frictions, Industrial Structure
    JEL: J31 J71
    Date: 2016–11–21
  28. By: Schmitt-Grohé, Stephanie; Uribe, Martin
    Abstract: This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. Moreover, in the run-up to a financial crisis optimal capital controls rise as the contraction sets in and reach their highest level at the peak of the crisis. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight.
    JEL: E44 F41 G01 H23
    Date: 2016–11
  29. By: Chen Lian (MIT); George-Marios Angeletos (M.I.T.)
    Abstract: General equilibrium (GE) effects are key to macroeconomics: they turn partial-equilibrium intuitions on their head; they also limit the use- fulness of identifying local responses to local shocks as a method of es- timating the macroeconomic effects of aggregate shocks. In this paper, we argue that GE effects are weak in the short run. In particular, we establish an equivalence between (i) the Tâtonnement process of a stan- dard macroeconomic model and (ii) the equilibrium dynamics of a variant model that removes common knowledge of aggregate economic conditions. This offers a formalization of the notion that GE adjustments take time; it provides a justification for extrapolating from the aforementioned kind of micro elasticities to macro effects; and it upsets conventional policy recommendations.
    Date: 2016
  30. By: Giorgio Topa (Federal Reserve Bank of New York); Aysegul Sahin (Federal Reserve Bank of New York); Andreas Mueller (Columbia University); Jason Faberman (Federal Reserve Bank of Chicago)
    Abstract: Using a unique new survey, we study the relationship between search effort and search outcomes for employed and non-employed job seekers. Our data have extensive information on individuals’ current and previous employment situations, search behavior, job offers, accepted offers, and reservation wages. We find that the unemployed fare much worse than the employed in their job search prospects along several dimensions, despite higher job search effort. The unemployed receive fewer offers per job application, and conditional on an offer, they are offered lower pay, fewer benefits, and fewer hours. Despite this, they are more likely to accept these lower-quality offers but are also much more likely to again engage in job search on their new job. In contrast, employed job seekers receive a higher fraction of both solicited and unsolicited job offers. In fact, the employed that are not searching tend to generate more plentiful and higher-quality job offers than the unemployed. We apply our results to a model of on-the-job search with search frictions and endogenous search effort. A simple application of the estimates to the model suggest that the employed are substantially more efficient in their job search relative to the unemployed.
    Date: 2016
  31. By: Juan Sanchez (Federal Reserve Bank of St. Louis); Jose Mustre-del-Rio (Federal Reserve Bank of Kansas City); Kartik Athreya (Federal Reserve Bank of Richmond)
    Abstract: How persistent is financial distress? We answer this question using data on the proximity to debt limits, household debt-income ratios, and the probability that given a past default, a household experiences repayment difficulties. We show that all of these measures indicate that household financial distress is an extremely persistent phenomenon. To what extent can standard theory, as represented by a basic incomplete-markets model in which consumers face state contingent borrowing limits, arising from default risk capture this observed persistence of financial distress? We show that the answer is “not well†: None of a wide array of model variants is capable of capturing this aspect of consumer credit use. This is important, as these baseline models have informed policy discussions on how best to provide debt relief to mitigate consumer financial distress. We then show that a plausible extension of standard approach yields a better account for the persistence of financial distress.
    Date: 2016
  32. By: Melosi, Leonardo (Federal Reserve Bank of Chicago)
    Abstract: We develop a dynamic general equilibrium model in which the policy rate signals the central bank’s view about macroeconomic developments to price setters. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters’ inflation expectations. This model improves upon existing perfect information models in explaining why, in the data, inflation expectations respond with delays to monetary impulses and remain disanchored for years. In the 1970s, U.S. monetary policy is found to signal persistent inflationary shocks, explaining why inflation and inflation expectations were so persistently heightened. The signaling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s.
    Keywords: Disanchoring of inflation expectations; heterogeneous beliefs; endogenous signals; Bayesian VAR; Bayesian counterfactual analysis; Delphic effects of monetary policy
    JEL: C11 C52 D83 E52
    Date: 2016–09–16
  33. By: Boel, Paola (Research Department, Central Bank of Sweden); Camera, Gabriele (Chapman University and University of Basel)
    Abstract: We extend the study of banking equilibrium in Berentsen, Camera and Waller (2007) by introducing an explicit production function for banks. Banks employ labor resources, hired on a competitive market, to run their operations. In equilibrium this generates a spread between interest rates on loans and on deposits, which naturally reflects the efficiency of financial intermediation and underlying monetary policy. In this augmented model, equilibrium deposits yield zero return in a deflation or very low inflation. Hence, if monetary policy is sufficiently tight then banks end up reducing aggregate efficiency, soaking up labor resources while offering deposits that do not outperform idle balances.
    Keywords: banks; frictions; matching
    JEL: C70 D40 E30 J30
    Date: 2016–10–01
  34. By: Paul Beaudry; Dana Galizia; Franck Portier
    Abstract: This paper begins by re-examining the spectral properties of several cyclically sensitive variables such as hours worked, unemployment and capacity utilization. For each of these series, we document the presence of an important peak in the spectral density at a periodicity of approximately 36-40 quarters. We take this pattern as suggestive of intriguing but little-studied cyclical phenomena at the long end of the business cycle, and we ask how best to explain it. In particular, we explore whether such patterns may reflect slow-moving limit cycle forces, wherein booms sow the seeds of the subsequent busts. To this end, we present a general class of models, featuring local complementarities, that can give rise to unique-equilibrium behavior characterized by stochastic limit cycles. We then use the framework to extend a New Keynesian-type model in a manner aimed at capturing the notion of an accumulation-liquidation cycle. We estimate the model by indirect inference and find that the cyclical properties identified in the data can be well explained by stochastic limit cycles forces, where the exogenous disturbances to the system are very short lived. This contrasts with results from most other macroeconomic models, which typically require very persistent shocks in order to explain macroeconomic fluctuations.
    JEL: E10
    Date: 2016–11
  35. By: Taisuke Nakata (Federal Reserve Board)
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2016
  36. By: Dominik Sachs (European University Institute); Sebastian Findeisen (University of Mannheim)
    Abstract: We study the optimal design of financial aid policies for college students. The total social benefits of college education exceed the private benefits because the government receives a share of the monetary returns in the form of income taxes. We underscore the policy implications of this fiscal externality in an optimal dynamic public finance framework. The model incorporates multidimensional heterogeneity, idiosyncratic risk and borrowing constraints. It matches key empirical results on college enrollment patterns, returns to education and enrollment elasticities. We find that a marginal increase in college subsidies in the US is at least 70 percent self-financing through the net-present value increase in future tax revenue. When targeting this increase to children in the lowest parental income tercile, it is more than self-financing with a fiscal return of 165 percent. The optimal Mirrleesian income tax schedule is barely affected, in particular if subsidies are set at their optimal level.
    Date: 2016
  37. By: Juan Sanchez (Federal Reserve Bank of St. Louis); Rodolfo Manuelli (Washington University and Federal Reserve Bank of St. Louis)
    Abstract: We study the joint determination of a technology ---the degree of illiquidity of a project, its mean growth rate and the variability of the growth rate--- — and the optimal debt …financing ---the face value of the debt, its coupon rate, and expected maturity—--- in an economy in which credit markets and decision makers are risk neutral and have the same discount rate. Our results show that the optimal maturity of the debt balances the risk of default due to illiquidity with the risk of strategic default. In a quantitative exercise we show how the optimal structure of debt varies with technological and environmental parameters. We …find that when output is low (and, hence, the probability of default is high) …firms choose to issue short term debt. In general, there is a positive relationship between output and maturity. We also fi…nd … that firms operating in more uncertain environments choose to issue shorter debt, while fi…rms whose assets have higher resale value (e.g. face lower costs of …re sales) issue longer maturity debt.
    Date: 2016
  38. By: Aliya Algozhina
    Abstract: According to Frankel and Catao (2011), a commodity exporting developing economy is advised to target the output price index rather than consumer price index, as the former monetary policy is automatically countercyclical against the volatile terms of trade shock. This paper constructs a dynamic stochastic general equilibrium model of joint monetary and fiscal policies for a developing oil economy, to find an appropriate monetary rule combined with a pro/counter/acyclical fiscal stance based on a loss measure. The foreign exchange interventions distinguish between a managed and flexible exchange rate regime, while fiscal policy cyclicality depends on the oil output response of public consumption and public investment. The study reveals that the best policy combination is a countercyclical fiscal stance and CPI inflation monetary targeting under a flexible exchange rate regime to stabilize equally the domestic price inflation, aggregate output, and real exchange rate in a small open economy. This result is conditional on weights for those three variables used in the loss measure.
    Keywords: oil economy; monetary policy; fiscal policy; exchange rate; oil price shock; interventions; SWF;
    JEL: E31 E52 E62 E63 F31 F41 H54 H63 Q33 Q38
    Date: 2016–10
  39. By: Michael T. Kiley
    Abstract: Both imperfect information and sticky prices allow nominal shocks to act as business cycle impulses, but only sticky prices propagate the real effects of nominal shocks. A simple model of imperfect information and sticky prices developed herein indicates that high rates of inflation lead to less price stickiness, and hence less persistent output fluctuations. Estimation of the model, as well as simple autocorrelations of real output, indicate that indeed output fluctuations are less persistent in high inflation economies. These results lend little support to models in which output persistence is explained through persistent real shocks, capital accumulation, or adjustment costs.
    Keywords: Output persistence ; sticky prices ; menu costs
  40. By: Pedro, Gomis-Porqueras
    Abstract: We study the impact of fiscal policies on inflation, unemployment and interest rate spreads dynamics in an environment where firms provide liquidity. Firms link labor and asset markets by hiring workers and issuing claims to their future profits. Matching frictions in the labor market drastically alters the effect of fiscal policy as the tax base increases with the number of jobs filled. As a result, labor market conditions directly affect the return on private assets and inflation dynamics. Moreover, since frictions in decentralized financial markets exist, public and private assets are also used as collateral. These features in the labor and financial markets drastically change the nature of monetary equilibria. In particular, monetary steady states are generically not unique and endogenous fluctuations are observed. Furthermore, characteristics of the labor market affect the demand for private and public assets, making the interaction between monetary and fiscal policies more intricate. Finally, traditional stabilization policies based on frictionless financial and labor markets are not robust to this frictional environment.
    Keywords: decentralized financial markets, unemployment, liquidity, fiscal rules
    JEL: D8 D80 E4 E40 E50
    Date: 2016–08–31
  41. By: Josef Schroth
    Abstract: Foreign direct investment inflows are positively related to growth across developing countries—but so are savings in excess of investment. I develop an explanation for this well-established puzzle by focusing on the limited availability of consumer credit in developing countries together with general equilibrium effects. In my model, fast-growing developing countries increase their holdings of safe assets, which creates net capital outflows despite inflows of foreign direct investment. The world risk-free interest rate falls as a result, and slow-growing developing countries reduce their holdings of safe assets, which creates net capital inflows despite outflows of foreign direct investment.
    Keywords: Foreign reserves management, Interest rates, International financial markets
    JEL: E13 E21 F43
    Date: 2016
  42. By: Bianchi, Francesco (Duke University); Melosi, Leonardo (Federal Reserve Bank of Chicago)
    Abstract: We develop and estimate a general equilibrium model to quantitatively assess the effects and welfare implications of central bank transparency. Monetary policy can deviate from active inflation stabilization and agents conduct Bayesian learning about the nature of these deviations. Under constrained discretion, only short deviations occur, agents’ uncertainty about the macroeconomy remains contained, and welfare is high. However, if a deviation persists, uncertainty accelerates and welfare declines. Announcing the future policy course raises uncertainty in the short run by revealing that active inflation stabilization will be temporarily abandoned. However, this announcement reduces policy uncertainty and anchors inflationary beliefs at the end of the policy. For the U.S., enhancing transparency is found to increase welfare. The same result is found when we relax the assumption of perfectly credible announcements.
    Keywords: Policy announcement; Bayesian learning; reputation; forward guidance; macroeco-nomic risk; uncertainty; inflation expectations; Markov-switching models; likelihood estimation
    JEL: C11 D83 E52
    Date: 2016–10–16
  43. By: Lukasz Balbus; Kevin Reffett; Lukasz Wozny
    Abstract: We give a set of sufficient conditions for uniqueness of a time-consistent Markov stationary consumption policy for a quasi-hyperbolic household under uncertainty. To the best of our knowledge, this uniqueness result is the first presented in the literature for general settings, i.e. under standard assumptions on preferences, as well as some new condition on a transition probability. This paper advocates a ''generalized Bellman equation'' method to overcome some predicaments of the known methods and also extends our recent existence result. Our method also works for returns unbounded from above. We provide few natural followers of optimal policy uniqueness: convergent and accurate computational algorithm, monotone comparative statics results and generalized Euler equation.
    Keywords: Time consistency, Markov equilibria, Uniqueness, Stochastic games, Generalized Bellman equation
    JEL: C62 C73 D91
    Date: 2016–11
  44. By: Arash Nekoei (IIES-Stockholm); Ali Shourideh (University of Pennsylavnia); Mikhail Golosov (Princeton University)
    Abstract: We develop a framework for optimal taxation when assignment of workers to firms is endogenous. In our model, workers are heterogeneous with respect to their productivity as well as their firm-specific cost of working. Firms have heterogeneous productivities and production exhibits complementarities between firm and worker productivity. Different workers assign to different firms and this assignment depends on the the distribution of workers characteristics. We show that the nature of the multi-dimensional heterogeneity of the workers implies that income taxes affect the way workers sort into jobs. As a result, taxes affect the allocation of workers among firms and thus aggregate productivity even when traditional notions of labor supply are fully inelastic. Our model allows us to define a notion of sorting elasticity with respect to taxes and technological changes. Furthermore, we can analyze optimal linear and non-linear taxes and provide formulas that relate optimal taxes to the sorting elasticity. Contrary to some results in the literature, technological change that changes firms' distribution of productivity does have an effect on marginal taxes through this sorting elasticity. Finally, we provide evidence on the magnitude of the sorting elasticity and its implications on optimal income taxes using employer-employee data.
    Date: 2016
  45. By: Szilard Benk; Tamas Csabafi; Jing Dang; Max Gillman; Michal Kejak
    Abstract: For US postwar data, the paper explains central consumption, labor, investment and output correlations and volatilities along with output growth persistence by including a human capital investment sector and a variable physical capital utilization rate. Strong internal "amplication" results from an economy-wide productivity shock across goods and human capital investment sectors that has variances 10,000 fold smaller than in the standard RBC TFP shock. Simulated moments are compared to data moments for the business cycle, the low frequency and the Medium Cycle frequency, as well as the high frequency. A metric is provided to gauge that the results have an average of 46% deviation of simulated moments from data moments, for a broad array of targets across all windows. Within this array, key correlations have only a 15% deviation in the business cycle window, and growth persistence only an 8% deviation in the low frequency, which indicates good "propagation". Countercyclic human capital investment time and procyclic physical capital capacity utilization rates are also found as in data.
    Date: 2016–11–10
  46. By: Charles-Henri Weymuller (French Treasury); Eduardo Davila (New York University)
    Abstract: We study the optimal design of a joint borrowing arrangement among countries. In our framework, a safe country, which never defaults, and a risky country, which may default, participate in a joint borrowing scheme, through which they allocate a predetermined fraction of their bond issuance to a joint bond. The joint borrowing scheme is flexible, and can feature pooled issuance, in which countries share the funds raised through the joint bond, and joint liability, in which one country guarantees the obligations of another one. We show that a change in the scale of the joint borrowing scheme affects social welfare through five different channels: the risk sharing channel, the default deadweight loss channel, the free riding channel, the joint liability channel and default spillover channel. We also show that only the first two channels are non-zero up to a first-order when the joint bond issuance is small. We develop a simple test based on pricing data to determine whether a joint borrowing scheme is socially desirable and also conduct a quantitative analysis. We show that our main insights remain valid through a number of extensions.
    Date: 2016
  47. By: Raphael Schoenle (Brandeis University); Michael Weber (University of Chicago); Ernesto Pasten (Central Bank of Chile)
    Abstract: We study the aggregate propagation of idiosyncratic, sectoral shocks in a multi-sector new-Keynesian model with intermediate inputs featuring sectoral heterogeneity in price stickiness, sectoral GDP, and input-output linkages. Heterogeneity of price rigidity distorts the "granular" effect of the fat-failed distribution of sectors' size as well as the "network" effect of the centrality of some sectors in the production network. This distortion involves the strength of the aggregate volatility generated by sectoral shocks as well as the identity of the most important sectors. The granular and the network effects may in fact be completely irrelevant while the empirical distribution of price stickiness may generate by itself sizable aggregate volatility from sectoral shocks. We calibrate our model to 350 sectors using US data to quantify the strenght and interaction of "granular", "network" and "frictional" sources of the aggregate propagation of sectoral shocks.
    Date: 2016
  48. By: Jordi Jofre-Monseny (IEB, Universitat de Barcelona); José I. Silva (Universitat de Girona); Javier Vázquez-Grenno (IEB, Universitat de Barcelona)
    Abstract: This paper quantifies the impact of public employment on local labor markets in the long-run. We adopt two quantitative approaches and apply them to the case of Spanish cities. In the first, we develop a 3-sector (public, tradable and non-tradable) search and matching model embedded within a spatial equilibrium model. We characterize the steady state of the model, which we calibrate to match the labor market characteristics of the average Spanish city. The model is then used to simulate the local labor market effects of expanding public sector employment. In the second empirical approach, we use regression analysis to estimate the effects of public sector job expansions on decadal changes (1980-1990 and 1990-2001) in the employment and population of Spanish cities. This analysis exploits the dramatic expansion of public employment that followed the advent of democracy in the period 1980 to 2001. The instrumental variables’ approach thatwe adopt uses the capital status of cities to instrument for changes in public sector employment. The two empirical approaches yield qualitatively similar results and, thus, cross-check each other. One additional public sector job creates about 1.3 jobs in the private sector. However, these new jobs do not translate into a substantial reduction in the local unemployment rate as better labor market conditions attract new workers to the city. Increasing public employment by 50% only reduces unemployment from 0.156 to 0.150.
    Keywords: Public employment, search, local multipliers, unemployment.
    JEL: J45 J64 H70 R12
    Date: 2016–11
  49. By: Victoria Nuguer (Banco de México); Jessica Roldan-Pena (Banco de Mexico); Enrique Mendoza (University of Pennsylvania); Julio Carrillo (Banco de Mexico)
    Abstract: We investigate the strategic interactions between the central bank and a financial authority in an economy distorted with nominal rigidities and credit frictions, and hit by financial shocks. Using a policy-rule approach, we find that introducing an independent financial instrument increases consumers’ welfare, versus the alternative of a central bank alone leaning against the financial shocks. Also, we find that when the two policymakers maximize welfare (our ideal case), the Nash equilibrium corresponds to the first best. However, under our implementable case, the policymakers face a conflict in objectives, as the central bank focuses on the stability of prices, while the financial authority on the stability of the credit spread. In such a case, cooperation across institutions is second best, while Nash is third best. However, if the policymakers have the same objectives, cooperation and Nash coincide and are second best.
    Date: 2016
  50. By: Natalia Ramondo (UCSD); Lindsay Oldenski (Georgetown University); Stefania Garetto (Boston University)
    Abstract: This paper examines how the activities performed by multinational firms change over time. Using a panel of US multinational firms over 25 years from the US Bureau of Economic Analysis, we classify affiliate sales as horizontal, vertical, or export platform based on their destination, and we trace the evolution of these three types of affiliate sales within firms over time. We establish two stylized facts. First, affiliate sales, both to the local market and to other countries, grow very little over the life cycle of the affiliate. Second, affiliates of U.S. multinational firms specialize in a core activity at birth, which persists as the main activity during the life cycle. Some diversification is observed later in life, particularly from horizontal to export activities. Informed by these facts, we propose a dynamic model of multinational production that is consistent with them. The model can be calibrated to shed light on the nature of the costs of multinational activity, which are essential ingredients to quantify the gains from openness arising from multinationals’ operations.
    Date: 2016
  51. By: Octavia Foarta (Stanford Graduate School of Business)
    Abstract: Two key features of the government bailout programs implemented in the 2008-2009 Â…financial crisis were: fiÂ…rst, the general opposition of voters to these programs and second, the implementation of a variety of interventions, ranging from targeted transfers meant to inject capital in particular institutions to untargeted transfers aimed at helping entire sectors. This paper argues that the observed shift in the balance between targeted and untargeted transfers emerges in a political economy environment, when voters posses less information than the government about the shocks hitting the economy, and when Â…firms can lobby the government for socially inefficient transfers. The model shows that the optimal incentives voters can give to an elected politician can lead to persistent effects of government interventions, which triggers a shift towards more untargeted interventions following a crisis.
    Date: 2016
  52. By: Marios Karabarbounis (Federal Reserve Bank of Richmond); Marianna Kudlyak (Federal Reserve Bank of Richmond); M. Saif Mehkari (University of Richmond); Bill Dupor (Federal Reserve Bank of St. Louis)
    Abstract: This paper uses cross-regional variation in the fiscal stimulus of 2009-2013 to analyze the effects of government spending on household-level consumption when the nominal interest rate is zero. The key novelty is the construction of a comprehensive measure of local consumption expenditures using (i) household-level retail purchase data using Nielsen Homescan Consumer Panel and (ii) state-level consumption data from the BEA. Most of our specifications point toward a significantly positive consumption multiplier around 0.25 for non-durable consumption. We translate our regional multiplier into an aggregate multiplier using a heterogeneous agents, New Keynesian model with multiple regions and input linkages.
    Date: 2016
  53. By: Thien Nguyen (The Ohio State University); Steve Raymond (UNC); Lukas Schmid (Duke University); Mariano Croce (University of North Carolina at Chapel H)
    Abstract: Elevated levels of US government debt in the aftermath of the great recession have raised concerns about their effects on long-term growth prospects. By empirically identifying measures of government indebtedness as risk factors priced in stock returns, we document and theoretically evaluate a novel risk channel at work shaping this link. In the cross-section, stocks earn positive premia for their exposure to movements in government debt, while these predict high stock returns going forward in the time series. A substantial return spread between the most and the least innovative firms is increasing in the debt-to-gdp ratio. We show that rises in the cost of capital for innovation-intensive firms associated with elevated government debt bring about declines in R&D activity and economic growth. We interpret these findings through the lens of a production-based asset pricing model with endogenous innovation and fiscal policy. The model emphasizes the role of political and fiscal uncertainty in shaping the empirical relationships.
    Date: 2016

This nep-dge issue is ©2016 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.