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on Dynamic General Equilibrium |
| By: | Christine S. Makanza (School of Economics, University of Cape Town) |
| Abstract: | Most general equilibrium models of the current account focus on developed countries and assume that the evolution of the current account is caused by changes in the traded goods sector. However, emerging markets are typically characterised by a relatively large non-traded goods sector, which also affects macroeconomic fundamentals. This study contributes to the literature by calibrating a Dynamic Stochastic General Equilibrium (DSGE) model to analyse the impact of non-traded goods on the current account and exchange rate. The model is calibrated to South Africa, an economy with a large current account deficit and a large non-traded goods sector. The results show that non-traded goods play a significant role in the determination of the current account, with half the variation in the current account explained by non-traded goods productivity shocks. A large proportion of variation in the exchange rate is explained by risk premium shocks, but the contribution of these shocks decreases with the introduction of non traded goods in the model. The model provides a good fit to stylised facts, suggesting that the non-traded goods sector is vital for the evolution of the current account and exchange rate. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ctn:dpaper:2016-04&r=dge |
| By: | Michał Brzoza-Brzezina; Jacek Kotlowski |
| Abstract: | Country risk premia can substantially affect macroeconomic dynamics. We concentrate on one of their most important determinants - a country’s net foreign asset position and - in contrast to the existing research - investigate its nonlinear link to risk premia. The importance of this particular nonlinearity is twofold. First, it allows to identify the NFA level above which the elasticity becomes much (possibly dangerously) higher. Second, such a nonlinear relationship is a standard ingredient of DSGE models, but its proper calibration/ estimation is missing. Our estimation shows that indeed the link is highly nonlinear and helps to identify the NFA position where the nonlinearity kicks in at -70% to -80% of GDP. We also provide a proper calibration of the risk premium - NFA relationship used in DSGE models and demonstrate that its slope matters significantly for economic dynamics in such a model. |
| Keywords: | Risk premium, PSTR model, open economy DSGE model |
| JEL: | C23 E43 E44 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:250&r=dge |
| By: | Ammar Farooq |
| Abstract: | This paper analyzes the relationship between age and the skill requirements of jobs performed by workers. I document that the proportion of college degree holders working in occupations that do not require a college degree is U-shaped over the life cycle and that there is a rise in transitions to non-college jobs among prime age college workers. The downward trend at initial stages of the life cycle is consistent with workhorse models of labor mobility, however, the rising trend at middle stages of the career is not. Such movements down the occupation ladder are also accompanied by average wage losses of 10% from the previous year. I develop an equilibrium model of frictional occupation matching featuring skill accumulation and depreciation along with worker and firm heterogeneity that can match the life cycle profile of downward occupational mobility. The model shows that skill depreciation is the key driver of transitions to low skill jobs with age. Using the model, I simulate the impact of different types of structural change in the labor market and find that the welfare consequences of long term changes depend on the interaction of the life cycle and human capital investment dimension. |
| JEL: | E24 J24 J31 J62 |
| Date: | 2016–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2016:pfa484&r=dge |
| By: | Francesco Zanetti; Christoph Görtz |
| Abstract: | We examine the dynamic effects and empirical role of TFP news shocks in the context of frictions in financial markets. We document two new facts using VAR methods. First, a (positive) shock to future TFP generates a signicant decline in various credit spread indicators considered in the macro-finance literature. The decline in the credit spread indicators is associated with a robust improvement in credit supply indicators, along with a broad based expansion in economic activity. Second, it is striking that VAR methods also establish a tight link between TFP news shocks and shocks that explain the majority of un-forecastable movements in credit spread indicators. These two facts provide robust evidence on the importance of movements in credit spreads for the propagation of news shocks. A DSGE model enriched with a financial sector of the Gertler-Kiyotaki-Karadi type generates very similar quantitative dynamics and shows that strong linkages between leveraged equity and excess premiums, which vary inversely with balance sheet conditions, are critical for the amplication of TFP news shocks. The consistent assessment from both methodologies provides support for the traditional 'news view' of aggregate fluctuations. |
| Keywords: | News shocks, Business cycles, DSGE, VAR, Bayesian estimation |
| JEL: | E2 E3 |
| Date: | 2016–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:813&r=dge |
| By: | Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Rangan Gupta (Department of Economics, University of Pretoria); Kevin Kotze (School of Economics, University of Cape Town) |
| Abstract: | This paper seeks to identify evidence of regime-switching behaviour in the monetary policy response function and the variance of the shocks. It makes use of various specifications of a small open-economy Markov-switching dynamic stochastic general equilibrium (DSGE) model that is applied to South African data from 1989 to 2014. While the in-sample statistics suggest that some of the regime-switching models may provide superior results, the out-of-sample statistics suggest that the inclusion of various forms of regime-switching does not significantly improve upon the forecasting performance of the model. The results also suggest that the central bank response function has been consistently applied over the sample period. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ctn:dpaper:2016-05&r=dge |
| By: | Gaston Navarro (Federal Reserve Board); Julio Blanco (University of Michigan) |
| Abstract: | We provide evidence of a significant and persistent negative relation between a firm's workers and her probability to default. In contrast with most "macro-finance" models, this relation is robust to controlling for the several firm's variables, such as the firm's leverage and profitability. In particular, for a panel of most US publicly traded firms, we find that a 10% increase in a firm's workers is associated with a 3% decline in her probability to default. To account for this fact, we extend a standard search-friction labor-market model to incorporate firms default risk. This environment provides a micro-foundation where workers determine the firm's value, and consequently affecting her incentives to default. We argue that fluctuations in the value of a worker generate and significantly amplify business cycle fluctuations. In the context of our model, we find that fluctuations in the value of a worker explain more than 68% of credit spreads volatility, and almost 80% of default rate volatility. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1502&r=dge |
| By: | anmol bhandari (university of minnesota); Hengjie Ai (University of Minnesota) |
| Abstract: | This paper studies asset pricing implications of idiosyncratic risk in labor productivities in a model where markets are endogenously incomplete. Well-diversified owners of firms provide insurance to workers using long-term wage contracts but cannot commit to ventures that yield a net present value of dividends. We show that under the optimal contract subject to limited commitment, workers are uninsured against tail risks in idiosyncratic productivities. Risk compensations are higher when we calibrate the model to replicate the feature that tail risk in labor income is more pervasive in recessions relative to expansions. Besides salient features of equity and bond markets, the model is consistent with other empirical facts such as the cyclicality of factor shares and limited stock market participation. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1523&r=dge |
| By: | Pengfei Wang (Hong Kong University of Science and Tech); Feng Dong (Shanghai Jiao Tong University); Jess Benhabib (NYU) |
| Abstract: | We develop a macroeconomic model with adverse selection in credit markets. A continuum of final-goods producers borrow from financial intermediary to purchase intermediate goods as input. The type of producers as borrower is private information. Adverse selection arises here. Higher aggregate supply of credit induces more high-quality borrowers, lowers default risks face by each financial intermediary, and stimulate more individual credit supply. We show that this lending externality can generate multiple equilibria or indeterminacy even when the steady state equilibrium is unique, making self-fulfilling expectation driven business cycles possible. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1526&r=dge |
| By: | Ilse Lindenlaub (Yale University) |
| Abstract: | This paper develops a theory that relates two seemingly unrelated facts: First, while US educational attainment has drastically increased during most of the last century, in recent decades this trend has stagnated. Second, roughly at the same time when educational growth slowed down, there was a shift in the composition of earnings shocks with transitory shocks becoming relatively more important in overall earnings volatility compared to permanent shocks. We study a dynamic general equilibrium matching model, in which heterogeneous agents face idiosyncratic permanent and transitory income risk and make educational choices.... |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1544&r=dge |
| By: | Frechette, Guilaume; Lizzeri, Alessandro; Salz, Tobias |
| Abstract: | This paper presents a dynamic general equilibrium model of a taxi mar- ket. The model is estimated using data from New York City yellow cabs. Two salient features by which most taxi markets deviate from the efficient market ideal is the need of both market sides to physically search for trading partners in the product market as well as prevalent regulatory limitations on entry in the capital market. To assess the relevance of these features we use the model to simulate the effect of changes in entry and an alternative search technology. The results are contrasted with a policy that improves the inten- sive margin of medallion utilization through a transfer of medallions to more efficient ownership. We use the geographical features of New York City to back out unobserved demand through a matching simulation. |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11626&r=dge |
| By: | Aaron Hedlund (University of Missouri); Carlos Garriga (Federal Reserve Bank of St. Louis) |
| Abstract: | This paper explores the contribution of housing and mortgage debt to the macroeconomic performance of the United States economy during the Great Recession, with a particular eye toward consumption. The importance of housing is evaluated using a quantitative, heterogeneous agent model with search frictions in the housing market and equilibrium mortgage default. The model successfully replicates key features of the U.S.\ economy prior to the Great Recession and can rationalize the dynamics of housing, debt, and consumption during the crisis. The increase in labor market risk and deterioration in housing finance both play pivotal but different roles in explaining the steep recession and slow recovery. Endogenous housing illiquidity is necessary to explain the magnitude of the house price drop, the spike in foreclosures, the fall in consumption, and the evolution of homeownership. The model also substantiates and explains findings from the literature on the sensitivity of consumption to house price movements and how the degree of household indebtedness affects this relationship. Lastly, the Federal Reserve's policy of Quantitative Easing is evaluated and found to have substantial effects on house price and consumption dynamics. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1564&r=dge |
| By: | Shengxing Zhang (London School of Economics); Ricardo Lagos |
| Abstract: | In this paper we document a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, we develop a model of this mechanism, and use a quantitative version to assess the ability of the theory to match the evidence. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1569&r=dge |
| By: | Chen Yeh (University of Chicago); David Argente (University of Chicago) |
| Abstract: | We document a new set of salient facts on pricing moments over the life-cycle of products. First, entering products change prices twice as often as the average product. Second, the average size of these adjustments is 50 percent larger than the average price change. We argue that a menu cost model with price experimentation can rationalize these findings. The firm is uncertain about its demand elasticity under this setting, but can experiment with its price to endogenously affect its posterior beliefs. Firms face the trade-off between increasing the speed of learning through price experimentation and maximizing their static profits. This mechanism can endogenously generate large price changes, without the use of fat-tailed shocks, and can replicate the life-cycle patterns we document. We show that the cumulative output effect of an unanticipated monetary shock is 40 percent larger than in Golosov and Lucas (2007). On impact, selection is weakened as the experimentation motive alters the distribution of desired price changes and decreases the fraction of firms near the margin of adjustment. Furthermore, the notion of a product’s life-cycle generates an additional form of cross- sectional heterogeneity in the frequency of price adjustment. This causes the monetary shock to be further propagated. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1515&r=dge |
| By: | Keister, Todd (Rutgers University); Sanches, Daniel R. (Federal Reserve Bank of Philadelphia) |
| Abstract: | It has been largely acknowledged that monetary policy can affect borrowers and lenders differently. This paper investigates whether the distributional effects of monetary policy are an inherent feature of monetary economies with private credit instruments. In our framework, both money and credit instruments can potentially be used as media of exchange to overcome trading frictions in decentralized markets. Entrepreneurs have access to productive projects but face credit constraints due to limited pledgeability of their returns. Monetary policy affects the liquidity premium on private credit and thereby influences the cost of borrowing and the level of investment, but any attempt to ease borrowing constraints results in suboptimal decentralized-market trading activity. We show that this policy trade-off is not an inherent feature of monetary economies with private credit instruments. If we consider a richer set of aggregate liquidity management instruments, such as the payment of interest on inside money and capital requirements, it is possible to implement an efficient allocation. |
| Keywords: | monetary theory and policy; liquidity premium; Friedman rule; investment; bank lending channel |
| Date: | 2016–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:16-32&r=dge |
| By: | Phuong Ngo (Cleveland State University); Francois Gourio (Federal Reserve Bank of Chicago) |
| Abstract: | Long-term interest rates have fallen to historically low levels since the Great Recession started. One potential contributor are low premia for infl‡ation and interest rate risk. We show how a fairly standard New Keynesian macroeconomic model generates lower infl‡ation and interest rate risk premia when the economy becomes close to the zero lower bound (ZLB). In particular, the in‡flation risk premia switches from positive to negative. We provide evidence consistent with this mechanism: since 2009, investors seem to view infl‡ation as more positively correlated with the price of risky assets. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1585&r=dge |
| By: | Isoré, Marlène |
| Abstract: | This paper develops a two-country model in which transmission of financial shocks arises despite a flexible exchange rate regime and substitutable financial assets, contrary to the open-economy literature results under these two conditions. The search and matching approach first accounts for the time needed to restore normal functioning of financial markets following a disruption. It also allows dissociating two types of financial shocks: (i) pure liquidity contractions imply negative co-movements of home and foreign outputs, so that the model nests the standard open macroeconomy results as a particular case; (ii) shocks to banks’ capitalization costs in one country do generate international financial contagion. |
| Keywords: | international contagion, financial multiplier, financial crises, credit rationing, open economy macroeconomics, search and matching theory |
| JEL: | C78 E44 E51 F41 F42 G01 G15 |
| Date: | 2016–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_028&r=dge |
| By: | Salome Baslandze (Einaudi Institute for Economics and Fina) |
| Abstract: | What is the impact of information and communications technologies (ICT) on aggregate productivity growth and sectoral reallocation? In this paper, I analyze the impact of ICT through facilitating knowledge diffusion in the economy. There are two opposing effects. The increased flow of ideas between firms improves learning opportunities and spurs innovation. However, knowledge diffusion through ICT also results in broader accessibility of knowledge by competitors harming innovation incentives. The nature of the tradeoff between these opposing forces depends on an industry's technological characteristics, which I call external knowledge dependence. Industries whose innovations rely more on external knowledge benefit greatly from knowledge externalities and expand, while more self-contained industries are more affected by intensified competition and shrink. This results in the reallocation of innovation and production activities toward more externally-focused, "knowledge-hungry" industries. I develop a general equilibrium endogenous growth model featuring this mechanism. Using NBER patent and citations data together with BEA industry-level data on ICT, I empirically validate the mechanism of the paper. Quantitative analysis from the calibrated model illustrates that it is important to account for both technological heterogeneity and the knowledge-diffusion role of ICT to explain U.S. trends in productivity growth and sectoral reallocation in recent decades. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1509&r=dge |
| By: | Eickmeier, Sandra; Metiu, Norbert; Prieto, Esteban |
| Abstract: | We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods. To rationalize our robust empirical results, we use a macroeconomic model in which banks endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, banks lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy. |
| Keywords: | monetary policy,credit spread,non-linearity,intermediary leverage,financial accelerator |
| JEL: | C32 E44 E52 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:462016&r=dge |
| By: | Yang, Qiming; Zhang, Xiaobo; Zhu, Wu |
| Abstract: | Normally as an economy develops, firm sizes increase. However, as measured by the employment rate, the firm size in China declined from 2004 to 2008. In this paper, we develop a structural dynamic model with heterogeneous workers to study the relative contributions of three factors to declining firm size: rising real wages, implementation of minimum wages, and the introduction of a new national labor contract law. While rising wages make a sizeable contribution, we find that the new labor law plays a dominant role in solving the puzzle. In comparison, the impact of minimum wages is more muted. |
| Keywords: | wages, labor law, labour legislation, law, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:ifprid:1558&r=dge |
| By: | William Hawkins (Yeshiva University); Carlos Carrillo-Tudela (Essex) |
| Abstract: | We develop a tractable equilibrium model of stock-flow matching in the labor market. The economy consists of many labor markets, and workers and jobs continually flow into each labor market. Within a labor market, potential worker-job matches differ in quality. Accordingly, a worker newly arrived in a labor market may not find any acceptable matches; if so, she becomes part of the stock of unemployed workers and must wait for the arrival of a new vacancy in the flow which offers her a sufficiently high quality match. When labor market conditions change, the set of acceptable matches changes in response, a feature not allowed for in previous work on stock-flow matching. Our model is consistent with several stylized facts about the labor market, such as the importance of flows, as well as stocks, for matching rates, as well as with duration dependence in unemployment. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1542&r=dge |
| By: | Alexandre Lucas Cole (LUISS "Guido Carli" University); Chiara Guerello (LUISS "Guido Carli" University); Guido Traficante (European University of Rome) |
| Abstract: | We build a Two-Country Open-Economy New-Keynesian DSGE model of a Currency Union, with a debt-elastic government bond spread and incomplete international financial markets, to study the e ects of government debt deleveraging. We evaluate the stabilization properties and welfare implications of di erent deleveraging schemes and instruments, under a range of alternative shocks and under alternative scenarios for fiscal policy coordination, bringing to policy conclusions for the proper government debt management in a Currency Union. We find that: a) coordinating on the net exports gap and consolidating budget constraints across countries when deleveraging provides more stabilization, b) taxes are a better instrument for deleveraging compared to government consumption or transfers, c) by backloading the deleveraging process one can achieve greater stabilization over time, d) deleveraging government debt increases the volatility and persistence of the economy after other shocks. Our policy prescriptions for the Eurozone are to reduce government debt more gradually over time and less during recessions, to do so using distortionary taxes, while concentrating on reducing international demand imbalances and maybe creating some form of fiscal union. |
| Keywords: | Sovereign Debt, International Policy Coordination, Monetary Union, New Keynesian. |
| JEL: | H63 E63 F42 F45 E12 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:lui:celegw:1603&r=dge |
| By: | Leslie J. Reinhorn (Durham Business School) |
| Abstract: | This paper addresses conflicting results regarding the optimal taxation of capital income. Judd (1985) proves that in steady state there should be no taxation of capital income. Lansing (1999) studies a logarithmic example of one of Judd’s models and finds that the optimal steady state tax on capital income is not always zero. it is positive in some specifications, negative in some others. There appears to be a contradiction. However, I show that Lansing derives his result by relaxing the hypotheses of Judd’s theorem -- with less restrictive hypotheses, a wider range of outcomes is possible. This raises the question of whether yet more outcomes are possible with yet weaker hypotheses. I find that the answer is no: the only possible interior steady states for the model are essentially Judd’s zero capital tax and Lansing’s unitary elasticity of marginal utility. |
| Keywords: | Dynamic optimal taxation |
| JEL: | H2 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:dur:cegapw:2016_07&r=dge |
| By: | Enrique G. Mendoza |
| Abstract: | Macroprudential policy holds the promise of becoming a powerful tool for preventing financial crises. Financial amplification in response to domestic shocks or global spillovers and pecuniary externalities caused by Fisherian collateral constraints provide a sound theoretical foundation for this policy. Quantitative studies show that models with these constraints replicate key stylized facts of financial crises, and that the optimal financial policy of an ideal constrained-efficient social planner reduces sharply the magnitude and frequency of crises. Research also shows, however, that implementing effective macroprudential policy still faces serious hurdles. This paper highlights three of them: (i) complexity, because the optimal policy responds widely and non-linearly to movements in both domestic factors and global spillovers due to regime shifts in global liquidity, news about global fundamentals, and recurrent innovation and regulatory changes in world markets, (ii) lack of credibility, because of time-inconsistency of the optimal policy under commitment, and (iii) coordination failure, because a careful balance with monetary policy is needed to avoid quantitatively large inefficiencies resulting from violations of Tinbergen’s rule or strategic interaction between monetary and financial authorities. |
| JEL: | E44 E5 F34 F4 G01 G28 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22868&r=dge |
| By: | Simeon Alder (University of Notre Dame) |
| Abstract: | We build a tractable assignment model to characterize the matching and separation patterns of CEOs and their employers. Managers learn about their own type by observing a sequence of public signals. The sorting is ex ante perfect across managers of a given cohort whose most recent assignment is the same, but is not typically so ex post. Moreover, if matching is costless, perfect \textit{ex ante} sorting occurs across managers of a given cohort regardless of their assignment history. We calibrate the model to match empirical targets from a large matched employer-employee dataset covering the Danish labor force between 2000 and 2009. We exploit the non-monotonicity of executive compensation in the employer type - the firm's productivity, that is - to parameterize the model. We have a particular interest in the degree of complementarity between the characteristics of the manager and those of the firm in the production function and our results fill a gap in the literature on the aggregate effects of a particular form of misallocation, namely mismatch, which depend critically on this elasticity. What's more, our theory is a natural building block for a dynamic theory of entrepreneurship. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1583&r=dge |
| By: | Hyun Lee (University of Connecticut) |
| Abstract: | In this paper, I develop a novel two-country general equilibrium model of immigration and return migration with incomplete markets and heterogeneous agents. I use the model to quan-tify the short-run and the long-run macroeconomic impacts of permanently doubling the US H-1B visa quota. In the short-run, I find huge endogenous increase in visa application by less talented skilled foreigners, which increases the probability of obtaining the H-1B visa by only 11 percentage points. In the long-run, US experiences a modest gain in output per capita. Most importantly, I find that there exists a sizable mass of US native skilled workers who—despite the decrease in their equilibrium wage—gain in welfare because of their accumulated capital holdings. Furthermore, I highlight the importance of including return migration in a quantita-tive model of international labor mobility by showing that shutting down return migration in my model results in overestimating the magnitude of the welfare changes by more than sixfold for certain cohorts. JEL Classification: E13, E24, F22, O11, J61 Key words: Immigration, heterogeneous agent model, H-1B visa quota, welfare, transition path, human capital, return migration |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2016-35&r=dge |
| By: | Jing Cynthia Wu; Ji Zhang |
| Abstract: | We propose a New Keynesian model with the shadow rate, which is the federal funds rate during normal times. At the zero lower bound, we establish empirically the negative shadow rate summarizes unconventional monetary policy with its resemblance to private interest rates, the Fed's balance sheet, and Taylor rule. Theoretically, we formalize our shadow rate New Keynesian model with QE and lending facilities. Our model generates data-consistent results: a negative supply shock is always contractionary. It also salvages the New Keynesian model from the zero lower bound induced structural break. |
| JEL: | E12 E52 E58 E63 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22856&r=dge |
| By: | Giovanni Nicoló (UCLA); Francesco Bianchi (Cornell University) |
| Abstract: | Modern empirical macroeconomics frequently tests for equilibrium determinacy in linear rational expectations (LRE) models. We propose an augmented representation to solve and estimate LRE models over the entire parameter space, even when the researcher does not know the region of determinacy. The novel approach does not impose restrictions on the parameter space over which the model is estimated and therefore exploits the full informational content of the data. Our methodology tests for determinacy in the wide class of medium- and large-scale models as well as small-scale models for which the region of determinacy is non-trivial. Importantly, the approach is implementable in standard software packages, such as Dynare. We apply our findings by simulating the canonical New-Keynesian model when the Taylor principle is both satisfied and not. We show that our method successfully recovers the true parameter values under the assumption that the researcher does not know the Taylor principle. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1516&r=dge |