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on Dynamic General Equilibrium |
| By: | Tobias Schuler; Luisa Corrado |
| Abstract: | This paper analyses the effects of several macro-prudential policy measures on the banking sector and its linkages to the macroeconomy. We employ a dynamic general equilibrium model with sticky prices, in which banks trade excess funds in the interbank lending market. We find that an increase in the liquidity requirement effectively reduces the impact of an interbank shock on output and employment, while an increased capital requirement propagates only through financial variables as inflation and interest rates. We conclude that stricter liquidity measures which limit inside money creation, dampen the severity of a breakdown in interbank lend- ing. Targeting interbank financing directly through liquidity measures along with a moderate capital requirement generates lower welfare losses. We thereby provide a comprehensive rationale in favor of the regulatory measures in Basel III. |
| JEL: | E40 E51 E58 G28 |
| Date: | 2016–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2016:psc747&r=dge |
| By: | Parkhomenko, Andrii |
| Abstract: | The unemployment insurance system in the U.S. does not provide incentives to look for jobs outside local labor markets. In this paper I introduce relocation subsidies as a supplement to unemployment benefits, and study their effects on unemployment, productivity and welfare. I build a job search model with heterogeneous workers and multiple locations, in which migration is impeded by moving expenses, cross-location search frictions, borrowing constraints, and utility costs. I calibrate the model to the U.S. economy, and then introduce a subsidy that reimburses a part of the moving expenses to the unemployed and is financed by labor income taxes. During the Great Recession, a relocation subsidy that pays half of the moving expenses would lower unemployment rate by 0.36 percentage points (or 4.8%) and increase productivity by 1%. Importantly, the subsidies cost nothing to the taxpayer: the additional spending on the subsidies is offset by the reduction in spending on unemployment benefits. Unemployment insurance which combines unemployment benefits with relocation subsidies appears to be more effective than the insurance based on the benefits only. |
| Keywords: | unemployment insurance, relocation subsidies and vouchers, local labor markets, moving costs, geographic mobility, internal migration |
| JEL: | E24 J61 J64 J65 R23 |
| Date: | 2016–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75256&r=dge |
| By: | Pierre-Richard Agénor; L. Pereira da Silva |
| Abstract: | The effects of capital requirements on risk taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may require concomitantly a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:226&r=dge |
| By: | Philipp Engler; Wolfgang Strehl |
| Abstract: | We analyze the positive and normative effects of a progressive tax on wages in a nonlinear New Keynesian DSGE model in the presence of demand and technology shocks. The non-linearity allows us to disentangle the effects of the progressive tax on the volatility and the level of macroeconomic variables, for both intertemporally optimizing (“Ricardian") and non-Ricardian (“rule-of-thumb") households. We find that the interaction of the two household types is of crucial importance. When only Ricardian households are considered, progressive taxes increase welfare (compared to at taxes) in the presence of technology shocks. Aggregate welfare falls, however, when rule-of-thumb households are added to the analysis. The progressive tax increases the welfare of the latter household by lowering its consumption volatility, but this is overcompensated for by the destabilization of Ricardian household consumption. Under demand shocks, progressive taxes reduce the welfare of both household types, with the welfare of rule-of-thumb households falling despite a decline in their consumption volatility. The reason is a lower average consumption level which is related to the changed curvature of the marginal cost function. |
| Keywords: | Progressive Taxation, Rule-of-thumb Households, Monetary Policy |
| JEL: | E2 E3 E52 E62 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1626&r=dge |
| By: | Engler, Philipp; Strehl, Wolfgang |
| Abstract: | We analyze the positive and normative effects of a progressive tax on wages in a nonlinear New Keynesian DSGE model in the presence of demand and technology shocks. The non-linearity allows us to disentangle the effects of the progressive tax on the volatility and the level of macroeconomic variables, for both intertemporally optimizing ("Ricardian") and non-Ricardian ("rule-of-thumb") households. We find that the interaction of the two household types is of crucial importance. When only Ricardian households are considered, progressive taxes increase welfare (compared to at taxes) in the presence of technology shocks. Aggregate welfare falls, however, when rule-of-thumb households are added to the analysis. The progressive tax increases the welfare of the latter household by lowering its consumption volatility, but this is overcompensated for by the destabilization of Ricardian household consumption. Under demand shocks, progressive taxes reduce the welfare of both household types, with the welfare of rule-of-thumb households falling despite a decline in their consumption volatility. The reason is a lower average consumption level which is related to the changed curvature of the marginal cost function. |
| Keywords: | progressive taxation,rule-of-thumb households,monetary policy |
| JEL: | E2 E3 E52 E62 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201623&r=dge |
| By: | Amaral, Pedro S. (Federal Reserve Bank of Cleveland); Corbae, Dean (Wisconsin School of Business); Quintin, Erwan (Wisconsin School of Business) |
| Abstract: | The existing literature on financial development focuses mostly on the causal impact of the quantity of financial intermediation on economic development. This paper, instead, focuses on the role of the financial sector in creating securities that cater to the needs of heterogeneous investors. To that end, we describe a dynamic extension of Allen and Gale (1989)’s optimal security design model in which producers can tranche the stochastic cash flows they generate at a cost. Lower tranching costs in that environment lead to capital deepening and raise aggregate output. The implications of lower tranching costs for TFP, on the other hand, are fundamentally ambiguous. In other words, our model predicts that increased financial sophistication/complexity—a securitization boom, e.g.—can have adverse consequences on aggregate productivity as it is conventionally measured. |
| Keywords: | Endogenous security markets; financial development; economic development; |
| JEL: | E30 E44 |
| Date: | 2016–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1629&r=dge |
| By: | Jan Babecky; Michal Franta; Jakub Rysanek |
| Abstract: | In this paper we explore the potential of the DSGE-VAR modelling approach for examining the effects of fiscal policy. The combination of the VAR and DSGE frameworks leads theoretically to more accurate estimates of impulse responses and consequently of fiscal multipliers. Moreover, the framework allows for discussion about the differences of the effects of fiscal shocks in DSGE and VAR models and to some extent discussion about misspecification in fiscal DSGE models. The DSGE-VAR model is estimated on Czech data covering the period from 1996 to 2011 at quarterly frequency. The government consumption multiplier attains a value close to 0.4 at the horizon of four years. The public investment multiplier is about 0.4 higher, which confirms findings in the literature. On the other hand, the DSGE model alone implies a similar government consumption multiplier but a much lower public investment multiplier, suggesting misspecification of the fiscal DSGE model. |
| Keywords: | DSGE-VAR model, fiscal multipliers, fiscal shocks, identification, model misspecification |
| JEL: | C11 E62 F41 H30 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2016/09&r=dge |
| By: | Santos, Tano; Veronesi, Pietro |
| Abstract: | Many stylized facts of leverage, trading, and asset prices follow from a frictionless general equilibrium model that features agents' heterogeneity in endowments and habit preferences. Our model predicts that aggregate debt increases in good times when stock prices are high, return volatility is low, and levered agents enjoy a "consumption boom". Our model is consistent with poorer agents borrowing more and with recent evidence on intermediaries' leverage being a priced factor of asset returns. In crisis times, levered agents strongly deleverage by "fire selling" their risky assets as asset prices drop. Yet, consistently with the data, their debt-to-wealth ratios increase because their wealth decline faster due to higher discount rates. |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11681&r=dge |
| By: | J. Ignacio García-Pérez; Sílvio Rendon |
| Abstract: | We develop and estimate a model of family job search and wealth accumulation. Individuals' job finding and job separations depend on their partners' job turnover and wages as well as common wealth. We fit this model to data from the Survey of Income and Program Participation (SIPP). This dataset reveals a very asymmetric labor market within household members, who share the feature that their job finding is stimulated by the partner's job separation, particularly during economic downturns. We uncover a job search-theoretic basis for this added worker effect and find that this effect is stronger with more children in the household. We also show that excluding wealth and savings from the analysis and estimation leads to underestimating the interdependency between household members. Our analysis shows that the policy goal of supporting job search by increasing unemployment transfers is partially offset by the partner's lower unemployment and wages. |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2016-10&r=dge |
| By: | Serdar Kabaca |
| Abstract: | This paper studies the effects of quantitative easing (QE) in a small open economy dynamic stochastic general-equilibrium model with international portfolio balancing. Portfolios are classified as imperfectly substitutable short-term and long-term subportfolios, each including domestic and foreign bonds. Unlike in standard small open economy models, both domestic and foreign bonds may be traded internationally. The model links the domestic term premium to the global term premium, and the implication of the model on the effectiveness of QE policies in reducing the domestic term premium depends crucially on the degree of substitutability between domestic and foreign bonds. The estimated model implies that QE in small open economies is expected to be much less effective on long-term yields because of the high substitutability between home and foreign assets found in the data. In the model, this causes the effect on the exchange rate to be limited. The paper also shows that foreign investors’ access to the domestic debt market is essential when evaluating the QE policy; ignoring foreign investors’ access would mistakenly make the policy look more effective. |
| Keywords: | International topics, Transmission of monetary policy |
| JEL: | E52 F41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:16-55&r=dge |
| By: | Philipp Engler; Juha Tervala |
| Abstract: | Several studies have analyzed the trade and output effects of the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union, but our paper is the first attempt to study its welfare effects. We measure the welfare effect of TTIP as the percentage of initial consumption that households would be willing to pay for TTIP in order to remain as well off with TTIP as without it. The discounted present value of the welfare gain of TTIP, which leads to the elimination of tariffs and cuts in non-tariff measures by 25%, is in the range of 1% to 4% of initial consumption, depending on the parameterization. The welfare gain increases in the elasticity of substitution between domestic and foreign goods. The bulk of the welfare gain is caused by cuts in non-tariff measures. |
| Keywords: | Tariffs, TTIP, trade agreement, trade liberalization |
| JEL: | F13 F41 E60 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1625&r=dge |
| By: | Stefano Bosi; David Desmarchelier |
| Abstract: | In this paper, we study a competitive Ramsey model where a pollution externality, coming from production, impairs a renewable resource which affects the consumption demand. A proportional tax, levied on the production level, is introduced to finance public depollution expenditures. In the long run, two steady states may coexist, the one with a low resource level, the other with a high level. Interestingly, a higher green tax rate lowers the resource level of the low steady state, giving rise to a Green Paradox (Sinn, 2008). Moreover, the green tax may be welfareimproving at the high steady state but never at the low one. Therefore, at the latter, it is optimal to reduce the green tax rate as much as possible. Conversely, the optimal tax rate is positive when the economy experiences the high steady state. This rate is unique. In the short run, the two steady states may collide and disappear through a saddle-node bifurcation. Since consumption and natural resources are substitutable goods, a limit cycle may arise around the high stationary state. To the contrary, this kind of cycles never occur around the low steady state whatever the resource effect on consumption demand. Finally, focusing on the class of bifurcations of codimension two, we find a Bogdanov-Takens bifurcation. |
| Keywords: | nature, logistic dynamics, Ramsey model, depollution, saddle-node bifurcation, Hopf bifurcation, Bogdanov-Takens bifurcation. |
| JEL: | E32 O44 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2016-53&r=dge |
| By: | Akinci, Ozge (Federal Reserve Bank of New York); Queralto, Albert (Board of Governors of the Federal Reserve System) |
| Abstract: | Credit spreads display occasional spikes and are more strongly countercyclical in times of financial stress. Financial crises are extreme cases of this nonlinear behavior, featuring deep recessions and sharp losses in bank equity. We develop a macroeconomic model with a banking sector in which banks’ leverage constraints are occasionally binding and equity issuance is endogenous. The model captures the nonlinearities in the data and produces quantitatively realistic crises. Endogenous equity issuance makes crises infrequent but does not prevent them altogether. Macroprudential policy designed to enhance banks’ incentive to issue equity lowers the probability of a crisis and increases welfare. |
| Keywords: | financial intermediation; sudden stops; leverage constraints; occasionally binding constraints; financial stability policy |
| JEL: | E32 E44 F41 |
| Date: | 2016–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:802&r=dge |
| By: | Athreya, Kartik B. (Federal Reserve Bank of Richmond); Sanchez, Juan M. (Federal Reserve Bank of St. Louis); Tam, Xuan S. (City University of Hong Kong); Young, Eric R. (University of Virginia) |
| Abstract: | This paper documents and interprets two facts central to the dynamics of informal default or "delinquency" on unsecured consumer debt. First, delinquency does not mean a persistent cessation of payment. In particular, we observe that for individuals 60 to 90 days late on payments, 85% make payments during the next quarter that allow them to avoid entering more severe delinquency. Second, many in delinquency (40%) have smaller debt obligations one quarter later. To understand these facts, we develop a theoretically and institutionally plausible model of debt delinquency and bankruptcy. Our model reproduces the dynamics of delinquency and suggests an interpretation of the data in which lenders frequently (in roughly 40% of cases) reset the terms for delinquent borrowers, typically involving partial debt forgiveness, rather than a blanket imposition of the "penalty rates" most unsecured credit contracts specify. |
| JEL: | E43 E44 G33 |
| Date: | 2016–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:16-12&r=dge |
| By: | Miyake, Atsushi; Yasuoka, Masaya |
| Abstract: | This paper presents consideration of the effects of child allowances and subsidies for private education investment on fertility and private education investment. The level of public education expenditure plays an important role in the effects of child care policies. To raise fertility, although child allowances are effective in an economy with low public education investment, subsidies for education investment are effective in an economy for which public education investment is high. The results presented in this paper are helpful for reconciling the conflicting results reported from previous studies. In addition, this paper presents an examination of the effects of those child care policies on pension benefits. A subsidy for private education can raise both fertility and pension benefits. |
| Keywords: | Fertility, Child allowance, Subsidy for education investment |
| JEL: | D91 H52 H55 I2 J13 |
| Date: | 2016–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75315&r=dge |
| By: | Raouf Boucekkine (AMSE - Aix-Marseille School of Economics - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - EHESS - École des hautes études en sciences sociales); Giorgio Fabbri (AMSE - Aix-Marseille School of Economics - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - EHESS - École des hautes études en sciences sociales); Salvatore Federico (Università degli Studi di Siena, Dipartimento di Economia Politica e Statistica) |
| Abstract: | We design a general set-up for the study of a generic economy whose development process is entirely driven by the spatio-temporal dynamics of capital accumulation. It allows to take into account spatial heterogeneities in technological level and population distribution. We solve analytically, via dynamic programming in infinite dimensions, the optimal control problem associated to the model, finding explicitly the optimal feedback and the value function. The expression of the optimal dynamics of the system in terms of eigenfunctions of an appropriate Sturm-Liouville problem allows to simulate the behavior of the variables and, in particular, their optimal discounted long-run spatial distribution. |
| Keywords: | dynamical spatial model,growth,agglomeration,infinite dimensional optimal control problems,Sturm-Liouville theory |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01399995&r=dge |