|
on Dynamic General Equilibrium |
| By: | Sergio A. Lago Alves |
| Abstract: | The literature has long agreed that the canonical DMP model with search and matching frictions in the labor market can deliver large volatilities in labor market quantities, consistent with US data during the Great Moderation period (1985-2005), only if there is at least some wage stickiness. I show that the canonical model can deliver nontrivial volatility in unemployment without wage stickiness. By keeping average US inflation at a small but positive rate, monetary policy may be accountable for the standard deviations of labor market variables to have achieved those large empirical levels. Solving the Shimer (2005) puzzle, the role of long-run inflation holds even for an economy with flexible wages, as long as it has staggered price setting and search and matching frictions in the labor market |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:450&r=dge |
| By: | Fabia A. de Carvalho; Marcos R. Castro |
| Abstract: | We use a DSGE model with heterogeneous financial frictions and foreign capital flows estimated with Bayesian techniques for Brazil to investigate optimal combinations of simple macroprudential, fiscal and monetary policy rules that can react to the business and/or the financial cycle. We find that the gains from implementing a cyclical fiscal policy are only significant if macroprudential policy countercyclically reacts to the financial cycle. Optimal fiscal policy is countercyclical in the business cycle and slightly procyclical in the financial cycle |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:453&r=dge |
| By: | Hiona Balfoussia (Bank of Greece); Dimitris Papageorgiou (Bank of Greece) |
| Abstract: | This paper examines the macroeconomic and welfare implications of banking capital requirement policies and their interactions with real and financial shocks for the Greek economy. The model employed is that of Clerc et al. (2015), a DSGE model featuring a detailed financial sector, banking capital regulations and bank default in equilibrium. The key model implication is that capital requirements reduce bank leverage and the default risk of banks but their relationship with social welfare is hump-shaped, reflecting a trade-off. The model is calibrated to data on the Greek economy and the dynamic responses to a number of financial and real shocks which may have played a material role in the unfolding of the Greek crisis are explored. The results indicate inter alia that an increase in the depositors’ cost of bank default leads to a substantial increase in the deposit rate, a decline in deposits and bank equity and an increase in bank fragility, while on the real side of the economy the decline in total credit prompts a deterioration of key macro variables. Additionally, the results imply that while recapitalizations increase bank net worth and credit supply and boost economic activity, this potential benefit is severely compromised in a high financial distress scenario, as the positive real and financial implications of a recapitalization become both smaller and more short-lived. |
| Keywords: | Macroprudential Policy; General Equilibrium; Greece. |
| JEL: | E3 E44 G01 G21 O52 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:218&r=dge |
| By: | Guido Ascari; Louis Phaneuf; Eric Sims |
| Abstract: | Recent empirical evidence identifies investment shocks as key driving forces behind business cycle fluctuations. However, existing New Keynesian models emphasizing these shocks counterfactually imply a negative unconditional correlation between consumption growth and investment growth, a weak positive unconditional correlation between consumption growth and output growth and anomalous profiles of cross-correlations involving consumption growth. These anomalies arise because of a short-run contractionary effect a positive investment shock on consumption. Such counterfactual co-movements are typical of the "Barro-King curse" (Barro and King 1984), wherein models with a real business cycle core must rely on technology shocks to account for the observed co-movement among output, consumption, investment, and hours. We show that two realistic additions to an otherwise standard medium scale New Keynesian model – namely, roundabout production and real per capita output growth stemming from trend growth in neutral and investment-specific technologies – can break the Barro-King curse and provide a more accurate account of unconditional business cycle comovements more generally. These two features substantially magnify the effects of neutral technology and investment shocks on aggregate fluctuations and generate a rise of consumption on impact of a positive investment shock. |
| JEL: | E31 E32 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22941&r=dge |
| By: | Cosmin L. Ilut; Hikaru Saijo |
| Abstract: | We build a tractable heterogeneous-firm business cycle model where firms face Knightian uncertainty about their profitability and learn it through production. The cross-sectional mean of firm-level uncertainty is high in recessions because firms invest and hire less. The higher uncertainty reduces agents' confidence and further discourages economic activity. We characterize this feedback mechanism in linear, workhorse macroeconomic models and find that it endogenously generates empirically desirable cross-equation restrictions such as: amplified and hump-shaped dynamics, co-movement driven by demand shocks and countercyclical correlated wedges in the equilibrium conditions for labor, risk-free and risky assets. In a rich model estimated on US macroeconomic and financial data, the information friction changes inference and significantly reduces the empirical need for standard real and nominal rigidities. Furthermore, endogenous idiosyncratic uncertainty propagates shocks to financial conditions, disciplined by observed spreads, as key drivers of fluctuations, and magnifies the aggregate activity's response to monetary and fiscal policies. |
| JEL: | C11 D81 E32 E44 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22958&r=dge |
| By: | In Hwan Jo (National University of Singapore); Tatsuro Senga (Queen Mary University of London) |
| Abstract: | Access to external finance is a major obstacle for small and young firms; thus, providing subsidized credit to small and young firms is a widely-used policy option across countries. We study the impact of such targeted policies on aggregate output and productivity and highlight indirect general equilibrium effects. To do so, we build a model of heterogeneous firms with endogenous entry and exit, wherein each firm may be subject to forward-looking collateral constraints for their external borrowing. Subsidized credit alleviates credit constraints small and young firms face, which helps them to achieve the efficient and larger scale of production. This direct effect is, however, either reinforced or offset by indirect general equilibrium effects. Factor prices increase as subsidized firm demand more capital and labor. As a result, higher production costs induce more unproductive incumbents to exit, while replacing them selectively with productive entrants. This cleansing effect reinforces the direct effect by enhancing the aggregate productivity. However, the number of firms in operation decreases in equilibrium, and this, in turn, depresses the aggregate productivity. |
| Keywords: | Firm dynamics, Misallocation, Financial frictions, Firm size and age |
| JEL: | E22 G32 O16 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp809&r=dge |
| By: | Chahrour, Ryan (Boston College); Chugh, Sanjay (Ohio State University); Potter, Tristan (Drexel University) |
| Abstract: | We estimate a real business cycle economy with search frictions in the labor market in which the latent wage follows a non-structural ARMA process. The estimated model does an excellent job matching a broad set of quantity data and wage indicators. Under the estimated process, wages respond immediately to shocks but converge slowly to their long-run levels, inducing substantial variation in labor's share of surplus. These results are not consistent with either a rigid real wage or flexible Nash bargaining. Despite inducing a strong endogenous response of wages, neutral shocks to productivity account for the vast majority of aggregate fluctuations in the economy, including labor market variables. |
| Keywords: | Search and Matching; Wages; Unemployment; Business Cycles |
| JEL: | E24 E32 |
| Date: | 2016–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2016_017&r=dge |
| By: | Michael Batu (Department of Economics, University of Windsor) |
| Abstract: | In this article I augment the standard open economy Real Business Cycle (RBC) model with stochastic remittance shocks. The model was calibrated to match broad, stylized facts common across a large set of remittance recipient countries. The calibration exercise reveals that output does not respond as much to remittance shocks relative to technology shocks. The model predicts that temporary inflows of worker remittances positively affect GDP per capita while a permanent increase of remittances does not. Cross country econometric evidence is consistent with the theory: there is a significant and positive correlation between the temporary component of remittances and growth; and permanent component of remittances do not affect output growth. |
| Keywords: | Remittances, business cycles, economic growth |
| JEL: | F24 O11 E32 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:wis:wpaper:1701&r=dge |
| By: | Ulrike Malmendier; Demian Pouzo; Vicotria Vanasco |
| Abstract: | How do financial crises and stock-market fluctuations affect investor behavior and the dynamics of financial markets in the long run? Recent evidence suggests that individuals overweight personal experiences of macroeconomic shocks when forming beliefs and making investment decisions. We propose a theoretical foundation for such experience-based learning and derive its dynamic implications in a simple OLG model. Risk averse agents invest in a risky and a risk-free asset. They form beliefs about the payoff of the risky asset based on the two key components of experience effects: (1) they overweight data observed during their lifetimes so far, and (2) they exhibit recency bias. In equilibrium, prices depend on past dividends, but only on those observed by the generations that are alive, and they are more sensitive to more recent dividends. Younger generations react more strongly to recent experiences than older generations, and hence have higher demand for the risky asset in good times, but lower demand in bad times. As a result, a crisis increases the average age of stock market participants, while booms have the opposite effect. The stronger the disagreement across generations (e.g., after a recent shock), the higher is the trade volume. We also show that, vice versa, the demographic composition of markets significantly influences the response to aggregate shocks. We generate empirical results on stock-market participation, stock-market investment, and trade volume from the \emph{Survey of Consumer Finances}, merged with CRSP and historical data on stock-market performance, that are consistent with the model predictions. |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1612.09553&r=dge |
| By: | Hashmat U. Khan (Department of Economics, Carleton University); Jean-François Rouillard (Département d'économique, Université de Sherbrooke) |
| Abstract: | We demonstrate that the model in Fisher (2007) produces two counterfactual results when the capital tax rate is calibrated to 35%---a rate consistent with estimates of the effective tax rate in the literature. First, household investment lags business investment. Second, household investment is less volatile than business investment with a relative volatility of .62. We show that increasing the degree of household capital complementarity cannot resolve these problems because the model produces counterfactual factor shares in market production relative to the empirical estimates in Fisher (2007). Accounting for U.S. investment dynamics, therefore, remains a significant challenge for macroeconomists. |
| Keywords: | household investment, business investment, capital taxation. |
| JEL: | E22 E32 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:17-01&r=dge |
| By: | J. Ignacio García-Pérez (Department of Economics, Universidad Pablo de Olavide); Sílvio Rendon (Federal Reserve Bank of Philadelphia) |
| 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 for household members, who share that their job finding is stimulated by their partners' 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 a partner's lower unemployment and wages. |
| Keywords: | job search, asset accumulation, household economics, consumption, unemployment, estimation of dynamic structural models. |
| JEL: | C33 E21 E24 J64 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:16.12&r=dge |
| By: | Krolikowski, Pawel (Federal Reserve Bank of Cleveland); McCallum, Andrew H. (Federal Reserve Bank of Cleveland) |
| Abstract: | We present a tractable framework that embeds goods-market frictions in a general equilibrium dynamic model with heterogeneous exporters and identical importers. These frictions arise because it takes time and expense for exporters and importers to meet. We show that search frictions lead to an endogenous fraction of unmatched exporters, alter the gains from trade, endogenize entry costs, and imply that the competitive equilibrium does not generally result in the socially optimal number of searching firms. Finally, ignoring search frictions results in biased estimates of the effect of tariffs on trade flows. |
| Keywords: | Search; trade; goods; frictions; information; |
| JEL: | D83 F12 |
| Date: | 2016–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1635&r=dge |
| By: | Lakdawala, Aeimit (Michigan State University); Minetti, Raoul (Michigan State University); Olivero, María Pía (Drexel University) |
| Abstract: | Interbank markets have been at the core of the international transmission of recent financial crises, including the European sovereign debt crisis. We study the transmission of shocks in a two-country DSGE model where banks pledge government bonds as collateral in interbank markets. A standard “bank net worth channel” amplifies negative shocks to the returns of private loans. However, an “interbank collateral channel” can partially contrast the bank net worth channel. The stabilizing interbank collateral channel works through banks' portfolio switch towards government bonds, which helps sustain the value of banks' bond holdings and partially relax collateral constraints in the interbank market. Unconventional credit policies raise banks' liquidity but, if financed through government debt issuance, can undermine the stabilizing effect of the interbank collateral channel. The analysis yields insights for the optimal design of credit policies during sovereign debt crises. |
| Keywords: | Sovereign debt; credit crunch; interbank markets; international contagion |
| JEL: | E32 E44 F44 |
| Date: | 2017–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2017_001&r=dge |
| By: | Mark Gertler; Christopher Huckfeldt; Antonella Trigari |
| Abstract: | Macroeconomic models often incorporate some form of wage stickiness to help account for employment fluctuations. However, a recent literature calls in to question this approach, citing evidence of new hire wage cyclicality from panel data studies as evidence for contractual wage flexibility for new hires, which is the relevant margin for employment volatility. We analyze data from the SIPP and find that the wages for new hires coming from unemployment are no more cyclical than those of existing workers, suggesting wages are sticky at the relevant margin. The new hire wage cyclicality found in earlier studies instead appears to reflect cyclical average wage gains of workers making job-to-job transitions, which we interpret as evidence of procyclical match quality for new hires from employment. We then develop a quantitative general equilibrium model with sticky wages via staggered contracting, on-the-job search, and variable match quality, and show that it can account for both the panel data evidence and aggregate labor market regularities. An additional implication of the model is that a sullying effect of recessions emerges, along the lines originally suggested by Barlevy (2002). |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp1634&r=dge |
| By: | Tirupam Goel |
| Abstract: | This paper presents a general equilibrium model with a dynamic banking sector to characterize optimal size-dependent bank capital regulation (CR). Bank leverage choices are subject to the risk-return trade-off: high leverage increases expected return on capital, but also increases return variance and bank failure risk. Financial frictions imply that bank leverage choices are socially inefficient, providing scope for a welfare-enhancing CR that imposes a cap on bank leverage. The optimal CR is tighter relative to the pre-crisis benchmark. Optimal CR is also bank specific, and tighter for large banks than for small banks. This is for three reasons. First, allowing small banks to take more leverage enables them to potentially grow faster, leading to a growth effect. Second, although more leverage by small banks results in a higher exit rate, these exits are by the less efficient banks, leading to a cleansing effect. Third, failures are more costly among large banks, because these are more efficient in equilibrium and intermediate more capital. Therefore, tighter regulation for large banks renders them less prone to failure, leading to a stabilization effect. In terms of industry dynamics, tighter CR results in a smaller bank exit rate and a larger equilibrium mass of better capitalized banks, even though physical capital stock and wages are lower. The calibrated model rationalizes various steady state moments of the US banking industry, and provides general support for the Basel III GSIB framework. |
| Keywords: | Size distribution, entry & exit, heterogeneous agent models, size dependent policy |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:599&r=dge |
| By: | Adema, Y. (Tilburg University, School of Economics and Management); Bonenkamp, J. (Tilburg University, School of Economics and Management); Meijdam, Lex (Tilburg University, School of Economics and Management) |
| Abstract: | This paper studies the redistribution and welfare effects of increasing the flexibility of individual pension take-up. We use an overlapping-generations model with Beveridgean pay-as-you-go pensions and heterogeneous individuals who differ in ability and lifespan. We find that introducing flexible pension take-up can induce a Pareto improvement when the initial pension scheme contains within-cohort redistribution and induces early retirement. Such a Pareto improving reform entails the application of uniform actuarial adjustment of pension entitlements based on average lifespan. Introducing actuarial non-neutrality that stimulates later retirement further improves such a flexibility reform. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:8e9de9ae-c1e4-41e2-8893-73a03932f49a&r=dge |
| By: | Salvador Barrios (European Commission - JRC); Mathias Dolls (ZEW); Anamaria Maftei (European Commission - JRC); Andreas Peichl (ZEW); Sara Riscado (European Commission - JRC); Janos Varga (European Commission – DG ECFIN); Christian Wittneben (ZEW) |
| Abstract: | In this paper, we present a dynamic scoring analysis of tax reforms for European countries. In this analysis we account for the feedback effects resulting from the adjustment in the labour market and for the economy-wide reaction to tax policy changes. We combine the microsimulation model EUROMOD, extended to incorporate an estimated labour supply model, with the new Keynesian DSGE model QUEST, used by the European Commission for analysing fiscal and structural reform in EU member states. These two models are connected in two ways: by introducing tax policy shocks in QUEST, derived from computing changes in implicit tax rates using EUROMOD; and by calibrating the elasticity of labour supply and the non-participation rates, by skill categories, in QUEST from values calculated using EUROMOD and the estimated labour supply function. Moreover, we discuss aggregation issues and the consistency between the micro and macro modelling of labour supply and interpret the model interaction in terms of tax incidence analysis. We illustrate the methodological approach with the results obtained when scoring specific reforms in three EU Member States, namely, Italy, Belgium and Poland. We compare two different scenarios – one in which the behavioural response to tax changes over the medium term is ignored and another scenario where this behavioural/micro-dimension is embedded into the microsimulation model. In this particular set-up, we do not find evidence of strong second-round effects, and the fiscal and distributional effects of the reforms tend to overlap in both scenarios. We attribute these results to existing rigidities in labour and product markets, which have shrunk further the small tax policy shocks introduced into the macroeconomic model. |
| Keywords: | Dynamic scoring, tax reforms, first and second round effects, labour market behaviour |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:taxref:201603&r=dge |
| By: | Cristina Arellano; Yan Bai; Patrick J. Kehoe |
| Abstract: | During the recent U.S. financial crisis, the large decline in aggregate output and labor was accompanied by both a tightening of financial conditions and a large increase in the dispersion of growth rates across firms. The tightened financial conditions manifested themselves as increases in firms' credit spreads and decreases in both equity payouts and debt purchases. These features motivate us to build a model in which increased volatility of firm level productivity shocks generates a downturn and worsened credit conditions. The key idea in the model is that hiring inputs is risky because financial frictions limit firms' ability to insure against shocks. Hence, an increase in idiosyncratic volatility induces firms to reduce their inputs to reduce such risk. We find that our model can generate most of the decline in output and labor in the Great Recession of 2007–2009 and the observed tightening of financial conditions. |
| JEL: | E32 E44 G32 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22990&r=dge |
| By: | Rong Hai; James J. Heckman |
| Abstract: | This paper investigates the determinants of inequality in human capital with an emphasis on the role of the credit constraints. We develop and estimate a model in which individuals face uninsured human capital risks and invest in education, acquire work experience, accumulate assets and smooth consumption. Agents can borrow from the private lending market and from government student loan programs. The private market credit limit is explicitly derived by extending the natural borrowing limit of Aiyagari (1994) to incorporate endogenous labor supply, human capital accumulation, psychic costs of working, and age. We quantify the effects of cognitive ability, noncognitive ability, parental education, and parental wealth on educational attainment, wages, and consumption. We conduct counterfactual experiments with respect to tuition subsidies and enhanced student loan limits and evaluate their effects on educational attainment and inequality. We compare the performance of our model with an influential ad hoc model in the literature with education-specific fixed loan limits. We find evidence of substantial life cycle credit constraints that affect human capital accumulation and inequality. The constrained fall into two groups: those who are permanently poor over their lifetimes and a group of well-endowed individuals with rising high levels of acquired skills who are constrained early in their life cycles. Equalizing cognitive and noncognitive ability has dramatic effects on inequality. Equalizing parental backgrounds has much weaker effects. Tuition costs have weak effects on inequality. |
| JEL: | I2 J2 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22999&r=dge |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | This paper characterizes analytically the adjustment of an open economy with a stock collateral constraint to fundamental and nonfundamental shocks. In the model, external borrowing is limited by the value of physical capital. Three results are established: (1) Adjustment to external shocks is nonlinear. In response to small negative output shocks, the economy adjusts as prescribed by the intertemporal approach to the current account, with increases in debt, deficits in the trade and current account balances, and no significant movement in the price of collateral. By contrast, in response to large negative output shocks the economy experiences a sudden stop with debt deleveraging, trade and current account reversals, and a Fisherian deflation of asset prices. (2) Generically, weak fundamentals (low output and high external debt) give rise to multiple equilibria. (3) In this case, the economy is prone to self-fulfilling sudden stops driven by downward revisions of expectations about the value of collateral. |
| JEL: | F41 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22971&r=dge |
| By: | Xavier Gabaix |
| Abstract: | This paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy. The model is a tractable and parsimonious enrichment of the widely-used New Keynesian model – with one main new parameter, which quantifies how poorly agents understand future policy and its impact. That myopia parameter, in turn, affects the power of monetary and fiscal policy in a microfounded general equilibrium. A number of consequences emerge. (i) Fiscal stimulus or \helicopter drops of money" are powerful and, indeed, pull the economy out of the zero lower bound. More generally, the model allows for the joint analysis of optimal monetary and fiscal policy. (ii) The Taylor principle is strongly modified: even with passive monetary policy, equilibrium is determinate, whereas the traditional rational model yields multiple equilibria, which reduce its predictive power, and generates indeterminate economies at the zero lower bound (ZLB). (iii) The ZLB is much less costly than in the traditional model. (iv) The model helps solve the “forward guidance puzzle”: the fact that in the rational model, shocks to very distant rates have a very powerful impact on today's consumption and inflation: because agents are partially myopic, this effect is muted. (v) Optimal policy changes qualitatively: the optimal commitment policy with rational agents demands “nominal GDP targeting”; this is not the case with behavioral firms, as the benefits of commitment are less strong with myopic forms. (vi) The model is “neo-Fisherian” in the long run, but Keynesian in the short run: a permanent rise in the interest rate decreases inflation in the short run but increases it in the long run. The non-standard behavioral features of the model seem warranted by the empirical evidence. |
| JEL: | D03 E03 E5 E6 G02 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22954&r=dge |
| By: | Carroll, Daniel R. (Federal Reserve Bank of Cleveland); Young, Eric R. (Federal Reserve Bank of Cleveland) |
| Abstract: | This paper studies short-run wealth mobility in a heterogeneous agents, incomplete-markets model. Wealth mobility has a “hump-shaped” relationship with the persistence of the stochastic process governing labor income: low when shocks are close to i.i.d. or close to a random walk, and higher in between. The standard incomplete markets framework features less wealth mobility than found in the PSID wealth supplements. We include features commonly used in the literature to capture wealth inequality and find that they do little to improve the model’s performance for wealth mobility. Finally, we introduce state-contingent assets, which allow households to partially span the space of labor productivity. Moving toward a more “complete” market lowers wealth mobility unless the labor income process is very persistent. |
| Keywords: | wealth mobility; inequality; incomplete markets; |
| JEL: | D31 D52 E21 |
| Date: | 2016–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1634&r=dge |
| By: | Eurilton Araújo |
| Abstract: | Empirical evidence suggests that the magnitude of the negative comovement between real stock returns and inflation declined during the Great Moderation in the U.S. To understand the role of monetary policy credibility in this change, I study optimal monetary policy under loose commitment in a macroeconomic model in which stock price movements have direct implications for business cycles. In line with the data, a calibration of the model featuring a significant degree of credibility can replicate the weakening of the negative relationship between real stock returns and inflation in the Great Moderation era |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:449&r=dge |
| By: | Grzegorz Koloch |
| Abstract: | In this paper we estimate a Smets and Wouters (2007) model with shocks following a closed skew normal distribution (csn) introduced in Gonzalez-Farias et al. (2004), which nests a normal distribution as a special case. In the paper we discuss priors for model parameters, including skewness-related parameters of shocks, i.e. location, scale and skewness parameters. Using data ranging from 1991Q1 to 2012Q2 we estimate the model and recursively verify its out-of sample forecasting properties for time period 2007Q1 - 2012Q2, therefore including the recent financial crisis, within a forecasting horizon from 1 up to 8 quarters ahead. Using a RMSE measure we compare the forecasting performance of the model with skewed shocks wit a model estimated using normally distributed shocks. We find that inclusion of skewness can help forecasting some variables (consumption, investment and hours worked), but, on the other hand, results in deterioration in the other ones (output, inflation wages and the short rate). |
| Keywords: | DSGE, Forecasting, Closed Skew-Normal Distribution |
| JEL: | C51 C13 E32 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2016023&r=dge |
| By: | Marine Charlotte André; Meixing Dai |
| Abstract: | We study in a New Keynesian framework the consequences of adaptative learning for the design of robust monetary policy. Compared to rational expectations, the fact that private follows adaptative learning gives the central bank an additional intertemporal trade-off between optimal behavior thanks to ability to manipulate future inflation expectations. We show that adaptative learning imposes a more restrictive constraint on monetary policy robustness to ensure the dynamic stability of the equilibrium than under rational expectations and weakens the argument in favor of a more aggressive monetary policy when the central bank takes account of model misspecifications. |
| Keywords: | robust control, model uncertainty, adaptative learning, optimal monetary policy. |
| JEL: | C62 D83 D84 E52 E58 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2016-54&r=dge |