nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒01‒15
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Housing Prices and Business Cycle in China: A DSGE Analysis By He, Qing; Liu, Fangge; Qian, Zhongxin; Chong, Terence Tai Leung
  2. Uncertainty-driven business cycles: assessing the markup channel By Born, Benjamin; Pfeifer, Johannes
  3. Price Dynamics with Customer Markets By Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
  4. Buffer stock savings in a New-Keynesian business cycle model By Rabitsch, Katrin; Schoder, Christian
  5. Distinguishing Constraints on Financial Inclusion and Their Impact on GDP and Inequality By Dabla-Norris, Era; Ji, Yan; Townsend, Robert M; Unsal, Derya Filiz
  6. Impacts of Universal Health Coverage: Financing, Income Inequality, and Social Welfare By Huang, Xianguo; Yoshino, Naoyuki
  7. Money, Asset Prices and the Liquidity Premium By Lee, Seungduck
  8. A Real-Business-Cycle Model with Efficiency Wages and Fiscal Policy: The Case of Bulgaria By Aleksandar Vasilev
  9. Capitalization, Decentralization, and Intergenerational Spillovers in a Tiebout Economy with a Durable Public Good By John P. Conley; Robert Driskill; Ping Wang
  10. Real Rigidities and Optimal Stabilization at the Zero Lower Bound in New Keynesian Economies By Adiya Belgibayeva; Michal Horvath
  11. A Behavioral New Keynesian Model By Gabaix, Xavier
  12. Output and Inflation Co-movement; An Update on Business-Cycle Stylized Facts By Michal Andrle; Jan Bruha; Serhat Solmaz
  13. Firing Costs, Misallocation, and Aggregate Productivity By José-María Da-Rocha; Marina Mendes Tavares; Diego Restuccia
  14. Saving and Wealth Inequality By De Nardi, Mariacristina; Fella, Giulio

  1. By: He, Qing; Liu, Fangge; Qian, Zhongxin; Chong, Terence Tai Leung
    Abstract: We investigate the interaction between the real estate market and the business cycle volatility in China over the past two decades. A Bayesian dynamic stochastic general equilibrium (DSGE) model with nominal stickiness and collateral constraints is estimated. It is found that shocks from the housing market (e.g., loan-to-value ratio and housing preference shocks) affect the macroeconomy of China. The interactive feedback between credit constraints and housing prices amplifies the impact of various economic shocks, which plays an important role in explaining the business cycle volatility in China.
    Keywords: housing prices; business cycle; DSGE; China
    JEL: E32 E42 R31
    Date: 2016–07–21
  2. By: Born, Benjamin; Pfeifer, Johannes
    Abstract: A growing recent literature relies on a precautionary pricing motive embedded in representative agent DSGE models with sticky prices and wages to generate negative output effects of uncertainty shocks. We assess whether this theoretical model channel is consistent with the data. Building a New Keynesian model, we show that indeed with sufficient nominal rigidities markups increase and output falls after uncertainty shocks. The model is also used as a business cycle accounting device to construct aggregate markups from the data. Time-series techniques are employed to study the conditional comovement between markups and output in the data. Consistent with the model's precautionary wage setting, we find that wage markups increase after uncertainty shocks. Price markups in contrast fall. This finding - inconsistent with the model - is corroborated by industry-level data. Overall, these results point to a prominent role for sticky wages in the transmission of uncertainty shocks.
    Keywords: price markup; Uncertainty shocks; wage markup
    JEL: E01 E24 E32
    Date: 2017–01
  3. By: Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
    Abstract: The customer base of a firm is an important and persistent determinant of its performance. Using rich U.S. data on consumer shopping behavior and good prices, we document that customer turnover is sensitive to price variation. Motivated by this finding, we study an economy where the customer base of a firm is persistent because of search frictions preventing customers from freely relocating across suppliers of consumption goods, and firms set prices under customer retention concerns. The key feature of our model is that the elasticity of the customer base to price -the extensive margin elasticity of demand- depends on the customers' endogenous opportunity cost of search, and interacts with heterogeneity in firm productivity. More productive firms enjoy less customer attrition and lower elasticity of demand. An increase in customers' search intensity leads to higher demand elasticity and lower prices. This provides a new channel affecting the relationship between consumer search and price markups in response to aggregate shocks. In particular, an increase in the utility of consumption relatively to the cost of search results in higher demand elasticity and lower prices, amplifying the effects of demand shocks on output. We highlight that the price response to demand shocks is heterogeneous across firms affecting dispersion in prices and consumption across consumers.
    Date: 2017–01
  4. By: Rabitsch, Katrin; Schoder, Christian
    Abstract: We introduce the tractable buffer stock savings setup of Carroll (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. (authors' abstract)
    Keywords: precautionary saving; buffer stock saving; dynamic stochastic general equilibrium model
    Date: 2016–08
  5. By: Dabla-Norris, Era; Ji, Yan; Townsend, Robert M; Unsal, Derya Filiz
    Abstract: We develop a micro-founded general equilibrium model with heterogeneous agents and three dimensions of financial inclusion: access (determined by a participation cost), depth (determined by a borrowing constraint), and intermediation efficiency (determined by a monitoring cost). We find that the economic implications of financial inclusion policies vary with the source of frictions. In partial equilibrium, we show analytically that relaxing each of these constraints separately increases GDP. However, when constraints are relaxed jointly, the impacts on the intensive margin (increasing output per entrepreneur with access to credit) are amplified, while the impacts on the extensive margin (promoting credit access) are dampened. In general equilibrium, we discipline the model with firm-level data from six countries and quantitatively evaluate the policy impacts. Multiple frictions are necessary to match the country-specific variables, e.g., credit access ratio, interest rate spread, and non-performing loans. A TFP decomposition finds that most of the productivity gains are captured by a between-regime shifting effect, whereby talented entrepreneurs obtain credit and expand their businesses. In terms of inequality and welfare, reducing the participation cost benefits talented-but-poor agents the most, while relaxing the borrowing constraint or intermediation cost is more beneficial for talented-and-wealthy agents.
    JEL: C54 E23 E44 E69 O11 O16 O57
    Date: 2017–01
  6. By: Huang, Xianguo (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute)
    Abstract: This paper studies the impact of tax-financed universal health coverage schemes on macroeconomic aspects of labor supply, asset holding, inequality, and welfare, while taking into account features common to developing economies, such as informal employment and tax avoidance, by constructing a dynamic stochastic general equilibrium model with heterogeneous agents. Agents have different education levels, employment statuses, and idiosyncratic shocks. Given three tax financing options, calibration results based on the Thai economy suggest that the financing options matter for outcomes both at the aggregate and disaggregate levels. Universal health coverage, financed by labor income tax revenue, could reduce inequality due to its large redistributive role. Social welfare cannot be improved when labor decisions are endogenous and distortions are higher than the redistributive gains for all tax financing options. In the absence of labor supply choice, mild welfare gains are found. In a broader sense, the paper aims to provide a frame for policy evaluation of socioeconomic policies from both macro and micro perspectives, taking different social groups into consideration.
    Keywords: universal health insurance; dynamic stochastic general equilibrium model; tax finance; social welfare; labor supply
    JEL: E24 E26 E62 H23 H51 J11
    Date: 2016–12–31
  7. By: Lee, Seungduck
    Abstract: This paper examines the effect of monetary policy on the liquidity premium, i.e., the market value of the liquidity services that financial assets provide. To guide the empirical analysis, I set up a monetary search model in which bonds provide liquidity services in addition to money. The theory predicts that money supply and nominal interest rates are positively correlated with the liquidity premium, but the premium is negatively correlated with the bond supply. The empirical analysis over the period from 1946 and 2008 confirms the theoretical predictions. This indicates that liquid bonds are substantive substitutes for money and the opportunity cost of holding money plays a key role in asset price determination. Lastly, the theory rationalizes the existence of negative nominal yields in equilibrium, when the cost of holding money is low whereas liquid bonds are scarce, and I present empirical findings to support it.
    Keywords: asset price, monetary search model, liquidity, liquidity premium, money supply, negative nominal yield
    JEL: E31 E41 E51 E52 G12
    Date: 2016–10–31
  8. By: Aleksandar Vasilev (Department of Economics, American University in Bulgaria)
    Abstract: In this paper we investigate the quantitative importance of efficiency wages in explaining uctuations in Bulgarian labor markets. This is done by augmenting an otherwise standard real business cycle model a la Long and Plosser (1983) with unobservable workers efort by employers and wage contracts as in Shapiro and Stiglitz (1984). This imperfection in labor markets introduces a strong propagation mechanism that allows the model to capture the business cycles in Bulgaria better than earlier models. The model performs well vis-a-vis data, especially along the labor market dimension, and in addition dominates the market-clearing labor market framework featured in the standard RBC model, e.g Vasilev (2009).
    Keywords: general equilibrium, shirking, eciency wages, unemployment, Bulgaria
    JEL: E24 E32 J41
    Date: 2017–01
  9. By: John P. Conley (Vanderbilt University); Robert Driskill (Vanderbilt University); Ping Wang (Washington University)
    Abstract: We consider an overlapping generations model with a Durable Local Public Good (DLPG). We establish a Tiebout Theorem (equilibrium exists and is first best) as well as a Second Welfare Theorem in this dynamic DLPG economy. We conditions under which local provision of durable public goods results in the full internalization of the intergenerational spillovers that durability entails. In contrast, when durable public goods are provided by the national government, internalization does not take place and underprovision of public goods results. This sets up an institutional tradeoff between national and local provision of public goods that balances the relative strength of intergenerational and interjurisdictional spillovers.
    Keywords: Durable Local Public Goods, Capitalization and Intergenerational Spillover E¤ects, Dynamic Tiebout Equilibrium, Welfare Analysis.
    JEL: H4 D9
    Date: 2017–01–10
  10. By: Adiya Belgibayeva; Michal Horvath
    Abstract: The paper re-visits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifes strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labour market segmentation is shown to have a signifcant infleuence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.
    Keywords: Zero Lower Bound, Strategic Complementarity, Labour Market, Inflation, Income Tax, Government Spending.
    JEL: E31 E32 E52 E61 E62
    Date: 2017–01
  11. By: Gabaix, Xavier
    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 firms. (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 extant empirical evidence.
    Keywords: behavioral macroeconomics; bounded rationality; forward guidance; price level targetting; zero lower bound
    JEL: D03 E03 E12 E52 E6 E62 E63 G02
    Date: 2016–12
  12. By: Michal Andrle; Jan Bruha; Serhat Solmaz
    Abstract: What are the drivers of business cycle fluctuations? And how many are there? By documenting strong and predictable co-movement of real variables during the business cycle in a sample of advanced economies, we argue that most business cycle fluctuations are driven by one major factor. The positive co-movement of real output and inflation convincingly argues for a demand story. We propose a simple statistic that can compare data and models. Based on this statistic, we show that the recent vintage of structural economic models has difficulties replicating the stylized facts we document.
    Keywords: Business cycles;Production;Demand;Inflation;Developed countries;General equilibrium models;Business cycle, demand shocks, DSGE models, dynamic principal components
    Date: 2016–12–13
  13. By: José-María Da-Rocha; Marina Mendes Tavares; Diego Restuccia
    Abstract: We assess the quantitative impact of firing costs on aggregate total factor productivity (TFP) in a dynamic general-equilibrium framework where the distribution of establishment-level productivity is not invariant to the policy. Firing costs not only generate static factor misallocation, but also a worsening of the productivity distribution contributing to large aggregate TFP losses. Firing costs equivalent to 5 year's wages imply a drop in TFP of more than 20 percent. Factor misallocation accounts for 20 percent of the productivity loss, a relatively small drop in TFP, whereas the remaining 80 percent arises from the endogenous change in the productivity distribution.
    JEL: E1 E6 O1 O4
    Date: 2016–12
  14. By: De Nardi, Mariacristina; Fella, Giulio
    Abstract: Why are some people rich while others are poor? To what extent can governments affect inequality? Which instruments should they use? Answering these questions requires understanding why people save. Dynamic quantitative models of wealth inequality can help us understand and quantify the determinants of the outcomes that we observe in the data and to evaluate the consequences of policy reform. This paper surveys the savings mechanisms generated by the transmission of bequests and human capital, by preference heterogeneity, by rates of returns heterogeneity, by entrepreneurship, by richer earnings processes, and by medical expenses. It concludes that the transmission of bequests and human capital, entrepreneurship, and medical expense risk are crucial determinants of savings and wealth inequality.
    Keywords: Wealth; Wealth Inequality
    Date: 2017–01

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