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on Dynamic General Equilibrium |
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Issue of 2017‒01‒22
twenty-two papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Christian Schoder (Department of Economics, New School for Social Research) |
| Abstract: | A Dynamic Stochastic Disequilibrium (DSDE) model is proposed for business cycle analysis. Unemployment arises from job rationing due to insucient aggregate spending. The nominal wage is taken as a policy variable subject to a collective Nash bargaining process between workers and rms with the state of the labor market a ecting the relative bargaining power. A precautionary saving motive arising from an uninsurable risk of permanent income loss implies an equilibrium relation between consumption, income and wealth. The DSDE model di ers from the corresponding Dynamic Stochastic General Equilibrium (DSGE) model with labor market clearing in important respects: (i) Output is determined from the demand side and not from the supply side; (ii) The steady-state interest rate cannot be interpreted as a natural rate; (iii) It has to be smaller than the rate of economic growth in order for a steady state to exist; (iv) Determinacy of the solution requires the monetary policy response to in ation to be high (low) at low (high) steady-state interest rates; (v) Fighting in ation is stabilizing in the active monetary policy regime but destabilizing in the passive monetary policy regime; (vi) Macroeconomic responses to monetary policy and productivity shocks are similar to those of the DSGE model but give more weight to quantity adjustment and predict the real wage to increase with productivity. |
| Keywords: | Dynamic stochastic disequilibrium, labor market disequilibrium, labor rationing, collective wage bargaining, monetary policy |
| JEL: | B41 E12 J52 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:1701&r=dge |
| By: | P. A. Pintu; Y. Wen; X. Xing |
| Abstract: | The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates today forecast future booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when interest-rate movements are driven, in a significant way, by self-fulfilling shocks that redistribute income away from lenders and to borrowers during booms. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the interest rate is state-contingent. Bayesian estimation of our benchmark DSGE model on US data shows that the model driven by redistribution shocks results in a better fit to the data than both standard RBC models and Kiyotaki-Moore type models with unique equilibrium. |
| Keywords: | Endogenous Collateral Constraints, State-Contingent Loan Repayment, Redistribution Shocks, Multiple Equilibria |
| JEL: | E21 E22 E32 E44 E63 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:616&r=dge |
| By: | Matthieu Darracq Paries (European Central Bank); Pascal Jacquinot (European Central Bank); Niki Papadopoulou (Central Bank of Cyprus) |
| Abstract: | The paper is putting forward a structural narrative for the euro area financial crisis and its asymmetric consequences through the monetary union. We conjecture three originating factors to the euro area financial fragmentation and discuss the role of specific financial frictions in transmitting and amplifying them: (i) the macroeconomic spillovers of sovereign market tensions through risky banks, (ii) the adverse real-financial feedback loop from rising corporate default to weak banks and credit supply constraints, (iii) bank deleveraging process at times of unprecedented regulatory overhaul. We develop global DSGE model featuring a sovereign-bank nexus, a granular set of relevant financial frictions. The model is calibrated for 6 regions in order to reflect the financial heterogeneity across the largest countries of the euro area. The counterfactual scenarios show that the interplay between sovereign, bank and corporate solvency risks generated sizeable procyclicality in some jurisdictions of the euro area during the crisis and severely impaired the transmission of the single monetary policy. |
| Keywords: | DSGE models, banking, nancial regulation, cross-country spillovers, bank lending rates |
| JEL: | E4 E5 F4 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:cyb:wpaper:2016-08&r=dge |
| By: | Julio A. Carrillo; Gert Peersman; Joris Wauters |
| Abstract: | Empirical and institutional evidence finds considerable time variation in the degree of wage indexation to past inflation, a finding that is at odds with the assumption of constant indexation parameters in most New-Keynesian DSGE models. We build a DSGE model with endogenous wage indexation in which utility maximizing workers select a wage indexation rule in response to aggregate shocks and monetary policy. We show that workers index wages to past inflation when output fluctuations are driven by technology and permanent inflation-target shocks, whereas they index to trend inflation when aggregate demand shocks dominate output fluctuations. The model's equilibrium wage setting can explain the time variation in wage indexation found in post-WWII U.S. data. |
| Keywords: | Wage indexation, Welfare costs, Nominal rigidities |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:604&r=dge |
| By: | Matthieu Darracq Paries (European Central Bank); Pascal Jacquinot (European Central Bank); Niki Papadopoulou (Central Bank of Cyprus) |
| Abstract: | The euro area experience during the financial crisis highlighted the importance of financial and sovereign risk factors in macroeconomic propagation, as well as the constraints that bank lending fragmentation would pose for monetary policy conduct in a currency union. Focusing specifically on the credit intermediation process, we claim that sources of impairments in the monetary policy transmission mechanism can arise from five distinct segments, related both to the demand and the supply of credit, namely: (i) deposit spread, (ii) market-funding cost spread, (iii) bank capital charges, (iv) compensation for expected losses and (v) competitive wedge. These intermediation wedges constitute specific types of financial frictions which may independently be the epicenter of financial disturbances. Against this background we design a DSGE model spanning the relevant "financial wedges" at play during the crisis, together with its cross-country heterogeneity within the euro area, focusing on Germany, France, Italy, Spain, and rest-of-euro area. Our main results are the following. First, we show that the cross-country heterogeneity of micro-structure of financial frictions are relevant to explain the divergence in lending rates. Second, sovereign risk, bank risk and corporate risk have been the most relevant channels to explain the financial heterogeneity observed during the banking crisis (bank capital shock). Third, the corporate risk channel has been the main source of impairment of the monetary policy transmission across euro area countries. Fourth, a 10 pp increase in the annual debt-to-GDP ratio triggers a surge in sovereign yields by than 300 bps and 200 bps for Italy and Spain respectively. Fifth, cross-border financial linkages are more important for Italy and Germany and affect for both countries the transmission of bank capital shocks. |
| Keywords: | DSGE models, banking, financial regulation, cross-country spillovers, bank lending rates |
| JEL: | E4 E5 F4 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:cyb:wpaper:2016-07&r=dge |
| By: | Sweder J.G. van Wijnbergen (University of Amsterdam, The Netherlands); Egle Jakucionyte (University of Amsterdam, The Netherlands) |
| Abstract: | The depreciation of the Hungarian forint in 2009 left Hungarian borrowers with a skyrocketing value of foreign currency debt. The resulting losses worsened debt overhang in to debt-ridden firms and eroded bank capital. Therefore, although Hungarian banks had partially isolated their balance sheets from exchange rate risk by extending FX-denominated loans, the ensuing debt overhang in borrowing firms exposed the banks to elevated credit risk. Firms, households and banks had run up the open FX-positions hoping to profit from low foreign rates in the run-up to Euro adoption. This example of carry trade in emerging Europe motivates our analysis of currency mismatch losses in different sectors in the economy, and the macroconsequences of reallocating losses from the corporate to the banking sector ex post. We develop a small open economy New Keynesian DSGE model that accounts for the implications of domestic currency depreciation for corporate debt overhang and incorporates an active banking sector with financial frictions. The model, calibrated to the Hungarian economy, shows that, in periods of unanticipated depreciation, allocating currency mismatch losses to the banking sector generates a milder recession than if currency mismatch is placed at credit constrained firms. The government can intervene to reduce aggregate losses even further by recapitalizing banks and thus mitigating the effects of currency mismatch losses on credit supply. |
| Keywords: | Debt overhang, foreign currency debt, leveraged banks, small open economy, Hungary |
| JEL: | E44 F41 P2 |
| Date: | 2017–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20170005&r=dge |
| By: | Nezih Guner (Universitat Autònoma de Barcelona); Remzi Kaygusuz; Gustavo Ventura (Arizona State University) |
| Abstract: | What are the macroeconomic and welfare effects of expanding transfers to households with children in the United States? How do childcare subsidies compare to alternative policies? We answer these questions in a life-cycle equilibrium model with household labor-supply decisions, skill losses of females associated to non participation, and heterogeneity in terms of fertility, childcare expenditures and access to informal care. We consider the expansion of transfers that are contingent on market work - childcare subsidies and Child and Dependent Care Tax Credits (CDCTC) - versus those that are not - Child Tax Credits (CTC). We find that expansions of transfers of the first group have substantial positive effects on female labor supply, that are largest at the bottom of the skill distribution. Universal childcare subsidies at a 75% rate lead to long-run increases in the participation of married females of 8.8%, while an equivalent expansion of the CTC program leads to the opposite - a reduction of about 2.4%. We find that welfare gains of newborn households are substantial and up to 2.3% under the CDCTC expansion. The expansion of none of the existing programs, however, receives majority support at the time of its implementation. Our findings show substantial heterogeneity in welfare effects, with a small fraction of households - young and poorer households with children - who gain significantly while many others lose. |
| Keywords: | household labor supply, child-related transfers, childcare |
| JEL: | E62 H24 H31 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2017-001&r=dge |
| By: | Alexis Derviz |
| Abstract: | The paper investigates the behavior of credit demand and output arising from differences in productive capital sources in economies recovering from an adverse real shock. Beside physical capital, another form of capital - human capital - is available during the catch-up phase. Since a part of new physical capital must be debt-financed, whereas production is risky due to uncertain future total factor productivity, defaults happen with positive probability. The latter can be reduced by partially substituting physical capital for human, at a disutility cost. We ask whether a shift away from risky borrowed physical capital to human capital is able to generate a reduction in aggregate credit losses without too big a loss in output, thereby warranting a specific prudential policy. This question is addressed by means of a dynamic stochastic model with feedback decision rules, for which we develop a full-distribution numerical solution method. The long-term stationary limit distribution of the solution generalizes the steady state notion of deterministic models. Agents that start from relatively "poor" initial states are found to benefit from limits on unsecured borrowing at a very moderate cost in output terms, whereas for "rich" initial states, such limits prove to be largely redundant. |
| Keywords: | Credit, dynamic stochastic equilibrium, human capital, prudential policy, recovery |
| JEL: | E22 G33 G38 C61 D92 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2016/10&r=dge |
| By: | Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo |
| Abstract: | What are the macroeconomic and welfare effects of expanding transfers to households with children in the United States? How do childcare subsidies compare to alternative policies? We answer these questions in a life-cycle equilibrium model with household labor-supply decisions, skill losses of females associated to non participation, and heterogeneity in terms of fertility, childcare expenditures and access to informal care. We consider the expansion of transfers that are contingent on market work -- childcare subsidies and Child and Dependent Care Tax Credits (CDCTC) -- versus those that are not -- Child Tax Credits (CTC). We find that expansions of transfers of the first group have substantial positive effects on female labor supply, that are largest at the bottom of the skill distribution. Universal childcare subsidies at a 75% rate lead to long-run increases in the participation of married females of 8.8%, while an equivalent expansion of the CTC program leads to the opposite -- a reduction of about 2.4%.We find that welfare gains of newborn households are substantial and up to 2.3% under the CDCTC expansion. The expansion of none of the existing programs, however, receives majority support at the time of its implementation. Our findings show substantial heterogeneity in welfare effects, with a small fraction of households —young and poorer households with children — who gain significantly while many others lose. |
| Keywords: | Child-Related Transfers; childcare; Household Labor Supply |
| JEL: | E62 H24 H31 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11779&r=dge |
| By: | Chatterjee, Satyajit (Federal Reserve Bank of Philadelphia); Eyigungor, Burcu (Federal Reserve Bank of Philadelphia) |
| Abstract: | A sovereign default model in which the sovereign derives private benefits from public office and contests elections to stay in power is developed. The economy’s growth process is modeled as a Markov switching regime, which is shown to be a better description of the data for our set of emerging economies. In the model, consistent with evidence, the sovereign is less likely to be reelected if economic growth is weak. In the low-growth regime, there is higher probability of loss of private benefits due to turnover, which makes the sovereign behave more myopically. This growth-linked variation in effective discount factor is shown to be important in generating volatility in sovereign spreads. |
| Keywords: | growth regimes; elections; sovereign default risk |
| Date: | 2017–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:17-1&r=dge |
| By: | LG Deidda; J.E. Galdon-Sanchez; M. Casares |
| Abstract: | We examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying business-cycle effects of a more rigid loan production technology. In the monetary policy analysis, the optimal rule clearly outperforms Taylor (1993) rule. The optimized interest-rate response to the external finance premium turns significantly negative when either banking rigidities are high or when financial shocks are the only source of business cycle fluctuations. |
| Keywords: | external finance,optimal monetary policy,business cycles |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201612&r=dge |
| By: | M. Isoré; U. Szczerbowicz |
| Abstract: | In RBC models, “disaster risk shocks” reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall, through their effects on agents’ preferences (Gourio, 2012). This paper offers a solution to this puzzle by developing a New Keynesian model with such a small but time-varying probability of “disaster”. We show that price stickiness, combined with an elasticity of intertemporal substitution smaller than unity, restores procyclical consumption and wages, while preserving countercyclical risk premia, in response to disaster risk shocks. The mechanism then provides a rationale for discount factor first- and second-moment (“uncertainty”) shocks. |
| Keywords: | disaster risk, rare events, uncertainty, Epstein-Zin-Weil preferences, asset pricing, DSGE models, New Keynesian models, business cycles, risk premium |
| JEL: | D81 D90 E20 E31 E32 E44 G12 Q54 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:614&r=dge |
| By: | James Heckman (University of Chicago); Rong Hai (University of Miami) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:16-104&r=dge |
| By: | Dongya Koh; Raül Santaeulàlia-Llopis |
| Abstract: | We empirically show that the short-run elasticity of substitution between capital and labor (?t) is countercyclical. In recessions, capital and labor are more substitutable than in expansions. We explore the effects of the countercyclicality of ?t on aggregate fluctuations in the context of an otherwise standard competitive-markets business cycle model. The countercyclical ?t contributes to resolve four main labor-market puzzles: Dunlop-Tarshis phenomenon, labor-productivity puzzle, hours-productivity puzzle, and labor share puzzle. |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:946&r=dge |
| By: | Jonathan Hoddenbagh (Johns Hopkins University); Mikhail Dmitriev (Florida State University) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:15-282&r=dge |
| By: | Pacheco, André Sanchez; Tenani, Paulo Sérgio |
| Abstract: | This paper accesses the presence of inflation bias in major Latin American Economies over the past decade. Using a small-scale New Keynesian DSGE model and Bayesian Techniques, the time-varying neutral rate of interest is estimated for major Latin American economies. Then the deviations in the policy rate from the neutral rate are overlapped with deviations in current inflation from target. This simple procedure allows the identification of three different regimes of monetary policy – too easy, too restrictive and appropriate. The main result is that Latin American Central Banks often set monetary policy too easy. Analogously, the same conclusion is found if one compares the policy rate with a Taylor Rule-based interest rate aimed at the center of the inflation target range. Such analysis provides evidence of inflation bias in the region, with the exception of Chile. |
| Date: | 2016–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:425&r=dge |
| By: | Strulik, Holger; Trimborn, Timo |
| Abstract: | It has been argued that hyperbolic discounting of future gains and losses leads to time-inconsistent behavior and thereby, in the context of health economics, not enough investment in health and too much indulgence of unhealthy consumption. Here, we challenge this view. We set up a life-cycle model of human aging and longevity in which individuals discount the future hyperbolically and make time-consistent decisions. This allows us to disentangle the role of discounting from the time consistency issue. We show that hyperbolically discounting individuals, under a reasonable normalization, invest more in their health than they would if they had a constant rate of time preference. Using a calibrated life-cycle model of human aging, we predict that the average U.S. American lives about 4 years longer with hyperbolic discounting than he would if he had applied a constant discount rate. The reason is that, under hyperbolic discounting, experiences in old age receive a relatively high weight in life time utility. In an extension we show that the introduction of health-dependent survival probability motivates an increasing discount rate for the elderly and, in the aggregate, a u-shaped pattern of the discount rate with respect to age. |
| Keywords: | discount rates,present bias,health behavior,aging,longevity |
| JEL: | D03 D11 D91 I10 I12 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuweco:112016&r=dge |
| By: | Piotr Gabrielczak (Faculty of Economics and Sociology, University of Lodz); Tomasz Serwach (Faculty of Economics and Sociology, University of Lodz) |
| Abstract: | In this paper, we estimate Erceg, Henderson and Levin’s [2000] sticky price and sticky wage dynamic stochastic general equilibrium (DSGE) model while allowing for wage or price Calvo parameters regime switching and compare this with the constant parameters model. Our results suggest that the model with price and wage rigidity switching is strongly favored by the data. However, we do not find significant evidence in support of independent Markov chains. Moreover, we identify historical periods when price and wage stickiness were low and show that during such periods, the economy reacts more strongly to structural shocks. |
| Keywords: | Eurozone, international trade, Slovenia, complexity, synthetic control method. |
| JEL: | C21 F14 F15 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:ann:wpaper:3/2017&r=dge |
| By: | S. Guilloux-Nefussi |
| Abstract: | The sensitivity of inflation to domestic slack has declined in developed countries since the mid-1980s. This article shows why this might result from globalization favoring concentration. To do so, I add three ingredients to an otherwise standard general equilibrium two-country new-Keynesian model. (1) Strategic interactions generate a time-varying desired markup; (2) endogenous entry and (3) heterogeneous productivity engender a self-selection of the most productive firms (which are also the largest ones) in international trade. Hence, the weight of large firms in domestic production increases in response to a fall in international trade costs. These large firms transmit less marginal cost fluctuations to price adjustments, rather absorbing them into their desired markup to protect their market share. At the aggregate level, this leads to domestic inflation reacting less to real activity fluctuations. |
| Keywords: | Inflation, Impact of Globalization, Strategic Interactions, Market Structure, Phillips Curve |
| JEL: | E31 F41 F62 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:610&r=dge |
| By: | Fujio Takata (Graduate School of Economics, Kobe University) |
| Keywords: | Two movement patterns, Balanced budget rule, Laborincome taxation, Divisible labor |
| JEL: | C61 C62 E20 E32 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1702&r=dge |
| By: | Toyoki Matue (Graduate School of Economics, Kobe University) |
| Keywords: | employment fluctuations, fixed-term contracts, trade unions, labor market reforms |
| JEL: | E24 J30 J51 J63 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1701&r=dge |
| By: | Jochem de Bresser; Raquel Fonseca; Pierre-Carl Michaud |
| Abstract: | We develop a retirement model featuring various labor market exit routes: unemployment, disability, private and public pensions. The model allows for saving and uncertainty along several dimensions, including health and mortality. Individuals’ preferences are estimated on data from the U.S. and Europe using institutional variation across countries. We analyze the roles of preferences and institutions in explaining international heterogeneity in retirement behavior. Preliminary estimates suggest that a single set of preferences for individuals from the U.S., the Netherlands and Spain does not fit the data well. Were Europeans to have the same preferences as Americans, they would save less than they actually do. Furthermore, the Dutch and Spanish would work more hours than is observed in the data. |
| Keywords: | Retirement; saving; institutions; structural estimation |
| JEL: | D91 J14 J26 H31 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:criacr:1609&r=dge |