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on Dynamic General Equilibrium |
| By: | Alok Johri; Muhebullah Karimzada |
| Abstract: | We incorporate shocks to the efficiency with which firms learn from production activity and accumulate knowledge into an otherwise standard real DSGE model with imperfect competition. Using real aggregate data and Bayesian inference techniques, we find that learning efficiency shocks are an important source of observed variation in the growth rate of aggregate output, investment, consumption and especially hours worked in post-war US data. The estimated shock processes suggest much less exogenous variation in preferences and total factor productivity are needed by our model to account for the joint dynamics of consumption and hours. This occurs because learning efficiency shocks induce shifts in labour demand uncorrelated with current TFP, a role usually played by preference shocks. At the same time, knowledge capital acts like an endogenous source of productivity variation in the model. Measures of model fit prefer the specification with learning efficiency shocks. |
| Keywords: | Business Cycles, Learning-by-Doing, Learning Efficiency Shocks, Knowledge Capital |
| JEL: | E32 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2016-11&r=dge |
| By: | Toshihiro Okada (School of Economics, Kwansei Gakuin University) |
| Abstract: | This paper develops a new Keynesian DSGE model with endogenous technology and explores the role of the endogenous mechanism of technology in macroeconomic fluctuations. It particularly considers the implications for the Phillips curve, the effects of news shocks and the persistence of the impacts of shocks. It has three main results. First, the model solves the "inflation persistence puzzle." It explains the persistence in inflation (the existence of the backward-looking term in the estimation of the new Keynesian Phillips curve) without relying on the ad hoc and empirically inconsistent assumptions made by conventional new Keynesian models. Second, the model solves the "disinflationary news shock puzzle." It explains the disinflationary effect of a news shock, which conventional new Keynesian models have difficulty explaining. Third, the model shows that the mechanism of an endogenous technological change generates larger volatility (a 12 percent increase in the standard deviation of output growth). It also shows that even monetary policy and government expenditure shocks have some persistent impacts on TFP and output. |
| Keywords: | New Keynesian Models, Endogenous Technology, Phillips Curve, Inflation, New Shock. |
| JEL: | E3 O4 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:154&r=dge |
| By: | Fabian Goessling |
| Abstract: | Global solution methods for dynamic stochastic general equilibrium (DSGE) models are acurrate but computationally expensive. In particular computing conditional expectations for numerous points in the state-space leads to signi cant complexity. In the present paper, I show how to remove the majority of calculations required for the evaluation of conditional expectations. Therefore I replace the approximated conditional expectation obtained by e.g. quadrature rules with an exact expectation. Further, similar to Judd et al. (2011), the required integrals are evaluated at the initial stage of the algorithm. I adopt Chebyshev polynomials as basis functions and provide a general framework. Subsequently, I adapt the technique to the neoclassical model with recursive utility and labor choice. |
| Keywords: | Profection, Precomputation, DSGE, Complexity reduction |
| JEL: | C63 C68 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:5416&r=dge |
| By: | Jakucionyte, Egle; van Wijnbergen, Sweder |
| Abstract: | 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; Hungary; leveraged banks; small open economy |
| JEL: | E44 F41 P2 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11788&r=dge |
| By: | Hashmat Khan (Department of Economics, Carleton University); Jean-François Rouillard (Department of Economics, 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: | 2017–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:17-04&r=dge |
| By: | Ken Tabata (School of Economics, Kwansei Gakuin University) |
| Abstract: | This paper examines how population aging caused by a decline in the birth rate or a reduction in the mortality rate affects economic growth in an overlapping generations model with a general demographic structure and a sizable unfunded social security system. Through numerical simulations, we show that a decline in the birth rate has non-monotonic effects on economic growth, yielding a hump-shaped relationship between the population growth rate and the economic growth rate, whereas a reduction in the mortality rate has a monotonic positive effect on economic growth, yielding a monotonic positive relationship between the population growth rate and the economic growth rate. We also use our model to study how predicted and occurring demographic changes in Japan affect that country’s economic growth rate. We show that the growth effect of the predicted demographic changes in Japan is initially positive but it may turn out to be negative from the mid 2030s forward. This paper also examines the growth and welfare effects of a reduction in pension payments or an extension of the retirement age, and shows that the pension payment reduction policy is better than the retirement extension policy for both growth and welfare in response to population aging. |
| Keywords: | Population aging, Unfunded social security, Retirement age, Economic growth |
| JEL: | D91 H55 O41 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:155&r=dge |
| By: | Dimitrios Bermperoglou; Evi Pappa; Eugenia Vella |
| Abstract: | We estimate the macroeconomic effects of public wage expenditures in U.S. data by identifying shocks to public employment and public wages using sign restrictions. Aggregate public wage bill shocks induce typically insignifi?cant effects. Disaggregating by government level reveals that public employment shocks are mildly expansionary at the federal level and strongly expansionary at the state and local level by crowding in private consumption and increasing labor force participation and private-sector employment.Similarly, state and local government wage shocks lead to increases in consumption and output, while shocks to federal government wages induce signifi?cant contractionary effects.In a stylized DSGE model we show that the degree of complementarity between public and private goods in the consumption bundle is key for explaining the observed heterogeneity. |
| Keywords: | Matching; government wage bill, fiscal multipliers, VARs, sign restrictions, DSGE model, search and matching frictions |
| JEL: | C22 E12 E32 E62 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:16.24&r=dge |
| By: | Marion Goussé |
| Abstract: | We extend the search-matching model of the marriage market of Shimer and Smith (2000) to allow for labor supply, home production, match-specific shocks and endogenous divorce. We study nonparametric identification using panel data on marital status, education, family values, wages, and market and non market hours, and we develop a semiparametric estimator. We estimate how much sorting results from time use specialization or homophilic preferences. We estimate how equilibrium marriage formation affects the wage elasticities of market and non market hours. We estimate individuals’ willingness to pay for marriage and quantify the redistributive effect of intrahousehold resource sharing. |
| Keywords: | Search-matching, sorting, assortative matching, collective labor supply, structural estimation |
| JEL: | C78 D83 J12 J22 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:crrecr:1603&r=dge |
| By: | Leonardo Gambacorta; Sudipto Karmakar |
| Abstract: | The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a bank's Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with difering degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios. |
| JEL: | G21 G28 G32 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201616&r=dge |
| By: | António Antunes; Valerio Ercolani |
| Abstract: | We show that the endogeneity of the household borrowing constraint accounts for a sizeable part of the efects in output, credit and welfare of fiscal policies that entail government debt expansions, using an incomplete-markets model featuring heterogeneous agents. These policies make the borrowing constraint tighter because of a higher interest rate. The tightening favors a deleveraging process in terms of private credit and reinforces the precautionary saving motive. This in turn exerts a downward pressure on the interest rate, dampening the tightening itself. As an example, under a plausible debt-financed transfers policy, the majority of households supports the policy within our baseline economy with the endogenous borrowing constraint, whereas it is against the policy if the endogeneity of the borrowing limit is not considered. |
| JEL: | E21 E44 E62 H60 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201618&r=dge |
| By: | Bas Jacobs (Erasmus School of Economics, Tinbergen Institute, CESifo); Alexandra Victoria Rusu (Erasmus School of Economics, The Netherlands) |
| Abstract: | Why is it optimal not to tax capital income in the long-run in Chamley (1986) and Judd (1985)? This paper demonstrates that the answer follows standard intuitions from the commodity tax literature. In the steady state, Engel curves for consumption are linear in labour earnings, irrespective of the utility function adopted. Thus, in the steady state, consumption demands in each period become equally complementary to leisure over time. This renders taxes on capital income redundant, since they cannot alleviate distortions from taxing labour income. The argument that taxes on capital income should be zero because distortions explode in finite time is relevant only if restrictions are imposed on the utility function. We show how these restrictions imply that consumption demands in each period are equally complementary to leisure over time. We also demonstrate that the optimal tax on capital income is zero irrespective of whether the gross interest rate is endogenous. This contradicts arguments that the entire burden of capital income taxes is shifted to labour through general equilibrium effects on the interest rate. |
| Keywords: | taxation of capital income; zero capital income tax; Corlett-Hague motive; Chamley-Judd result |
| JEL: | H2 |
| Date: | 2017–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20170011&r=dge |
| By: | Barbara Annichiarico; Fabio Di Dio; Francesco Felici |
| Abstract: | This paper provides a full technical description of a variant of the Italian General Equilibrium Model (IGEM), a dynamic general equilibrium model used as a laboratory for policy analysis at the Department of the Italian Treasury. This version of IGEM presents four specific key features: (i) imperfectly competitive final good sector; (ii) involuntary unemployment; (iii) a business tax bearing on firms; (iv) market frictions in the labor market of atypical workers. The paper presents some simulation scenarios of structural and fiscal reforms. |
| Keywords: | Dynamic General Equilibrium Model, Quantitative Policy Analysis, Simulation Analysis, Italy |
| JEL: | E27 E30 E60 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:itt:wpaper:2016-4&r=dge |
| By: | Amanda Michaud; Jacek Rothert |
| Abstract: | Government expenditures are procyclical in emerging markets and countercyclical in developed economies. We show this pattern is driven by differences in social transfers: transfers are more countercyclical and make up a larger portion of spending in developed economies. We use a small open economy model to study how much these differences in fiscal policies can account for differences in business cycle characteristics of emerging economies, particularly excess volatility of private consumption. We find that ignoring disparate fiscal policy results in an overestimation of the persistence of technology shocks in emerging markets relative to developed by 52%. We study how this conclusion depends on differences in the extent and sources of inequality across countries. |
| Keywords: | fiscal policy, emerging markets, trasnfers, inequality |
| JEL: | E21 E32 E62 F41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:253&r=dge |
| By: | Karl Farmer (University of Graz) |
| Abstract: | A dramatic decline of EMU periphery's and the US saving rate, house price booms and huge global and intra-EMU trade imbalances characterize the evolution of the world economy since Euro-related intra-EMU and global financial integration after the East-Asian currency crisis up to the onset of the global financial crisis. While the intra-EMU and global trade imbalances and the huge level differences between Asian and US saving rates can be explained by means of Farmer and Mihaiescu's (2016) three-country, three-good OLG model with financial constraints and growth rate differentials, the pronounced decline in EMU periphery’s and in the US saving rate cannot. It is natural to suggest that house price booms in EMU periphery and in the US boosted consumption and reduced savings. Thus, this paper introduces house price dynamics à la Arce and López-Salido (2011) and Basco (2014) into Farmer and Mihaiescu's (2016) intertemporal equilibrium model, and finds that house price increases let EMU periphery’s and US saving rates indeed decline more quickly – in line with empirical facts. |
| Keywords: | Trade Imbalances, Financial Integration, House Price Dynamics, Overlapping Generations, Three-Country Model |
| JEL: | F36 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2016-08&r=dge |
| By: | Jeremy Greenwood (University of Pennsylvania); Philipp Kircher (European University Institute and University of Edinburgh); Cezar Santos (Getulio Vargas Foundation); Michele Tertilt (University of Mannheim) |
| Abstract: | How might policies that promote marriage and/or dissuade divorce help in the fight against HIV/AIDS? This question is addressed employing a choice-theoretic general equilibrium search model, using Malawi as a case study. In the framework developed, individuals can choose between married and single life. A single person can select among abstinence and sex with or without a condom. The results suggest that marriage-friendly policies can help to abate HIV/AIDS. The policy predictions that obtain from general equilibrium analysis are compared with those that arise from simulated synthetic field experiments and epidemiological studies. AEA, Papers and Proceedings, forthcoming. |
| Keywords: | AIDS, circumcision, condoms, general equilibrium modeling, HIV, marriage and divorce, Malawi, sex markets, search |
| JEL: | D10 D50 E10 I10 O11 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:eag:rereps:28&r=dge |
| By: | Kirkby, Robert |
| Abstract: | We analyse general equilibrium transition paths for Bewley-Huggett-Aiyagari models: general equilibrium models with heterogeneous agents, incomplete markets, and idiosyncratic but no aggregate uncertainty. We first provide precise definitions of the theoretical problem to be solved. We then consider a variety of algorithms for computation of the finite horizon general equilibrium transition paths. These algorithms can solve for unannounced one-off changes, pre-announced one-off changes, or even any finite series of one-off changes (such as announcing today a series of tax increases to be rolled out over the next few years). The algorithms are all based on shooting-algorithms but differ in how they update the price paths during convergence. Evaluation of the algorithms in terms of both robustness and runtime is performed by applying them to looking at capital tax reforms in the model of Aiyagari (1994) and its extension to endogenous labour. Simulation results show that the literature standard of simply using a fixed factor to update the entire path performs both fast and robustly; and that a weight of 0.9 on the old path is typically the best by these criterion. |
| Keywords: | Bewley-Huggett-Aiyagari models, Numerical methods, Transition Path, General Equilibrium, |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwecf:5642&r=dge |
| By: | Balleer, Almut; Hristov, Nikolay; Menno, Dominik |
| Abstract: | This paper investigates how financial market imperfections and the frequency of price adjustment interact. Based on new firm-level evidence for Germany, we document that financially constrained firms adjust prices more often than their unconstrained counterparts, both upwards and downwards. We show that these empirical patterns are consistent with a partial equilibrium menu-cost model with a working capital constraint. We then use the model to show how the presence of financial frictions changes profits and the price distribution of firms compared to a model without financial frictions. Our results suggest that tighter financial constraints are associated with higher nominal rigidities, higher prices and lower output. Moreover, in response to aggregate shocks, aggregate price rigidity moves substantially, the response of inflation is dampened, while output reacts more in the presence of financial frictions. This means that financial frictions make the aggregate supply curve flatter for all calibrations considered in our model. We show that this differs fundamentally from models in which the extensive margin of price adjustment is absent (Rotemberg, 1982) or constant (Calvo, 1983). Hence, the interaction of financial frictions and the frequency of price adjustment potentially induces important consequences for the effectiveness of monetary policy. |
| Keywords: | Financial Frictions; Frequency of price adjustment; menu cost model |
| JEL: | E31 E44 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11790&r=dge |
| By: | Jones, John Bailey (Federal Reserve Bank of Richmond); Li, Yue (University at Albany) |
| Abstract: | Since 1983, Social Security benefits have been subject to income taxation, a provision that can significantly increase the marginal income tax rate for older individuals. To assess the impact of this tax, we construct and calibrate a detailed life-cycle model of labor supply, saving, and Social Security claiming. We find that in a long-run stationary environment, replacing the taxation of Social Security benefits with a revenue-equivalent increase in the payroll tax would significantly increase labor supply, consumption and welfare. From an ex-ante perspective an even more desirable reform would be to make the portion of benefits subject to income taxes completely independent of other income. |
| Keywords: | Social Security; Labor Supply; Taxation |
| JEL: | E21 H24 H55 I38 |
| Date: | 2017–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:17-02&r=dge |
| By: | Silvo, Aino |
| Abstract: | I study the link between house prices, lending standards, and aggregate over-investment in housing. I develop a model of the housing market where the credit market is affected by asymmetric information. Selection is towards less creditworthy borrowers. Asymmetric information coupled with deadweight costs of default can create endogenous boom-bust cycles in house prices. I show that lending standards are loose and the incentives for less-than-creditworthy borrowers to apply for a loan are particularly strong, first, when future house values are expected to be high, which leads to high leverage of borrowers; and second, when safe interest rates are low, which implies low costs of borrowing. However, there are strong nonlinearities in the relationship between borrowing incentives and economic fundamentals. The results shed light on incentive mechanisms that can help explain the developments in the U.S. housing market in the early 2000s. They also imply that loose monetary policy can have a direct impact on the stability of the housing market through the cost of borrowing and the opportunity cost of housing investment. |
| JEL: | E21 E32 E44 G14 G21 |
| Date: | 2017–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_004&r=dge |
| By: | Bart Cockx (SHERPPA, Ghent University, UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales IRES, IZA and CESIfo); Muriel Dejemeppe (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Andrey Launov (University of Kent, IZA and CESIfo); Bruno Van der Linden (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), FNRS, IZA and CESIfo) |
| Abstract: | We build and estimate a non-stationary structural job search model that incorporates the main stylized features of a typical job search monitoring scheme in unemployment insurance (UI) and acknowledges that search effort and requirements are measured imperfectly. Based on Belgian data, monitoring is found to affect search behavior only weakly, because (i) assessments were scheduled late and infrequently; (ii) the monitoring technology was not suffciently precise, (iii) lenient Belgian UI results in caseloads that are less responsive to incentives than elsewhere. Simulations show how changing the aforementioned design features can enhance effectiveness and that precise monitoring is key in this. |
| Keywords: | Monitoring, sanctions, non-stationary job search, unemployment benefits, structural estimation |
| JEL: | J64 J68 C41 |
| Date: | 2016–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2017002&r=dge |
| By: | Leung, Charles Ka Yui; Tse, Chung-Yi |
| Abstract: | We add arbitraging middlemen -- investors who attempt to profit from buying low and selling high -- to a canonical housing market search model. Flipping tends to take place in sluggish and tight, but not in moderate, markets. To follow is the possibility of multiple equilibria. In one equilibrium, most, if not all, transactions are intermediated, resulting in rapid turnover, a high vacancy rate, and high housing prices. In another equilibrium, few houses are bought and sold by middlemen. Turnover is slow, few houses are vacant, and prices are moderate. Moreover, flippers can enter and exit en masse in response to the smallest interest rate shock. The housing market can then be intrinsically unstable even when all flippers are akin to the arbitraging middlemen in classical finance theory. In speeding up turnover, the flipping that takes place in a sluggish and illiquid market tends to be socially beneficial. The flipping that takes place in a tight and liquid market can be wasteful as the efficiency gain from any faster turnover is unlikely to be large enough to offset the loss from more houses being left vacant in the hands of flippers. Based on our calibrated model, which matches several stylized facts of the U.S. housing market, we show that the housing price response to interest rate change is very non-linear, suggesting cautions to policy attempt to “stabilize” the housing market through monetary policy. |
| Keywords: | Search and matching, housing market, liquidity, flippers and speculators, financing and bargaining advantage. |
| JEL: | D83 G12 R30 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:76443&r=dge |
| By: | Stefano Eusepi; Marc P. Giannoni; Bruce Preston |
| Abstract: | Survey data on expectations of a range of macroeconomic variables exhibit low-frequency drift. In a New Keynesian model consistent with these empirical properties, optimal policy in general delivers a positive inflation rate in the long run. Two special cases deliver classic outcomes under rational expectations: as the degree of low-frequency variation in beliefs goes to zero, the long-run inflation rate coincides with the inflation bias under optimal discretion; for non-zero low-frequency drift in beliefs, as households become highly patient valuing utility in any period equally, the optimal long-run inflation rate coincides with optimal commitment - price stability is optimal. |
| Keywords: | Optimal monetary policy, Learning dynamics, Price stability |
| JEL: | E32 D83 D84 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2017-08&r=dge |
| By: | Jeremy Greenwood (University of Pennsylvania, Department of Economics); Nezih Guner (CEMFI); Guillaume Vandenbroucke (Federal Reserve Bank of St Louis, Research Department) |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:598&r=dge |
| By: | Costa Junior, Celso José |
| Abstract: | The determination of the steady state of DSGE models remains the obscure stage of the resolution methods of this modeling. Researchers seek to solve a nonlinear system rather than understand the theory behind these models. In order to fill this gap and help in learning this methodology, this paper develops a procedure for finding the steady- state by using concepts that rest on Walras' Law. |
| Keywords: | C60; E13; E30 |
| JEL: | E13 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:76182&r=dge |
| By: | James Hansen (Reserve Bank of Australia); Angus Moore (Reserve Bank of Australia) |
| Abstract: | This paper examines the role of central clearing in a consumption-based asset pricing model with incomplete markets and default. We show that central clearing can increase welfare by insuring against counterparty credit risk when private insurance markets are incomplete. We find that the gains from central clearing are largest when there is a higher probability of default and when over-the-counter derivative contracts provide an effective hedge against underlying risk. However, the potential gains are sensitive to the level of margin required by the central counterparty. When margin requirements are not set optimally, central clearing can result in too much or too little financial trade. |
| Keywords: | central counterparties; central clearing; over-the-counter derivatives; mutualisation externality; collateral; margin requirements; moral hazard |
| JEL: | D53 G11 G23 G28 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2016-07&r=dge |
| By: | Ennis, Huberto M. (Federal Reserve Bank of Richmond) |
| Abstract: | I study the implications for central bank discount window stigma of the model by Philippon and Skreta (2012). I take an equilibrium perspective for a given discount window program instead of following the program-design approach of the original paper. This allows me to narrow the focus on the model's positive predictions. In the model, firms (banks) need to borrow to finance a productive project. There is limited liability and firms have private information about their ability to repay their debts. This creates an adverse selection problem. The central bank can ameliorate the impact of adverse selection by lending to firms. Discount window borrowing is observable and it may be taken as a signal of firms' credit worthiness. Under some conditions, firms borrowing from the discount window may pay higher interest rates to borrow in the market, a phenomenon often associated with the presence of stigma. I discuss these conditions in detail and what they suggest about the relevance of stigma as an empirical phenomenon. |
| Keywords: | Banking; Federal Reserve; Central Bank; Policy; Lender of last resort |
| JEL: | E51 E58 G21 G28 |
| Date: | 2017–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:17-01&r=dge |
| By: | Arkadiusz Florczak; Janusz Jabłonowski |
| Abstract: | The article attempts to verify the existence and strength of the buffer stock and precautionary savings’ behaviours of households in Poland, with the use of the dynamic stochastic model of permanent income with life cycle hypothesis (PILCH). The theoretical part of the model relies heavily on Gourinchas & Parker [14], while numerical solutions are based on Carroll [3]. The model includes partial insurance of households against idiosyncratic risk. The data relies on two household surveys: on budgets (HBS) and wealth (HWS), with parametrisation based on the 1% sample from the social insurance administrative data. The results generally seem to confirm the initial presumption on doubtful reflection of the dynamic economic reality of the fast converging market economy in the applied version of the model. The reason may stem from the lack of sufficiently stable economic environment through at least one full working career path of the household generation. Polish households, in general, are not (yet) patient enough to create buffer stock behaviour based on financial means, so precautionary behaviour prevails. The detailed results for decomposed types of households show proof for buffer stock behaviour for high school graduates from richer regions, and specific professions. |
| Keywords: | consumption over life cycle, precautionary savings, household wealth survey, household budget survey, simulated method of moments, data matching, endogenous gridpoints. |
| JEL: | C49 C61 D91 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:252&r=dge |