nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒02‒19
27 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Migration, Unemployment and the Business Cycle - A Euro Area Perspective By Clemens, Marius
  2. Asset Bubbles, Technology Choice, and Financial Crises By Takuma Kunieda; Tarishi Matsuoka; Akihisa Shibata
  3. Optimal Domestic (and External) Sovereign Default By D'Erasmo, Pablo; Mendoza, Enrique G.
  4. Human Capital Acquisition and Occupational Choice: Implications for Economic Development By Martí Mestieri; Johanna Schauer; Robert Townsend
  5. A New Dilemma: Capital Controls and Monetary Policy in Sudden-Stop Economies By Michael B. Devereux; Eric R. Young; Changhua Yu
  6. SOE and Chinese Real Business Cycle By Daoju Peng; Kang ShiAuthor-Workplace-Name: Chinese University of Hong Kong; Juanyi XuAuthor-Workplace-Name: Hong Kong University of Science and Technology
  7. How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output By Kyle Herkenhoff; Gordon Phillips; Ethan Cohen-Cole
  8. What is the truth about DSGE models? Testing by indirect inference By Meenagh, David; Minford, Patrick; Wickens, Michael R.; Xu, Yongdeng
  9. A note on news about the future: the impact on DSGE models and their VAR representation By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  10. The Post-Crisis Slump in the Euro Area and the US: Evidence from an Estimated Three-Region DSGE Model By Vogel, Lukas; Kollmann, Robert; Pataracchia, Beatrice; Ratto, Marco; Roeger, Werner
  11. Asset Bubbles, Unemployment, and a Financial Crisis By Takuma Kunieda; Ken-ichi Hashimoto; Ryonghun Im
  12. Delayed Collection of Unemployment Insurance during Recessions By Xie, Zoe
  13. Public Insurance and Wealth Inequality - A Euro Area Analysis By Pham-Dao, Lien
  14. Capital Misallocation and Secular Stagnation By Andrea Caggese; Ander Perez
  15. Why mandate young borrowers to contribute to their retirement accounts? By Andersen, Torben M.; Bhattacharya, Joydeep
  16. Optimal Climate Policies in a Dynamic Multi-Country Equilibrium Model By Hillebrand, Marten; Hillebrand, Elmar
  17. Search-for-Yield and Business Cycle* By Katsuhiro Oshima
  18. Inflation Bias and Markup Shocks in a LAMP Model with Strategic Interaction of Monetary and Fiscal Policy By Alice Albonico; Lorenza Rossi
  19. Testing part of a DSGE model by Indirect Inference By Minford, Patrick; Wickens, Michael R.; Xu, Yongdeng
  20. Pension reform with entrepreneurial choice By Hofbauer, Florian; Fehr, Hans
  21. Temptation and Forward Guidance By Airaudo, Marco
  22. Comparing different data descriptors in Indirect Inference tests on DSGE models By Minford, Patrick; Wickens, Michael R.; Xu, Yongdeng
  23. Effectiveness of Early Retirement Disincentives: Individual Welfare, Distributional and Fiscal Implications By Timm Bönke; Daniel Kemptner; Holger Lüthen
  24. Capital Controls and Monetary Policy Autonomy in a Small Open Economy By J. Scott Davis; Ignacio Presno
  25. Optimal Climate Policy When Damages are Unknown By Rudik, Ivan
  26. Post Keynesian Dynamic Stochastic General Equilibrium Theory By Roger E.A. Farmer
  27. Managing Climate Change Under Uncertainty: Recursive Integrated Assessment at an Inflection Point By Lemoine, Derek; Rudik, Ivan

  1. By: Clemens, Marius
    Abstract: In the recent European debt crisis, internal migration flows in the euro area reacted strongly to diverging labor market conditions. This experience points towards the prominent role of short-term business-cycle migration in the euro area and the consequent need to understand the motives behind it. Investigating the business cycle in 55 bilateral migration corridors in the euro area over the period 1980-2010, we find evidence for business cycle related fluctuations in net migration flows and the crucial role of unemployment in shaping migration patterns. While on average wage and unemployment differentials are negatively correlated with net migration, across migration corridors we document a considerable heterogeneity in both dimensions that is more pronounced for wages. In line with these findings, we built a two-country dynamic stochastic general equilibrium (DSGE) model of internal business cycle migration in the euro area and allow for unemployment that occurs as a consequence of labor market frictions and rigidities in both countries. Our model is able to replicate the empirical observations and explains the heterogeneity of migration corridors by differences in the type of shock that hits an economy and the relative price/wage rigidity. We contribute to the literature on the causes and consequences of temporary migration and bridge it to DSGE models with unemployment.
    JEL: E24 F22 F41
    Date: 2016
  2. By: Takuma Kunieda (School of Economics, Kwansei Gakuin University); Tarishi Matsuoka (Faculty of Urban Liberal Arts, Tokyo Metropolitan University); Akihisa Shibata (Institute of Economic Research, Kyoto University)
    Abstract: How does an economy fall into depression after an asset bubble bursts? To address this question, we extend Matsuyama’s (2007) overlapping-generations model with multiple technologies to a dynamic general equilibrium model with infinitely lived agents. Our analysis focuses on a case of two technologies: one with high productivity and another with low productivity. The crowd-in effect that asset bubbles have on capital accumulation occurs in equilibrium, in which the high interest rates resulting from asset bubbles crowd out low-productivity technology. When asset bubbles with high-productivity technology collapse, a depression follows.
    Keywords: Asset bubbles, Crowd-in effect, Matsuyama model, Infinitely-lived agents
    JEL: E32 E44 O41
    Date: 2017–02
  3. By: D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia); Mendoza, Enrique G. (University of Pensylvania)
    Abstract: Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a “forgotten history” in macroeconomics. We propose a heterogeneous- agents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous default costs due to value of debt for self-insurance, liquidity, and risk-sharing. The government’s aim to redistribute resources across agents and through time in response to uninsurable shocks produces a rich dynamic feedback mechanism linking debt issuance, the distribution of government bond holdings, the default decision, and risk premia. Calibrated to Spanish data, the model is consistent with key cyclical comovements and features of debt-crisis dynamics. Debt exhibits protracted fluctuations. Defaults have a low frequency of 0.93 percent, are preceded by surging debt and spreads, and occur with relatively low external debt. Default risk limits the sustainable debt, and yet spreads are zero most of the time.
    Keywords: public debt; sovereign default; debt crisis; European crisis
    JEL: E44 E6 F34 H63
    Date: 2017–02–10
  4. By: Martí Mestieri (Northwestern University); Johanna Schauer (Toulouse School of Economics); Robert Townsend (Massachusetts Institute of Technology)
    Abstract: Using household-level data from Mexico we document patterns among schooling, entrepreneurial decisions and household characteristics such as assets, talent of household members and age of the household head. Motivated by our findings, we develop a heterogeneous-agent, incomplete-markets, overlapping-generations dynasty model. Households jointly decide over their life cycle on (i) kids' human capital investments (schooling) and (ii) parents' entry, exit and investment into alternative entrepreneurial modes (subsistence and modern). With financial constraints all of these are co-determined. A calibrated version of our model can account for the broad correlation patterns uncovered in the data within and across generations, e.g., a non-monotonic relationship between educational choices and assets across occupations, growth in profits and employment for modern firms only, and dynastic persistence across generations in education and wealth. Endogenous human capital acquisition is a key driver of inequality and intergenerational persistence. Eliminating this channel would decrease the top 10% income share by 47%. Eliminating within-period borrowing constraints would increase average household expenditure by 7.1% and benefit the middle class, reducing top and bottom expenditure shares. It would also reduce by 28% the correlation between household assets and kids’ schooling levels.
    Keywords: human capital, Inequality, development, occupational choice, entrepreneurship, Mexico
    JEL: O15 O54 I24
    Date: 2017–01
  5. By: Michael B. Devereux (University of British Columbia); Eric R. Young (University of Virginia); Changhua Yu (Peking University)
    Abstract: The dangers of high capital flow volatility and sudden stops have led economists to promote the use of capital controls as an addition to monetary policy in emerging market economies. This paper studies the benefits of capital controls and monetary policy in an open economy with financial frictions, nominal rigidities, and sudden stops. We focus on a time-consistent policy equilibrium. We find that during a crisis, an optimal monetary policy should sharply diverge from price stability. Without commitment, policymakers will also tax capital inflows in a crisis. But this is not optimal from an ex-ante social welfare perspective. An outcome without capital inflow taxes, using optimal monetary policy alone to respond to crises, is superior in welfare terms, but not time-consistent. If policy commitment were in place, capital inflows would be subsidized during crises. We also show that an optimal policy will never involve macro-prudential capital inflow taxes, or a departure from price stability, as a precaution against the risk of future crises (whether or not commitment is available).
    Keywords: Sudden stops, Pecuniary externality, Monetary policy, Capital controls, Time-consistency
    JEL: E44 E58 F38 F41
    Date: 2016–03
  6. By: Daoju Peng (Capital University of Economics and Business); Kang ShiAuthor-Workplace-Name: Chinese University of Hong Kong; Juanyi XuAuthor-Workplace-Name: Hong Kong University of Science and Technology
    Abstract: Chinese real business cycle (RBC) exhibits a unique pattern, which is characterized by moderate consumption volatility, substantially low investment volatility, and acyclical trade balance. These features are quite different from business cycles in other emerging markets and cannot be explained by existing emerging market RBC theories. Motivated by the facts that China undertook dramatic and persistent reform on state-owned enterprises (SOE) in the last 30 years, we construct a full-fledged general equilibrium model with SOE sector and show that the model does a fairly good job in accounting for the above features. The two main driving forces are: (1) shock to the share of downstream SOE in manufacturing sectors and (2) shock to upstream SOE's monopolistic position. These two shocks can explain 85 percent of output volatility, 79 percent of consumption volatility, 72 percent of investment volatility, and 57 percent of the volatility of trade balance-to-output ratio. Relatively speaking, standard shocks such as permanent productivity shock, credit shocks, country risk premium shocks, and preference shocks are less important in explaining Chinese economic fluctuations. Our results show that Chinese RBC may be affected substantially by domestic policies.
    Date: 2016–02
  7. By: Kyle Herkenhoff (University of Minnesota); Gordon Phillips (Dartmouth College Tuck School of Business); Ethan Cohen-Cole (Econ One Research)
    Abstract: How does access to consumer credit affect the allocation of workers to firms, and what happens to sorting and the subsequent recovery if credit tightens during a recession? To answer this question, we develop a labor sorting model with saving and borrowing. We show that even with two-sided heterogeneity and risk aversion, the model remains tractable because it admits a unique block recursive solution. We find that if credit limits tighten during a downturn, employment recovers quicker, but output and productivity remain depressed. This is because when limits tighten, low-asset, low-productivity job losers cannot self-insure. Therefore, they search less thoroughly and take more accessible jobs at less productive firms. We then build a new administrative dataset that merges credit reports with employment histories, and we test the model's mechanisms.
    Keywords: sorting model, credit constraints, block recursive, self-insurance
    JEL: E13 E20 E24 E32 J21 J24 J31 J60 J63 J64 J65
    Date: 2017–02
  8. By: Meenagh, David; Minford, Patrick; Wickens, Michael R.; Xu, Yongdeng
    Abstract: This paper addresses the growing gulf between traditional macroeconometrics and the increasingly dominant preference among macroeconomists to use DSGE models and to estimate them using Bayesian estimation with strong priors but not to test them as they are likely to fail conventional statistical tests. This is in conflict with the high scientific ideals with which DSGE models were first invested in their aim of finding true models of the macroeconomy. As macro models are in reality only approximate representations of the economy, we argue that a pseudo-true inferential framework should be used to provide a measure of the robustness of DSGE models.
    Keywords: DSGE models; Indirect Inference; Wald tests; Likelihood Ratio tests; robustness; Pseudo-true inference
    Date: 2017–01
  9. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
    Abstract: In this paper we investigate the role of news shocks in aggregate fluctuations by comparing the empirical performance of models with and without the feature of the news shocks. We found a trivial difference between the two models. That is, the model with news shocks explains the variation as well as the alternative. The reason is that the news shocks can only advance the date at which agents know about the changes, but they do not change the stochastic structure of the model.
    Keywords: News shocks; DSGE; VAR; Indirect Inference
    Date: 2017–01
  10. By: Vogel, Lukas; Kollmann, Robert; Pataracchia, Beatrice; Ratto, Marco; Roeger, Werner
    Abstract: The global financial crisis (2008-09) led to a sharp contraction in both Euro Area (EA) and US real activity, and was followed by a long-lasting slump. However, the post-crisis adjustment in the EA and the US shows striking differences—in particular, the EA slump has been markedly more protracted. We estimate a three-region (EA, US and Rest of World) New Keynesian DSGE model (using quarterly data for 1999-2014) to quantify the drivers of the divergent EA and US adjustment paths. Our results suggest that financial shocks were key drivers of the 2008-09 Great Recession, for both the EA and the US. The post-2009 slump in the EA mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment, linked to the continuing poor health of the EA financial system. Adverse financial shocks were less persistent for the US. The dynamics of financial shocks identified by the model is consistent with observed performance indicators of the EA and US banking systems.
    JEL: E32 F41 C11
    Date: 2016
  11. By: Takuma Kunieda (School of Economics, Kwansei Gakuin University); Ken-ichi Hashimoto (Graduate School of Economics, Kobe University); Ryonghun Im (Graduate School of Economics, Kobe University)
    Abstract: A tractable model with asset bubbles is presented to demonstrate that a financial crisis caused by a bubble bursting increases unemployment rates. A bubbly asset has a positive market value because purchasing the asset is the sole saving method for agents who draw insufficient productivity, whereas selling the asset is a fund-raising method to initiate an investment project. The presence of bubbles corrects allocative inefficiency, relocating investment resources from low-productivity agents to high-productivity agents. Accordingly, the presence of bubbles can promote capital accumulation and reduce unemployment rates. However, a self-fulfilling financial crisis would result in high unemployment rates.
    Keywords: Overlapping generations, Labor market friction, Borrowing constraints, Asset bubbles, Unemployment
    JEL: J64 O41 O42
    Date: 2017–02
  12. By: Xie, Zoe
    Abstract: Contrary to assumptions in the unemployment insurance (UI) literature, this paper argues that unemployed workers do not always lose uncollected UI benefits when they start a new job. Instead, they may postpone the collection of leftover benefits to future unemployment spells. Further, using cross-time and cross-state variations in UI policies, the paper finds empirical evidence that allowing unemployed workers to delay the collection of benefits increases their incentives to find a job during recessions when wages are low, job separation rates are high, and UI benefits are extended. I quantify the effects of the policy of allowing delayed collection of benefits on aggregate unemployment by introducing endogenous search effort, benefit eligibility, and wage indexed benefits into a standard search-and-matching framework. The model demonstrates how the policy increases the future value of employment even though more generous UI benefits in general reduce the net value of employment. Using a calibrated model,I find that allowing delayed benefit collection raises the proportion of unemployed workers receiving benefits and reduces the unemployment rate during 2009–2012.
    Keywords: Unemployment insurance, Unemployment, Short-term employment
    JEL: E65 J64 J65
    Date: 2015–11–15
  13. By: Pham-Dao, Lien
    Abstract: Since the release of the first wave of the Household Finance and Consumption Survey, the causes of the large euro area differences in private net wealth inequality have been at the forefront of the political debate. This paper assesses the quantitative importance of cross-country differences in labor market risks and social security institutions for euro area differences in private net wealth inequality. I document the empirical puzzle that euro area countries with the largest reduction in the income Gini coefficient through public transfers and with most generous welfare states, robustly show a higher inequality in private net wealth. Going back to the argument by Hubbard et al. (1995) that public insurance crowds out private savings especially of the poor, I construct a life cycle model with heterogeneous households and incomplete markets that features exogenous labor market risks, social transfers and public and occupational pensions. Calibrating the model to the actual euro area differences in the gross earnings process, unemployment dynamics and social security systems, it can account for 61.2% of the cross-country differences in the net wealth Gini coefficients for the bottom 95% of the wealth distribution. The model results suggest that welfare policies contribute with 47.3% to the wealth inequality differences across the euro area, while gross earnings inequality and unemployment can rationalize 13.9%.
    JEL: D31 D91 E21
    Date: 2016
  14. By: Andrea Caggese; Ander Perez
    Abstract: The widespread emergence of intangible technologies in recent decades may have significantly hurt output growth--even when these technologies replaced considerably less productive tangible technologies--because of structurally low interest rates caused by demographic forces. This insight is obtained in a model in which intangible capital cannot attract external finance, firms are credit constrained, and there is substantial dispersion in productivity. In a tangibles-intense economy with highly leveraged firms, low rates enable more borrowing and faster debt repayment, reduce misallocation, and increase aggregate output. An increase in the share of intangible capital in production reduces the borrowing capacity and increases the cash holdings of the corporate sector, which switches from being a net borrower to a net saver. In this intangibles-intense economy, the ability of firms to purchase intangible capital using retained earnings is impaired by low interest rates, because low rates increase the price of capital and slow down the accumulation of corporate savings.
    Keywords: Borrowing Constraints ; Capital Reallocation ; Intangible Capital ; Secular Stagnation
    JEL: E22 E43 E44
    Date: 2017–01–17
  15. By: Andersen, Torben M.; Bhattacharya, Joydeep
    Abstract: Many countries, in an effort to address the problem that too many retirees have too little saved up, impose mandatory contributions into retirement accounts, that too, in an age-independent manner. This is puzzling because such funded pension schemes effectively mandate the young, who wish to borrow, to save for retirement. Further, if agents are present-biased, they disagree with the intent of such schemes and attempt to undo them by reducing their own saving or even borrowing against retirement wealth. We establish a welfare case for mandating the middle-aged and the young to contribute to their retirement accounts, even with age-independent contribution rates. We find, somewhat counter-intuitively, that pitted against laissez faire, mandatory pensions succeed by incentivizing the young to borrow more and the middle-aged to save nothing on their own, in effect, rendering the latter's present-biasedness inconsequential.
    Date: 2016–09–26
  16. By: Hillebrand, Marten; Hillebrand, Elmar
    Abstract: This paper develops a dynamic general equilibrium model with an arbitrary number of different regions to study alternative climate policies and the consequences of climate change. Countries differ with respect to their state of economic development, factor endowments, and climate damages and trade on global markets for capital and exhaustible resources. Our main theoretical result derives an optimal climate policy consisting of an optimal emissions tax and an optimal transfer policy. The optimal climate tax can be determined explicitly in our framework and is independent of any weights attached to the interests of different countries. These weights only determine optimal transfers which distribute tax revenues across countries. We infer that the real political issue is not the amount of taxation required to reduce global warming but how the burden of climate change should be shared via transfer payments between different countries. To offer some guidance on this matter, we conduct a numerical simulation study which analyzes the optimal transfers between OECD and Non-OECD countries.
    JEL: H23 Q43 Q54
    Date: 2016
  17. By: Katsuhiro Oshima (Graduate School of Economics,Kyoto University)
    Abstract: Observing ultra-low interest yields in recent years, it is often pointed out that the existence of "search-for-yield" behaviors of nancial institutions might have been inten- sifying interest rate drops. One hypothesis to explain "search-for-yield" is that banks try to buy longer-term bonds even when they expect upward paths of the short-term interest rate and they recognize negative term premium in long-term rates because they care about current portfolio income, not just expected holding-period returns. A main purpose of this paper is to study implications about general equilibrium effects from the existence of banks with this type of "search-for-yield". Hanson and Stein (2015) give explanations about what these investors bring to the long-term interest rate pricing from their partial equilibrium model. I incorporate a similar setting to theirs into a general equilibrium model with banks exposed to the value at risk constraint. Implica- tions found here are as follows. First, the existence of these banks makes recovery path after negative productivity shock hits the economy more sluggish. Second, as Hanson and Stein (2015) suggest, we observe lower term premium in the long-term bond in- terest rate. Third, when the scal authority is more sensitive to the increase in bond outstanding, these impacts become smaller.
    Keywords: Business cycle, Irrationality, Yield-search, Long-term real rates, Value at Risk Constraint, Banks' asset allocation
    JEL: E32 E43 G11 G12
    Date: 2017–02
  18. By: Alice Albonico (Department of Economics, Management and Statistics, University of Milan-Bicocca); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: This paper investigates the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authorities are independent and play strategically. It shows that: (i) both the long run and the short run equilibrium require a departure from zero inflation rate; (ii) in response to a markup shock, fiscal policy becomes more aggressive as the fraction of liquidity constrained agents increases and price stability is no longer optimal even under Ramsey; (iii) overall, optimal discretionary policies imply welfare losses for Ricardians, while liquidity constrained consumers experience welfare gains with respect to Ramsey.
    Keywords: inflation bias, markup shocks, liquidity constrained consumers, optimal monetary and fiscal policy
    JEL: E3 E5
    Date: 2017–02
  19. By: Minford, Patrick; Wickens, Michael R.; Xu, Yongdeng
    Abstract: We propose a new type of test. Its aim is to test subsets of the structural equations of a DSGE model. The test draws on the statistical inference for limited information models and the use of indirect inference to test DSGE models. Using Monte Carlo experiments on two subsets of equations of the Smets-Wouters model we show that the model has accurate size and good power in small samples. In a test of the Smets-Wouters model on US Great Moderation data we reject the specification of the wage-price but not the expenditure sector, pointing to the first as the source of overall model rejection.
    Keywords: indirect inference; limited information; Monte Carlo; Power; sub sectors of models; test size; testing DSGE models equations
    Date: 2017–01
  20. By: Hofbauer, Florian; Fehr, Hans
    Abstract: This paper presents an overlapping generations model with occupational choice that allows for entrepreneurial exit, entry and investment decisions in the presence of idiosyncratic productivity risk and borrowing constraints. The model is applied to analyze the consequences of three pension reforms in Germany: A move towards a comprehensive paygo system, the introduction of flat benefits, and a funded pension system. Our simulation results indicate that pension systems directly affect occupational choice when households have a choice to avoid the implied tax burden. In addition, pension systems influence indirectly through changes in financial constraints and factor prices. Direct and indirect effects may neutralize each other and we are able to separate them quantitatively. We also document that the pension system might have opposite effects on different types of entrepreneurs. Quite surprisingly, some pension reforms increase labor input in the corporate sector and entrepreneurial activities at the same time. Finally, pension reforms have a strong impact on wealth inequality in our set up. Consequently, occupational choice and the pension system are strongly interrelated and more research is needed to understand this connection.
    JEL: C68 H55 J26
    Date: 2016
  21. By: Airaudo, Marco (School of Economics)
    Abstract: In the aftermath of the recent financial crisis, several central banks have resorted to "forward guidance" in monetary policy - that is, announcing publicly the future path of the short-term interest rate - to stimulate inflation and economic activity, and therefore move the economy away from the liquidity trap. Standard monetary models predict sizable stimulative effects of forward guidance, which are much in excess of what observed in the data and grow exponentially with the forward guidance horizon. This apparent disconnect between theory and data has been labeled by the literature as the forward guidance puzzle. We introduce temptation and dynamic-self-control preferences, as formalized by Gul and Pesendorfer (Econometrica 2002, 2004), into an otherwise standard New Keynesian model. In our set-up, the representative agent faces a temptation to liquidate his entire financial wealth for the purpose of immediate consumption. Resisting temptation involves cognitive effort (or self-control) and hence some disutility. Optimal behavior therefore trades of the temptation for immediate satisfaction with long-run optimal consumption smoothing. We show that, for suitable parameterizations, dynamic self-control preferences deliver a discounted Euler equation,lower households. sensitivity to real interest rates, and make the Phillips curve less forward-looking. These features combined help solve the puzzle. Moreover, they have stark implications for what concerns the conditions for equilibrium determinacy, the adverse effects of large negative shocks to the real interest rate, and the paradox of volatility.
    Keywords: Monetary Policy; New Keynesian Model; Forward Guidance; Temptation; Self-Control
    JEL: E31 E32 E43 E52 E58
    Date: 2017–02–07
  22. By: Minford, Patrick; Wickens, Michael R.; Xu, Yongdeng
    Abstract: Indirect inference testing can be carried out with a variety of auxiliary models. Asymptotically these different models make no difference. However, in small samples power can differ. We explore small sample power with three different auxiliary models: a VAR, average Impulse Response Functions and Moments. The latter corresponds to the Simulated Moments Method. We find that in a small macro model there is no difference in power. But in a large complex macro model the power with Moments rises more slowly with increasing misspecification than with the other two which remain similar.
    Keywords: Indirect Inference; DGSE model; Auxiliary models; Simulated Moments Method
    Date: 2017–01
  23. By: Timm Bönke; Daniel Kemptner; Holger Lüthen
    Abstract: In aging societies, information on how to reform pension systems is essential to policy makers. This study scrutinizes effects of early retirement disincentives on retirement behavior, individual welfare, pensions and public budget. We employ administrative pension data and a detailed model of the German tax and social security system to estimate a structural dynamic retirement model. We find that retirement behavior is strongly influenced by the level of disincentives. Further, disincentives come at the cost of increasing inequality and individual welfare losses. Still, net public returns are about three times as high as monetarized individual welfare losses. Our estimates also suggest that similar levels of net public returns, if achieved by indiscriminating pension cuts, are associated with individual welfare losses that are more than twice as high.
    Keywords: dynamic discrete choice, retirement, tax and pension system, pension reform
    JEL: C61 H55 J26
    Date: 2017
  24. By: J. Scott Davis; Ignacio Presno
    Abstract: Is there a link between capital controls and monetary policy autonomy in a country with a floating currency? Shocks to capital flows into a small open economy lead to volatility in asset prices and credit supply. To lessen the impact of capital flows on financial instability, a central bank finds it optimal to use the domestic interest rate to "manage" the capital account. Capital account restrictions affect the behavior of optimal monetary policy following shocks to the foreign interest rate. Capital controls allow optimal monetary policy to focus less on the foreign interest rate and more on domestic variables.
    Keywords: Capital controls ; Credit constraints ; Small open economy
    JEL: F32 F41 E52 E32
    Date: 2017–02
  25. By: Rudik, Ivan
    Abstract: Integrated assessment models (IAMs) are economists' primary tool for analyzing the optimal carbon tax. Damage functions, which link temperature to economic impacts, have come under fire because of their assumptions that may produce significant, and ex-ante unknowable misspecifications. Here I develop novel recursive IAM frameworks to model damage uncertainty. I decompose the optimal carbon tax into channels capturing parametric damage uncertainty, learning, and misspecificationconcerns. Damage learning and using robust control to guard against potentialmisspecifications can both improve ex-post welfare if the IAM's damage function is misspecified. However, these ex-post welfare gains may take decades or centuries to arrive.
    Date: 2016–11–13
  26. By: Roger E.A. Farmer
    Abstract: This paper explains the connection between ideas developed in my recent books and papers and those of economists who self-identify as Post Keynesians. My own work is both neoclassical and ‘old Keynesian’. Much of my published work assumes that people have rational expectations and that ‘animal spirits’ should be modeled as a new fundamental. I adopt a general equilibrium framework to model the macroeconomy. But although I write from a neo-classical tradition the themes I explore in my published writing have much in common with heterodox economics. This paper explains the common elements between these seemingly disparate traditions. I make the case for unity between Post-Keynesian and General Equilibrium Theory under the banner of Post-Keynesian Dynamic Stochastic General Equilibrium Theory.
    JEL: E0 E12
    Date: 2017–01
  27. By: Lemoine, Derek; Rudik, Ivan
    Abstract: Uncertainty is critical to questions about climate change policy. Recently developed recursive integrated assessment models have become the primary tool for studying and quantifying the policy implications of uncertainty. The first wave of recursive models has made valuable, pioneering efforts at analyzing disparate sources of uncertainty. We decompose the channels through which uncertainty affects policy and quantify them in a recursive extension of a benchmark integrated assessment model. We argue that frontier numerical methods will enable the next generation of recursive models to better capture the information structure of climate change and to thereby ask new types of questions about climate change policy
    Date: 2016–10–01

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