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on Dynamic General Equilibrium |
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Issue of 2017‒03‒12
twenty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Hüseyin Çağrı Akkoyun; Yavuz Arslan; Mustafa Kılınç |
| Abstract: | Most of the international macro models, in contrast to the data, imply a very high level of risk sharing across countries and very low real exchange rate (RER) volatility relative to output. In this paper we show that a standard two-country two-good model augmented with conintegrated TFP processes comes closer to matching the data. We first show that the tradable and non-tradable total factor productivity (TFP) processes of the US and Europe have unit roots and can be modelled by a vector error correction model (VECM). Then, we develop a standard two-country and two-good (tradable and non-tradable) DSGE model and study the quantitative implications. Cointegrated TFP shocks, or trend shocks, generate significant income effects and amplify the mechanisms that produce high RER volatility. Moreover, trend shocks can break the tight link between relative consumption and RER for low and high values of trade elasticity parameters. |
| Keywords: | trends shocks, risk sharing, real exchange rates |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:613&r=dge |
| By: | McGrattan, Ellen R. (Federal Reserve Bank of Minneapolis) |
| Abstract: | Because firms invest heavily in R&D, software, brands, and other intangible assets—at a rate close to that of tangible assets—changes in measured GDP, which does not include all intangible investments, understate the actual changes in total output. If changes in the labor input are more precisely measured, then it is possible to observe little change in measured total factor productivity (TFP) coincidentally with large changes in hours and investment. This mismeasurement leaves business cycle modelers with large and unexplained labor wedges accounting for most of the fluctuations in aggregate data. To address this issue, I incorporate intangible investments into a multi-sector general equilibrium model and parameterize income and cost shares using data from an updated U.S. input and output table, with intangible investments reassigned from intermediate to final uses. I employ maximum likelihood methods and quarterly observations on sectoral gross outputs for the United States over the period 1985–2014 to estimate processes for latent sectoral TFPs—that have common and sector-specific components. Aggregate hours are not used to estimate TFPs, but the model predicts changes in hours that compare well with the actual hours series and account for roughly two-thirds of its standard deviation. I find that sector-specific shocks and industry linkages play an important role in accounting for fluctuations and comovements in aggregate and industry-level U.S. data, and I find that the model’s common component of TFP is not correlated at business cycle frequencies with the standard measures of aggregate TFP used in the macroeconomic literature. |
| Keywords: | Business cycles; Total factor productivity; Intangible investments; Input-output linkages |
| JEL: | D57 E32 O41 |
| Date: | 2017–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:545&r=dge |
| By: | Chen, Hongyi; Funke, Michael; Lozev, Ivan; Tsang, Andrew |
| Abstract: | This paper discusses the macroeconomic effects of China’s informal banking regulatory tool “win-dow guidance,” introduced in 1998. Using an open-economy DSGE model that includes the com-mercial banking sector, we study the stabilizing effects of this non-standard quantitative monetary policy tool and the implications of quantity-based vs. price-based monetary policy instruments for welfare. The analyses are relevant to the current overhaul of Chinese monetary policy. |
| JEL: | C61 E32 E44 E52 |
| Date: | 2017–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2017_003&r=dge |
| By: | Stefano Bosi (EPEE - Université d'Evry); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics, IPAG Business School and VCREME); Ngoc-Sang Pham (Centre d'Economie de la Sorbonne and EPEE - Université d'Evry) |
| Abstract: | We build dynamic general equilibrium models with heterogeneous producers and financial market imperfections. First, we prove the existence of equilibrium. Second, we investigate the role of financial market imperfection in growth and land prices. Third, we introduce land dividends, then define and study land bubbles as well as individual land bubbles |
| Keywords: | Infinite horizon; general equilibrium; financial market imperfection; incomplete markets; asset valuation; rational bubbles |
| JEL: | C62 D53 D9 E44 G10 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:15067r&r=dge |
| By: | Javier Andrés; José E. Boscá; Javier Ferri; Cristina Fuentes-Albero |
| Abstract: | This paper develops a model with heterogeneous households in terms of net worth and collaterizable assets. Using sample weights estimated from the PSID, we show that balancesheet heterogeneity is key to characterizing the aggregate effects of government spending along different dimensions. We find that: (i) the response of individual consumption to a government spending shock is negatively correlated with household’s net worth and also depends on her access to mortgage and non-mortgage credit, which implies that the size of the fiscal multiplier is sensitive to the distribution of household types; (ii) the response of aggregate employment is negatively correlated with the share of impatient households; as the weight of these households in total population increases firms rely more on adjustments in the intensive margin to meet the fiscal induced boost in aggregate demand, thus generating jobless recoveries; (iii) the output multiplier is positively correlated with wealth inequality; and (iv) while a government spending shock has a welfare cost for wealthy households, it delivers a welfare gain for constrained households. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2017-05&r=dge |
| By: | Ngotran, Duong |
| Abstract: | Using the sparse grid, we solve a DSGE model where there are two types of electronic money: reserves (e-money that is issued by the central bank for banks) and zero maturity deposits (e-money that is issued by banks). Transactions between bankers are settled by reserves, while transactions in the non-bank private sector are settled by zero maturity deposits. We use our model to discuss about unconventional monetary policy tools during the Great Recession. Due to the maturity mismatch between deposits and loans, we find that keeping the federal funds rate at the lower bound for a long but finite time stimulates the economy in the short run but creates deflation and lower outputs in the long run. To get out of the zero lower bound, the central bank can conduct helicopter money and increase the interest rate paid on reserves simultaneously, which is impossible in the Keynesian theory, but possible with the current electronic money system. |
| Keywords: | e-money, reserves, quantitative easing, zero lower bound, interest on reserves, helicopter money |
| JEL: | E4 E40 |
| Date: | 2016–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77206&r=dge |
| By: | Goldstein, Joshua R.; Koulovatianos, Christos; Li, Jian; Schröder, Carsten |
| Abstract: | We compare the cost effectiveness of two pronatalist policies: (a) child allowances; and (b) daycare subsidies. We pay special attention to estimating how intended fertility (fertility before children are born) responds to these policies. We use two evaluation tools: (i) a dynamic model on fertility, labor supply, outsourced childcare time, parental time, asset accumulation and consumption; and (ii) randomized vignette-survey policy experiments. We implement both tools in the United States and Germany, finding consistent evidence that daycare subsidies are more cost effective. Nevertheless, the required public expenditure to increase fertility to the replacement level might be viewed as prohibitively high. |
| Keywords: | childcare,fertility,labor supply,vignette survey method,public policy |
| JEL: | J13 J18 J38 D91 C83 D10 C38 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:568&r=dge |
| By: | Tripathy, Jagdish (Bank of England) |
| Abstract: | This paper studies the effect of asset bubbles on economic growth in the presence of financial constraints and heterogeneous projects. I consider an economy with two sectors which differ in their productivity and the pledgeability of their output in financial markets. The first sector has low productivity and high levels of pledgeability (or low levels of financial constraints), whereas the second sector has higher productivity and lower levels of pledgeability. In this framework, asset bubbles raise interest rates and lower investment productivity by directing financial resources to the sector with lower financial constraints. Steady states in which asset bubbles lower investment productivity and consumption are termed bubbly growth-traps. |
| Keywords: | sset bubbles; credit misallocation; inefficient investments; growth traps |
| JEL: | O11 O16 O41 O43 |
| Date: | 2017–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0649&r=dge |
| By: | Haan, Peter; Haywood, Luke |
| Abstract: | We estimate a dynamic life-cycle model of labor supply with a focus on time preferences for women. We extend the dynamic discrete choice model to accommodate potentially non-exponential discounting. Variation in job protection regulations provides identifying variation to test time discounting, affecting future and not current payoffs. Reforms to job protection legislation in Germany constitute a natural experiment to identify the key time preference parameters of our model. We shed light on the importance of time-inconsistent preferences on maternal labor market return. The structure of time preferences will importantly affect cost and effectiveness of labor market policies. |
| JEL: | J24 D91 E24 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145751&r=dge |
| By: | Stijepic, Damir |
| Abstract: | In the present paper, I develop an on-the-job search model in which workers face both frictional and structural impediments to sorting. There are two key model predictions. First, versatility enhances the worker’s ability to sort into the most productive firms since a mismatch between the job requirements and the worker’s skill set is less likely to occur. Second, the larger the productivity differentials between the firms, the larger the returns to sorting and, hence, versatility. I test the latter hypothesis by exploiting industry variation in sales-per-worker dispersion across employers in the United States in 2007. An increase in the sales-per-worker standard deviation by ten log-points is, indeed, estimated to raise the above-median versatile worker’s relative wage by 11 to 21 log-points. I also provide supportive evidence from Germany. |
| JEL: | I26 J31 J24 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145710&r=dge |
| By: | Yongsung Chang (University of Rochester and Yonsei University); Yena Park (University of Rochester) |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:599&r=dge |
| By: | Legge, Stefan |
| Abstract: | What is the effect of population aging on the rate of innovation? In this paper, I examine a new channel and argue that demographic shifts affect the demand for innovative goods. In an overlapping-generations model, it is assumed that individuals must spend time on learning how to use new technology. This creates age-dependent demand structures because older individuals have limited time windows for investments to pay off. The result is that in an aging population a larger fraction of the population does not invest in acquiring new skills. The amount of R&D is reduced as demand for innovative goods falls. Using data from all OECD countries for the period 1978-2010, I find support for these theoretical predictions. Those countries that faced the largest demographic shifts experienced the sharpest growth reduction in patent applications. |
| JEL: | J11 J31 O41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145590&r=dge |
| By: | Tomoyuki Nakajima (Institute of Economic Research, Kyoto University); Shuhei Takahashi (Institute of Economic Research, Kyoto University) |
| Abstract: | Japan's net government debt reached 130% of GDP in 2013. The present paper analyzes the welfare implications of the large debt for Japan. We use a heterogeneous- agent, incomplete-market model with idiosyncratic wage risk and endogenous labor supply. We nd that under the utilitarian welfare measure, the optimal government debt for Japan is 50% of GDP and the current level of debt incurs the welfare cost that is 0.22% of consumption. Decomposing the welfare cost reveals substantial wel- fare e¤ects arising from changes in the level, inequality, and uncertainty. The level and inequality costs are 0.38% and 0.52% respectively, whereas the uncertainty bene t is 0.68%. Adjusting consumption taxes instead of factor income taxes to balance the gov- ernment budget reduces the welfare cost of the current debt, whereas the indivisibility of labor increases the cost. |
| Keywords: | Government debt; welfare; incomplete markets; inequality; uncertainty; Japanese economy. |
| JEL: | E62 H63 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:964&r=dge |
| By: | Mann, Katja; Davenport, Margaret |
| Abstract: | This paper studies the effect of population aging on portfolio choice, asset prices and international asset trades. In a multi-period OLG model, we analyze how an increase in longevity or a decrease in fertility in a country affects the demand for safe and risky assets. In a closed economy, given a fixed supply, the riskfree rate falls and the risk premium rises, because retirees prefer to hold a larger share of safe assets in their portfolio than working-age households. In a financially integrated world, countries with more extreme demographic trends export risky assets and import safe assets. We quantify these effects for the United States. |
| JEL: | G11 G15 J11 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145948&r=dge |
| By: | Gehringer, Agnieszka; Prettner, Klaus |
| Abstract: | We analyze the impact of increasing longevity on technological progress within a simple R&D-based growth framework with overlapping generations and test the model's implication on OECD data from 1960 to 2011. The central hypothesis derived in the theoretical part is that - by raising the incentives of households to invest in physical capital and in R&D - decreasing mortality positively impacts upon technological progress and productivity growth. The empirical results clearly confirm the theoretical prediction. This implies that the demographic changes we observed in industrialized economies over the last decades were not detrimental to economic prosperity, at least as far as technological progress and productivity growth are concerned. |
| JEL: | J11 O11 O41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145482&r=dge |
| By: | Kazuya Kamiya (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Hajime Kobayashi (Kansai University, Japan); Tatsuhiro Shichijo (Osaka Prefecture University, Japan); Takashi Shimizu (Kobe University, Japan) |
| Abstract: | It is known that there exists a multiplicity (indeterminacy) of stationary equilibria in search models with divisible money. This paper investigate whether some specific stationary equilibrium is selected through economic experiments. We observe that in some treatments there is a tendency to converge to the most efficient equilibrium. However, as a whole, there remains some degree of indeterminacy. |
| Keywords: | Real Indeterminacy, Random Matching, Money, Experiment, Equilibrium Selection. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2017-03&r=dge |
| By: | Nimark, Kristoffer P |
| Abstract: | In models where privately informed agents interact, they may need to form higher-order expectations, i.e. expectations about other agents' expectations. In this paper we prove that there exists a unique equilibrium in a class of linear dynamic rational expectations models in which privately informed agents form higher order expectations. We propose an iterative procedure that recursively computes increasing orders of expectations. The algorithm is a contraction mapping, and the implied dynamics of the endogenous variables converge to the unique equilibrium of the model. The contractive property of the algorithm implies that, in spite of the fact that the model features an infinite regress of expectations, the equilibrium dynamics of the model can be approximated to an arbitrary accuracy with a finite-dimensional state. We provide explicit bounds on the approximation errors. These results hold under quite general conditions: It is sufficient that agents discount the future and that the exogenous processes follow stationary (but otherwise unrestricted) VARMA processes. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11863&r=dge |
| By: | Groneck, Max; Schön, Matthias; Wallenius, Johanna |
| Abstract: | In this paper, we study the intra-generational redistribution of the U.S. social security system in a dynamic, structural life cycle model of couples with uncertain marital status and survival risk. We focus particularly on auxiliary benefits, namely spousal and survivor benefits, where eligibility is directly linked to marital status. We show that marital stability increases strongly with income, leading to redistribution from the bottom to the top. We evaluate the impact of auxiliary social security benefits on both the poverty rate of the elderly and on household labor supply. |
| JEL: | J26 E62 D91 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145801&r=dge |
| By: | Patrick J. Kehoe (; Centre for Macroeconomics (CFM)) |
| Abstract: | Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance across member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies. |
| Keywords: | Cross-country Externalities, Cross-country Insurance, Cross-country Transfers, Fiscal Externalities, International Financial Markets, International Transfers, Optimal Currency Area |
| JEL: | E60 E61 F33 F35 F38 F42 G15 G28 G33 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1712&r=dge |
| By: | Keiichiro Kobayashi; Daichi Shirai |
| Abstract: | Economic growth slows for an extended period after a financial crisis. We construct a model in which the one-time buildup of debt can depress the economy persistently even when there is no shock on financial technology. We consider the debt dynamics of a firm under an endogenous borrowing constraint. When the initial debt is large, the borrowing constraint binds tight and production is inefficient for an extended period. A firm is called debt-ridden when it owes the maximum sustainable amount of debt. A debt-ridden firm pays all income every period as the interest payment on the debt. A noticeable result in the deterministic case is that a debt-ridden firm continues inefficient production permanently. Further, if the initial debt exceeds a certain threshold, the firm chooses to increase borrowing and become debt-ridden intentionally. The emergence of a substantial number of debt-ridden firms lowers economic growth persistently by reducing the growth rate of aggregate productivity. As lenders have no incentive to reduce debt, a policy intervention that provides debtridden borrowers with relief from excessive debt may thus be necessary to restore economic growth. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:17-002e&r=dge |
| By: | Koelle, Michael |
| Abstract: | I look at the dynamics of firms when investment decisions interact with occupational choice. To model the implications for firm survival and growth, I extend a neoclassical growth model by an endogenous shutdown condition that is driven by the reservation wage in alternative employment. This model is able to generate multiple steady-state equilibria that arise through convexities in the optimal growth path of a firm. I provide empirical evidence consistent with the model predictions using panel data from urban Colombia. I also structurally estimate the model to identify the wage function in a way that is robust to occupational choices being driven by particular wage offers that are observed as subsequent outcomes. The findings are useful for understanding heterogeneous economic decisions of the large number of self-employed small firm owners in developing countries. |
| JEL: | J24 L26 O10 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145813&r=dge |