nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒04‒02
28 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Macroeconomic Dynamics in Korea during and after the Global Financial Crisis: A Bayesian DSGE Approach By Hyunju Kang; Hyunduk Suh
  2. Budget Rules and Resource Booms and Busts: A Dynamic Stochastic General Equilibrium Analysis By Sherman Robinson; Shantayanan Devarajan , Yazid Dissou , Delfin S. Go
  3. A penalty function approach to occasionally binding credit constraints By Marcin Kolasa; Michal Brzoza-Brzezina; Krzysztof Makarski
  4. Inflation and Real Wage Dispersion: A Model of Frictional Markets By Zhang, Min; Huangfu, Stella
  5. Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel By Kollmann, Robert
  6. The effects of productivity and benefits on unemployment: Breaking the link By Brown, Alessio J. G.; Kohlbrecher, Britta; Merkl, Christian; Snower, Dennis J.
  7. Firm Dynamics, Misallocation, and Targeted Policies By In Hwan JO; SENGA Tatsuro
  8. Intangible Capital and Measured Productivity By Ellen R. McGrattan
  9. Financial intermediation, resource allocation, and macroeconomic interdependence By Galip Kemal Ozhan
  10. Environmental Policy Instruments and Uncertainties Under Free Trade and Capital Mobility By Shreekar Pradhan; J. Scott Holladay; Mohammed Mohsin; Shreekar Pradhan
  11. How much Keynes and how much Schumpeter? An Estimated Macromodel of the US Economy By Cozzi, Guido; Pataracchia, Beatrice; Ratto, Marco; Pfeiffer, Philipp
  12. Redistributive effects of the US pension system among individuals with different life expectancy By Sanchez-Romero, Miguel; Fürnkranz-Prskawetz, Alexia
  13. Labor market reforms and current account imbalances - beggar-thy-neighbor policies in a currency union? By Timo Baas; Ansgar Belke
  14. Countercyclicality of financial crisis interventions in an open economy with credit constraint By Carmiña O. Vargas; Julian A. Parra-Polania
  15. Optimal Progressive Income Taxation in a Bewley-Grossman Framework By Juergen Jung; Chung Tran
  16. Durations at the Zero Lower Bound By Richard Dennis
  17. Macroeconomic policy coordination in the global economy: VAR and BVAR-DSGE analyses By Keshab Raj Bhattarai; Sushanta K. Mallick
  18. Labor market effects of Pension Reform : an overlapping generations general equilibrium model applied to Tunisia By Mouna Ben Othman; Mohamed Ali Marouani
  19. Fiscal sustainability under physical and human capital accumulation in an overlapping generations model By Takumi Motoyama
  20. PROSPECT THEORY AND SELF-FULFILLING MARKET SENTIMENTS By Giuseppe Ciccarone; Francesco Giuli; Enrico Marchetti
  21. The Interaction of Direct and Indirect Taxes: The Prospects of Fiscal Devaluation By Michael Stimmelmayr
  22. Trade Liberalization and the Costs and Benefits of Informality of Labor: An Intertemporal General Equilibrium Model for Egypt By Abeer Elshennawy; Dirk Willenbockel
  23. Sovereign risk and firm heterogeneity By Arellano, Cristina; Bai, Yan; Bocola, Luigi
  24. The Distribution of Optimal Liquidity for Economic Growth and Stability By PYO , Hak K.; Song , Saerang
  25. Welfare Cost of Inflation: The Role of Price Markups and Increasing Returns to Production Specialization By Chang, Juin-Jen; Lai, Ching-Chong; Liao, Chih-Hsing
  26. The Emergence of Market Structure By Maryam Farboodi; Gregor Jarosch; Robert Shimer
  27. Thomas Sargent face à Robert Lucas : une autre ambition pour la Nouvelle Economie Classique By Aurélien Goutsmedt
  28. An estimated two-country EA-US model with limited exchange rate pass-through By Gregory De Walque; Thomas Lejeune; Yuliya Rychalovska; Rafael Wouters

  1. By: Hyunju Kang (Korea Capital Market Institute); Hyunduk Suh (Department of Economics, Inha University)
    Abstract: We estimate a medium-scale DSGE model, including a financial accelerator and the search and matching framework in labor markets, for the Korean economy, using the Bayesian technique. The estimated model shows that the recent sluggishness in GDP growth can be explained by slow technology growth, and the decline in CPI inflation is affected by a falling markup in domestic homogeneous goods production and a negative intertemporal consumption preference. Although wages, unemployment, and total labor hours are influenced by various factors, households¡¯ weak bargaining power causes a slow recovery in wages, while pushing the unemployment rate down. There was also a spillover from non-big-5 to big-5 firms during the global financial crisis, while monetary and fiscal policy has been mostly conservative in the post-crisis period.
    Keywords: DSGE Model, Financial Frictions, Employment Frictions, Korean Economy
    JEL: C5 E3 E5 F4 G1
    Date: 2017–03
  2. By: Sherman Robinson; Shantayanan Devarajan , Yazid Dissou , Delfin S. Go
    Abstract: We develop a DSGE model to analyze and derive simple budget rules in the face of volatile public revenue from natural resources in a low-income country. We simulate the impact of resource windfalls and policy responses in a model that captures both the implications of current decisions on future growth and welfare, and the uncertainty that is intrinsic to resource prices. We ask: What rules-of-thumb does dynamic stochastic general equilibrium (DSGE) analysis provide about budgetary spending of uncertain and fluctuating resource windfalls, especially in low-income and newly resource rich developing?Our simulation results suggest three policy lessons or rules of thumb. (1) When a resource price change is positive and temporary, the best strategy is to save the revenue windfall in a sovereign fund, and use the interest income from the fund to raise citizens’ consumption over time. This strategy is preferred to investing in public capital domestically, even when private investment benefits from an enhanced public capital stock. (2) In the presence of a negative temporary resource price change however, the best strategy is to cut public investment. (3) In the presence of persistent (positive and negative) shocks, the best strategy is to combine both public investment and saving abroad in a balanced regime that provides a natural insurance against both types of price shocks.
    Keywords: Niger, Optimization models, General equilibrium modeling
    Date: 2015–07–01
  3. By: Marcin Kolasa; Michal Brzoza-Brzezina; Krzysztof Makarski
    Abstract: A substantial part of the literature using dynamic stochastic general equilibrium (DSGE) models features financial frictions in the form of credit constraints. In this concept some agents (entrepreneurs or households) are limited in their borrowing capacity by the amount of collateral that they can provide to the lender. The constraint is assumed to be eternally binding, which facilitates the model solution as standard perturbation techniques can be applied. A number of papers used this approach to model frictions in the housing market. However, while conceptually and computationally attractive, the eternally binding constraint (EBC) setup suffers from a major shortcoming. The permanent nature of collateral constraints generates strong, short-lived and symmetric reactions of macroeconomic variables to shocks. This means in particular that the EBC modeling strategy does not allow to distinguish between “normal” and “stress” periods. This model feature seems inconsistent with empirical evidence, which shows that residential investment, housing stock, change in mortgage loans and house price inflation are all skewed downwards, i.e. left tail events are relatively more frequent. This suggests either that shocks affecting the housing market are asymmetric, or that it responds to symmetric shocks in a skewed fashion. In this paper we consider a model in which asymmetries emerge endogenously from constraints facing the agents. The discussion presented above suggests that the collateral constraints should not be applied in a permanently and symmetrically binding fashion. A preferred specification would feature constraints that do not matter under normal circum-stances (from the modeling perspective: in the vicinity of the steady state), but become binding occasionally, i.e. during episodes of unfavorable economic conditions (e.g. after a series of negative macroeconomic or financial shocks). The idea of occasionally binding constraints (OBC) is not new. However, given their highly non-linear nature, they should ideally be solved with global methods. Due to the curse of dimensionality, however, these can be applied only to relatively small models with a limited number of state variables. In spite of the progress achieved in the area of global solution techniques in recent years, such methods are still out of range for models of the size used for practical policymaking, i.e. featuring a number of real and nominal rigidities. Adding these frictions seems indispensable when the models are to be applied for instance for analyzing business cycle consequences of macroprudential policies. For such models, local solution methods are still the only feasible option. For these reasons, we thoroughly investigate a potentially attractive shortcut to approximate occasionally binding constraints, i.e. the so-called barrier or penalty function method. This approach essentially consists in converting inequality constraints into equality constraints, making the use of standard perturbation techniques possible. To this end, we construct a DSGE model with a standard set of rigidities and collateral constraints, except that the latter are introduced in the form of a smooth penalty function. We parametrize the model in such a way that the constraint does not play an important role close to the steady state, but becomes binding when the economy is hit by sufficiently large negative shocks. Next, we investigate the main features of the model both under per-fect foresight and in a stochastic setting using its local approximations of various orders. Our main findings are as follows. First, the introduction of occasionally binding con-straints via the penalty function approach allows to generate asymmetric and non-linear reactions of the economy to shocks. Second, this feature can be also reproduced for local approximations, though only for orders higher than two. Third, and less optimistic, stochastic simulations for 2nd, 3rd and 4th order approximations suffer from serious stability problems that make them inapplicable in practice. Approximations of order higher than four are, on the other hand, prohibitively expensive in terms of storing and computing power for medium-sized business cycle models. All in all, while being practical for non-stochastic models, the penalty function approach unfortunately fails to fulfill our expectations in a stochastic environment. This makes it an attractive way of introducing financial frictions into deterministic models like GEM or EAGLE. However, a fully-fledged application in a realistic stochastic framework seems currently out of range.
    Keywords: general, United States, General equilibrium modeling, Modeling: new developments
    Date: 2015–07–01
  4. By: Zhang, Min; Huangfu, Stella
    Abstract: Current Population Survey (CPS) data over the period from 1994 - 2008 shows that inflation has a positive effect on the residual wage dispersion. To explain this phenomenon, we introduce uncoordinated job searches into a general equilibrium monetary search framework. Our model shows that the uncoordinated job searches by unemployed workers give rise to an equilibrium where a firm is matched with zero, one or multiple job applicants. The ex post dfference in matching probabilities generates a two-point wage dispersion among identical workers when the Mortensen rule is implemented in the wage determination process. In our model, inflation positively influences the wage dispersion directly through its impact on firm's real profit and indirectly through the effect of inflation that spills over from the goods market to the labor market. With reasonable parameter values, the calibrated model can account for most of the observed responses of residual wage dispersion to inflation..
    Keywords: Inflation, Residual Wage Dispersion, Uncoordinated Job Search, Spillover Effect
    Date: 2016–05
  5. By: Kollmann, Robert
    Abstract: The business cycles of advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple model of a two-country, two-traded good, complete-financial-markets world in which country-specific productivity shocks generate business cycles that are highly correlated internationally. The model assumes recursive intertemporal preferences (Epstein-Zin-Weil), and a muted response of labor hours to household wealth changes (due to Greenwood-Hercowitz-Huffman period utility and demand determined employment under rigid wages). Recursive intertemporal preferences magnify the terms of trade response to country specific shocks. Hence, a productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country's terms of trade, which raises foreign labor demand. With a muted labor wealth effect, foreign labor and GDP rise, i.e. domestic and foreign real activity comove positively.
    Keywords: international business cycle synchronization; real exchange rate; recursive preferences; terms of trade; wealth effect on labor supply
    JEL: F31 F32 F36 F41 F43
    Date: 2017–03
  6. By: Brown, Alessio J. G.; Kohlbrecher, Britta; Merkl, Christian; Snower, Dennis J.
    Abstract: In the standard macroeconomic search and matching model of the labor market, there is a tight link between the quantitative effects of (i) aggregate productivity shocks on unemployment and (ii) unemployment benefits on unemployment. This tight link is at odds with the empirical literature. We show that a two-sided model of labor market search where the household and firm decisions are decomposed into job offers, job acceptances, firing, and quits can break this link. In such a model, unemployment benefits affect households' behavior directly, without having to run via the bargained wage. A calibration of the model based on U.S. JOLTS data generates both a solid amplification of productivity shocks and a moderate effect of benefits on unemployment. Our analysis shows the importance of investigating the effects of policies on the households' work incentives and the firms' employment incentives within the search process.
    Keywords: unemployment benefits,search and matching,aggregate shocks,macro models of the labor market
    JEL: E24 E32 J63 J64
    Date: 2017
  7. By: In Hwan JO; SENGA Tatsuro
    Abstract: Access to external finance is a major obstacle for small and young firms. Thus, providing subsidized credit to small and young firms is a widely used policy option across countries. We study the impact of such targeted policies on aggregate output and productivity and highlight indirect general equilibrium effects. To do so, we build a model of heterogeneous firms with endogenous entry and exit, wherein each firm may be subject to a forward-looking collateral constraint for external borrowing. Subsidized credit alleviates credit constraints facing small and young firms, which helps them achieve an efficient and larger scale of production. This direct effect, however, is either reinforced or offset by indirect general equilibrium effects. Factor prices increase as subsidized firms demand more capital and labor. As a result, higher production costs induce more unproductive incumbents to exit, while replacing them selectively with productive entrants. This cleansing effect reinforces the direct effect by enhancing the aggregate productivity. However, the number of firms in operation decreases in equilibrium, and this, in turn, depresses the aggregate productivity.
    Date: 2017–03
  8. By: Ellen R. McGrattan
    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 in- vestments, 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.
    JEL: D57 E32 O41
    Date: 2017–03
  9. By: Galip Kemal Ozhan
    Abstract: This paper studies the role of the financial sector in a↵ecting domestic resource allocation and cross-border capital flows. I develop a quantitative, two-country, macroeconomic model in which banks face endogenous and occasionally binding leverage constraints. Banks lend funds to be invested in tradable or non-tradable sector capital and there is international financial integration in the market for bank liabilities. I focus on news about economic fundamentals as the key source of fluctuations. Specifically, in the case of positive news on the valuation of non-traded sector capital that turn out to be incorrect at a later date, the model generates an asymmetric, belief-driven boom-bust cycle that reproduces key features of the recent Eurozone crisis. Bank balance sheets amplify and propagate fluctuations through three channels when leverage constraints bind: First, amplified wealth e↵ects induce jumps in import-demand (demand channel). Second, changes in the value of non-tradable sector assets alter bank lending to tradable sector firms (intra-national spillover channel). Third, domestic and foreign households re-adjust their savings in domestic banks, and capital flows further amplify fluctuations (international spillover channel). A common central bank’s unconventional policies of private asset purchases and liquidity facilities in response to unfulfilled expectations are successful at ameliorating the economic downturn. JEL Classification: E44, F32, F41, G15, G21
    Keywords: Bank Lending, Belief-Driven Dynamics, Current Account, Macroeconomic Interdependence
    Date: 2016–10
  10. By: Shreekar Pradhan; J. Scott Holladay; Mohammed Mohsin; Shreekar Pradhan
    Abstract: We analyze the properties of environmental policy instruments in the face of uncertainty for an economy that is open to international trade and capital mobility (open economy). We incorporate three static environmental policy instruments which could be inefficient: cap-and-trade, pollution tax and emission intensity standard in our model and evaluate their properties under an exogenous temporary productivity shocks to simulate business cycles and an exogenous temporary abatement cost shock to represent reduced costs of clean inputs (for example cheap natural gas due to fracking). We then compare impacts on welfare, pollution levels, outputs, consumption, investment, supply of labor and trade flows in the economy. To date this literature has either focused on either economies under autarky or in a static modeling framework with a focus on strategic interaction among agents and thus ignore an additional channel of international trade and capital mobility that may smooth the intensity of business cycle shock or abatement cost breakthrough. We develop a small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model where we incorporate international trade and capital mobility. We evaluate long term properties and use DYNARE to evaluate short term (dynamic) properties. Our results suggest that the preferred environmental policy instrument varies with the source of uncertainty. The cap-and-trade policies are best suited to smooth the business cycle while pollution taxes and intensity targets are most effective in the face of abatement cost shocks. We find that the magnitude of the productivity shock's impact on the economy swamps the impact of an abatement cost shock. This suggests that a cap-and-trade policy, which performs best in the face of productivity shocks, should be the preferred policy instrument in most cases. In our model, calibrated to Canadian data, a one standard deviation productivity shock has nearly an order of magnitude larger impact than a one standard deviation abatement cost shock.
    Keywords: Canadian Economy, Energy and environmental policy, Business cycles
    Date: 2015–07–01
  11. By: Cozzi, Guido; Pataracchia, Beatrice; Ratto, Marco; Pfeiffer, Philipp
    Abstract: The macroeconomic experience of the last decade stressed the importance of jointly studying the growth and business cycle fluctuations behavior of the economy. To analyze this issue, we embed a model of Schumpeterian growth into an estimated medium-scale DSGE model. Results from a Bayesian estimation suggest that Investment risk premia are a key driver of the slump following the Great Recession. Endogenous innovation dynamics amplifies financial crises and helps explain the slow recovery. Moreover, financial conditions also account for a substantial share of R&D Investment dynamics.
    Keywords: Endogenous growth; New Keynesian Economics; R&D; Schumpeterian Growth; Bayesian Estimation.
    JEL: E32 O3 O33 O42
    Date: 2017–02–03
  12. By: Sanchez-Romero, Miguel; Fürnkranz-Prskawetz, Alexia
    Abstract: We investigate the differential impact that pension systems have on the labor supply and the accumulation of physical and human capital for individuals that differ by their learning ability and levels of life expectancy. Our analysis is calibrated to the US economy using a general equilibrium model populated by overlapping generations, in which all population groups interact through the pension system, the labor market, and the capital market. Within our framework we analyze the redistributive and macroeconomic effects of a progressive versus a flat replacement rate of the pension system.
    Keywords: Human capital,Longevity,Inequality,Life cycle,Social Security
    JEL: E24 J10 J18 H55
    Date: 2017
  13. By: Timo Baas; Ansgar Belke
    Abstract: Member countries of the European Monetary Union (EMU) initiated wide-ranging labor market reforms in the last decade. This process is ongoing as countries that are faced with serious labor market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. Among observers, however,there are fears about a beggar-thy-neighbor policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. By analyzing the impact of reforms on foreign debt, we contribute to the debate on whether labor market reforms increase or reduce current account imbalances. Using a two-country, two-sector search and matching DSGE model, we analyze the impact of labor market reforms on the transmission of macroeconomic shocks in both, non-reforming and reforming countries.In the case of a positive technology shock hitting a reforming country with the characteristics of a typical EMU member, fears about a beggar-thy-neighbor cannot be corroborated by us for the specic bundle of reforms considered. The positive effect of a reduction in the replacement rate more than compensates negative spillovers from increases in matching ef- ciency and a decrease in vacancy posting costs. This does not hold for a negative productivity shock in the non-reforming country, as the second reform measure, a reduction in vacancy posting costs in the tradable sectors,is dominating the overall impact of labor market reforms and, thus, increasing the foreign debt of the non-reforming country.
    Keywords: Eurozone, Business cycles, Labor market issues
    Date: 2015–07–01
  14. By: Carmiña O. Vargas (Banco de la República de Colombia); Julian A. Parra-Polania (Banco de la República de Colombia)
    Abstract: In an open-economy model with collateral constraint, Schmitt-Grohé and Uribe (2016) propose a procyclical policy (it calls for capital controls that are higher during crises than during normal times) that supposedly solves the externality problem that results from the underestimation of the social costs of decentralized debt decisions. We show that such policy does not solve the problem and recall that previous literature has established that a countercyclical tax on debt (positive during normal times and nil during crisis) does. We also show that the externality problem can be solved as well by a countercyclical subsidy on consumption (positive during crises and zero in normal times). The latter result, however, is not a robust policy recommendation because it is not a solution if we remove the assumption that lenders overlook the effect of lump-sum taxes on borrowing capacity. Classification JEL: F34, F41, G01, H23, D62
    Keywords: credit constraint; financial crisis; policy cyclicality; capital controls; macroprudential
    Date: 2017–03
  15. By: Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University)
    Abstract: We study the optimal progressivity of income taxation in a Bewley-Grossman model of health capital accumulation where individuals are exposed to earnings and health risks over the lifecycle. We impose the U.S. tax and transfer system and calibrate the model to match U.S. data. We then optimize the progressivity of the income tax code. The optimal income tax system is more progressive than current U.S. income taxes with zero taxes at the lower end of the income distribution and a marginal tax rate of over 50 percent for income earners above US$ 200,000. The Suits index—a Gini coefficient for the income tax contribution by income—is around 0.53 and much higher than 0.17 in the U.S. benchmark tax system. Welfare gains from switching to the optimal tax system amount to over 5 percent of compensating consumption. Moreover, we find that the structure of the health insurance system affects the degree of optimal progressivity of the income tax system. The introduction of Affordable Care Act in 2010—a program that redistributes wealth from high income and healthy types, to low income and sicker types—reduces the optimal progressivity level of the income tax system. Finally, we demonstrate that the optimal tax system is sensitive to the parametric specification of the income tax function and the transfer policy.
    Keywords: Health risk, inequality, tax progressivity, Suits index, social insurance, optimal tax, general equilibrium.
    JEL: E62 H24 I13 D52
    Date: 2017–03
  16. By: Richard Dennis
    Abstract: Many central banks in developed countries have had very low policy rates for quite some time. A growing number are experimenting with official rates that are negative. We develop a New Keynesian model in which the zero lower bound (ZLB) on nominal interest rates is imposed as an occasionally binding constraint and use this model to examine the duration of ZLB episodes. In addition, we show that capital accumulation and capital adjustment costs can raise significantly the length of time an economy spends at the ZLB, as can the conduct of monetary policy. We identify anticipation effects that make the ZLB more likely to bind and we show that allowing negative nominal interest rates shortens average durations, but only by about one quarter.
    Keywords: Monetary policy, zero lower bound, new Keynesian
    JEL: E3 E4 E5
    Date: 2017–03
  17. By: Keshab Raj Bhattarai; Sushanta K. Mallick
    Abstract: Impulse response and variance decomposition estimations are similar in traditional VAR (1) and BVAR-DSGE models but the later model can provide theoretical and structural reasons behind those estimations. In the context of growth competition and spill over effects of policies, it is important to quantify such positive or complementary from negative or competitive impacts so that appropriate actions could be taken for policy coordination. Cooperative mechanism should be structured based on these analysis and evaluation of likely scenarios in coming years. Analysis of business cycle results from the VAR and BVAR-DSGE models illustrate the degree of interactions and interdependence in the global economy in the short to medium runs. Impulse response and variance decomposition estimations are similar in traditional VAR (1) and BVAR-DSGE models but the later model can provide theoretical and structural reasons behind those estimations. In the context of growth competition and spill over effects of policies, it is important to quantify such positive or complementary impacts from negative or competitive impacts so that appropriate actions could be taken for policy coordination. Cooperative mechanism should be structured based on these analysis and evaluation of likely scenarios in coming years. First two models in this paper illustrated how interactions and interdependence could be studied using VAR and BVAR-DSGE models of India and the US. Then strategic macroeconomic policy coordination and interdependence were studied strategically with VAR models of China, India, Germany, UK and the US estimated using the quarterly time series of growth rates. Persistency and conditional dependencies are observed and fluctuations around the average growth rates are compared across countries. Estimates show that there is a considerable growth competition among these countries. India's growth is influenced much by its fundamentals but slows down a bit when China, Germany, UK or US grow. In contrast China is able to absorb foreign growth to its benefit except that it competes with Germany. Germany's growth is more determined by its fundamentals and that of the US. Higher growth rates in other countries seem to lower it. Growth rate in the UK are positively related to the growth of Germany, UK and US but not related to that of India and China. The US growth rate are positively linked to that of India, the UK and the US growth itself.
    Keywords: India and USA, Modeling: new developments, Business cycles
    Date: 2015–07–01
  18. By: Mouna Ben Othman; Mohamed Ali Marouani
    Date: 2016
  19. By: Takumi Motoyama (Graduate School of Economics, Osaka University)
    Abstract: We consider fiscal sustainability by using an overlapping generations model with human capital accumulation (private and public education) and public debt. Based on this model, we explicitly show (i) the parameter region in which the economy cannot be fiscally sustainable for any initial endowment, and (ii) the threshold of initial endowment over (under) which the economy diverges (converges) to the steady state. Importantly, the threshold is neutral to the level of initial human capital. Further, we show the existence and uniqueness of the growth-maximizing level of each policy variable (i.e., the tax rate and public education/production ratio).
    Keywords: Human capital accumulation, Public education, Public debt, Fiscal sustainability
    JEL: E62 H52 H63 I28
    Date: 2017–03
  20. By: Giuseppe Ciccarone; Francesco Giuli; Enrico Marchetti
    Abstract: In this paper we present a novel channel through which the volatility of the monetary/financial sector affects the instability of the real macroeconomic variables originated by self-fulfilling market sentiments. To this aim, we insert some elements of Prospect Theory in the preferences of agents living in an overlapping generations economy where consumers’ heterogeneity and firms’ imperfect information on the level of aggregate demand allow market sentiments to affect the equilibrium path of the economy. In this environment, greater heterogeneity in the household’s narrow framing parameter favour the emergence of self-fulfilling equilibria by exacerbating the coordination problem generated by a pair-wise matching process in the labor market. Furthermore, higher volatility of the money market, by increasing the effect of Prospect Theory on households’ choices, makes the signal upon which firms form their demand schedules noisier; this, in its turn, generates greater variability in market sentiments and hence in real economic activity.
    Keywords: Prospect theory; Self-fulfilling equilibria; Sentiments; Behavioral macroeconomics.
    JEL: D84 E03 E32
    Date: 2017–03
  21. By: Michael Stimmelmayr
    Abstract: In this paper we derive the theoretical underpinning of fiscal devaluation (i.e. the reduction of direct taxes combined with a (revenue-neutral) increase in indirect taxes in order to mimic the real outcome of a nominal exchange rate devaluation.) in the framework of a neoclassical growth model. In addition, we calibrate the model to the German economy and quantify the effects associated with the fiscal devaluation carried out in Germany since 2005.A computable general equilibrium growth model calibrated to the German economy. The model accounts for endogenous production and labour supply as well as international trade.The simulation results show that due to the reform a significant amount of revenues were raised without generating a negative effect on economic growth. Further, the reform lead to a significant improvement of the trade balance (by around 3.1 percentage points in the short-run) thereby confirming the theoretical considerations associated with fiscal devaluation.
    Keywords: Germany, Public finance, Trade issues
    Date: 2015–07–01
  22. By: Abeer Elshennawy; Dirk Willenbockel
    Abstract: Utilizing an Intertemporal General Equilibrium model for Egypt, this paper seeks to analyze the interaction between informality of labor and trade liberalization. Although it is documented in the literature that trade liberalization can be associated with short run transitional unemployment, we find that in the presence of informal labor markets this seizes to occur. Informality thus reduces the adjustment costs to trade liberalization. Policy makers are thus encouraged to exploit the benefits of informality. Issues related to the sequencing of formalization and trade liberalization were also explored. In this regard, we find that it is not advisable that formalization precedes trade liberalization as the gains foregone by delaying trade policy reform are likely to dominate the outcome. See above See above
    Keywords: Egypt, Trade issues, General equilibrium modeling
    Date: 2015–07–01
  23. By: Arellano, Cristina (Federal Reserve Bank of Minneapolis); Bai, Yan (University of Rochester); Bocola, Luigi (Northwestern University)
    Abstract: This paper studies the recessionary effects of sovereign default risk using firm-level data and a model of sovereign debt with firm heterogeneity. Our environment features a two-way feedback loop. Low output decreases the tax revenues of the government and raises the risk that it will default on its debt. The associated increase in sovereign interest rate spreads, in turn, raises the interest rates paid by firms, which further depresses their production. Importantly, these effects are not homogeneous across firms, as interest rate hikes have more severe consequences for firms that are in need of borrowing. Our approach consists of using these cross-sectional implications of the model, together with micro data, to measure the effects that sovereign risk has on real economic activity. In an application to Italy, we find that the progressive heightening of sovereign risk during the recent crisis was responsible for 50% of the observed decline in output.
    Keywords: Sovereign debt crises; Firm heterogeneity; Financial frictions
    JEL: E44 F34 G12 G15
    Date: 2017–03–22
  24. By: PYO , Hak K. (Korea Institute for International Economic Policy); Song , Saerang (University of Wisconsin - Madison)
    Abstract: This research paper intends to redefine and extend the concept of 'optimal liquidity' discussed in Han and Lee (2012). For this purpose, we have distinguished between liquidity held by households and liquidity held by firms following Levhari and Patinkin (1968) and Yoo and Pyo (1986). Han and Lee (2012) have revised the 'money-in-utility' model by Walsh (2012) and derived the relationship between liquidity and consumption. In the present paper, we have extended Han and Lee (2012) to a 'money-in-utility-and-production' model. We have specified a DSGE model in which liquidity serves for both household utility and production input and have conducted the impulse-response analysis. The impulse-responses of most of important variables from the shock of TFP increase are consistent with the results of Bhattacharjee and Thoenissen (2007). On the other hand, the policy interest rate shows a hump-shaped impulse-response, which is consistent with the impulse response of monetary expansion in the cash-in-advance model. In addition, the increase in money supply has produced a kind of crowding-out effect reducing the share of liquidity held by firms. The main policy implication of our model is that not only the absolute level of optimal liquidity but also the relative distribution of the liquidity between households and firms are important determinant for economic growth and stability. In order to validate this proposition, we have conducted a panel regression analysis and have empirically verified the proposition that the relatively higher share of liquidity held by firms would contribute to both GDP growth and its stability.
    Keywords: Monetary Policy; Liquidity; DSGE; Panel Regression
    JEL: C32 E23 E40
    Date: 2015–12–28
  25. By: Chang, Juin-Jen; Lai, Ching-Chong; Liao, Chih-Hsing
    Abstract: Estimates of the welfare costs of moderate inflation are generally modest or small. This paper, by shedding light on increasing returns to production specialization, obtains a substantial welfare cost of 8% in an endogenous growth model of monopolistic competition with endogenous entry. Analytically, we show that the effect of inflation is aggravated (resp. alleviated) by a price markup if the degree of increasing returns to production specialization is relatively high (resp. low). Accordingly, our quantitative analysis indicates that the welfare cost of inflation exhibits an inverted U-shaped relationship with the price markup. This non-monotone is sharply in contradiction to the conventional notion. Nonetheless, the welfare cost of inflation is unambiguously increasing in the degree of increasing returns to production specialization.
    Keywords: Welfare cost of inflation, price markup, increasing returns to production specialization.
    JEL: E5 E52 O4 O42
    Date: 2017–03–21
  26. By: Maryam Farboodi; Gregor Jarosch; Robert Shimer
    Abstract: What market structure emerges when market participants can choose the rate at which they contact others? We show that traders who choose a higher contact rate emerge as intermediaries, earning profits by taking asset positions that are misaligned with their preferences. Some of them, middlemen, are in constant contact with other traders and so pass on their position immediately. As search costs vanish, traders still make dispersed investments and trade occurs in intermediation chains, so the economy does not converge to a centralized market. When search costs are a differentiable function of the contact rate, the endogenous distribution of contact rates has no mass points. When the function is weakly convex, faster traders are misaligned more frequently than slower traders. When the function is linear, the contact rate distribution has a Pareto tail with parameter 2 and middlemen emerge endogenously. These features arise not only in the (inefficient) equilibrium allocation, but also in the optimal allocation. Moreover, we show that intermediation is key to the emergence of the rest of the properties of this market structure.
    JEL: E44 G12 G20
    Date: 2017–03
  27. By: Aurélien Goutsmedt (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The article shows that Sargent's view of macroeconomics is in contrast with Lucas' one. According to the latter, assumptions in a model are un-realist, the model do not aim at representing reality. It is rather a simulation tool to enable the evaluation of different economic policies. The Lucasian ideal reflects a belief in a macroeconomist who is an engineer in charge of the production of a “software for economic policies” used by governmental authorities. And he is the one who handles the software to help policy choices on a scientific basis. Concerning Sargent, he believed that in order to replace the Keynesian paradigm, New Classical Economics had to be able to succeed in the same tasks. And one of these tasks was to advise political power by bringing some telescope to read current economic phenomenon and some intuitive ideas to debate on economic policy. Sargent sought to implement what he called the Rational Expectations Theory to some concrete cases (Poincaré Stabilization, German Hyperinflation, Thatcher and Reagan policies) to show the relevance of such a framework to think about current economic issues.
    Abstract: L'idée est de montrer que la vision de la macroéconomie de Sargent contraste avec celle de Lucas. Pour Lucas, les hypothèses d'un modèle sont « a-réalistes », le modèle ne vise pas à représenter la réalité. Il est un outil de simulation qui doit permettre de simuler différentes politiques économiques. L'idéal « lucassien » est celui d'un macroéconomiste qui a donc vocation à devenir un ingénieur chargé de fournir un « logiciel de politiques économiques » aux autorités publiques, logiciel qu'il manipule afin d'aiguiller les choix de politiques sur une base scientifique. Sargent, quant à lui, considère que pour suppléer le paradigme keynésien, la nouvelle économie classique doit être capable de remplir les mêmes tâches, et l'une de ces tâches est de conseiller le pouvoir en lui fournissant une grille de lecture des phénomènes économiques et des outils intuitifs pour d&eaute;battre des politiques économiques à mettre en place. Sargent cherche à appliquer ce qu'il nomme la théorie des anticipations rationnelles à un ensemble de cas concrets (stabilisation Poincaré, hyperinflation allemande, politique de Thatcher et Reagan) pour montrer la pertinence de ce cadre d'analyse pour penser les problèmes économiques contemporains.
    Keywords: Rational Expectations,New Classical Economics,Macroeconomics History,Histoire de la macroéconomie,Nouvelle Economie Classique,Anticipations rationnelles
    Date: 2017–02
  28. By: Gregory De Walque (NBB, Economics and Research Department); Thomas Lejeune (NBB, Economics and Research Department); Yuliya Rychalovska (University of Namur); Rafael Wouters (NBB, Economics and Research Department)
    Abstract: We develop a two-country New Keynesian model with sticky local currency pricing,distribution costs and a demand elasticity increasing with the relative price. These features help to reduce the exchange rate pass-through to import price at the border and down the chain towards consumption price, both in the short and the long run. Oil and imported goods enter at the same time as inputs in the production process and as consumption components. The model is estimated using Bayesian full information maximum likelihood techniques and based on real and nominal macroeconomic series for the euro area and the United States together with the bilateral exchange rate and oil prices. The estimated model is shown to perform well in an out-of-sample forecasting exercise and is able to reproduce most of the cross-series co-variances observed in the data. It is then used for forecast error variance decomposition and historical decomposition exercises.
    Keywords: Open-economy macroeconomics, DSGE models, exchange-rate pass through, Bayesian inference, forecasting, policy analysis
    JEL: C11 E32 E37 F41
    Date: 2017–03

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