nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒04‒09
27 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Business Cycle Dynamics and Macroprudential Policy Through the Lens of the Aino Model - A Micro-Founded Small Open Economy DSGE Mo By Fabio Verona; Juha Kilponen; Seppo Orjasniemi; Antti Ripatti
  2. Does foreign sector help forecast domestic variables in DSGE models? By Marcin Kolasa; Michal Rubaszek
  3. Money, inflation, and unemployment in the presence of informality By Mohammed Aït Lahcen
  4. Impact Evaluation of Scenario with Local Currencies: DSGE Model By Katerina Gawthorpe
  5. Estimated Small Multiple Regions Dynamic Stochastic General Equilibrium Model By Bulat Mukhamediyev; Mukhamediyev Bulat
  6. Capital controls and foreign currency denomination By Fernando Garcia-Barragan; Guangling Liu
  7. Directed Search with Phantom Vacancies By James Albrecht; Bruno Decreuse; Susan Vroman
  8. Dynamic scoring of tax reforms in the European Union By Barrios Cobos, Salvador; Dolls, Mathias; Maftei, Anamaria; Peichl, Andreas; Riscado, Sara; Varga, Janos; Wittneben, Christian
  9. Co-movement Puzzle and the Overlapping Roles of Consumer Durables and Capital By Sayed Mehdi Naji Esfahani
  10. Optimal Fiscal Simple Rules for Small and Large Countries of a Monetary Union By Paulo Vieira; Celsa Machado; Ana Paula Ribeiro
  11. The Government Spending Multiplier in a (Mis-)Managed Liquidity Trap By Jordan Roulleau-Pasdeloup
  12. The Right Fit for the Wrong Reasons: Real Business Cycle in an Oil-Dependent Economy By Miguel Angel Santos
  13. The impact of growth on unemployment in a low vs. a high inflation environment By Tesfaselassie, Mewael F.; Wolters, Maik H.
  14. Durations at the zero lower bound By Richard Dennis
  15. Liquidity Premiums on Government Debt and the Fiscal Theory of the Price Level By Berentsen, Aleksander; Waller, Christopher J.
  16. On Temporal Aggregators and Dynamic Programming * By Philippe Bich; Jean-Pierre Drugeon; Lisa Morhaim
  17. Financial Cycles with Heterogeneous Intermediaries By Coimbra, Nuno; Rey, Hélène
  18. Taxation and housing markets with search frictions By Danilo Liberati; Michele Loberto
  19. Anticipated Technology Shocks: A Re-Evaluation Using Cointegrated Technologies By Joel Wagner
  20. The Role of the Inflation Target Adjustment in Stabilization Policy By Eo, Yunjong; Lie,Denny
  21. The Macroeconomic Consequences of Raising the Minimum Wage: Capital Accumulation, Employment and the Wage Distribution By Alexandre Janiak; Sofía Bauducco
  22. Oil prices in a real-businesscycle model with precautionary demand for oil By Olovsson, Conny
  24. Investment price rigidity and business cycles By Alban Moura
  25. Inside money, investment, and unconventional monetary policy By Lukas Altermatt
  26. Is the “Beckerian” quantity-quality tradeoff regarding the offspring always true? Analysis of NTA data. By Izabella Kuncz; Éva Berde
  27. Conditional forecasting with DSGE models - A conditional copula approach By Kenneth Sæterhagen Paulsen

  1. By: Fabio Verona; Juha Kilponen; Seppo Orjasniemi; Antti Ripatti
    Abstract: We specify a DSGE model for the small open economy of Finland and incorporate a monopolistic competitive banking sector in the spirit of Gerali, Neri, Sessa, and Signoretti (2010) for the purpose of analyzing various macroprudential issues within general equilibrium setup. We incorporate a monopolistic competitive banking sector in the spirit of Gerali, Neri, Sessa, and Signoretti (2010) in a small open economy setting similar to that in Christoffel, Coenen, and Warne (2008) and Adolfson, Laseen, Linde, and Villani (2005, 2007, 2008). We estimate it using Bayesian methods. //
    Keywords: Finland, Business cycles, Modeling: new developments
    Date: 2015–07–01
  2. By: Marcin Kolasa; Michal Rubaszek
    Abstract: Estimated dynamic stochastic general equilibrium (DSGE) models are now used around the world for policy analysis. They have become particularly popular in central banks, some of which successfully applied them to generate macroeconomic forecasts. Arguably, one of the key drivers behind this trend was growing evidence that DSGE model-based forecasts can be competitive with those obtained with flexible time series models such as vector autoregressions (VAR), and also with expert judgement.See e.g. Smets and Wouters (2007), Edge et al. (2010), Kolasa et al. (2012) and Del Negro and Schorfheide (2012). The vast majority of these studies focus on the US economy as it allows to evaluate the forecast quality over a relatively large number of periods, and also makes the convenient closed economy assumption acceptable. The open economy applications that use the New Open Macroeconomics (NOEM) framework originating from Obstfeld and Rogoff (1995) and extended by Devereux and Engel (2003) and Gali and Monacelli (2005) do exist, but usually base their conclusions on a rather short evaluation sample. The earliest contribution to this literature is Bergin (2003) who tests small open economy DSGE models for Australia, Canada and the United Kingdom, and Bergin (2006) where a two-country model for the US and G7 is considered. However, only in-sample forecasts are evaluated in these papers. The literature testing open economy DSGE model-base forecasts out of sample include: Adolfson et al. (2007) and Christoffel et al. (2010) for the euro area, Adolfson et al. (2008) for Sweden, Matheson (2010) for Australia, Canada and New Zealand, Gupta et al. (2010) and Alpanda et al. (2011) for South Africa, Marcellino et al. (2014) for Luxemburg within the euro area. Following the literature working with closed economy models, the common practice is to evaluate forecasts generated with a NOEM framework relative to those obtained with some variants of Bayesian VARs. The overall finding is that open economy DSGE models are quite competitive, even though the conclusions differ by variables and countries. However, none of these studies tells us how much we actually gain by accounting for a foreign block in DSGE models. Since this question is essentially about the empirical validity of the key NOEM ingredients, i.e. those theoretical additions over the standard quantitative business cycle framework that are related to an open economy dimension, we argue that not having an aswer to it can be considered an important gap. Actually, there are reasons to be sceptical about the empirical success of the NOEM framework. In an influential paper Justiniano and Preston (2010) demonstrate that estimated small open economy DSGE models fail to account for the substantial influence of foreign shocks identified in many reduced-form studies. They show that capturing the observed comovement between domestic and foreign variables generates counterfactual implications for other variables, especially for the real exchange rate and terms of trade. It is also well-known that NOEM models have difficulties in explaining swings in the exchange rates and current account balances (Engel, 2014; Gourinchas and Rey, 2014). On the bright sight, Ca'Zorzi et al. (2016) show that real exchange rate forecasts from small open economy DSGE models beat the random walk at medium and long horizons and are very competitive with tougher benchmarks. In this paper we evaluate the forecasting performance of a state-of-the-art small open economy NOEM model developed by Justiniano and Preston (2010) relative to its associated New Keynesian (NK) closed economy benchmark. We focus on the forecast accuracy for three standard macrovariables showing up in both models: output, inflation and the short-term interest rate. Several variants of the NOEM model are considered that differ in the set of foreign sector variables used in estimation, which include the real exchange rate, terms of trade, current account balance, as well as foreign output, inflation and interest rates. Our conclusions are based on evidence from three economies, i.e. Australia, Canada and the United Kingdom, for which we can collect data that date back far enough to make our evaluation sample large when compared to the previous studies. Our findings are mainly negative. When we consider the full NOEM model, its point and density forecasts for domestic variables are statistically indistinguishable from, and in most cases even significantly less accurate than, those produced by the standard NK benchmark. Alternative model variants that leave either terms of trade or both terms of trade and foreign variables unobservable do not fare much better, and also do not offer much improvement relative to the closed economy variant. We show that these results are consistent with evidence from BVARs as expanding their dimension with the foreign sector variables also does not usually lead to improvement in their forecasting performance. However, this feature of BVARs is not surprising in light of the earlier literature stressing that small-scale VARs can forecast much better than large-scale VARs (Gurkaynak et al., 2013) as the number of estimated parameters grows very fast with the number of variables included in this class of models. In contrast, the open economy DSGE model considered in this paper is still very scarcely parameterized, hence its lack of competitiveness relative to the closed economy benchmark points at important misspecification of the underlying theoretical structure. We provide support for this claim by showing that even the richly specified NOEM model generates several counterfactual predictions about the comovement between domestic and foreign sector variables.
    Keywords: Australia, Canada, United Kingdom, Forecasting and projection methods, General equilibrium modeling
    Date: 2016–07–04
  3. By: Mohammed Aït Lahcen
    Abstract: This paper studies the impact of informality on the long-run relationship between inflation and unemployment in developing economies. I present a dynamic general equilibrium model with informality in both labor and goods markets and where money and credit coexist. An increase in inflation affects unemployment through two channels: the matching channel and the hiring channel. On one hand, higher inflation reduces the surplus of monetary trades thus lowering firms entry and increasing unemployment. On the other hand, the lower impact of inflation on formal transactions where credit is partially available shifts firms hiring decision from high separation informal jobs to low separation formal jobs thus reducing unemployment. The model is calibrated to match certain long-run statistics of the Brazilian economy. Numerical results indicate that, in the presence of a sizable informal sector, inflation has a small negative effect on unemployment while producing a significant impact on labor allocation between formal and informal jobs. These results point to the importance of accounting for informality when considering the inflation-unemployment trade-off in the conduct of monetary policy.
    Keywords: Informality, Phillips curve, money, labor, search and matching
    JEL: E26 E41 J64 H26 O17
    Date: 2017–03
  4. By: Katerina Gawthorpe
    Abstract: This paper presents a dynamic stochastic general equilibrium model developed to conduct a monetary analysis of a scenario with local currencies. The popularity of the alternative currency initiatives has remarkably increased during the last three decades. Despite their widespread proliferation with thousands of them currently circulating, there is a lack of quantitative analysis. This absence worsens the ability of central banks to choose the most appropriate position towards such movement. Presented study proposes an impact evaluation of these initiatives with a unique New Keynesian version of DSGE model extended for capital and labor market along with comparison of different monetary policies from a side of the local currencies. Co-existence of multiple currencies enters the model in the form of a Dixit-Stiglitz index. Simulation of the model suggests a positive effect of the alternative currencies in terms of increase of income but also inflation rate in absolute terms. This outcome appears to be highly sensitive to monetary policy from the side of issuers of the local currencies. The aim of this study is to construct a New Keynesian version of a DSGE model for impact evaluation of local currencies. This model simulates a local economy within the United States with an assumption of price and wage stickiness. Monopolistic competition between firms as well as on the labor market allows a derivation of the traditional New Keynesian Phillips curve. The appearance of the model assimilates the classical New Keynesian DSGE model of Galí (2008) enhanced for a capital variable. In contrast to this traditional textbook model, a local currency variable enters the utility function of the model in a form of a Dixit-Stiglitz aggregate famously applied for consumption bundle. Wage and price setting behaviors are in turn affected by the existence of multiple currencies. In the end, two potential monetary policies of issuing institutions for local currencies allow a comparison these policies might have on the circulation of the local currency as well as on the local economy itself. This model may additionally serve as a tool for a researcher to answer inquiries about the macro impact of these currencies on an economy. he dynamic stochastic general equilibrium model stands for the applied method to model a local currency movement simulated in the program Dynare. The influential book of Galí (2008) inspires the construction of this version of New Keynesian model with price and wage stickiness along with the existence of monopolistic competition between firms and on labor market. The model is further modified to incorporate features characteristic for local currency systems next to circulation of a legal tender. The introduction of local currencies into the model takes a form of a Dixit-Stiglitz index. A representative agent opts between a continuum of various complementary currencies for trading purposes while representative firm makes a decision over currency for price and wage denomination taking into consideration behavior on labor as well as capital market. Classical New Keynesian Phillips curve allows a simple simulation and comparison of the result to the original model of Galí (2008) without the co-existence of national currency aside local currencies. Next, I introduce adjustment costs in association with using new local currency, network externality variable and social capital. The intuition behind incorporating social capital stands behind the idea of local currencies to improve social network within a community. For this reason, local currencies enter an agent’s utility function being a function of social capital. Two different common monetary policies have been selected for the issuing institutions of local currencies. An issuer is assumed to either maximize profit or to allow money demand to react to money supply without her intervention. Central bank issuing the national currency is assumed to follow the famous Taylor rule. Concerning selected monetary policies profit maximization has a destabilizing effect on the economy. Monetary policy of elastic money demand in reaction to money supply changes provides more reasonable results. In this scenario, an increase in demand for a local currency in presence of adjustment costs drop results in a raise of the output variable along with higher inflation rate. In response, wages tend to decrease. The growth of demand for a local currency allows producers to request higher prices for their products. At the same time, employees are willing to work for relatively lower wages. Inflation rate of the local currency increases as well as inflation rate of the legal tender. In response, upward movement of interest rates stabilizes the economy and results in a continuous return of other variables to their previous steady-state levels. In conclusion, a local currency movement seems to favor the aggregate output of a local economy. This result could be of an interest to policy-makers whether to support a local-currency movement in their community.
    Keywords: United States, General equilibrium modeling, Monetary issues
    Date: 2016–07–04
  5. By: Bulat Mukhamediyev; Mukhamediyev Bulat
    Abstract: Small open economy is vulnerable to various macroeconomic shocks arising in large economies. It must take into account their possible consequences in own economic policy. In paper a small dynamic stochastic general equilibrium model for several counties/regions is presented. It develops an Obstfeld & Rogoff (2001) approach and its subsequent variants for model of the two countries, taking into account the nominal price rigidity. In each country domestic and foreign goods are consumed.The model is estimated on the data of Kazakhstan, Russia, China and the European Union. The results of the model simulation are discussed from the viewpoint of the influence of external and internal shocks to the small open economy of Kazakhstan.
    Keywords: Kazakhstan, Russia, China and the European Union, Impact and scenario analysis, General equilibrium modeling
    Date: 2015–07–01
  6. By: Fernando Garcia-Barragan; Guangling Liu
    Abstract: This paper studies the effectiveness of capital controls with foreign currency denomination and its welfare implications. To do this, we develop a general equilibrium model with financial frictions and banking, in which assets and liabilities are denominated in both domestic and foreign currencies. We propose a non-pecuniary capital-control policy that limits the gap between foreign-currency denominated loans and deposits to the amount of foreign funds that bankers can borrow from the international credit market. We show that capital controls have a critical impact on the dynamics of assets and liabilities that are denominated in foreign currency. This critical impact works through the capital control constraint on quantitative nancial variables directly, not through the spreads. The non-pecuniary capital controls help to stabilize the nancial sector and, hence, reduces the negative spillovers to the real economy. A more restrictive capital-control policy signicantly attenuates the welfare effect of the foreign monetary policy and exchange rate shocks.
    Keywords: Capital control, Foreign currency denomination, Open economy macroeconomics, Financial friction, Welfare analysis, DSGE
    JEL: E32 E44 E58 F38 F41
    Date: 2017–02
  7. By: James Albrecht (Department of Economics, Georgetown University, IZA - Institute for the study of labor - Institute for the Study of Labor - IZA); Bruno Decreuse (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille 2 - Université Paul Cézanne - Aix-Marseille 3 - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Susan Vroman (Department of Economics, Georgetown University, IZA - Institute for the study of labor - Institute for the Study of Labor - IZA)
    Abstract: When vacancies are filled, the ads that were posted are generally not withdrawn, creating phantom vacancies. The existence of phantoms implies that older job listings are less likely to represent true vacancies than are younger ones. We assume that job seekers direct their search based on the listing age for otherwise identical listings and so equalize the probability of matching across listing age. Forming a match with a vacancy of age a creates a phantom of age a and thus creates a negative informational externality that affects all vacancies of age a or older. The magnitude of this externality decreases with a. The directed search behavior of job seekers leads them to over-apply to younger listings. We calibrate the model using US labor market data. The contribution of phantoms to overall frictions is large, but, conditional on the existence of phantoms, the social planner cannot improve much on the directed search allocation.
    Keywords: directed search,information persistence,vacancy age
    Date: 2017–03
  8. By: Barrios Cobos, Salvador; Dolls, Mathias; Maftei, Anamaria; Peichl, Andreas; Riscado, Sara; Varga, Janos; Wittneben, Christian
    Abstract: In this paper, we present the first dynamic scoring exercise linking a multi-country microsimulation and DSGE models for all countries of the European Union. We illustrate our novel methodology analysing a hypothetical tax reform for Belgium. We then evaluate real tax reforms in Italy and Poland. Our approach takes into account the feedback effects resulting from adjustments in the labor market and the economy-wide reaction to the tax policy changes. Our results suggest that accounting for the behavioral reaction and macroeconomic feedback to tax policy changes enriches the tax reforms' analysis, by increasing the accuracy of the direct fiscal and distributional impact assessment provided by the microsimulation model for the tax reforms considered. Our results are in line with previous dynamic scoring exercises, showing that most tax reforms entail relatively smaller feedback effects in terms of the labor tax revenues for tax cuts benefiting workers, compared with the ones granted to firms.
    Date: 2017
  9. By: Sayed Mehdi Naji Esfahani
    Abstract: This paper resolves the co-movement puzzle in durable goods by revising one of the traditional assumptions in the standard theory, that is functional distinguishability of consumer durables and capital. This paper also shows how the standard assumption of distinguishable roles of consumer durables and capital is the major responsible for the failure of standard theory to generate counterfactual responses for durable spending. - VAR - New-Keynesian dynamic stochastic general equilibrium- The assumption of overlapping roles of consumer durables and capital not only can resolve the co-movement puzzle but also tempers the extraordinary sensitivity of durable spendings in response to monetary policy shocks.
    Keywords: United States, Business cycles, General equilibrium modeling
    Date: 2015–07–01
  10. By: Paulo Vieira; Celsa Machado; Ana Paula Ribeiro
    Abstract: The recent financial crisis revived the role for debt-stabilizing fiscal policy together with its systematic use in response to business cycle fluctuations. This is of crucial interest for the particular case of a very small country-member of a monetary union, for which domestic shocks produce substantial welfare costs. Extending a standard New Keynesian open-economy model to a heterogeneous country-size monetary union, where very small economies coexist with a large country, this work provides (i) optimal countercyclicality and debt feedback degrees for fiscal policy and (ii) provides insights on how rules should differ in low- and high-debt scenarios, for different-size countries within a monetary union.We conclude that the common interest rate should not significantly react to the union’s aggregate debt, whereas the reaction of fiscal instruments to inflation is also negligible. Instead, public consumption (tax rate) should react negatively (positively) to the level of public debt, while both instruments should react negatively to output gap. In small countries, fiscal policy debt feedback should be stronger than that for a big country under high-debt, but the reverse should occur in a low-debt scenario. Moreover, the reaction of a big (small) country’s fiscal policy to debt should weaken (increase) in high-debt scenarios. High-debt scenarios also optimally require higher (lower)government spending (taxes) feedback on output gap, particularly for small countries. Derivation of optimal simple rules (OSR) for large and very small economies. We take linear feedback rules for the fiscal instruments of each country, as well as for the common nominal interest rate. Feedback parameters on selected variables are optimized such as to maximize the union-wide welfare function (cooperative scenario), yielding OSRs. Policy rules are derived through assuming a cooperative scenario where all agents seek to maximize the union-wide social welfare. Rule parameters are optimized by minimizing the union-wide welfare costs resulting from asymmetric shocks.We adapt Söderlind (1999) and Giordani and SÖderlind (2004) matlab codes to perform simple rules optimization. Results confirm that the stabilization costs for the union as a whole are higher under a high-debt scenario. Moreover, though the performance of OSR is worse than full-optimal policies under commitment, they perform better relative to discretion. In particular, our results point to an active monetary policy and a passive fiscal policy. The interest rate gap responds to both structural variables (output and inflation), and mostly to the union’s average inflation, and fiscal instruments (government spending and the revenue tax rate) react to output gap differences and national public debt. We conclude that the common interest rate should not significantly react to the union’s aggregate debt, whereas the reaction of fiscal instruments to inflation is also negligible. Instead, public consumption (tax rate) should react negatively (positively) to the level of public debt, while both instruments should react negatively to output gap. In small countries, fiscal policy debt feedback should be stronger than that for a big country under high-debt, but the reverse should occur in a low-debt scenario. Moreover, the reaction of a big (small) country’s fiscal policy to debt should weaken (increase) in high-debt scenarios. High-debt scenarios also optimally require higher (lower) government spending (taxes) feedback on output gap, particularly for small countries. Moreover, as cost-push shocks gain relative importance, country-specific fiscal instruments should react slightly and positively to output gap, whereas the tax rate (government spending) should be more (less) reactive towards debt. Under higher nominal rigidity, government expenditures (tax rate) should be slightly more (less) reactive towards output gap and debt. In turn, lower labor supply elasticity requires more union-wide inflation stabilization and a larger output stabilization burden on both country-specific fiscal instruments. Foreign-domestic goods complementarity relative to substitutability also requires larger reactions of fiscal instruments to output gap and larger debt stabilization from taxes.
    Keywords: Monetary Union, Optimization models, Monetary issues
    Date: 2016–07–04
  11. By: Jordan Roulleau-Pasdeloup
    Abstract: I study the impact of a government spending shock in a New Keynesian model when monetary policy is set optimally. In this framework, the economy is at the Zero Lower Bound but expectations are well managed by the Central Bank. As such, the multiplier effect of government spending increases on expected inflation is close to zero while the one on output can be larger than one. This is consistent with recent empirical evidence on the effects of the 2009 American Recovery and Reinvestment Act.
    Keywords: Zero lower bound, New Keynesian, Government spending multiplier
    JEL: E31 E32 E52 E62
    Date: 2017–03
  12. By: Miguel Angel Santos (Center for International Development at Harvard University)
    Abstract: Venezuela is an oil-dependent economy subject to large exogenous shocks, with a rigid labor market. These features go straight at the heart of two weaknesses of real business cycle (RBC) theory widely reported in the literature: Neither shocks are volatile enough nor real salaries are sufficiently flexible as required by the RBC framework to replicate the behavior of the economy. We calibrate a basic RBC model and compare a set of relevant statistics from RBC-simulated time series with actual data for Venezuela and the benchmark case of the United States (1950-2008). In spite of Venezuela being one of the most heavily intervened economies in the world, RBC-simulated series provide a surprisingly good fit when it comes to the non-oil sector of the economy, and in particular for labor markets. Large restrictions on dismissal and widespread minimum (nominal) wage put all the burden of adjustment on prices; which translate into highly volatile real wages.
    Keywords: Macroeconomics, RBC, oil shocks, labor markets, Venezuela
    JEL: E10 E32 O47 O54 Q32
    Date: 2015–09
  13. By: Tesfaselassie, Mewael F.; Wolters, Maik H.
    Abstract: The standard search model of unemployment predicts, under realistic assumptions about household preferences, that disembodied technological progress leads to higher steady-state unemployment. This prediction is at odds with the 1970s experience of slow productivity growth and high unemployment in industrial countries. We show that introducing nominal price rigidity helps in reconciling the model's prediction with experience. Faster growth is shown to lead to lower unemployment when inflation is relatively high, as was the case in the 1970s. In general, the sign of the effect of growth on unemployment is shown to depend on the level of steady-state inflation. There is a threshold level of inflation below (above) which faster growth leads to higher (lower) unemployment. The prediction of the model is supported by an empirical analysis based on US and European data.
    Keywords: growth,trend inflation,unemployment
    JEL: E24 E31
    Date: 2017
  14. 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
  15. By: Berentsen, Aleksander (University of Basel); Waller, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: We construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real rate on bonds. In equilibrium, the price level is determined according to the fiscal theory of the price level. However, the market value of government debt exceeds its fundamental value. We then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or future taxes or spending. The price dynamics are driven solely by the liquidity premium on the debt.
    Keywords: Price level; Fiscal Policy; Liquidity
    JEL: E31 E62
    Date: 2017–03–29
  16. By: Philippe Bich (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Jean-Pierre Drugeon (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Lisa Morhaim (CRED - Centre de Recherche en Economie et Droit - UP2 - Université Panthéon-Assas - M.E.N.E.S.R. - Ministère de l'Éducation nationale, de l’Enseignement supérieur et de la Recherche)
    Abstract: This paper proposes dynamic programming tools for payoffs based on aggregating functions that depend on the current action and the future expected payoff. Some regularity properties are provided on the aggregator to establish existence, uniqueness and computation of the solution to the Bellman equation. Our setting allows to encompass and generalize many previous results based upon additive or non-additive payoff functions.
    Keywords: Dynamic Programming,Temporal Aggregators,Intertemporal Choice JEL Classification: C61,D90 *
    Date: 2017
  17. By: Coimbra, Nuno; Rey, Hélène
    Abstract: This paper develops a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of financial intermediaries combined with entry and exit. We show that when interest rates are high, a decrease in interest rates stimulates investment and increases financial stability. In contrast, when interest rates are low, further stimulus can increase systemic risk and induce a fall in the risk premium through increased risk-shifting. In this case, the monetary authority faces a trade-off between stimulating the economy and financial stability.
    Keywords: banks; cycle; leverage; risk-shifting; systemic risk
    JEL: E44 E58 G21
    Date: 2017–03
  18. By: Danilo Liberati (Bank of Italy); Michele Loberto (Bank of Italy)
    Abstract: Housing taxation is an important policy instrument that shapes households’ choices about homeownership and renting as well as the evolution of the housing market. We study the effects of housing taxation in a model with search and matching frictions in the property market and a competitive rental market. We show a new transmission channel for a housing tax reform that works through a ‘shifting’ effect from landlords to tenants. We calibrate the model in order to estimate the long-run effects of the recent Italian housing market taxation reforms and the extent of property tax capitalization on house prices. We show that property taxation on owner-occupied dwellings has a negative effect on property and rental prices, whereas taxes on second homes have opposite qualitative effects. The simultaneous increase in both these instruments may mitigate the dynamics of prices and rents as well as the change in the ratio between the share of owners and renters, leading to a partial capitalization taxation on prices.
    Keywords: housing market, matching, property taxation
    JEL: R21 R31 E62
    Date: 2017–03
  19. By: Joel Wagner
    Abstract: Two approaches have been taken in the literature to evaluate the relative importance of news shocks as a source of business cycle volatility. The first is an empirical approach that performs a structural vector autoregression to assess the relative importance of news shocks, while the second is a structural-model-based approach. The first approach suggests that anticipated technology shocks are an important source of business cycle volatility; the second finds anticipated technology shocks are incapable of generating any business cycle volatility. This paper challenges the latter conclusion by presenting a structural news shock model adapted to reproduce the cointegrating relationship between total factor productivity and the relative price of investment. With cointegrated neutral and investment-specific technology, anticipated shocks to the common stochastic trend explain approximately 22%, 32%, 34% and 20% of the variance of output, investment, hours and consumption in the United States, respectively, reconciling the discrepancy between theory and data.
    Keywords: Business fluctuations and cycles, Productivity
    JEL: E32
    Date: 2017
  20. By: Eo, Yunjong; Lie,Denny
    Abstract: We study optimal monetary policy in a New Keynesian model in which the monetary authority faces a trade-off between inflation and output-gap stabilization due to cost-push shocks. In particular, we highlight the role of the inflation target adjustment in stabilization policy by showing that it can mitigate this policy trade-off and considerably improve welfare. The main fi ndings can be summarized as follows. First, we find that the welfare cost of a standard Taylor rule is non-trivial, even with optimized policy cofficients. Second, we propose an additional policy tool of a medium-run inflation target (MRIT) rule. When combined with the standard Taylor rule, the optimal MRIT signi ficantly reduces fluctuations in inflation originating from the cost-push shocks and results in a similar level of welfare to that associated with the Ramsey optimal policy. Third, the optimal MRIT needs to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock. Fourth, the welfare implication of the MRIT is more pronounced under a flatter Phillips curve. Finally, the main findings are relevant to the current economic environment of low inflation rates under a flat Phillips curve, implying that the monetary authority should increase the inflation target in such an environment..
    Keywords: Cost-push shocks; Monetary policy; Medium-run inflation targeting; Flat Phillips curve; Welfare analysis
    Date: 2017–05
  21. By: Alexandre Janiak; Sofía Bauducco
    Abstract: We study the quantitative impact of a rise in the minimum wage on macroeconomic outcomes such as employment, the stock of capital and the distribution of wages. Our modeling framework is the large-firm search and matching model. Our comparative statics are in line with previous empirical findings: a moderate increase in the minimum wage barely affects employment, while it compresses the wage distribution and generates positive spillovers on higher wages. The model also predicts an increase in the stock of capital. Next, we perform the policy experiment of introducing a 10 dollar minimum wage. Our results suggest large positive effects on capital (4.0%) and output (1.8%), with a decrease in employment by 2.8%. The introduction of a 9 dollar minimum wage would instead produce similar effects on capital accumulation without harming employment.
    JEL: E24 J63 J68 L20
    Date: 2017
  22. By: Olovsson, Conny (Research Department, Central Bank of Sweden)
    Abstract: This paper analyzes the interaction between oil prices and macroeconomic outcomes by incorporating oil as an input in production alongside a precautionary motive for holding oil in a real-business-cycle model. The driving forces are factor-specific technology shocks and supply shocks that can be imprecisely forecasted by noisy news shock. These shocks explain most of the U.S. business cycle as well as the empirical distribution of oil prices. Oil shocks are mainly driven by increasing precautionary/smoothing demand, but supply shocks contribute substantially to both the oil-price volatility and the magnitude of oil shocks mainly through their effect on oil reserves.
    Keywords: Oil price shocks; business cycles
    JEL: E32 Q43
    Date: 2016–11–01
  23. By: Willem Devriendt; Freddy Heylen (-)
    Abstract: In the absence of behavioural adjustments, demographic change may cut off about 0.4%- point on average from the annual per capita growth rate in the next 25 years. The behavioural responses of households and firms to declining fertility and rising life expectancy may significantly change this outcome, but the sign and the size of this change are unclear. In this paper we construct and parameterize a large-scale OLG model for a small open economy to quantify (the net effect of) these behavioural adjustments. Important endogenous variables in the model are hours worked and (un)employment, investment in human and physical capital, per capita growth and inequality. Individuals differ not only by age, but also by innate ability. We calibrate the model to Belgium and find that it replicates key data since about 1960 remarkably well. Simulating the model, we observe significant (positive) behavioural adjustments by households and firms, but these do not reverse the negative arithmetical effect of projected future demographic change on per capita growth. Many of the adjustments have already taken place in previous decades. Furthermore, ongoing adjustments do not affect future domestic output due to capital outflow in a small open economy. To counter (very) poor per capita growth in the next two decades, policy changes will be necessary.
    Keywords: demographic change, population ageing, economic growth, overlapping generations
    JEL: C68 D91 E17 J11 O40
    Date: 2017–03
  24. By: Alban Moura
    Abstract: This paper incorporates sticky investment prices in a two-sector monetary model of business cycles. Fit to quarterly U.S. time series, the model suggests that price rigidity in the investment sector is the single most empirically relevant friction to match the data. Sticky investment prices are also important to understand the dynamic effects of technology shocks and their pass-through to the relative price of investment goods.
    Keywords: investment price rigidity, relative price of investment, multisector DSGE model.
    JEL: C32 E32
    Date: 2017–03
  25. By: Lukas Altermatt
    Abstract: In this paper I build a new monetarist model that includes inside money and investment to analyze why an economy can fall into a liquidity trap, and what the effects of unconventional monetary policy measures like helicopter money and negative interest rates are under these circumstances. I find that the liquidity trap can be caused by a scarcity of savings instruments, by insufficient investment opportunities, by too much supply of bank deposits or by a combination of any of these reasons. I also find that unconventional monetary policies can get an economy out of a liquidity trap, but at a welfare cost, while issuing more government debt can do the same and also improve welfare.
    Keywords: New monetarism, liquidity trap, helicopter money, negative interest rates, government debt, Ricardian equivalence, banking
    JEL: E4 E5 G2
    Date: 2017–03
  26. By: Izabella Kuncz; Éva Berde
    Abstract: The "Beckerian" theory of the quantity-quality tradeoff between the number of children and their quality is deeply permeates all the literature dealing with fertility rate analysis. It has great influence to the new direction of growth models, which derives the growth opportunities from the number and "quality" of the population growth (or decrease). In these models human capital investments play crucial role (see Lee and Mason (2010) 1 ). In our paper we argue that Lee and Mason (2010) could not lead to a precise interpretation because they deal only with average data. We show that by calculating the correlation between the human investment and fertility rate using a continuous relationship between the two variables, a modified result is obtained. In the first part of our paper we build an overlapping generation (OLG) model, similar to that in Lee and Mason (2010), but with altered human capital elasticity. Additionally we include two other modifications: i) four overlapping generations instead of three are introduced, and ii) transfer to oldest generation is provided by the second and the third generations. We seek answers to the following question: How much consumption is provided for the youngest andthe oldest generations as a function of the fertility and survival rates? The different paths of our model show that there are difficulties if the fertility rate is extremely high or extremely low. In both cases elderly could improve their own situation if they work and receive labourincome. Children can consume at a proper level only if the fertility rate is not remarkably high. One way to decide the relevance of quantity – quality choice is to find out the relationship between the families’ human investments into their children and the fertility rate of the same families. Data usually do not allow this kind of analysis, because the determination of the level of human investment is a very difficult task. However the National Transfer Account Project ( provides unique opportunity to evaluate how strong the correlation between the human investment and the fertility was, because the countries in the project collected detailed income and consumption data for all ages of their population. The pioneering work of Lee and Mason (2010), using NTA data, found a negative and significant correlation between the number of children and the human investment into children. In our paper we argue that their analysis could lead to a false interpretation because they deal only with average data. Grouping NTA countries upon their latest fertility ratio could modify the results. We show that if we calculate the correlation between the human investment and fertility rate splitting the countries into two groups (low and close or above the replacement level fertility rate) we receive a slightly modified result. In the first part of our paper we present these calculations. In the second part we show two overlapping generation (OLG) models, similar to that in Lee and Mason (2010), but we quantify these models separately for our two groups of countries. In the third part of our paper we use a more sophisticated OLG model, and explain the new consequences. Finally we conclude.
    Keywords: NTA countries, Growth, Labor market issues
    Date: 2016–07–04
  27. By: Kenneth Sæterhagen Paulsen (Norges Bank (Central Bank of Norway))
    Abstract: DSGE models may be misspecified in many dimensions, which can affect their forecasting performance. To correct for these misspecifications we can apply conditional information from other models or judgment. Conditional information is not accurate, and can be provided as a probability distribution over different outcomes. These probability distributions are often provided by a set of marginal distributions. To be able to condition on this information in a structural model we must construct the multivariate distribution of the conditional information, i.e. we need to draw multivariate paths from this distribution. One way to do this is to draw from the marginal distributions given a correlation structure between the different marginal distributions. In this paper we use the theoretical correlation structure of the model and a copula to solve this problem. The copula approach makes it possible to take into account more flexible assumption on the conditional information, such as skewness and/or fat tails in the marginal density functions. This method may not only improve density forecasts from the DSGE model, but can also be used to interpret the conditional information in terms of structural shocks/innovations.
    Keywords: DSGE model, conditional forecast, copula
    JEL: C53 E37 E47 E52
    Date: 2017–04–07

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