nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒04‒16
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Entrepreneurial skills, technological progress and firm growth By Amaia Iza
  2. What drives the labour wedge? A comparison between CEE countries and the Euro Area By Malgorzata Skibinska
  3. Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel By Kollmann, Robert
  4. The Effects of Productivity and Benefits on Unemployment: Breaking the Link By Brown, Alessio J. G.; Kohlbrecher, Britta; Merkl, Christian; Snower, Dennis J.
  5. Financial frictions and the real economy By Mario Pietrunti
  6. Competitive Tax Reforms in a Monetary Union with Endogenous Entry and Tradability By Stéphane Auray; Aurélien Eyquem; Xiaofei Ma
  7. Post-2008 Brazilian Fiscal Policy: an Interpretation through the Analysis of Fiscal Multipliers By Alejandro C. Garcia-Cintado; Celso Jose Costa Junior (; Armando Vaz Sampaio (
  8. Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity By Jose-Maria Da-Rocha; Marina Mendes Tavares; Diego Restuccia
  9. Solving DSGE models with stochastic trends By Sergei Seleznev
  10. Bayesian Estimation of the Storage Model using Information on Quantities By Gouel, Christophe; Legrand, Nicolas
  11. Pension Reform Options in Chile; Some Tradeoffs By Marika Santoro
  12. Learning to Believe in Secular Stagnation By Christopher G. Gibbs
  13. Fiscal devaluation and structural gaps By François Langot; Lise Patureau; Thepthida Sopraseuth
  14. Term Structure of Interest Rates: Macro-Finance Approach By Zbynek Stork
  15. Sectoral Labor Mobility and Optimal Monetary Policy By Alessandro Cantelmo; Giovanni Melina
  16. Flight to liquidity and systemic bank runs By Roberto Robatto
  17. Business cycles in an oil economy By Drago Bergholt; Vegard H Larsen; Martin Seneca
  18. Dynamic Skill Accumulation, Education Policies and the Return to Schooling By Belzil, Christian; Hansen, Jörgen; Liu, Xingfei
  19. Comparison of Various Business Cycle Models for Pakistan By M. Ali Choudhary; Sajawal Khan; Farooq Pasha
  20. Consistent Utility of Investment and Consumption : a forward/backward SPDE viewpoint * By Nicole El Karoui; Caroline Hillairet; Mohamed Mrad
  21. Evaluating Changes in the Transmission Mechanism of Government Spending Shocks By Nooman Rebei
  22. Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal By Aguiar, Mark; Chatterjee, Satyajit; Cole, Harold L.; Stangebye, Zachary
  23. Oil, equities, and the zero lower bound By Deepa Datta; Benjamin K Johannsen; Hannah Kwon; Robert J Vigfusson
  24. Deposit Insurance and Reinsurance: A General Equilibrium Perspective By Gersbach, Hans; Haller, Hans; Volker, Britz
  25. Estimating DSGE models with Zero Interest Rate Policy By Mariano Kulish; James Morley; Tim Robinson
  26. The role of the inflation target adjustment in stabilization policy By Yunjong Eo; Denny Lie

  1. By: Amaia Iza
    Abstract: One recent empirical regularity is that Örm-growth is negatively related to Örmís age. Besides, employment-age proÖles are áatter in less developed economies, but it is also observed áatter employmentage proÖles among fast growing economies rather than in slow growing economies. This paper develops an occupational choice life-cycle model based on Guner et al. (2015), where entrepreneursískills determine entrepreneurial technology in a similar way to Poschke (2015). We consider that exogenous technological advances imply a higher degree of complexity. Entrepreneursí skills determine the degree of complexity they can manage. As in Guner et al. (2015), entrepreneurs invest in their skills over their life-cycle. But, unlike Guner et al. (2015), entrepreneursí skills depreciation depends also on the rhythm at which skills of newborn entrepreneurs are growing. The empirical implication of the stationary equilibrium concerning Örm growth is consistent with these observed facts This paper develops an occupational choice life-cycle version of Lucas (1978) span-of-control model based on the assumption that entrepreneurs' skills determine entrepreneurial technology in a similar way to Poschke (2015). We consider that there are exogenous technological advances in the economy and that new advances imply a higher degree of complexity. Entrepreneurs' skills determine the degree of complexity they can manage and, hence, the degree of adoption of new technologies. As in Guner et al. (2015), entrepreneurs invest in their skills over their life-cycle. But, unlike Guner et al. (2015), entrepreneurs' skills investment also depends on the depreciation of their relative skill with respect to newborn entrepreneurs' skills. Faster exogenous growth of technological advances can lead to a higher firms' productivity growth over their life cycle, but also may imply a higher depreciation of old entrepreneurs abilities. We analyze the empirical implications of the stationary equilibrium concerning firms' age-TFP profile, employment-age profile, managers' income life-cycle profile, and aggregate TFP growth depending on the country's level of development and growth rate of technological advances.
    Keywords: European countries and the US., Miscellaneous, Growth
    Date: 2016–07–04
  2. By: Malgorzata Skibinska
    Abstract: The standard frictionless real business cycle model assumes that the wage should be equal to the firms’ marginal product of labour and the households’ marginal rate of substitution . However, the data indicates that this relationship does not hold and that the labour wedge, defined as a gap between these two objects, is characterized by large cyclical variations. This paper aims to identify the factors which might contribute to the differences in the volatilities of the labour wedge across CEE region and the EA. We look at the labour wedge through the lens of a small open economy real business cycle model with search and matching frictions on the labour market. The constructed model is estimated with Bayesian methods separately for Poland, the Czech Republic and the Euro Area and used to decompose variance of the labour wedge and perform some counterfactual simulations. Firstly, we show that the forces driving the labour wedge volatility differ across the analysed economies. While the dynamics of the gap between MRS and MPL in Poland can be attributed mainly to labour market disturbances, the consumption preference shock is the main force behind the wedge variability in the Euro Area and the Czech Republic. The bigger role of the labour market disturbances in Poland may suggest that the labour market in this country functions less smoothly, with negative consequences for welfare. Secondly, our results indicate that the differences in volatilities of the labour wedge in the analysed economies result primarily from the distinct characteristics of stochastic disturbances. However, in Poland the labour market structure also plays some role in explaining the differences vis-à-vis the EA. More precisely, lower, as compared to the Eurozone, elasticity of the matching function with respect to unemployment and higher workers’ bargaining power raise the volatility of the labour wedge in this country. The impact of heterogeneity in these parameters between the EA and the Czech Republic is rather marginal. All in all, we find heterogeneity in the labour wedge fluctuations within the CEE region. The Czech Republic seems to resemble more the EA in terms of both wedge volatility and its driving forces. Our results suggest that the labour market frictions in Poland are relatively more severe and generate fluctuations that are more harmful for social welfare.
    Keywords: Poland, Czech Republic, Euro Area, Labor market issues, Business cycles
    Date: 2016–07–04
  3. By: Kollmann, Robert (Université Libre de Bruxelles)
    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 commove positively.
    JEL: F31 F32 F36 F41 F43
    Date: 2017–03–01
  4. 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
  5. By: Mario Pietrunti
    Abstract: This paper investigates in a non-linear setting the impact on the real economy of frictions stemming from the financial sector. We develop a medium scale DSGE model with a banking sector where an occasionally binding constraint on banks’ capital induces a relevant non-linearity. The model - estimated on Italian data from 1999 to 2015 via a likelihood-free method - is able to generate business cycle asymmetries as in actual data that cannot replicated by linear models. Lastly, the role of macroprudential policies in smoothing the cycle is discussed JEL Classification: C15, E32, E44, G01
    Keywords: financial frictions, non-linear DSGE Models, likelihood-free estimation
    Date: 2017–04
  6. By: Stéphane Auray (CREST - Centre de Recherche en Économie et Statistique - INSEE - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique); Aurélien Eyquem (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Etienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Xiaofei Ma (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Etienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique, UEVE - Université d'Évry-Val-d'Essonne, UL2 - Université Lumière - Lyon 2)
    Abstract: We quantify the effects of competitive tax reforms within a two-country monetary union model with endogenous entry and endogenous tradability. As expected, their effects on output , consumption, hours worked and the terms of trade are positive. Extensive margins provide additional transmission mechanisms that turn the response of foreign output from negative to positive and yields larger aggregate welfare gains compared to alternative models. These positive spillovers are due to the positive effect of the reform on variety creation in both countries and change our vision of this type of reform from beggar-thy-neighbor to prosper-thy-neighbor.
    Keywords: Competitive tax reforms, endogenous tradability, endogenous varieties, monetary union, taxes, fiscal,devaluations
    Date: 2017
  7. By: Alejandro C. Garcia-Cintado; Celso Jose Costa Junior (; Armando Vaz Sampaio (
    Abstract: The global crisis that erupted in 2007 led many countries to embark on countercyclical fiscal policies as a way to cushion the blow of a depressed aggregate demand. Advocates of discretionary measures emphasize that fiscal policy can indeed stimulate the economy. The main goal of this work is to assess whether the fiscal policies pursued by the Brazilian government in the aftermath of the 2008 crisis succeeded in bringing the economy back on track in a sustainable fashion. To this end, the fiscal multipliers of five different shocks are studied in a small open-economy New Keynesian framework. Our results point to the government spending and public investment as the most effective fiscal tools for combating the crisis. However, the highest fiscal multiplier turned out to be the one associated with excise tax reductions. Interestingly, contrary to the government’s expectations, this policy of lowering taxes on manufactured durable goods (IPI) was found to be neutral at a longer horizon as it was not applied horizontally to all sectors of the economy. Seeking to understand, analyze and compare the effects of expenditure- and revenue-based fiscal policies on the Brazilian economy over the post-crisis period of 2008, a standard DSGE model (with the main frictions of this methodology) has been developed and estimated. The model features public capital stock as an input, thus allowing for the analysis of the effects of shocks to public investment on the marginal productivity of private inputs and on the GDP. The spending-based measures were the most successful in affecting GDP over the whole period studied, primarily because of PAC2, whose actual goal was to bolster aggregate demand. It is worth mentioning that stimulus program led to a positive result only up until 2013. Actually, the systematic reduction of this multiplier that followed from that year onwards contributed to deterioration of the Brazilian economy. However, these tools were not the only ones the government availed itself of to prop up aggregate demand. It also resorted to tax exemptions from durable goods consumption without much success, as already underscored above. The main reason for this policy to have failed is that this fiscal stimulus was only targeted at the durable-goods sector, which caused the consumption of non-durable goods to decrease. This latter effect ended up offsetting the positive impact of this policy on economic activity. As already laid out before, should this tax-exemption policy be applied in an horizontal way to all sectors of the economy, the result would be the most efficient one among all fiscal measures under study.
    Keywords: Brazil, General equilibrium modeling, Business cycles
    Date: 2016–07–04
  8. By: Jose-Maria Da-Rocha; Marina Mendes Tavares; Diego Restuccia
    Abstract: What accounts for differences in output per capita and total factor productivity (TFP) across countries? Empirical evidence points to resource misallocation across heterogeneous production units as an important factor. We study resource misallocation in a model where establishment-level productivity is endogenous and responds to the same policy distortions that create misallocation. In this framework, policy distortions not only misallocate resources across a given set of productive units (static effect), but also create disincentives for productivity improvement (dynamic effect) thereby affecting the productivity distribution and further contributing to lower aggregate output and productivity. The dynamic effect is substantial quantitatively. Reducing the dispersion in revenue productivity in the model by 25 percentage points to the level of the U.S. benchmark implies an increase in aggregate output and TFP by a factor of 2.9-fold. Improved resource allocation accounts for 42 percent of the gain, whereas the change in the productivity distribution accounts for the remaining 58 percent.
    Keywords: distortions, misallocation, investment, endogenous productivity, establishments.
    JEL: O1 O4 E0 E1
    Date: 2017–04–08
  9. By: Sergei Seleznev (Bank of Russia, Russian Federation)
    Abstract: We propose an algorithm for solving DSGE models with stochastic trends. Several implementations help us to solve the model with a small number of stochastic trends in the absence of a balanced growth path fast and allow us to control the accuracy of approximation in a certain range. Taking into account the fact that many implementations can be easily parallelized, this algorithm enables the estimation of models in the absence of a balanced growth path. We also provide a number of possible methods for estimation.
    Keywords: Non-stationary DSGE, stochastic trends, Smolyak’s algorithm, perturbation method.
    JEL: C61 C63
    Date: 2016–09
  10. By: Gouel, Christophe; Legrand, Nicolas
    Abstract: This paper presents a new strategy to estimate the rational expectations storage model. It uses information on prices and quantities – consumption and production – in contrast to previous approaches which use only prices. This additional information allows us to estimate a model with elastic supply, and to identify parameters such as supply and demand elasticities, which are left unidentified when using prices alone. The estimation relies on the Bayesian methods popularized in the literature on the estimation of DSGE models. It is carried out on a market representing the caloric aggregate of the four basic staples – maize, rice, soybeans, and wheat – from 1961 to 2006. The results show that to be consistent with the observed volatility of consumption, production, and price, elasticities have to be in the lower ranges of the elasticities in the literature, a result consistent with recent instrumental variable estimations on the same sample.
    Keywords: Commodity price dynamics, storage, Bayesian inference.
    JEL: C51 C52 Q11
    Date: 2017–03
  11. By: Marika Santoro
    Abstract: In this paper, we study the macroeconomic impact of pension reform options in Chile, using a dynamic general equilibrium model. The main reform proposal considers raising contributions (employer side) and vehicle additional proceeds to individual accounts and to increase the support of solidarity pensions. We model increased contributions as a labor tax. We find the impact of this reform on GDP to be negative in the near to the medium run, with GDP declining by 0.5 percent by 2021, as a result of labor tax distortions which lead to a fall in labor supply, investment and to a loss in competitiveness. We also illustrate the main macroeconomics tradeoffs by analyzing alternative reforms, such as using revenues only to improve future pensions or a reform package funded by a mix of higher contributions and indirect taxes.
    Date: 2017–03–13
  12. By: Christopher G. Gibbs (School of Economics, UNSW Business School, UNSW)
    Abstract: This paper shows that a secular stagnation equilibrium as proposed by Eggertsson and Mehrotra (2014) is E-stable. This is in contrast to the often studied liquidity trap equilibrium that exists in representative agent New Keynesian models at the zero lower bound when there is active monetary policy following a Taylor rule. This result reconciles the observed stable low growth and low inflation outcomes since the end of the Global Financial Crisis with the instability predicted by the New Keynesian model using a standard modeling framework. The stability of the secular stagnation equilibrium is due to the assumption of downwardly rigid nominal wages and overlapping generations. At the zero lower bound, the wage friction determines the price level and makes inflation a predetermined variable, while overlapping generations weakens the negative relationship between expected output and the real interest rate.
    Keywords: Secular stagnation, Expectations, Adaptive learning, Zero lower bound
    JEL: E31 E32 E52 D83 D84
    Date: 2017–02
  13. By: François Langot (GAINS-TEPP - UM - Université du Maine); Lise Patureau (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique, EQUIPPE - Economie Quantitative, Intégration, Politiques Publiques et Econométrie - Université de Lille, Sciences et Technologies - Université de Lille, Sciences Humaines et Sociales - PRES Université Lille Nord de France - Université de Lille, Droit et Santé, LEDa - DIAL - Laboratoire d'Economie de Dauphine - Economie de la mondialisation et du développement - Université Paris-Dauphine); Thepthida Sopraseuth (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The paper characterizes the optimal tax scheme in an open economy with structural inefficiencies on the labor market and on government size. On analytical grounds first, we show that the economy can use fiscal revaluation to exploit the terms of trade externality and to dampen the impact of an excessive public spending. However, if real labor market rigidities are large enough, fiscal devaluation may be desirable. Second, we provide a quantitative assessment of the optimal tax reform using France as the benchmark economy. Our results show that France would benefit more from fiscal devaluation than a economy where the labor market is more flexible, as the US. We also show that the welfare gains from the optimal tax reform crucially depend on the ability of the government to target its optimal size.
    Abstract: Cet article détermine le régime fiscal optimal dans une économie ouverte caractérisée par des inefficiences structurelles liées au marché du travail et à la taille de l’Etat. De façon analytique, nous montrons d’abord que la réévaluation fiscale permet d’exploiter l’externalité des termes de l’échange et d’atténuer l’impact d’une dépense publique excessive.Toutefois, si les rigidités sur le marché du travail sont suffisamment grandes, la dévaluation fiscale peut être préférable. Deuxièmement, nous fournissons une évaluation quantitative d’une réforme adoptant cette fiscalité optimale en utilisant la France comme économie de référence. Nos résultats montrent que la France bénéficierait plus d’une dévaluation fiscale qu’une économie où le marché du travail est plus flexible, comme lesÉtats-Unis. Nous montrons également que les gains de bien-être de la réforme fiscale dépendent essentiellement de la capacité du gouvernement à revenir à sa taille optimale.
    Keywords: consumption tax,payroll tax,Ramsey allocation,labor market search,open economy,public spending,Taxes sur la consommation,cotisations sociales,allocation de Ramsey,appariement sur le marché du travail,économie ouverte,dépenses publiques
    Date: 2017–01–17
  14. By: Zbynek Stork
    Abstract: Paper focuses on macro-finance models that try to analyze and explain yield curve and its dynamics using macroeconomic variables as underlying factors. These models represent a growing part of financial economics having implications for both, macro and financial models. This work is an update of my monography on this topic (STORK, Zbynek. Term Structure of Interest Rates: Macro-Finance Approach. 2014). The aim of the paper is in twofold. First, it shows the possibility to come up with a consistent derivation of financial model, including yield curve using Dynamic Stochastic General Equilibrium Approach. Second, using this approach, the structural macro-finance model is able to fit real yield curve data. The paper also demonstrates that analysis of macroeconomic shocks to yield term structure should be of importance mainly for economic policy authorities that are already using DSGE models for their macro analysis. Although these institutions already work with various financial analytical tools, results of such a complex model would be consistent with macro forecasts and could serve as a benchmark. Macro-finance modelling that tries to connect these two spheres has been growing quite quickly. Attempts to derive dynamics of the yield curve usually employ Vector-Autoregression (VAR), which unfortunately do not tell much about an economic structure. In this sense, structural models are more useful and allow for better interpretability of results. The study introduces rather simple, four-equation DSGE model including blocks of households, firms, government and central bank. Solution of the macro part serves as an input to financial model. Mutual consistency is fulfilled in derivation of pricing kernel equation, which is a central point for deriving yield term structure. In this approach, it is done using macroeconomic variables and structural parameters only. Therefore, it is not necessary to rely on latent factors, as in case of VAR, that are difficult to interpret directly. Having derived such a model, it allows to estimate effects of basic macroeconomic variables such as the private and the government consumption, the short term interest rate and the inflation rate on the term structure of interest rates. Derived structural macro-finance model is able to fit an average yield curve observed in the data. Further, in case of Central Bank, simple analysis can give a notion to what extent will an economic situation have impact on different parts of yield curve and how long are these influences likely to persist. Since monetary policy is able to have an effect rather on a short end of the yield curve, it can indicate whether to respond to a particular shock or not. And possibly how costly it might be. The case of fiscal authority is for the purpose of illustration very simplified, so it is more an academic example. However, it shows an essence of the issue, i.e. that for debt management it is crucial to understand the relationship between real economy and yield term structure, since it is important for maturity distribution of the debt. Very simple calculations show how costs of debt are affected when certain economic shocks take place.
    Keywords: USA, General equilibrium modeling, Finance
    Date: 2016–07–04
  15. By: Alessandro Cantelmo; Giovanni Melina
    Abstract: In an estimated two-sector New-Keynesian model with durable and nondurable goods, an inverse relationship between sectoral labor mobility and the optimal weight the central bank should attach to durables inflation arises. The combination of nominal wage stickiness and limited labor mobility leads to a nonzero optimal weight for durables inflation even if durables prices were fully flexible. These results survive alternative calibrations and interestrate rules and point toward a non-negligible role of sectoral labor mobility for the conduct of monetary policy.
    Keywords: Central banks and their policies;Labor mobility;Optimal monetary policy, durable goods, DSGE, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–03–06
  16. By: Roberto Robatto
    Abstract: This paper presents a general equilibrium, monetary model of bank runs to study monetary injections during financial crises. When the probability of runs is positive, depositors increase money demand and reduce deposits; at the economy-wide level, the velocity of money drops and deflation arises. Two quantitative examples show that the model accounts for a large fraction of (i) the drop in deposits in the Great Depression, and (ii) the $400 billion run on money market mutual funds in September 2008. In some circumstances, monetary injections have no effects on prices but reduce money velocity and deposits. Counterfactual policy analyses show that, if the Federal Reserve had not intervened in September 2008, the run on money market mutual funds would have been much smaller. JEL Classification: E44, E51, G20
    Keywords: Monetary Injections, Flight to Liquidity, Bank Runs, Endogenous Money Velocity, Great Depression, Great Recession, Money Market Mutual Funds
    Date: 2017–03
  17. By: Drago Bergholt; Vegard H Larsen; Martin Seneca
    Abstract: The recent oil price fall has created concern among policy makers regarding the consequences of terms of trade shocks for resource-rich countries. This concern is not a minor one - the world's commodity exporters combined are responsible for 15-20% of global value added. We develop and estimate a two-country New Keynesian model in order to quantify the importance of oil price shocks for Norway - a large, prototype petroleum exporter. Domestic supply chains link mainland (nonoil) Norway to the off-shore oil industry, while fiscal authorities accumulate income in a sovereign wealth fund. Oil prices and the international business cycle are jointly determined abroad. These features allow us to disentangle the structural sources of oil price fluctuations, and how they affect mainland Norway. The estimated model provides three key results. First, oil price movements represent an important source of macroeconomic volatility in mainland Norway. Second, while no two shocks cause the same dynamics, conventional trade channels make an economically less significant difference for the transmission of global shocks to the oil exporter than to oil importers. Third, the domestic oil industry's supply chain is an important transmission mechanism for oil price movements, while the prevailing fiscal regime provides substantial protection against external shocks.
    Keywords: DSGE, small open economy, oil and macro, Bayesian estimation
    Date: 2017–03
  18. By: Belzil, Christian (Ecole Polytechnique, Paris); Hansen, Jörgen (Concordia University); Liu, Xingfei (University of Alberta)
    Abstract: Using a dynamic skill accumulation model of schooling and labor supply with learning-by-doing, we decompose early life-cycle wage growth of U.S. white males into four main sources: education, hours worked, cognitive skills (AFQT scores) and unobserved heterogeneity, and evaluate the effect of compulsory high school graduation and a reduction in the cost of college. About 60 percent of the differences in slopes of early life-cycle wage profiles are explained by heterogeneity while individual differences in hours worked and education explain the remaining part almost equally. We show how our model is a particularly useful tool to comprehend the distinctions between compulsory schooling and a reduction in the cost of higher education. Finally, because policy changes induce simultaneous movements in observed choices and average per-year effects, linear IV estimates generated by those policy changes are uninformative about the returns to education for those affected. This is especially true for compulsory schooling estimates as they exceed IV estimates generated by the reduction in the cost of higher education even if the latter policy affects individuals with much higher returns than than those affected by compulsory schooling.
    Keywords: dynamic skill accumulation, education policies, returns to schooling, learning-by-doing, life-cycle labor-supply, IV estimation
    JEL: I2 J1 J3
    Date: 2017–03
  19. By: M. Ali Choudhary (State Bank of Pakistan); Sajawal Khan (State Bank of Pakistan); Farooq Pasha (State Bank of Pakistan)
    Abstract: In this paper, we compare the performance of different models, on two data frequencies, in terms of matching the business cycle moments of Pakistani economy. Out of the four models, two are simple real business cycle models for Pakistan introduced in Choudhary and Pasha (2013), and the other two are benchmark models [Aguiar and Gopinath (2007) and Garcia-Cicco et al. (2010)] from the literature for explaining the business cycles in emerging and developing economies. This paper calibrate these models for Pakistan and evaluate their performance in terms of matching second order moments from the actual data at both annual and quarterly frequency. We find that even though no single model is able to match all the relevant moments for all the important macroeconomic variables at both frequencies, the augmented RBC model with FDI shock (Choudhary and Pasha, 2013) performs relatively better.
    Keywords: DSGE Model, Emerging Economies, FDI shock, Business Cycles
    JEL: C61 D58 E32
    Date: 2017–04
  20. By: Nicole El Karoui (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique); Caroline Hillairet (ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique); Mohamed Mrad (LAGA - Laboratoire Analyse, Géométrie et Applications - UP8 - Université Paris 8, Vincennes-Saint-Denis - Université Paris 13 - USPC - Université Sorbonne Paris Cité - Institut Galilée - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper provides an extension of the notion of consistent progressive utilities U to consistent progressive utilities of investment and consumption (U, V). It discusses the notion of market consistency in this forward framework, compared to the classic backward setting with a given terminal utility, and whose value function is an example of such consistent forward utility. To ensure the consistency with the market model or a given set of test processes, we establish a stochastic partial differential equation (SPDE) of Hamilton-Jacobi-Bellman (HJB)-type that U has to satisfy. This SPDE highlights the link between the utility of wealth U and the utility of consumption V, and between the drift and the volatility characteristics of the utility U. By associating with the HJB-SPDE two SDEs, we discuss the existence and the uniqueness of a concave solution. Finally, we provide explicit regularity conditions and characterize the consistent pairs of consistent utilities of investment and consumption. Some examples, such as power utilities, illustrate the theory.
    Keywords: Market-consistent progressive utility of investment and consumption,Forward/backward stochastic partial differential equation (SPDE)
    Date: 2017–02–06
  21. By: Nooman Rebei
    Abstract: We empirically revisit the crowding-in effect of government spending on private consumption based on rolling windows of U.S. data. Results show that in earlier samples government spending is increasingly crowding in private consumption; however, this relation is reverted in the latest periods. We propose a model embedding non-separable public and private consumption in the utility function and rule-of-thumb consumers to assess the sources of non-monotonic changes in the transmission of the shock. The iterative full information estimation of the model reveals that changes in the co-movement between private and public spending is primarily driven by the fluctuations in the elasticity of substitution between private and public consumption, the share of financially constrained consumers, and the elasticity of intertemporal substitution.
    Keywords: Government expenditures;Private consumption;Parameter estimation;Vector autoregression;Econometric models;Bayesian Vector Autoregression, Government spending, Rule-of-thumb consumers, Government spending in utility, Tax rule.
    Date: 2017–03–10
  22. By: Aguiar, Mark (Princeton University); Chatterjee, Satyajit (Federal Reserve Bank of Philadelphia); Cole, Harold L. (University of Pennsylvania); Stangebye, Zachary (University of Notre Dame)
    Abstract: We revisit self-fulfilling rollover crises by introducing an alternative equilibrium selection that involves bond auctions at depressed but strictly positive equilibrium prices, a scenario in line with observed sovereign debt crises. We refer to these auctions as “desperate deals”, the defining feature of which is a price schedule that makes the government indifferent to default or repayment. The government randomizes at the time of repayment, which we show can be implemented in pure strategies by introducing stochastic political payoffs or external bailouts. Quantitatively, auctions at fire-sale prices are crucial for generating realistic spread volatility.
    Keywords: Debt; Crises; Bonds; Bond Auctions;
    Date: 2017–03–27
  23. By: Deepa Datta; Benjamin K Johannsen; Hannah Kwon; Robert J Vigfusson
    Abstract: Since 2008, oil and equity returns have moved together much more than they did previously. In addition, we show that both oil and equity returns have become more responsive to macroeconomic news. Before 2008, there is little evidence that oil returns were responsive to macroeconomic news. We argue that these results are consistent with a new-Keynesian model that includes oil and incorporates the zero lower bound on nominal interest rates. Our empirical findings lend support the model's implication that different rules apply at the zero lower bound.
    Keywords: macroeconomic announcements, news, monetary policy, zero lower bound, fiscal policy, fiscal multiplier
    Date: 2017–03
  24. By: Gersbach, Hans; Haller, Hans; Volker, Britz
    Abstract: We study the consequences and optimal design of bank deposit insurance and reinsurance in a general equilibrium setting. The model involves two production sectors. One sector is financed by issuing bonds to risk-averse households. Firms in the other sector are monitored and financed by banks. Households fund banks through deposits and equity. Deposits are explicitly insured by a deposit insurance fund. Any remaining shortfall is implicitly guaranteed by the government. The deposit insurance fund charges banks a premium per unit of deposits whereas the government finances any necessary bail-outs by lump-sum taxation of households. When the deposit insurance premium is actuarially fair or higher than actuarially fair, two types of equilibria emerge: One type of equilibria supports the Pareto optimal allocation, and the other type does not. In the latter case, bank lending is too large relative to equity and the probability that the banking system collapses is positive. Next, we show that a judicious combination of deposit insurance and reinsurance eliminates all non-optimal equilibrium allocations. Our paper provides a benchmark result for policy proposals that advocate deposit insurance cum reinsurance.
    Keywords: Capital Structure; deposit insurance; Financial Intermediation; General Equilibrium; reinsurance
    JEL: D53 E44 G2
    Date: 2017–03
  25. By: Mariano Kulish (School of Economics, Australian School of Business, the University of New South Wales); James Morley (School of Economics, Australian School of Business, the University of New South Wales); Tim Robinson (Melbourne Institute of Applied Economics and Social Research, University of Melbourne)
    Abstract: We propose an approach to estimating structural models in which the central bank holds the policy rate fixed for an extended period of the estimation sample. Embedding this policy in a version of the Smets and Wouters (2007) model that incorporates information from the yield curve to help with identification at the zero lower bound, we jointly estimate the structural parameters for the period of 1983-2014 and the expected duration of the zero interest rate policy in each quarter since 2009. This allows us to assess the effects of the zero lower bound, in particular, how private agents' beliefs about its duration influence output, inflation and interest rates at longer maturities. We find considerable variation in the expected duration over time, with a large increase in 2011 when the Federal Reserve moved to calendar-based forward guidance and a similar decrease in 2013 with the so-called `Taper tantrum'. We also measure the severity of the zero lower bound as a constraint and quantify the associated output losses. Conditional forecasts from the model suggest that a longer expected duration corresponds to higher output growth in the near term, with offsetting lower growth at the time of expected liftoff. Impulse response analysis confirms that an exogenous change in the expected duration has significant effects on the real economy.
    Keywords: zero lower bound, forward guidance, Bayesian estimation.
    JEL: E52 E58
    Date: 2016–10
  26. By: Yunjong Eo; Denny Lie
    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 findings can be summarized as follows. First, we find that the welfare cost of a standard Taylor rule is non-trivial, even with optimized policy coefficients. 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 significantly 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
    JEL: E12 E32 E58 E61
    Date: 2017–04

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