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on Dynamic General Equilibrium |
| By: | Muhammad Rehman (State Bank of Pakistan); Sajawal Khan (State Bank of Pakistan); Zafar Hayat (State Bank of Pakistan) |
| Abstract: | In this paper, we develop and estimate a small open economy Dynamic Stochastic General Equilibrium (DSGE) model with an enriched specification, which enables us to include a variable of high significance for Pakistan viz. workers’ remittances. The results indicate that a positive shock to workers’ remittances help boost real growth via increased consumption and imported investment and helps ease-off the pressure on current account balance and thereby exchange rate. Too much dependence on workers’ remittances to help meet the trade deficits may potentially leave the economy in doldrums in case sizable negative shocks occur to the flow of foreign remittances. Therefore there is a need for structural reforms to help the economy out of the historical trade deficits, and decrease dependence on the workers’ remittances source to allow for a sustainable economic growth. |
| Keywords: | Business cycles, Workers remittances, Open economy |
| JEL: | E32 F24 F43 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:sbp:wpaper:84&r=dge |
| By: | Roberta Cardani; Alessia Paccagnini; Stelios D. Bekiros |
| Abstract: | We assess the effectiveness of the forward guidance undertaken by European Central Bank using a standard medium-scale DSGE model à la Smets and Wouters (2007). Exploiting data on expectations from surveys, we show that incorporating expectations should be crucial in performance evaluation of models for the forward guidance. We conduct an exhaustive empirical exercise to compare the pseudo out-of-sample predictive performance of the estimated DSGE model with a Bayesian VAR and a DSGE-VAR models. DSGE model with expectations outperforms others for inflation; while for output and short term-interest rate the DSGE-VAR with expectations reports the best prediction. |
| Keywords: | DSGE Bayesian estimation; Survey professional forecasts; Real time data |
| JEL: | C52 C53 E58 E52 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201701&r=dge |
| By: | Martin Bodenstein; Gunes Kamber; C. Thoenissen |
| Abstract: | We investigate the connection between commodity price shocks and unemployment in advanced resource-rich small open economies from an empirical and theoretical perspective. Shocks to commodity prices are shown to influence labour market conditions primarily through the real exchange rate. The empirical impact of commodity price shocks is obtained from estimating a panel vector autoregression; a positive price shock is found to expand the components of GDP, to cause the real exchange rate to appreciate, and to improve labour market conditions. For every one percent increase in commodity prices, our estimates suggest a one basis point decline in the unemployment rate and at its peak a 0.3% increase in unfilled vacancies. We then match the impulse responses to a commodity price shock from a small open economy model with net commodity exports and search and matching frictions in the labour market to these empirical responses. As in the data, an increase in commodity prices raises consumption demand in the small open economy and induces a real appreciation. Facing higher relative prices for their goods, non-commodity producing firms post additional job vacancies, causing the number of matches between firms and workers to rise. As a result, unemployment falls, even if employment in the commodity-producing sector is negligible. For commodity price shocks, there is little difference between the standard Diamond (1982), Mortensen (1982), and Pissarides (1985) approach of modelling search and matching frictions and the alternating offer bargaining model suggested by Hall (2008). |
| Keywords: | Commodity prices ; Search and matching ; Unemployment |
| JEL: | E44 E61 F42 |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-39&r=dge |
| By: | Chahrour, Ryan; Ulbricht, Robert |
| Abstract: | We develop a methodology to estimate DSGE models with incomplete information, free of parametric restrictions on information structures. First, we define a “primal” economy in which deviations from full information are captured by wedges in agents' equilibrium expectations. Second, we provide implementability conditions, which ensure the existence of an information structure that implements these wedges. We apply the approach to estimate a New Keynesian model in which firms, households and the monetary authority have dispersed information about business conditions and productivity is the only aggregate fundamental. The estimated model fits the data remarkably well, with informational shocks able to account for the majority of U.S. business cycles. Output is driven mainly by household sentiments, whereas firm errors largely determine inflation. Our estimation indicates that firms and the central bank learn the aggregate state of the economy quickly, while household confusion about aggregate conditions is sizable and persistent. |
| Keywords: | Business cycles, dispersed information, DSGE models, primal approach, sentiments. |
| JEL: | D84 E32 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:31575&r=dge |
| By: | Sandra Gomes; Nikola Bokan; Andrea Gerali; Massimiliano Pisani; Pascal Jacquinot |
| Abstract: | We aim to properly assess domestic and cross-country macroeconomic effects of financial shocks. To do so, we introduce a number of new features in a model previously developed by some of the authors. which together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks – allow a detailed analysis of the transmission of financial shocks. We incorporate financial linkages in a multi-country New-Keynesian microfounded general equilibrium model of the euro area by including financial frictions and country-specific banking sectors. The model is non-linear and simulated under perfect foresight. The experiments are run in Dynare. Our results support the views that (1) the business cycles in the euro area can be driven not only by real shocks, but also by financial shocks, (2) the financial sector could amplify the transmission of (real) shocks, and (3) the financial/ banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union. |
| Keywords: | Euro area (split into Germany and the rest of the euro area), Modeling: new developments, Macroeconometric modeling |
| Date: | 2016–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:009007:9431&r=dge |
| By: | Timo Baas; Marjan Aikimbaeva |
| Abstract: | In this paper, we analyze the impact of economic conditions on bilateral migration from Poland to Germany by estimating a two-country DSGE model using Bayesian methods. We build a simple two-country DSGE model that examines the business cycle fluctuations of labor. Households in the low-income country can choose to supply labor at home and abroad. Labor supply depends on the differential of real wages, but migrants and natives are imperfect substitutes. The migrants remit their income and increase the utility of the households in the country of origin. Prices are sticky according to Calvo price setting and, therefore, need time to adjust. With this setting, the model is parsimonious but reflects essential characteristics of intra-EU migration. We estimate the model using data from Poland and Germany, as both countries share a common border and migration is significantly large. We observe significant differences in real wages among both countries, migration costs are low and migration has a long tradition. It is an open question whether migration does follow business cycle pattern and to what extent business cycles of the host or the country of origin are more important. The results of our paper imply that a common labor market already exists, as, by comparing two DSGE models with and without the internal market, we can show, that migrants link labor markets of member states by choosing the optimum location for the provision of labor. The shock absorbing properties of the common market, however, benefits foremost the home rather than the host country of migrants. |
| Keywords: | Germany, Poland, General equilibrium modeling, Labor market issues |
| Date: | 2016–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:009007:9555&r=dge |
| By: | Jang-Ting Guo (Department of Economics, University of California Riverside); Yan Zhang (Shanghai University of Finance and Economics) |
| Abstract: | It has been analytically shown that under an additively separable preference formulation between consumption and hours worked, indeterminacy and sunspots may arise in a standard one-sector real business cycle model when the labor tax rate is endogenously determined by a balanced-budget rule with a pre-specified constant level of government expenditures. This paper finds that local indeterminacy disappears if the period utility function is postulated to exhibit no income effect on the household's demand for leisure. In particular, the model's low-tax steady state always displays saddle-path stability and equilibrium uniqueness; whereas the high-tax steady state is either a source or a saddle point. |
| Keywords: | Keywords: Income Effect; Balanced-Budget Rules; Indeterminacy; Business Cycles. |
| JEL: | E32 E62 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:201704&r=dge |
| By: | James Albrecht (Georgetown University and IZA); Bruno Decreuse (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille); Susan Vroman (Georgetown University and 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 |
| JEL: | J60 D83 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1707&r=dge |
| By: | Elmar Hillebrand (EEFA Research Institute); Marten Hillebrand (Johannes Gutenberg University Mainz) |
| Abstract: | This paper develops a dynamic general equilibrium model with an arbitrary number of different regions to study the economic consequences of climate change under alternative climate policies. Regions di?er with respect to their state of economic development, factor endowments, and climate damages and trade on global markets for capital, output, and exhaustible resources. Our main result derives an optimal climate policy consisting of an emissions tax and a transfer policy. The optimal tax can be determined explicitly in our framework and is independent of any weights attached to the interests of different countries. Such weights only determine optimal transfers which distribute tax revenues across countries. We infer that the real political issue is not the tax policy required to reduce global warming but rather how the burden of climate change should be shared via transfer payments between di?erent countries. We propose a simple transfer policy which induces a Pareto improvement relative to the Laissez faire solution. |
| Keywords: | Multi-region model; Dynamic equilibrium; Climate change; Optimal climate tax; Optimal transfer policy; Emissions trading system |
| JEL: | E10 E61 H21 H23 Q43 Q54 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:jgu:wpaper:1704&r=dge |
| By: | Cristina Arellano; Yan Bai; Luigi Bocola |
| 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. |
| JEL: | E44 F34 G12 G15 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23314&r=dge |
| By: | Aleksandar Vasilev (Department of Economics, American University in Bulgaria) |
| Abstract: | In this paper we introduce reciprocity in labor relations and government sector to investigate how well the real wage rigidity that results out of that arrangement explains business cycle uctuations in Bulgaria. The reciprocity mechanism described in this paper follows Danthine and Kurmann (2010) and is generally consistent with micro-studies, e.g. Lozev et all. (2011) and Paskaleva (2016), while at the same time comes into contrast with models with eciency wages of no-shirking type that emphasize the importance of aggregate labor market conditions as the main determinant in wage setting, e.g. Vasilev (2017). Rent-sharing considerations, and worker's own past wages turn out to be the most important aspects of how labor contracting happens. In contrast, aggregate economic conditions, as captured by the employment rate, are not found to be quantitatively important for wage dynamics. Overall, the model with reciprocity and fiscal policy performs well vis-a-vis data, especially along the labor market dimension, and in addition dominates the market-clearing labor market frame- work featured in the standard RBC model, e.g Vasilev (2009). |
| Keywords: | general equilibrium, reciprocity, gift exchange, eciency wages, unemployment, fiscal policy, Bulgaria |
| JEL: | E24 E32 J41 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:sko:wpaper:bep-2017-03&r=dge |
| By: | Neuhann, Daniel |
| Abstract: | This paper develops a theory of the credit cycle to account for recent evidence that capital is increasingly allocated to inefficiently risky projects over the course of the boom. The model features lenders who sell risk exposure to non-lender investors in order to relax borrowing constraints, but are tempted to produce and sell off bad assets when asset prices are sufficiently high. Asset prices gradually increase during the boom because non-lender wealth grows as their risk-taking pays off, triggering a fall in asset quality and precipitating an eventual crisis. I study the initial conditions that give rise to the credit cycle and consider policy implications. JEL Classification: G01, E32, E44 |
| Keywords: | credit booms, credit cycles, financial crisis, financial fragility, risk-taking channel of monetary policy, saving gluts, secondary markets, securitization |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172039&r=dge |
| By: | Sevgi Coskun |
| Abstract: | The aim of this study is to explore the labor market properties of business cycle fluctuations for a group of 17 developing economies from 1970 to 2013 and compare these results to findings from the USA. Then, we build 7 RBC models without nominal frictions driven by temporary and permanent shocks following Aguiar and Gopinath (2007) to explain whether real business cycle models can successfully account for the labor market properties of business cycle fluctuations in these economies. Lastly, we would like to understand the fluctuations of labor wedge are mostly coming from the fluctuations of the household component of labor wedge or the fluctuations of the firm component of labor wedge in these economies. First, we would like to look at the performance of the most standard basic frictionless business cycle model driven by permanent and temporary shocks in terms of labor market moments. Then, we would like to see the performance of RBC model augmented capacity utilization, investment adjustment cost and indivisible labor using the same shocks and using both non-separable and separable utility functions. Preliminary Results: We have found that business cycle volatility is significantly higher in developing countries than in the USA. We figure also out that our models fail to generate the properties of labor market in these economies but RBC model with investment adjustment cost doing the best job among others. Lastly, we found that the most of the fluctuations comes from the fluctuations of the household component of labor wedge in developing countries. |
| Keywords: | United Kingdom, General equilibrium modeling, Developing countries |
| Date: | 2016–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:009007:9732&r=dge |
| By: | Williamson, Stephen D. (Federal Reserve Bank of St. Louis) |
| Abstract: | How do low real interest rates constrain monetary policy? Is the zero lower bound optimal if the real interest rate is sufficiently low? What is the role of forward guidance? A model is constructed that can in- corporate sticky price frictions, collateral constraints, and conventional monetary distortions. The model has neo-Fisherian properties. Forward guidance in a liquidity trap works through the promise of higher future inflation, generated by a higher future nominal interest rate. With very tight collateral constraints, the real interest rate can be very low, but the zero lower bound need not be optimal. |
| JEL: | E4 E5 |
| Date: | 2017–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-010&r=dge |
| By: | Olga Croitorov |
| Abstract: | This paper studies the economic conditions under which a government chooses to disseminate information among its creditors. The government receives private information about economic output and provides public information, either implicitly by the actions it takes, or explicitly by communicating the true value of output. In a dynamic model of endogenous sovereign default, I find that the government prefers to be more transparent when it has lower debt, expects a lower drop in output, and the probability of receiving a low output is higher. A higher probability of a recession lowers the bond price and brings the optimal borrowing to a level where a transparent government can repay even if it receives a low output. Hence, higher borrowing costs, due to higher default risk, make the government to choose more transparency. The result is supported by empirical evidence for OECD. I find that an increase in borrowing cost (proxy for increase in likelihood of recession) by 1% is associated with a future increase in information transparency by 6%. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:580077&r=dge |
| By: | Erwan MOUSSAULT (Université de Cergy-Pontoise, THEMA) |
| Abstract: | This paper studies the impact of the tax system on intergenerational family transfers in an overlapping generation model of a closed economy, with endogenous human capital growth. We limit ourselves to simple tax structures with labor and inheritance taxes. When public debt is an available instrument for the government, we show that the fiscal policy used to achieve the long run optimal endogenous growth improves the individuals' consumption of the first generations. In this case, the government reduces the tax burden on labor, encourages human capital development and puts in place a redistributive policy. If the public debt is not available, the government does not pursue a redistributive policy, both tax rates implemented are higher and the long run human capital growth is greater as well. In all cases, the optimal inheritance tax rate is higher than the optimal tax rate on labor income. |
| Keywords: | family transfers, debt, altruism, growth, optimal taxation. |
| JEL: | D64 H21 H23 H63 I31 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2017-04&r=dge |
| By: | Adriano A. Rampini; S. Viswanathan |
| Abstract: | We propose a dynamic theory of financial intermediaries that are better able to collateralize claims than households, that is, have a collateralization advantage. Intermediaries require capital as they can borrow against their loans only to the extent that households themselves can collateralize the assets backing these loans. The net worth of financial intermediaries and the corporate sector are both state variables affecting the spread between intermediated and direct finance and the dynamics of real economic activity, such as investment, and financing. The accumulation of net worth of intermediaries is slow relative to that of the corporate sector. The model is consistent with key stylized facts about macroeconomic downturns associated with a credit crunch, namely, their severity, their protractedness, and the fact that the severity of the credit crunch itself affects the severity and persistence of downturns. The model captures the tentative and halting nature of recoveries from crises. |
| JEL: | E02 E32 E51 G01 G21 G32 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23302&r=dge |
| 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) |
| Abstract: | We analyze the effects of world wars on the macroeconomic dynamics of the U.S., France, Germany, and the UK, by means of an estimated open-economy model. The model allows wars to affect the economy through capital depreciation, sovereign default, a military draft, household preferences, and spillovers on other exogenous processes (productivity, investment, trade, policy variables). If the bulk of fluctuations during war episodes can be explained by the rise in government spending in the U.S., other factors are crucial in other countries. We also discuss the size and state-dependence of public spending multipliers, and a counterfactual welfare exercise. |
| Keywords: | Fluctuations, War, Trade, Taxes, Public Debt, Bayesian estimations, Multipliers, Welfare |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01467219&r=dge |
| By: | Waknis, Parag |
| Abstract: | The standard undergraduate textbook models in macroeconomics like the IS-LM/AD-AS model are not disaggregated enough to understand the effects of monetary policy shocks in developing economies typically characterized by substantial informality, and goods and financial markets segmentation. In this paper, I present a version of a segmented markets model based on Williamson (2009, 2011) that could be used as an effective alternative. I demonstrate the use of the framework by analyzing the effects of demonetization- a substantial reduction in the availability of outside money- in a developing country setting. |
| Keywords: | segmented markets, developing countries, demonetization, economic education, informal markets, undergraduate macroeconomics. |
| JEL: | A22 E42 O17 |
| Date: | 2017–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:78011&r=dge |
| By: | Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume |
| Abstract: | In a neoclassical growth model with incomplete markets and heterogeneous, liquidity-constrained agents, the properties of the Laffer curve depend on whether debt or transfers are adjusted to balance the government budget constraint. The Laffer curve conditional on public debt is horizontally S-shaped. Two opposing forces explain this result. First, when government wealth increases, the fiscal burden declines, calling for lower tax rates. Second, because the interest rate decreases when government wealth increases, fiscal revenues may also decline, calling for higher taxes. For sufficiently negative government debt, the second force dominates, leading to the odd shape of the Laffer curve conditional on debt. |
| Keywords: | Laffer Curve, Incomplete Markets, Labor Supply, Public Debt. |
| JEL: | E00 E60 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:31553&r=dge |
| 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) |
| Abstract: | We develop a model with financial frictions and sovereign default risk where the maturity of public debt is allowed to be larger than one period. When the debt portfolio has longer average maturities, public debt increases less in the event of a crisis, reducing the size of the subsequent fiscal consolidation through distorsionary taxes or public spending, with positive effects on welfare. In addition, we provide some results suggesting that optimized fiscal responses to a crisis depend on the average maturity of the debt portfolio. Abstract We develop a model with financial frictions and sovereign default risk where the maturity of public debt is allowed to be larger than one period. When the debt portfolio has longer average maturities, public debt increases less in the event of a crisis, reducing the size of the subsequent fiscal consolidation through distorsionary taxes or public spending, with positive effects on welfare. In addition, we provide some results suggesting that optimized fiscal responses to a crisis depend on the average maturity of the debt portfolio. |
| Keywords: | Sovereign Default Risk, Financial Crisis, Fiscal Policy |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01467214&r=dge |
| By: | Ricardo Reis (Economics Department London School of Economics (LSE); Centre for Macroeconomics (CFM)) |
| Abstract: | While there is much that is wrong with macroeconomics today, most critiques of the state of macroeconomics are off target. Current macroeconomic research is not mindless DSGE modeling filled with ridiculous assumptions and oblivious of data. Rather, young macroeconomists are doing vibrant, varied, and exciting work, getting jobs, and being published. Macroeconomics informs economic policy only moderately and not more nor all that differently than other fields in economics. Monetary policy has benefitted significantly from this advice in keeping inflation under control and preventing a new Great Depression. Macroeconomic forecasts perform poorly in absolute terms and given the size of the challenge probably always will. But relative to the level of aggregation, the time horizon, and the amount of funding, they are not so obviously worst than those in other fields. What is most wrong with macroeconomics today is perhaps that there is too little discussion of which models to teach and too little investment in graduate-level textbooks. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1713&r=dge |
| By: | Volker Grossman; Thomas Steger |
| Abstract: | There are, by now, several long term, time series data sets on important housing & macro variables, such as land prices, house prices, and the housing wealth-to-income ratio. However, an appropriate theory that can be employed to think about such data and associated research questions has been lacking. We present a new housing & macro model that is designed specifically to analyze the long term. As an illustrative application, we demonstrate that the calibrated model replicates, with remarkable accuracy, the historical evolution of housing wealth (relative to income) after World War II and suggests a further considerable increase in the future. The model also accounts for the close connection of house prices to land prices in the data. We also compare our framework to the canonical housing & macro model, typically employed to analyze business cycles, and highlight the main differences. |
| Date: | 2017–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/80&r=dge |