nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒05‒14
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. International Real Business Cycle Models with Incomplete Information\ By Zi-Yi Guo
  2. House Prices, Geographical Mobility, and Unemployment By Marcus Mølbak Ingholt
  3. Creative Destruction Cycles: Schumpeterian Growth in an Estimated DSGE Model By Marco Luca Pinchetti
  4. Exchange rate forecasting with DSGE models By Marcin Kolasa; Michał Rubaszek; Michele Ca' Zorzi
  5. Learning and Job Search Dynamics during the Great Recession By Potter, Tristan
  6. Household Debt, Macroprudential Rules, and Monetary Policy By Nurlan Turdaliev; Yahong Zhang
  7. Early and Late Human Capital Investments, Borrowing Constraints, and the Family By Elizabeth M. Caucutt; Lance Lochner
  8. Safety, liquidity, and the natural rate of interest By Del Negro, Marco; Giannone, Domenico; Giannoni, Marc; Tambalotti, Andrea
  9. Capital Requirements, Risk-Taking and Welfare in a Growing Economy By Pierre-Richard Agénor; Luiz A. Pereira da Silva
  10. An Equilibrium Model of the African HIV/AIDS Epidemic By Jeremy Greenwood; Philipp Kircher; Cezar Santos; Michèle Tertilt
  11. Organizations, Skills, and Wage Inequality By Pinheiro, Roberto; Tasci, Murat
  12. Population Aging, Social Security and Fiscal Limits By Heer, Burkhard; Polito, Vito; Wickens, Michael R.
  13. Policy Effects of International Taxation on Firm Dynamics and Capital Structure By Spencer, Adam
  14. A Theory of Sticky Rents: Search and Bargaining with Incomplete Information By Verbrugge, Randal; Gallin, Joshua H.

  1. By: Zi-Yi Guo (Wells Fargo Bank, N.A.)
    Abstract: Standard international real business cycle (IRBC) models formulated by Backus, Kehoe, and Kydland (BKK, 1992) have been considered a natural starting point to assess the quantitative implications of dynamic stochastic general equilibrium (DSGE) models in an open economy environment. Since the standard IRBC model under assumptions of flexible prices and perfect competition cannot replicate all the observed characteristics of international business cycles, a number of extended models with more realistic features have been developed in the past two decades. We introduce a noisy information structure into an otherwise standard international real business cycle model with two countries. When domestic firms observe current foreign technology with some noise, predictions of the model on international correlation can be very different from those of a standard perfect information model. We show that the model can explain: (i) positive output correlation both in complete and incomplete market models; (ii) consumption correlation smaller than output correlation with an introduction of information-constrained consumers; and (iii) observation of both positive and negative productivity-hours correlation in two countries.
    Keywords: Cross-country correlations; Imperfect information; Incomplete markets
    JEL: E32 F41 G15
    Date: 2017–04
  2. By: Marcus Mølbak Ingholt (Department of Economics, University of Copenhagen)
    Abstract: Geographical mobility correlates positively with house prices and negatively with unemployment over the U.S. business cycle. I present a DSGE model in which declining house prices and tight credit conditions impede the mobility of indebted workers. This reduces the workers’ cross-area competition for jobs, causing wages and unemployment to rise. A Bayesian estimation shows that this channel more than quadruples the response of unemployment to adverse housing market shocks. The estimation also shows that adverse housing market shocks caused the decline in mobility during the Great Recession. Absent this decline, the unemployment rate would have been 0.5 p.p. lower.
    Keywords: Refinancing collateral constraint, Geographical mobility, Wage setting, DSGE model
    JEL: D58 E24 E32 E44 R21 R23
    Date: 2017–04–10
  3. By: Marco Luca Pinchetti
    Abstract: In this paper I incorporate a Schumpeterian mechanism of creative destruction in a standard DSGE framework. In the model, a sector of forward-looking profit maximizing innovators determines the economy’s TFP growth rate. I estimate the model with Bayesian methods, and show that models featuring an endogenous TFP channel can empirically outperform models that exhibit standard, exogenous productivity dynamics. The paper provides a comprehensive comparative assessment of the impact of the endogenous TFP channel in an estimated fully-fledged DSGE model. The variance decomposition analysis shows that endogenous TFP is a powerful channel of transmission of adverse shocks throughout the business cycle. The estimates suggest that the 35% of the productivity growth rate fluctuations had endogenous origins during the Great Recession.
    Keywords: DSGE model; endogenous TFP; schumpeterian growth; post-crisis slump
    JEL: E50 E24 E32 O47
    Date: 2017–02
  4. By: Marcin Kolasa (Narodowy Bank Polski and Warsaw School of Economics); Michał Rubaszek (Narodowy Bank Polski and Warsaw School of Economics); Michele Ca' Zorzi (European Central Bank)
    Abstract: We run an exchange rate forecasting “horse race”, which highlights that three principles hold. First, forecasts should not replicate the high volatility of exchange rates observed in sample. Second, models should exploit the mean reversion of the real exchange rate over long horizons. Third, they should account for the international price co-movement seen in the data. Abiding by the first two principles an open-economy dynamic stochastic general equilibrium (DSGE) model performs well in forecasting the real but not the nominal exchange rate. Only approaches that conform to all three principles tend to outperform the random walk.
    Keywords: Forecasting; exchange rates; New Open Economy Macroeconomics; mean reversion
    JEL: C32 F31 F41 F47
    Date: 2017
  5. By: Potter, Tristan (School of Economics Drexel University)
    Abstract: I document two new facts about job search during the Great Recession: (i) Search effort permanently increases after individuals receive (and reject) job offers, and (ii) search effort decreases with cumulative failed search. Motivated by these facts, I introduce a model in which Bayesian job seekers learn about the arrival rate of offers through their idiosyncratic search experiences. The model yields a tractable characterization of search effort in terms of an individual's past job offers and past search effort. I use the model to decompose the effect of learning on job search into static and dynamic components: Failing to find work exerts a negative influence on search by reducing the perceived opportunity cost of leisure in the current period, but also stimulates search by reducing the option value of unemployment in future periods. Because these effects vary endogenously over the spell, the model delivers rich – and potentially nonmonotonic – dynamics in search behavior. I estimate the model and demonstrate that learning accounts for the empirical profiles of search time, offer arrivals, and hazard rates over the unemployment spell.
    Keywords: unemployment; search theory; learning
    JEL: D83 E24 J64
    Date: 2017–04–17
  6. By: Nurlan Turdaliev (Department of Economics, University of Windsor); Yahong Zhang (Department of Economics, University of Windsor)
    Abstract: Today's Canadian economy features a historic high of household debt and persistently low growth rate. The average debt-to-GDP ratio has reached the level experienced in the U.S. just prior to the recent financial crisis. Should monetary policy lean against the household indebtedness or are macroprudential policies better suited for the task? To provide a quantitative answer, this paper develops a small open economy dynamic stochastic general equilibrium model featuring a banking sector that channels funds between household savers and borrowers. We estimate the model using the Canadian data from 1991Q1 to 2015Q3 and conduct policy experiments. We find that using monetary policy that reacts to household indebtedness increases inflation volatility and lowers borrowers' welfare, while using macroprudential policies such as lowering the loan-to-value ratio limit increases borrowers' welfare.
    Keywords: household debt, macroprudential rules, monetary policy
    JEL: E32 E44 E52
    Date: 2017–05
  7. By: Elizabeth M. Caucutt (University of Western Ontario); Lance Lochner (University of Western Ontario)
    Abstract: We develop a dynastic human capital investment framework to study the importance of potential market failures -- family borrowing constraints and uninsured labor market risk -- as well as the process of inter- generational ability transmission in determining human capital investments in children at different ages. We explore the extent to which policies targeted to different ages can address these market failures, potentially improving economic efficiency and equity. We show that dynamic complementarity in investment and the timing of borrowing constraints are critical for the qualitative nature of investment responses to income and policy changes. Based on these analytical results, we use data from the Children of the NLSY (CNLSY) to establish that borrowing constraints bind for at least some families with young and old children. Calibrating our model to fit data from the CNLSY, we find a moderate degree of dynamic complementarity in investment and that 12% of young and 14% of old parents borrow up to their limits. While the effects of relaxing any borrowing limit at a single stage of development are modest, completely eliminating all lifecycle borrowing limits dramatically increases investments, earnings, and intergenerational mobility. Additionally, the impacts of policy or family income changes at college-going ages are substantially greater when anticipated earlier, allowing early investments to adjust. Finally, we show that shifting the emphasis of investment subsidies from college-going ages to earlier ages increases aggregate welfare and human capital.
    Date: 2017
  8. By: Del Negro, Marco (Federal Reserve Bank of New York); Giannone, Domenico (Federal Reserve Bank of New York); Giannoni, Marc (Federal Reserve Bank of New York); Tambalotti, Andrea (Federal Reserve Bank of New York)
    Abstract: Why are interest rates so low in the Unites States? We find that they are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed. We reach this conclusion using two complementary perspectives: a flexible time-series model of trends in Treasury and corporate yields, inflation, and long-term survey expectations, and a medium-scale dynamic stochastic general equilibrium (DSGE) model. We discuss the implications of this finding for the natural rate of interest.
    Keywords: natural rate of interest; r*; DSGE models; liquidity; safety; convenience yield
    JEL: C11 C32 C54 E43 E44
    Date: 2017–05–11
  9. By: Pierre-Richard Agénor; Luiz A. Pereira da Silva
    Abstract: The effects of capital requirements on risk-taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk-taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk-taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may concomitantly require a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.
    Keywords: Capital Requirements, Bank risk-taking, Investment, Financial Stability, Economic Growth, Capital Goods, Financial Regulation, Financial Intermediaries, Financial Markets, risky investments, financial regulation, financial stability
    JEL: O41 G28 E44
    Date: 2017–03
  10. By: Jeremy Greenwood (University of Pennsylvania); Philipp Kircher (EUI and University of Edinburgh); Cezar Santos (FGV/EPGE); Michèle Tertilt (University of Mannheim)
    Date: 2017–05
  11. By: Pinheiro, Roberto (Federal Reserve Bank of Cleveland); Tasci, Murat (Federal Reserve Bank of Cleveland)
    Abstract: We extend an on-the-job search framework in order to allow firms to hire workers with different skills and skills to interact with firms’ total factor productivity (TFP). Our model implies that more productive firms are larger, pay higher wages, and hire more workers at all skill levels and proportionately more at higher skill types, matching key stylized facts. We calibrate the model using five educational attainment levels as proxies for skills and estimate nonparametrically firm-skill output from the wage distributions for different educational levels. We consider two periods in time (1985 and 2009) and three counterfactual economies in which we evaluate how the wage distribution would have evolved if we kept one of the following key characteristics at its 1985’s levels: firm-skill output distribution, labor market frictions, and skill distribution. Our results indicate that 79.2 percent of the overall wage dispersion and 72.6 percent of the within-group component can be attributed to a shift in the firm-skill output distribution. Once we assume a parametric calibration of the output per skill-TFP pair, we are able to show that most of the effect of changes in the output distribution is due to an increase in the average labor productivity of college graduates and post-graduates.
    Keywords: Multi-agent firms; skill distributions; wage inequality;
    JEL: D02 D21 J2 J3
    Date: 2017–05–05
  12. By: Heer, Burkhard; Polito, Vito; Wickens, Michael R.
    Abstract: We study the sustainability of pension systems using a life-cycle model with distortionary taxation that sets an upper limit to the real value of tax revenues. This limit implies an endogenous threshold dependency ratio, i.e. a point in the cross-section distribution of the population beyond which tax revenues can no longer sustain the planned level of transfers to retirees. We quantify the threshold using a computable life-cycle model calibrated on the United States and on 14 European countries which have dependency ratios among the highest in the world. We examine the effects on the threshold and welfare of a number of policies often advocated to improve the sustainability of pension systems. New tax data on dynamic Laffer effects are provided.
    Keywords: Dependency Ratio; Fiscal space; Laffer Effects; Pensions
    JEL: E62 H20
    Date: 2017–04
  13. By: Spencer, Adam
    Abstract: I develop and calibrate an industry equilibrium model with heterogeneous multinational firms to study the impact of a potential policy change from the current U.S. worldwide taxation system to a territorial system on firm investment, capital structure, payout policy and tax revenues. Firms in the model make both intensive and extensive margin decisions in terms of overseas investment. They optimally choose dividend payments to shareholders, holdings of riskless debt securities and earnings repatriations from the subsidiary to the parent in each period. To estimate the impact of the policy change, I solve the model under both worldwide and territorial systems and compare the stationary equilibria. The results show that the policy change causes both domestic and overseas production by U.S. firms to rise. In addition, firms borrow more and pay larger dividends to shareholders. These effects on firm variables are coupled with a rise in U.S. Government tax collections.
    Keywords: Multinational corporations, Firm dynamics, Capital structure, Corporate taxation, Repatriation tax
    JEL: F23 G32 H25 L11
    Date: 2017–05–06
  14. By: Verbrugge, Randal (Federal Reserve Bank of Cleveland); Gallin, Joshua H. (Board of Governors of the Federal Reserve System)
    Abstract: The housing rental market offers a unique laboratory for studying price stickiness. This paper is motivated by two facts: 1. Tenants’ rents are remarkably sticky even though regular and expected recontracting would, by itself, suggest substantial rent flexibility. 2. Rent stickiness varies significantly across structure type; for example, detached unit rents are far stickier than large apartment unit rents. We offer the first theoretical explanation of rent stickiness that is consistent with these facts. In this theory, search and bargaining with incomplete information generates stickiness in the absence of menu costs or other commonly used modeling assumptions. Tenants’ valuations of their units, and whether they are considering other units, are both private information. At lease end, the behavior of risk-averse landlords differs according to the number of units managed. Multi-unit landlords, aided by the law of large numbers, exploit tenant moving costs. When renegotiating rent contracts, they set rent increases that exceed the inflation rate; while the majority of tenants stay, those who place low value on the unit search elsewhere and leave. Landlords with one unit loathe vacancy and offer tenants the identical contract to pre-empt search; only those who really hate the unit leave.
    Keywords: Price stickiness; Bargaining; Search; Incomplete information;
    JEL: C7 C78 D4 D83 D9 E3 R31
    Date: 2017–05–05

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