nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒05‒21
27 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Farms, Fertiliser, and Financial Frictions; Yields from a DSGE Model By Sébastien Walker
  2. Could the boom-bust in the eurozone periphery have been prevented? By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  3. On the sources of business cycles: implications for DSGE models By Andrle, Michal; Brůha, Jan; Solmaz, Serhat
  4. The Effectiveness of Consumption Taxes and Transfers as Insurance against Idiosyncratic Risk By Tomoyuki Nakajima; Shuhei Takahashi
  5. The natural rate of interest in a nonlinear DSGE model By Yasuo Hirose; Takeki Sunakawa
  6. Exchange Rate Disconnect in General Equilibrium By Oleg Itskhoki; Dmitry Mukhin
  7. Fiscal Rules and Sovereign Default By Laura Alfaro; Fabio Kanczuk
  8. Coordinating the Household Retirement Decision By Irina Merkurieva
  9. Measuring the size of the shadow economy using a dynamic general equilibrium model with trends By Solis-Garcia, Mario; Xie, Yingtong
  10. The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model By Hohberger, Stefan; Priftis, Romanos; Vogel, Lukas
  11. Liquidity Constraints in the U.S. Housing Market By Denis Gorea; Virgiliu Midrigan
  12. Is GDP more volatile in developing countries after taking the shadow economy into account? Evidence from Latin America By Solis-Garcia, Mario; Xie, Yingtong
  13. Monetary-Fiscal Interactions and the Euro Area's Malaise By Jarocinski, Marek; Mackowiak, Bartosz Adam
  14. What determines Chinaís housing price dynamics? New evidence from a DSGE-VAR By Liu, Chunping; Ou, Zhirong
  15. International Reserves, Credit Constraints, and Systemic Sudden Stops By Samer Shousha
  16. Interbank Market Frictions and Unconventional Policy in a Currency Union By Swarbrick, Jonathan Mark; Blattner, Tobias
  17. Do Misperceptions about Demand Matter? Theory and Evidence By Kenza Benhima; Céline Poilly
  18. Effects of Monetary Policy Shocks on Inequality in Japan By Masayuki Inui; Nao Sudo; Tomoaki Yamada
  19. Growth Effects of Annuities and Government Transfers in Perpetual Youth Models By Miyoshi, Yoshiyuki; Toda, Alexis Akira
  20. Sovereign default risk and debt limits: Case of Slovakia By Zuzana Mucka; Ludovit Odor
  21. A New Way to Quantify the Effect of Uncertainty By Richter, Alexander; Throckmorton, Nathaniel
  22. Development, fertility and childbearing age: A unified growth theory By Hippolyte D'Albis; Angela Greulich; Grégory Ponthière
  23. Banks as Tanks: A Continuous-Time Model of Financial Clearing By Isaac M. Sonin; Konstantin Sonin
  24. Bank Lending Constraints in the Euro Area By Daniel P. Monteiro; Romanos Priftis
  25. An Estimated Structural Model of Entrepreneurial Behavior By Jones, John Bailey; Pratap, Sangeeta
  26. The effects of Fiscal Consolidations: Theory and Evidence By Alesina, Alberto; Barbiero, Omar; Favero, Carlo A.; Giavazzi, Francesco; Paradisi, Matteo
  27. Huggett Economies with Multiple Stationary Equilibria By Toda, Alexis Akira

  1. By: Sébastien Walker
    Abstract: This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model with a financial accelerator which captures key features of low-income countries (LICs). The predominance of supply shocks in LICs poses distinct challenges for policymakers, given the negative correlation between inflation and the output gap in the case of supply shocks. Our results suggest that: (1) in the face of a supply-side shock, the most desirable interest rate rule involves simply targeting current inflation and smoothing the policy interest rate; and (2) ignoring financial frictions when evaluating policy rules can be particularly problematic in LICs, where financial frictions loom especially large.
    Date: 2017–05–05
  2. By: Marcin Bielecki (Narodowy Bank Polski, University of Warsaw); Michał Brzoza-Brzezina (Narodowy Bank Polski, Warsaw School of Economics); Marcin Kolasa (Narodowy Bank Polski, Warsaw School of Economics); Krzysztof Makarski (Narodowy Bank Polski, Warsaw School of Economics)
    Abstract: Boom-bust cycles in the eurozone periphery almost toppled the common currency and recent experience suggests that they may return soon. We check whether monetary or macroprudential policy could have prevented the periphery’s violent boom and bust after the euro adoption. We estimate a DSGE model for the two euro area regions, core and periphery, and conduct a series of historical counterfactual experiments in which monetary and macroprudential policy follow optimized rules that use area-wide welfare as the criterion. We show that common monetary policy could have better stabilized output in both regions, but not the housing market or the periphery’s trade balance.In contrast, region-specific macroprudential policy could have substantially smoothed the credit cycle in the periphery and reduced the build-up of external imbalances.
    Keywords: euro-area imbalances, monetary policy, macroprudential policy, Bayesian estimation
    JEL: E32 E44 E58
    Date: 2017
  3. By: Andrle, Michal; Brůha, Jan; Solmaz, Serhat
    Abstract: What are the drivers of business cycle fluctuations? And how many are there? By documenting strong and predictable co-movement of real variables during the business cycle in a sample of advanced economies, we argue that most business cycle fluctuations are driven by one major factor. The positive co-movement of real output and inflation convincingly argues for a demand story. This feature—robust across time and space—provides a simple smell test for structural macroeconomic models. We propose a simple statistic that can compare data and models. Based on this statistic, we show that the recent vintage of structural economic models has difficulties replicating the stylized facts we document. JEL Classification: C10, E32, E50
    Keywords: business cycle, demand shocks, DSGE models, dynamic principal component analysis
    Date: 2017–05
  4. By: Tomoyuki Nakajima (Institute of Economic Research, Kyoto University); Shuhei Takahashi (Institute of Economic Research, Kyoto University)
    Abstract: We quantitatively evaluate the effectiveness of a consumption tax and transfer pro- gram as insurance against idiosyncratic earnings risk. Our framework is a heterogeneous- agent, incomplete-market model with idiosyncratic wage risk and indivisible labor. The model is calibrated to the U.S. economy. We find a weak insurance effect of the transfer program. Extending the transfer system from the current scale raises consumption un- certainty, which increases aggregate savings and reduces the interest rate. Furthermore, consumption inequality shows a small decrease.
    Keywords: Consumption taxes; Transfers; Risk sharing; Consumption inequality; Indivisible labor; Incomplete markets
    JEL: E62 D31 J22 C68
    Date: 2017–03
  5. By: Yasuo Hirose; Takeki Sunakawa
    Abstract: This paper investigates how and to what extent nonlinearity, including the zero lower bound on the nominal interest rate, affects the estimates of the natural rate of interest in a dynamic stochastic general equilibrium model with sticky prices and wages. We find that the estimated natural rate of interest in a nonlinear model is substantially different from that in its linear counterpart because of a contractionary effect of the zero lower bound, and that other nonlinearities such as price and wage dispersion, from which a linear model abstracts, play a minor role in identifying the natural rate.
    Keywords: Natural rate of interest, Nonlinearity, Zero lower bound, Particle filter
    JEL: C32 E31 E43 E52
    Date: 2017–05
  6. By: Oleg Itskhoki; Dmitry Mukhin
    Abstract: We propose a dynamic general equilibrium model of exchange rate determination, which simultaneously accounts for all major puzzles associated with nominal and real exchange rates. This includes the Meese-Rogoff disconnect puzzle, the PPP puzzle, the terms-of-trade puzzle, the Backus- Smith puzzle, and the UIP puzzle. The model has two main building blocks — the driving force (or the exogenous shock process) and the transmission mechanism — both crucial for the quantitative success of the model. The transmission mechanism — which relies on strategic complementarities in price setting, weak substitutability between domestic and foreign goods, and home bias in consumption — is tightly disciplined by the micro-level empirical estimates in the recent international macroeconomics literature. The driving force is an exogenous small but persistent shock to international asset demand, which we prove is the only type of shock that can generate the exchange rate disconnect properties. We then show that a model with this financial shock alone is quantitatively consistent with the moments describing the dynamic comovement between exchange rates and macro variables. Nominal rigidities improve on the margin the quantitative performance of the model, but are not necessary for exchange rate disconnect, as the driving force does not rely on the monetary shocks. We extend the analysis to multiple shocks and an explicit model of the financial sector to address the additional Mussa puzzle and Engel’s risk premium puzzle.
    JEL: E30 F30 F4
    Date: 2017–05
  7. By: Laura Alfaro; Fabio Kanczuk
    Abstract: Recurrent concerns over debt sustainability in emerging and developed nations have prompted renewed debate on the role of fiscal rules. Their optimality, however, remains unclear. We provide a quantitative analysis of fiscal rules in a standard model of sovereign debt accumulation and default modified to incorporate quasi-hyperbolic preferences. For reasons of political economy or aggregation of citizens’ preferences, government preferences are present biased, resulting in over-accumulation of debt. Calibrating this parameter with values in the literature, the model can reproduce debt levels and frequency of default typical of emerging markets even if the household impatience parameter is calibrated to local interest rates. A quantitative exercise finds welfare gains of the optimal fiscal policy to be economically substantial, and the optimal rule to not entail a countercyclical fiscal policy. A simple debt rule that limits the maximum amount of debt is analyzed and compared to a simple deficit rule that limits the maximum amount of deficit per period. Whereas the deficit rule does not perform well, the debt rule yields welfare gains virtually equal to the optimal rule.
    JEL: F34 H63
    Date: 2017–04
  8. By: Irina Merkurieva (University of St Andrews)
    Abstract: This paper explores the sources of retirement synchronisation in dual career households. Empirical evidence suggests that majority of the couples exit the labor force within a short period of time, too tight to be explained by the age differences alone. This retirement coordination is frequently attributed to the complementarity of the spouses’ leisure. Contrary to this view, my estimates suggest that in a household with CES preferences the quantities of leisure consumed by husbands and wives are gross substitutes. Looking for alternative explanations, I develop a dynamic programming model of optimal retirement and labor supply decisions with uncertainty about the household structure, survival, future health status and income. Apart from leisure complementarity, four other channels may generate coordinated retirement in the model: correlated shocks to the individual health and wages, joint response to the shocks received by the household, correlated tastes for leisure due to sorting on unobservables captured by the household fixed effects, and spousal benefits provided by the Social Security. The model generates a distribution of optimal retirement timing that closely mimics the outcomes observed in the data. A counterfactual designed to shut down the family based provisions of the Social Security Act shows that most of the observed coordination can be explained by the existing Social Security policy.
    Keywords: retirement, intertemporal household choice, leisure complementarity
    JEL: J26 J14 D91
  9. By: Solis-Garcia, Mario; Xie, Yingtong
    Abstract: We propose a methodology for measuring the size and properties of the shadow economy. We use a two-sector dynamic deterministic general equilibrium model with four different trends: hours worked, investment-specific productivity, formal productivity, and shadow productivity. We find that the shadow productivity trend is endogenous, in the sense that it is an exact function of model parameters and the other three trends. We also document that, in order to be consistent with observed (real-world) trend growths, the shadow sector needs to exhibit increasing returns to scale, which is contrary to the standard procedure of imposing decreasing returns to this sector. We apply our methodology to a set of seven Latin American and Asian countries and document several empirical regularities that emerge from our analysis, the most important one being that the volatility of shadow sector output is considerably larger than the one in formal sector output.
    Keywords: shadow economy, business cycles, DSGE models
    JEL: E26 E32 O17
    Date: 2017–01–03
  10. By: Hohberger, Stefan; Priftis, Romanos; Vogel, Lukas
    Abstract: This paper analyses the macroeconomic effects of the ECB's quantitative easing programme using an open-economy DSGE model estimated with Bayesian techniques. Using data on government debt stocks and yields across maturities we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to EA year-on-year output growth and inflation of up to 0.4 and 0.5 pp in the standard linearised version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact up to 1.0 and 0.7 pp, respectively.
    Keywords: E44, E52, E53, F41
    JEL: E44 E52 F41
    Date: 2017–03–14
  11. By: Denis Gorea; Virgiliu Midrigan
    Abstract: We study the severity of liquidity constraints in the U.S. housing market using a life-cycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents have the option to refinance their long-term mortgages or obtain home equity loans. The model reproduces well the distribution of individual-level balance sheets – the fraction of housing, mortgage debt and liquid assets in households' wealth, the fraction of hand-to-mouth homeowners (Kaplan and Violante, 2014), as well as the frequency of housing turnover and home equity extraction in the 2001 data. The model implies that 75% of homeowners are liquidity constrained and willing to pay an average of 8 cents to extract an additional dollar of liquidity from their home. Liquidity constraints imply sizable welfare losses equivalent to a 1.2% permanent reduction in consumption.
    JEL: E21 E30
    Date: 2017–04
  12. By: Solis-Garcia, Mario; Xie, Yingtong
    Abstract: Why is GDP more volatile in developing countries? In this paper we propose an explanation that can account for the substantial differences in the volatility of measured real GDP per capita between developing and developed countries. Our explanation involves the often overlooked fact that developing economies have a sizable shadow economy. We build a two-sector model that distinguishes between measured (formal) and total (formal and shadow) outputs; using data from Latin America, our model results suggest that developing and developed economies are fairly similar in terms of the volatility of total real GDP. We also document an apparent puzzle, in that the model suggests that the volatility of the size of the shadow economy should be substantially larger than what is observed in the real world. We believe that this may be indicative of frictions that prevent agents from optimally moving between the formal and shadow economies.
    Keywords: shadow economy, business cycles, DSGE models, Bayesian estimation
    JEL: E26 E32 O17
    Date: 2017–03–30
  13. By: Jarocinski, Marek; Mackowiak, Bartosz Adam
    Abstract: When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB's objective.
    Keywords: fiscal theory of the price level; eurobond; self-ful lfiling expectations; zero lower bound
    JEL: E31 E32 E63
    Date: 2017–05
  14. By: Liu, Chunping (Nottingham Trent University); Ou, Zhirong (Cardiff Business School)
    Abstract: We investigate what determines Chinaís housing price dynamics using a DSGE-VAR estimated with priors allowing for the featured operating of normal and ëshadowí banks in China, with data observed between 2001 and 2014. We Önd that the housing demand shock, which is the essential factor for housing price ëbubblesí to happen, accounts for over 80% of the housing price áuctuation. We also Önd that a prosperous housing market could have led to future economic growth, though quantitatively its marginal impact is small. But this also means that, for policy-makers who wish to stabilise the housing market, the cost on output reduction would be rather limited.
    Keywords: Housing price; Bubbles; Market spillovers; DSGE-VAR; China
    JEL: C11 E32 E44 R31
    Date: 2017–04
  15. By: Samer Shousha
    Abstract: Why do emerging market economies simultaneously hold very high levels of international reserves and foreign liabilities? Moreover, why, even with such huge amounts of international reserves, did countries barely use them during the Global Financial Crisis? I argue that including international reserves as an implicit collateral for external borrowing in a small open economy model subject to exogenous financial shocks can explain both of these puzzling facts. I find that the model can obtain ratios of international reserves and net foreign liabilities to GDP similar to those of Latin American countries. Additionally, the optimal policy implies that the government accumulates international reserves before a sudden stop and that there is a small depletion during it. Finally, an alternative policy of keeping international reserves constant at the average level yields results very similar to those of the optimal policy during sudden stops, highlighting the stabilizing role of international reserves even if central banks do not use them.
    Keywords: International reserves ; Emerging market economies ; Sudden stops ; International crises
    JEL: F32 F34 F41
    Date: 2017–05–04
  16. By: Swarbrick, Jonathan Mark; Blattner, Tobias
    Abstract: In this paper we show how interbank market frictions can play an important role in propagating and enhancing the effects of shocks in a currency union, and discuss the efficacy of two unconventional policy measures; multi-period central bank refinance operations and large scale asset purchases. To this end, a two-country structural model with idiosyncratic risk and country-specific transactional costs on interbank lending is proposed and used to show that (i) the effectiveness of monetary policy is enhanced when banks face an external finance premium in the interbank market; (ii) adverse shocks to the real economy can be the source of banking crisis, causing an increase in the interbank finance premia, aggravating the initial shock; and (iii) asset purchase policies and long-term refinancing operations can both be successful in supporting conventional monetary policy in mitigating the adverse effects of shocks.
    Keywords: Interbank market,monetary union,financial frictions,unconventional monetary policy
    JEL: E44 E52 F32 F36
    Date: 2017
  17. By: Kenza Benhima (DEEP-HEC - HEC Lausanne - Université de Lausanne, CEPR - Center for Economic Policy Research - CEPR); Céline Poilly (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique - ECM - Ecole Centrale de Marseille)
    Abstract: We assess theoretically and empirically the consequences of demand misperceptions. In a New Keynesian model with dispersed information, agents receive noisy signals about both supply and demand. Firms and consumers have an asymmetric access to information, so aggregate misperceptions of demand by the supply side can drive economic fluctuations. The model’s predictions are used to identify empirically fundamental and noise shocks on supply and demand. We exploit survey nowcast errors on both GDP growth and inflation, fundamental and noise shocks affecting the errors with opposite signs. We show that demand-related noise shocks have a negative effect on output and contribute substantially to business cycles. Additionally, monetary policy plays a key role in the transmission of demand noise.
    Keywords: business cycles,information frictions,noise shocks,SVARs with sign restrictions
    Date: 2017–05
  18. By: Masayuki Inui (Bank of Japan); Nao Sudo (Bank of Japan); Tomoaki Yamada (Meiji University)
    Abstract: Impacts of monetary easing on inequality have recently attracted increasing attention. In this paper, we use the micro-level data of Japanese households to study the distributional effects of monetary policy. We construct quarterly series of income and consumption inequality measures from 1981 to 2008, and estimate their response to a monetary policy shock. We do find that monetary policy shocks do not have statistically significant impacts on inequalities across Japanese households in a stable manner. We find evidence, when considering inequality across households whose head is employed, an expansionary monetary policy shock increased income inequality through a rise in earnings inequality, in the period before the 2000s. Such procyclical responses are, however, scarcely observed when the current data is included in the sample period, or when earnings inequality across all households is considered. We also find that, transmission of income inequality to consumption inequality is minor even during the period when procyclicality of income inequality was pronounced. Using a two-sector dynamic general equilibrium model with attached labor inputs, we show that labor market flexibility is the central to the dynamics of income inequality after monetary policy shocks. We also use the micro-level data of households' balance sheet and show that distributions of households' financial assets and liabilities do not play a significant role in the distributional effects of monetary policy.
    Keywords: Monetary Policy; Income inequality; Consumption inequality
    JEL: E3 E4 E5
    Date: 2017–05–10
  19. By: Miyoshi, Yoshiyuki; Toda, Alexis Akira
    Abstract: We show that in overlapping generations endogenous growth models with uncertain lifetime, the introduction of government transfers always increases economic growth by crowding out the private annuity market and increasing accidental bequests. In particular, if the government imposes a flat-rate consumption tax (which is neutral to the consumption-saving margin), uses part of the tax revenue for unproductive purposes, and rebates the rest equally across agents as a lump-sum transfer, the economy grows faster and improves the welfare of future generations.
    Keywords: annuity, endogenous growth, overlapping generations, redistribution
    JEL: D58 E21 H20 H21 O41
    Date: 2016–05–16
  20. By: Zuzana Mucka (Council for Budget Responsibility); Ludovit Odor (Council for Budget Responsibility)
    Abstract: We use a sovereign default model developed by Hatchondo et al. (2015) to study the implications of adopting constitutional debt limits. It can be shown, that for a benevolent government issuing long-term debt it is welfare-enhancing to introduce credible fiscal rules to mitigate the so called "debt dilution" problem. By calibrating the theoretical model to Slovak data, we estimate the optimal (net) debt brake threshold at 48 percent of the mean annual output. Compared to a no-rule economy, the introduction of a fully-credible debt limit represents a substantial decrease in average sovereign spreads (50 basis points). In the empirical part of the paper we find that the introduction of the constitutional Fiscal Responsibility Act in Slovakia in 2011 might have helped to lower sovereign spreads compared to euro area peers by 20-30 basis points.
    Keywords: sovereign default risk, debt dilution, fiscal rules, debt limits
    JEL: H1 H63 H8
    Date: 2017–04
  21. By: Richter, Alexander (Federal Reserve Bank of Dallas); Throckmorton, Nathaniel (College of William & Mary)
    Abstract: This paper develops a new method to quantify the effects of uncertainty using estimates from a nonlinear New Keynesian model. The model includes an occasionally binding zero lower bound constraint on the nominal interest rate, which creates time-varying endogenous uncertainty, and two exogenous types of time-varying uncertainty—a volatility shock to technology growth and a volatility shock to the risk premium. A filtered third-order approximation of the Euler equation shows consumption uncertainty on average reduced consumption by about 0.06% and the peak effect was 0.15% during the Great Recession. Other higher-order moments such as inflation uncertainty, technology growth uncertainty, consumption skewness, and inflation skewness had smaller
    Keywords: Baysian estimation; uncertainty; stochastic volatility; zero lower bound
    JEL: C11 D81 E32 E58
    Date: 2017–05–04
  22. By: Hippolyte D'Albis (PSE - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Angela Greulich (PSE - Paris School of Economics, INED - Institut national d'études démographiques, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Grégory Ponthière (PSE - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12)
    Abstract: During the last two centuries, fertility has exhibited, in industrialized economies, two distinct trends: the cohort total fertility rate follows a decreasing pattern, while the cohort average age at motherhood exhibits a U-shaped pattern. This paper proposes a unified growth theory aimed at rationalizing those two demographic stylized facts. We develop a three-period OLG model with two periods of fertility, and show how a traditional economy, where individuals do not invest in higher education, and where income rises push towards advancing births, can progressively converge towards a modern economy, where individuals invest in higher education, and where income rises encourage postponing births. Our findings are illustrated numerically by replicating the dynamics of the quantum and the tempo of births for Swedish cohorts born between 1876 and 1966.
    Keywords: fertility,childbearing age,births postponement,human capital,regime shift
    Date: 2017–02
  23. By: Isaac M. Sonin; Konstantin Sonin
    Abstract: We present a simple model of clearing in financial networks in continuous time. In the model, firms (banks) are represented as reservoirs (tanks) with liquid (money) flowing in and out. This approach provides a simple recursive solution to a classical static model of financial clearing introduced by Eisenberg and Noe (2001). The dynamic structure of our model helps to answer other related questions and, potentially, opens the way to handle more complicated dynamic financial networks. Also, our approach provides a useful tool for solving nonlinear equations involving linear system and max min operations similar to the Bellman equation for the optimal stopping of Markov chains and other optimization problems.
    Date: 2017–05
  24. By: Daniel P. Monteiro; Romanos Priftis
    Abstract: This paper constructs stylized scenarios to assess the lending constraints faced by the banking sectors of euro area Member States arising from a combination of low profitability, adverse bank equity markets and the phase in of new capital requirements. In this connection, it also presents a comprehensive review of the potential sources of increases in minimum bank capital requirements, providing projections for their evolution at Member State level. The combination of the aforementioned factors is seen to carry the potential to significantly constrain bank lending over the period of transition to higher capital ratios which, according to DSGE model simulations, can noticeably impair growth and investment levels in the short run.
    JEL: G21 G28 E22 E27
    Date: 2017–02
  25. By: Jones, John Bailey (Federal Reserve Bank of Richmond); Pratap, Sangeeta (Hunter College & Graduate Center - CUNY)
    Abstract: Using a rich panel of owner-operated New York dairy farms, we provide new evidence on entrepreneurial behavior. We formulate a dynamic model of farms facing uninsured risks and financial constraints. Farmers derive nonpecuniary benefits from operating their businesses. We estimate the model via simulated minimum distance, matching both production and financial data. We find that financial factors and nonpecuniary benefits are of first-order importance. Collateral constraints and liquidity restrictions inhibit borrowing and the accumulation of capital. The nonpecuniary benefits to farming are large and keep small, low-productivity farms in business. Although farmers are risk averse, eliminating uninsured risk has only modest effects on capital and output.
    Keywords: Entrepreneurs; financial constraints
    JEL: G31 G32 L26
    Date: 2017–05–08
  26. By: Alesina, Alberto; Barbiero, Omar; Favero, Carlo A.; Giavazzi, Francesco; Paradisi, Matteo
    Abstract: We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, finding details on over 3500 measures. Government spending and transfer cuts are much less harmful than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigates the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices. This channel explains different sizes of multipliers found in fiscal stimuli compared to consolidation plans.
    Keywords: fiscal consolidation plans; Fiscal multipliers
    JEL: E62
    Date: 2017–05
  27. By: Toda, Alexis Akira
    Abstract: I obtain a closed-form solution to a Huggett economy with CARA utility when the vector of individual state variables follows a VAR(1) process with an arbitrary shock distribution. The stationary equilibrium is unique if the income process is AR(1), but not necessarily so otherwise. With Gaussian shocks, I provide general sufficient conditions for the existence of at least three equilibria when the income process is either ARMA(1,1), AR(2), or has a persistent-transitory (PT) representation with negatively correlated shocks. The possibility of multiple equilibria calls for caution in comparative statics exercises and policy analyses using heterogeneous-agent models.
    Keywords: CARA utility, income fluctuation problem, persistent-transitory representation
    JEL: C62 D52 D58 E21
    Date: 2017–03–13

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