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on Dynamic General Equilibrium |
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Issue of 2017‒06‒04
thirteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Funke, Michael; Kirkby, Robert; Mihaylovski, Petar |
| Abstract: | We analyse the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to New Zealand. We find that the main historical drivers of house prices are shocks specific to the housing sector. While our estimates show that monetary policy has large spillover effects on house prices, it does not appear to have been a major driver of house prices in New Zealand. We consider macroprudential policies, including the loan-to-value restrictions that have been implemented in New Zealand. We find that loan-to-value restrictions reduce house prices with negligible effects on consumer prices, suggesting that they can be used without derailing monetary policy. We estimate that the loan-to-value restrictions imposed in New Zealand in 2013 reduced house prices by 3.8 per cent and that greater forward guidance on their duration would have made them more effective. |
| Keywords: | Macroprudential policies, Housing, DSGE, Bayesian estimation, New Zealand, |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwecf:6354&r=dge |
| By: | Tomasz Piskorski; Alexei Tchistyi |
| Abstract: | We develop a tractable general equilibrium framework of housing and mortgage markets with aggregate and idiosyncratic risks, costly liquidity and strategic defaults, empirically relevant informational asymmetries, and endogenous mortgage design. We show that adverse selection plays an important role in shaping the form of an equilibrium contract. If borrowers' homeownership values are known, aggregate wages and house prices determine the optimal state-contingent mortgage payments, which efficiently reduces the costs of liquidity default. However, when lenders are uncertain about homeownership values, the equilibrium contract only depends on house prices and takes the form of a home equity insurance mortgage (HEIM) that eliminates the strategic default option and insures the borrower's equity position. Interestingly, we show that widespread adoption of such loans has ambiguous effects on the homeownership rate and household welfare. In economies in which recessions are expected to be severe, the HEIM equilibrium Pareto dominates the equilibrium with fixed-rate mortgages. However, if economic downturns are not severe, HEIMs can lower the homeownership rate and make some marginal home buyers worse-off. We also note that adjustable-rate mortgages (ARMs) may share some benefits with HEIMs, which may help justify a high concentration of ARMs among riskier borrowers. Finally, we find that unrestricted competition between lenders may lead to a non-existence of equilibrium. This suggests that government-sponsored enterprises may stabilize mortgage markets by subsidizing certain mortgage contracts. |
| JEL: | D1 D5 E44 G01 G21 G28 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23452&r=dge |
| By: | Gerba, Eddie; Żochowski, Dawid |
| Abstract: | The Great Recession has been characterised by the two stylized facts: the buildup of leverage in the household sector in the period preceding the recession and a protracted economic recovery that followed. We attempt to explain these two facts as an information friction, whereby agents are uncertain about a new state of the economy following a financial innovation. To this end, we extend Boz and Mendoza (2014) by explicitly modelling the credit markets and by modifying the learning to an adaptive set-up. In our model the build-up of leverage and the collateral price cycles takes longer than in a stylized DSGE model with financial frictions. The boom-bust cycles occur as rare events, with two systemic crises per century. Financial stability is achieved with an LTV-cap regulation which smooths the leverage cycles through quantity (higher equity participation requirement) and price (lower collateral value) effects, as well as by providing an anchor in the learning process of agents. JEL Classification: G14, G17, G21, G32, E44, E58 |
| Keywords: | deregulation, financial engineering, leverage forecasting, macroprudential policy, uncertainty |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172068&r=dge |
| By: | Georgiadis, Georgios (European Central Bank); Jancokova, Martina (European Central Bank) |
| Abstract: | Financial globalisation and spillovers have gained immense prominence over the last two decades. Yet, powerful cross-border financial spillover channels have not become a standard element of structural monetary models. Against this background, we hypothesise that New Keynesian DSGE models that do not feature powerful financial spillover channels confound the effects of domestic and foreign disturbances when confronted with the data. We derive predictions from this hypothesis and subject them to data on monetary policy shock estimates for 29 economies obtained from more than 280 monetary models in the literature. Consistent with the predictions from our hypothesis we find: Monetary policy shock estimates obtained from New Keynesian DSGE models that do not account for powerful financial spillover channels are contaminated by a common global component; the contamination is more severe for economies that are more susceptible to financial spillovers in the data; and the shock estimates imply implausibly similar estimates of the global output spillovers from monetary policy in the US and the euro area. None of these findings applies to monetary policy shock estimates obtained from VAR and other statistical models, financial market expectations and the narrative approach. |
| JEL: | C50 E52 F42 |
| Date: | 2017–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:314&r=dge |
| By: | Wei Cui (Centre for Macroeconomics (CFM); University College London (UCL)); Leo Kaas (University of Konstanz) |
| Abstract: | Recessions are often accompanied by spikes of corporate default and prolonged declines of business credit. This paper argues that credit and default cycles are the outcomes of variations in self-fulfilling beliefs about credit market conditions. We develop a tractable macroeconomic model in which leverage ratios and interest spreads are determined in optimal credit contracts that reflect the expected default risk of borrowing firms. We calibrate the model to evaluate the impact of sunspots and fundamental shocks on the credit market and on output dynamics. Self-fulfilling changes in credit market expectations trigger sizable reactions in default rates and generate endogenously persistent credit and output cycles. All credit market shocks together account for about 50% of the variation of U.S. output growth during 1982-2015. |
| Keywords: | Firm default, Financing constraints, Credit spreads, Sunspots |
| JEL: | E22 E32 E44 G12 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1716&r=dge |
| By: | Pawel Krolikowski; Andrew H. McCallum |
| Abstract: | We present a tractable framework that embeds goods-market frictions in a general equilibrium dynamic model with heterogeneous exporters and identical importers. These frictions arise because it is time consuming and expensive for exporters and importers to meet. We show that search frictions lead to an endogenous fraction of unmatched exporters, alter the gains from trade, endogenize entry costs, and imply that the competitive equilibrium does not generally result in the socially optimal number of searching firms. Finally, ignoring search frictions results in biased estimates of the effect of tariffs on trade flows. |
| Keywords: | Search ; Trade ; Goods ; Frictions ; Information |
| JEL: | D83 F12 |
| Date: | 2017–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1207&r=dge |
| By: | Shaofeng Xu |
| Abstract: | This paper examines the effects of time-varying volatility on welfare. I construct a tractable endogenous growth model with recursive preferences, stochastic volatility, and capital adjustment costs. The model shows that a rise in volatility can decelerate growth in the absence of any level shocks. In contrast to level risk, which is always welfare reducing for a risk-averse household, volatility risk can increase or decrease welfare, depending on model parameters. When calibrated to U.S. data, the model finds that the welfare cost of volatility risk is largely negligible under plausible model parameterizations. |
| Keywords: | Business fluctuations and cycles, Economic models |
| JEL: | E2 E3 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:17-20&r=dge |
| By: | Adrien Auclert |
| Abstract: | This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Three channels affect aggregate spending when winners and losers have different marginal propensities to consume: an earnings heterogeneity channel from unequal income gains, a Fisher channel from unexpected inflation, and an interest rate exposure channel from real interest rate changes. Sufficient statistics from Italian and U.S. data suggest that all three channels are likely to amplify the effects of monetary policy. A standard incomplete markets model can deliver the empirical magnitudes if assets have plausibly high durations but a counterfactual degree of inflation indexation. |
| JEL: | D31 D52 E21 E52 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23451&r=dge |
| By: | Michaud, Amanda M. (Federal Reserve Bank of Cleveland); Rothert, Jacek (United States Naval Academy) |
| Abstract: | Government expenditures are pro-cyclical in emerging markets and counter-cyclical in developed economies. We show this pattern is driven by differences in social transfers. Transfers are more counter-cyclical and comprise a larger portion of spending in developed economies compared to emerging. In contrast, government expenditures on goods and services are quite similar across the two. In a small open economy model, we find disparate social transfer policies can account for more than a half of the excess volatility of consumption relative to output in emerging economies. We analyze how differences in tax policy and the nature of underlying inequality amplify or mitigate this result. |
| Keywords: | Fiscal Policy; Open Economy Macroeconomics; Emerging Markets; Business Cycles; |
| JEL: | E3 E6 F4 |
| Date: | 2017–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1709&r=dge |
| By: | Luca Pensieroso (Université Catholique de Louvain); Alessandro Sommacal (Department of Economics (University of Verona)) |
| Abstract: | We show that the structural change of the economy from agriculture to industry was a major determinant of the observed shift in intergenerational coresidence. We build a two-sector overlapping generation model of the structural change out of agriculture, in which the coresidence choice is endogenous. We calibrate the model on US data and simulate it. The model can match well the decline in US intergenerational coresidence between 1870 and 1940. |
| Keywords: | living arrangements, family economics, structural change, economic development, unified growth theory |
| JEL: | O40 O11 O33 J10 E13 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:10/2017&r=dge |
| By: | Oliver de Groot (University of St Andrews); Alexander W. Richter (Federal Reserve Bank of Dallas); Nathaniel A. Throckmorton (College of William & Mary) |
| Abstract: | Basu and Bundick (2017) show a second moment intertemporal preference shock creates meaningful declines in output in a sticky price model with Epstein and Zin (1991) preferences. The result, however, rests on the way they model the shock. If a preference shock is included in Epstein-Zin preferences, the distributional weights on current and future utility must sum to 1, otherwise it creates an asymptote in the response to the shock with unit intertemporal elasticity of substitution. When we change the preferences so the weights sum to 1, the asymptote disappears as well as their main results—uncertainty shocks generate small increases in output and comovement with consumption and investment that is at odds with the data. We examine three changes to the model—recalibration, a risk-premium shock, and a disaster risk-type shock—to try and restore their results, but in all three cases the model is unable to match VAR evidence. |
| Keywords: | Stochastic Volatility, Epstein-Zin Preferences, Uncertainty, Economic Activity |
| JEL: | D81 E32 |
| Date: | 2017–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1710&r=dge |
| By: | Francisco M. Gonzalez (Department of Economics, University of Waterloo); Itziar Lazkano (University of Wisconsin-Milwaukee); Sjak A. Smulders (Tilburg University) |
| Abstract: | We show that intergenerational altruism suffers from future bias if generations overlap and people?s altruism concerns the well-being of immediate ancestors and descendants. Future bias involves preference reversals associated with increasing impatience, which can create a con?flict of interest between current and future governments representing living generations. We explore the implications of this con?flict for intergenerational redistribution when there is a sequence of utilitarian governments choosing policies independently over time. We show that future-biased governments can have an incentive to legislate and sustain a pay-as-you-go pension system, which can be understood, from the viewpoint of every government, as a self-enforcing commitment mechanism to increase future old-age transfers. |
| JEL: | D71 D72 H55 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:wat:wpaper:1703&r=dge |
| By: | Mariano A. Somale |
| Abstract: | This paper develops a multi-country, general equilibrium, semi endogenous growth model of innovation and trade in which specialization in innovation and production are jointly determined. The distinctive element of the model is the ability of the agents to direct their research efforts to specific goods, in a context of heterogeneous innovation capabilities across countries and contemporaneous decreasing returns to R&D. The model features a two-way relationship between trade and technology absent in standard quantitative Ricardian trade models. I calibrate the model using a sample of 29 countries and 18 manufacturing industries and quantify the importance of endogenous adjustments in technology. I find that endogenous adjustments in technology due to directed research can account for up to 52.8% of the observed variance in comparative advantage in production. In addition, the model suggests that standard Ricardian models overestimate the reductions in real income from increases in trade costs and underestimate the increment in real income due to trade liberalizations. |
| Keywords: | Trade ; Innovation ; Directed research ; Quantitative models |
| JEL: | F10 F11 O30 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1206&r=dge |