nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒06‒18
twelve papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Credit imperfections, labor market frictions and unemployment: a DSGE approach By Imen Ben Mohamed; Marine Salès
  2. When Inequality Matters for Macro and Macro Matters for Inequality By SeHyoun Ahn; Greg Kaplan; Benjamin Moll; Thomas Winberry; Christian Wolf
  3. Monetary-fiscal interactions and the euro area's malaise By Jarociński, Marek; Maćkowiak, Bartosz
  4. Medium and long term implications of financial integration without financial development By Flavia Corneli
  5. Durable Goods, Investment Shocks and the Comovement Problem By Bee-Lon Chen; Shian-Yu Liao
  6. Approximating Multisector New Keynesian Models By Carvalho, Carlos; Nechio, Fernanda
  7. Cyclical Job Ladders by Firm Size and Firm Wage By John Haltiwanger; Henry Hyatt; Lisa B. Kahn; Erika McEntarfer
  8. Capital Taxation and Investment: Matching 100 Years of Wealth Inequality Dynamics By Boehl, Gregor; Fischer, Thomas
  9. The collateral channel of unconventional monetary policy By Giuseppe Ferrero; Michele Loberto; Marcello Miccoli
  10. Nonneutrality of Money in Dispersion: Hume Revisited By Jin, Gu; Zhu, Tao
  11. Social Security and Saving: An Update By Sita Slavov; Devon Gorry; Aspen Gorry; Frank N. Caliendo
  12. The Optimal Response of Bank Capital Requirements to Credit and Risk in a Model with Financial Spillovers By Occhino, Filippo

  1. By: Imen Ben Mohamed (PSE - Paris School of Economics); Marine Salès (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper investigates the impact of credit market imperfections on unemployment, vacancy posting and wages. We develop and simulate a new-Keynesian DSGE model, integrating sticky prices in goods market and frictions in labor and credit markets. A search and matching process in the labor market and a costly state verification framework in the credit market are introduced. Capital spending, vacancies costs and wage bill need to be paid in advance of production and thus require external financing in a frictional credit market. The theoretical model demonstrates how the procyclicality of the risk premium impacts the vacancy posting decisions, the wage and unemployment levels in the economy. Higher credit market frictions are the source of lower posting vacancies and higher unemployment level. Asymmetric information in the signing of a loan pushes up wholesale firms' marginal costs, as well as hiring costs by a financial mark-up charged by financial intermediaries. This financial mark-up is then transmitted by these firms on prices. Thus, it affects their hiring behavior, the wage and employment levels, as well as inflation in the economy. Then, the theoretical model is simulated by using quarterly United-States (US) data for the sample period 1960:Q1 to 2007:Q4. We find that employment rates and vacancy posting increase following positive credit, net worth and uncertainty shocks. Different channels of propagation from the financial sphere of the economy to the labor market are investigated and the results appear to be consistent with our theoretical model.
    Keywords: new-Keynesian model,labor and credit market frictions,vacancies and unemployment dynamics,intensive and extensive margins,credit shocks
    Date: 2015–10–13
  2. By: SeHyoun Ahn; Greg Kaplan; Benjamin Moll; Thomas Winberry; Christian Wolf
    Abstract: We develop an efficient and easy-to-use computational method for solving a wide class of general equilibrium heterogeneous agent models with aggregate shocks, together with an open source suite of codes that implement our algorithms in an easy-to-use toolbox. Our method extends standard linearization techniques and is designed to work in cases when inequality matters for the dynamics of macroeconomic aggregates. We present two applications that analyze a two-asset incomplete markets model parameterized to match the distribution of income, wealth, and marginal propensities to consume. First, we show that our model is consistent with two key features of aggregate consumption dynamics that are difficult to match with representative agent models: (i) the sensitivity of aggregate consumption to predictable changes in aggregate income and (ii) the relative smoothness of aggregate consumption. Second, we extend the model to feature capital-skill complementarity and show how factor-specific productivity shocks shape dynamics of income and consumption inequality.
    JEL: A0 C0 E0 F0 G0 J0
    Date: 2017–06
  3. By: Jarociński, Marek; Maćkowiak, Bartosz
    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. JEL Classification: E31, E32, E63
    Keywords: eurobond, fiscal theory of the price level, self-fulfilling expectations, zero lower bound
    Date: 2017–06
  4. By: Flavia Corneli (Bank of Italy)
    Abstract: We show that, in a two-country model where the two economies differ in their level of financial market development and initial capital endowment, financial integration has sizeable transitory as well as permanent effects. We confirm that, consistent with the Lucas paradox, financial integration in the medium term can reduce capital accumulation and increase savings in the financially less developed country, characterized by domestic capital market distortions, due to a higher risk premium in production activities. In the long run, however, integration produces higher levels of capital than in the autarky steady state. The opposite happens to the financially advanced economy, where integration initially boosts consumption and leads to a lower saving rate, and in the long run causes a reduction in capital compared with the autarky steady state. Two forces drive these results: precautionary saving and the propensity to move resources from risky capital to safe assets until the risk-adjusted return on capital equalizes the risk-free interest rate; assuming a constant relative risk aversion (CRRA) utility function, these forces are both decreasing in wealth.
    Keywords: financial integration, international capital movements, incomplete markets, economic growth
    JEL: F36 F43 G11 O16
    Date: 2017–06
  5. By: Bee-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Shian-Yu Liao (Department of International Business, Chung Yuan Christian University)
    Abstract: Recent research based on sticky-price models suggests that capital investment shocks are an important driver of business cycle fluctuations. Despite their quantitative importance in explaining business cycles, a comovement problem emerges because the shocks generate an intertemporal substitution effect away from consumption toward investment. This paper resolves the comovement problem by extending the standard neoclassical sticky-price model to a two-sector model with consumer durable services. When durable goods are used as investment in capital and consumer durables, positive capital investment shocks also generate an intratemporal substitution effect away from consumer durable services toward nondurable consumption that dominates the intertemporal effect. As a result, consumption increases, and the comovement problem is resolved.
    Keywords: Investment shocks, Durables, Sticky prices, Comovement
    Date: 2017–05
  6. By: Carvalho, Carlos (Central Bank of Brazil); Nechio, Fernanda (Federal Reserve Bank of San Francisco)
    Abstract: We show that a calibrated three-sector model with a suitably chosen distribution of price stickiness can closely approximate the dynamic properties of New Keynesian models with a much larger number of sectors. The parameters of the approximate three-sector distribution are such that both the approximate and the original distributions share the same (i) average frequency of price changes, (ii) cross-sectional average of durations of price spells, (iii) cross-sectional standard deviation of durations of price spells, (iv) the cross-sectional skewness of durations of price spells, and (v) cross-sectional kurtosis of durations of price spells. These results provide the tools for a growing literature that tries to estimate empirically-relevant multisector models with much reduced computational costs.
    Date: 2017–06–08
  7. By: John Haltiwanger; Henry Hyatt; Lisa B. Kahn; Erika McEntarfer
    Abstract: We study whether workers progress up firm wage and size job ladders, and the cyclicality of this movement. Search theory predicts that workers should flow towards larger, higher paying firms. However, we see little evidence of a firm size ladder, partly because small, young firms poach workers from all other businesses. In contrast, we find strong evidence of a firm wage ladder that is highly procyclical. During the Great Recession, this firm wage ladder collapsed, with net worker reallocation to higher wage firms falling to zero. The earnings consequences from this lack of upward progression are sizable.
    JEL: E24 E32 J63
    Date: 2017–06
  8. By: Boehl, Gregor (IFMS, Goethe University Frankfurt, Germany.); Fischer, Thomas (Department of Economics, Lund University)
    Abstract: Using a parsimonious, analytically tractable dynamic model, we are able to explain up to 100 years of the available data on the dynamics of top-wealth shares for several countries. We build a micro-founded model of heterogeneous agents in which - in addition to stochastic returns on investment - individuals disagree marginally on their expectations of future returns and thus hold different asset positions. We show that, given a positive tax on capital gains, the distribution converges to a double Pareto distribution for which the degree of wealth inequality decreases with the tax rate. Closed-form solutions confirm that without government intervention there is infinite inequality. Moreover, transition dynamics are shown to increase with the tax rate. We discuss the model's ability to match the measured wealth inequality for the US, the UK, Sweden, and France, both in levels and transitions. The heterogeneous development in the different countries and across time can be traced back to different tax regimes.
    Keywords: Wealth inequality; capital taxation; stochastic simulation; heterogeneity
    JEL: C63 D31 G11 H23
    Date: 2017–06–07
  9. By: Giuseppe Ferrero (Bank of Italy); Michele Loberto (Bank of Italy); Marcello Miccoli (Bank of Italy)
    Abstract: We build a general equilibrium model - along the lines of Williamson (2012) - where financial assets can be used as collateral in secured interbank markets to obtain reserves (central bank money). In this framework, frictions in the exchange process give rise to a liquidity premium for assets. An open market operation that provides reserves in exchange for assets decreases the availability of collateral by increasing its liquidity premium (and decreasing its return). The magnitude of the effect depends on assets' pledgeability properties (haircuts). We explore the positive implications of the model shown in the data. Focusing on the period 2009-2014, we analyse the relationship between yields of euro-area government bonds and the relative amount of bonds and central bank reserves held by the euro-area banking sector. We find evidence consistent with our model: yields decrease when reserves increase relative to bonds, with the effect being stronger at lower levels of haircuts. The results are confirmed after several robustness checks.
    Keywords: unconventional monetary policy, secured interbank market, asset prices
    JEL: E43 E58 G12
    Date: 2017–06
  10. By: Jin, Gu; Zhu, Tao
    Abstract: For a class of standard and widely-used preferences, a one-shot money injection in a standard matching model can induce a significant and persistent output response by dispersing the distribution of wealth. Decentralized trade matters for both persistence and significance. In the presence of government bonds the injection has a liquidity effect and the inflation rate right following the injection may be below the steady-state rate level.
    Keywords: Nonneutrality, Money Injection, Phillips Curve, Nominal Rigidity
    JEL: E31 E40 E5 E50
    Date: 2017–06–05
  11. By: Sita Slavov; Devon Gorry; Aspen Gorry; Frank N. Caliendo
    Abstract: Typical neoclassical life-cycle models predict that Social Security has a large and negative effect on private savings. We review this theoretical literature by constructing a model where individuals face uninsurable longevity risk and differ by wage earnings, while Social Security provides benefits as a life annuity with higher replacement rates for the poor. We use the model to generate numerical examples that confirm the standard result. Using several benefit and tax changes from the 1970s and 1980s as natural experiments, we investigate the empirical relationship between Social Security and private savings and find little to support the strong predictions from the theoretical model. We explore possible reasons for the divergence between theoretical predictions and empirical findings.
    JEL: D14 H31 H55
    Date: 2017–06
  12. By: Occhino, Filippo (Federal Reserve Bank of Cleveland)
    Abstract: This paper studies optimal bank capital requirements in an economy where bank losses have financial spillovers. The spillovers amplify the effects of shocks, making the banking system and the economy less stable. The spillovers increase with banks’ financial distortions, which in turn increase with banks’ credit risk. Higher capital requirements dampen the current supply of banks’ credit, but mitigate banks’ future financial distortions. Capital requirements should be raised in response to both an expansion of banks’ credit supply and an increase in the expected future credit risk of banks. They should be lowered close to one-to-one in response to bank losses.
    Keywords: Debt overhang; financial vulnerabilities; financial stability; macro prudential regulation;
    JEL: G20 G28
    Date: 2017–06–06

This nep-dge issue is ©2017 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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