nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒07‒02
fifteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Monetary Policy According to HANK By Greg Kaplan; Benjamin Moll; Giovanni L. Violante
  2. The welfare cost of macro-prudential policy in a two-country DSGE model By Hilary Patroba
  3. Subprime Mortgages and Banking in a DSGE Model By Martino, Ricci; Patrizio, Tirelli
  4. Mortgage Default in an Estimated Model of the U.S. Housing Market By Lambertini Luisa; Nuguer Victoria; Uysal Pinar
  5. Understanding the Aggregate Effects of Credit Frictions and Uncertainty By Balke, Nathan S.; Martinez-Garcia, Enrique; Zeng, Zheng
  6. Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies By Carrillo Julio A.; Mendoza Enrique G.; Nuguer Victoria; Roldán-Peña Jessica
  7. Financial globalisation, monetary policy spillovers and macro-modelling: tales from 1001 shocks By Georgiadis, Georgios; Jančoková, Martina
  8. Heterogeneous Human Capital, Inequality and Growth: The Role of Patience and Skills By Kirill Borissov; Stefano Bosi; Thai Ha-Huy; Leonor Modesto
  9. Scenario Analysis of the Impact of Reducing the Export Duty on Oil on the Russian Economy within the Framework of the General Equilibrium Model By Zubarev, Andrey; Polbin, Andrey
  10. Welfare analysis of bank capital requirements with endogenous default By Fernando Garcia-Barragan; Guangling Liu
  11. Understanding the Cross-Country Effects of US Technology Shocks By Wataru Miyamoto; Thuy Lan Nguyen
  12. Structural asymmetries and financial imbalances in the eurozone By Jaccard, Ivan; Smets, Frank
  13. Having It All? Employment, Earnings and Children By Laun, Tobias; Wallenius, Johanna
  14. Equilibrium Search and the Impact of Equal Opportunities for Women By Coles, Melvyn; Francesconi, Marco
  15. POSITIVE TREND INFLATION AND DETERMINACY IN A MEDIUM-SIZED NEW KEYNESIAN MODEL By Arias, Jonas E.; Ascari, Guido; Branzoli, Nicola; Castelnuovo, Efrem

  1. By: Greg Kaplan (University of Chicago and NBER (E-mail: gkaplan@; Benjamin Moll (Princeton University and NBER (E-mail:; Giovanni L. Violante (Princeton University, CEPR and NBER (E-mail:
    Abstract: We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of wealth and marginal propensities to consume because of two features: uninsurable income shocks and multiple assets with different degrees of liquidity and different returns. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where the substitution channel drives virtually all of the transmission from interest rates to consumption. Failure of Ricardian equivalence implies that, in HANK models, the fiscal reaction to the monetary expansion is a key determinant of the overall size of the macroeconomic response.
    Keywords: Monetary Policy, Heterogeneous Agents, New Keynesian, Consumption, Liquidity, Inequality
    JEL: D14 D31 E21 E52
    Date: 2017–06
  2. By: Hilary Patroba
    Abstract: This paper builds a two-country DSGE model with financial frictions and investigates the welfare cost of macro-prudential policy and its impact on financial stability. The two countries in question are the U.S. and South Africa. The results show that macro-prudential policy results in a welfare trade-off between patient and impatient households. The impact of macro-prudential policy tends to benefit patient households more than impatient households. By decreasing the volatility of loans uptake and output growth, macro-prudential policy could helps to achieve financial stability in South Africa.
    Keywords: welfare cost, credit growth, macro-prudential policy, Financial Stability, two-country, DSGE model
    JEL: E32 E44 E52 E58
    Date: 2017–05
  3. By: Martino, Ricci; Patrizio, Tirelli
    Abstract: Can a DSGE model replicate the financial crisis effects without assuming unprecedented and implausibly large shocks? Starting from the assumption that the subprime crisis triggered the financial crisis, we introduce balance-sheet effects for housing market borrowers and for commercial banks in an otherwise standard DSGE model. Our crisis experiment is initiated by a shock to subprime lending risk, which is calibrated to match the observed increase in subprime delinquency rates. Due to contagion of prime borrowers and to the ensuing adverse effect on banks balance sheets, this apparently small shock is sufficient to trigger a decline in housing investment comparable to what was observed during the financial crisis. The adverse effect of subprimers risk on commercial banks' agency problem is a crucial driver of our results.
    Keywords: Housing, Mortgage default, subprime risk, DSGE
    JEL: E32 E44 G01 R31
    Date: 2017–06–22
  4. By: Lambertini Luisa; Nuguer Victoria; Uysal Pinar
    Abstract: This paper models the housing sector, mortgages and endogenous default in a DSGE setting with nominal and real rigidities. We use data for the period 1981-2006 to estimate our model using Bayesian techniques. We analyze how an increase in risk in the mortgage market raises the default rate and spreads to the rest of the economy, creating a recession. In our model two shocks are well suited to replicate the subprime crisis and the Great Recession: the mortgage risk shock and the housing demand shock. Next we use our estimated model to evaluate a policy that reduces the principal of underwater mortgages. This policy is successful in stabilizing the mortgage market and makes all agents better off.
    Keywords: Housing;Mortgage Default;DSGE model;Bayesian Estimation
    JEL: G01 E44 G21 C11
    Date: 2017–06
  5. By: Balke, Nathan S. (Southern Methodist University); Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas); Zeng, Zheng (Bowling Green State University)
    Abstract: This paper integrates a financial accelerator mechanism à la Bernanke et al. (1999) and timevarying uncertainty into a Dynamic New Keynesian model. We examine the extent to which uncertainty and credit conditions interact with one another. The idea is that uncertainty aggravates the information asymmetry between lenders and borrowers, and worsens credit conditions. Already poor credit conditions amplify the effect of shocks (to both the mean and variance) on the aggregate economy. In our model, uncertainty modelled as time-varying stochastic volatility emerges from monetary policy (policy uncertainty), financial risks (microuncertainty), and the aggregate state of the economy (macro-uncertainty). Using a third order approximation, we find that micro-uncertainty has first order effects on economic activity through its direct impact on credit conditions. We also find that if credit conditions (as measured by the endogenous risk spread) are already poor, then additional micro-uncertainty shocks have even larger real effects. In turn, shocks to aggregate uncertainty (macro- and policy-uncertainty) have relatively small direct effects on aggregate economic activity.
    JEL: C32 D8 E32 E44
    Date: 2017–06–20
  6. By: Carrillo Julio A.; Mendoza Enrique G.; Nuguer Victoria; Roldán-Peña Jessica
    Abstract: In a New Keynesian model with the BGG accelerator and risk shocks, we show that violations of Tinbergen's Rule and strategic interaction between economic authorities undermine the effectiveness of monetary and financial policies. Separate monetary and financial policy rules produce higher welfare than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to credit. Reaction curves for the policy-rule elasticities are nonlinear, which reflects shifts in these elasticities from strategic substitutes to complements. The Nash equilibrium is inferior to the Cooperative equilibrium, both are inferior to a first-best outcome, and both might produce tight money-tight credit regimes.
    Keywords: Financial Frictions;Monetary Policy;Financial Policy
    JEL: E44 E52 E58
    Date: 2017–06
  7. By: Georgiadis, Georgios; Jančoková, Martina
    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 Classification: F42, E52, C50
    Keywords: financial globalisation, monetary policy shocks, New Keynesian DSGE models, spillovers
    Date: 2017–06
  8. By: Kirill Borissov; Stefano Bosi; Thai Ha-Huy; Leonor Modesto
    Abstract: We extend the Lucas’ 1988 model introducing two classes of agents with heterogeneous skills, discount factors and initial human capital endowments. We consider two regimes according to the planner’s political constraints. In the meritocratic regime, the planner faces individual constraints. In the redistributive regime, the planner faces an aggregate constraint. We find that heterogeneity matters, particularly with redistribution. In the meritocratic regime, the optimal solution coincides with the BGP found by Lucas (1988) for the representative agent’s case. In contrast, in the redistribution case, the solution for time devoted to capital accumulation is never interior for both agents. Either the less talented agents do not accumulate human capital or the more skilled agents do not work. Moreover, social welfare under the redistribution regime is always higher than under meritocracy and it is optimal to exploit existing differences. Finally, we find that inequality in human capital distribution increases in time and that, in the long run, inequality always promotes growth.
    Keywords: Human capital, Heterogenous patience and skills, Inequality and growth
    JEL: J24 O15 O40
    Date: 2017–06–23
  9. By: Zubarev, Andrey (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Polbin, Andrey (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The article studies macroeconomic effects of reducing oil export duty in the neoclassical general equilibrium model for the Russian economy. It is shown that in the current economic environment with low oil prices, this tax reform can be virtually painless for the economy. At the same time, if considered economic policy measure will force the oil refining industry to modernise its production facilities, there will be a positive effect on output in the economy and the welfare of domestic economic agents in the long run.
    Keywords: ýêñïîðòíàÿ ïîøëèíà íà íåôòü, íàëîãîâûé ìàíåâð, äèíàìè÷åñêèå ìîäåëè îáùåãî ðàâíîâåñèÿ, ðîññèéñêàÿ ýêîíîìèêà, oil export duty, tax reform, DSGE model for the Russian economy
    Date: 2017–05
  10. By: Fernando Garcia-Barragan; Guangling Liu
    Abstract: This paper presents a tractable framework with endogenous default and evaluates the welfare implication of bank capital requirements. We analyze the response of social welfare to a negative technology shock under different capital requirement regimes with and without default. We show that including default as an additional indicator of capital requirements is welfare improving. When implementing capital requirements, a more aggressive reaction to the default rate is more effective for weakening the negative effect of the shock on welfare. Compared with output gap, the credit-to-output gap is a better indicator for implementing the countercyclical capital buffer.
    Keywords: Bank capital requirement, Default, Welfare, DSGE
    JEL: E44 E47 E58 G28
    Date: 2017–06
  11. By: Wataru Miyamoto; Thuy Lan Nguyen
    Abstract: Business cycles are substantially correlated across countries. Yet most existing models are not able to generate substantial transmission through international trade. We show that the nature of such transmission depends fundamentally on the features determining the responsiveness of labor supply and labor demand to international relative prices. We augment a standard international macroeconomic model to incorporate three key features: a weak short-run wealth effect on labor supply, variable capital utilization, and imported intermediate inputs for production. This model can generate large and significant endogenous transmission of technology shocks through international trade. We demonstrate this by estimating the model using data for Canada and the United States with limited-information Bayesian methods. We find that this model can account for the substantial transmission of permanent US technology shocks to Canadian aggregate variables such as output and hours, documented in a structural vector autoregression. Transmission through international trade is found to explain the majority of the business cycle co-movement between the United States and Canada.
    Keywords: Business fluctuations and cycles, Economic models, International topics
    JEL: F41 F44 F62 E30
    Date: 2017
  12. By: Jaccard, Ivan; Smets, Frank
    Abstract: Almost two decades after the introduction of the common currency differences in institutional frameworks remain a major source of cross-country heterogeneity in the eurozone. We develop a two-country model with incomplete international markets in which the availability of credit depends on the country’s institutional environment. Our main finding is that structural differences in domestic credit environments provide an explanation for the procyclicality of net capital inflows observed in the South of Europe. We show that frictions in domestic credit markets generate asymmetries in the transmission mechanism of shocks that are common to both regions. JEL Classification: F32, F20, G17
    Keywords: cross-border financial markets, eurozone crisis, incomplete international asset markets, structural reforms
    Date: 2017–06
  13. By: Laun, Tobias (Department of Economics); Wallenius, Johanna (Department of Economics, Stockholm School of Economics)
    Abstract: Sweden boasts high fertility and high female employment. However, part-time employment is very prevalent. There is a notable gender gap in both wages and earnings, which widens substantially after women have children. In this paper we study the effect of family policies on female employment, fertility and the gender wage gap. To this end, we develop a structural, life cycle model of heterogeneous households which features endogenous labor supply, human capital accumulation, fertility and home production. We find that family policies, such as subsidized daycare and part-time work options, promote maternal employment and fertility. Part-time work contributes greatly to the widening of the gender wage gap following the arrival of children. However, restricting part-time work options would lower maternal employment, and thereby also widen the gender wage gap.
    Keywords: Life cycle; Labor supply; Human capital; Fertility; Home production
    JEL: E24 J22 J24
    Date: 2017–04–23
  14. By: Coles, Melvyn; Francesconi, Marco
    Abstract: This paper develops a new equilibrium model of two-sided search where ex-ante heterogenous individuals have general payoff functions and vectors of attributes. The analysis applies to a large class of models, from the non-transferable utility case to the collective household case with bargaining. The approach is powerful for it identifies a simple algorithm which, in the empirical application, is found to rapidly converge to equilibrium. Using indirect inference, we identify the differential effects of women's ability and charm on female match incentives. We use these results to assess the separate impacts of the arrival of equal opportunities for women in the labor market and the advent of the contraceptive pill on female economic activity and matching.
    Keywords: Two-sided search; Multiple attribute matching; Marriage; Female labor supply; Contraceptive pill
    Date: 2017–06
  15. By: Arias, Jonas E. (Federal Reserve Bank of Philadelphia); Ascari, Guido (University of Oxford, University of Pavia, and Bank of Finland); Branzoli, Nicola (Bank of Italy); Castelnuovo, Efrem (University of Melbourne and University of Padova)
    Abstract: This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops significantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates.
    Keywords: trend inflation; determinacy; monetary policy
    JEL: C22 E3 E52
    Date: 2017–06–21

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.