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on Dynamic General Equilibrium |
| By: | Marcin Bielecki (University of Warsaw; Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski; Warsaw School Economics); Marcin Kolasa (Narodowy Bank Polski; Warsaw School Economics); Krzysztof Makarski (Narodowy Bank Polski; Warsaw School Economics; Group for Research in Applied Economics (GRAPE)) |
| Abstract: | Boom-bust cycles in the eurozone periphery almost toppled the single 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 single 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 |
| JEL: | E32 E44 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:17&r=dge |
| By: | Enrique Mendoza (University of Pennsylvania) |
| Abstract: | Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a “forgotten history†in Macroeconomics. We propose a heterogeneous-agents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous default costs due to the value of debt for self-insurance, liquidity and risk-sharing. The government's aim to redistribute resources across agents and through time in response to uninsurable shocks produces a rich dynamic feedback mechanism linking debt issuance, the distribution of government bond holdings, the default decision, and risk premia. Calibrated to Spanish data, the model is consistent with key cyclical co-movements and features of debt-crisis dynamics. Debt exhibits protracted fluctuations. Defaults have a low frequency of 0.93 percent, are preceded by surging debt and spreads, and occur with relatively low external debt. Default risk limits the sustainable debt and yet spreads are zero most of the time. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:279&r=dge |
| By: | Darracq-Pariès, Matthieu; Kühl, Michael |
| Abstract: | We analyse the effects of central bank government bond purchases in an estimated DSGE model for the euro area. In the model, central bank asset purchases are relevant in so far as agency costs distort banks' asset allocation between loans and bonds, and households face transaction costs when trading government bonds. Such frictions in the banking sector induce inefficient time-variation in the term premia and allow for a credit channel of central bank government bond purchases. Considering ad hoc asset purchase programmes like the one implemented by the ECB, we show that their macroeconomic multipliers get stronger when the lower bound on the policy rate becomes binding and when the purchasing path is fully communicated and anticipated by the agents. From a more normative standpoint, interest rate policy and asset purchases feature strong strategic complementarities during both normal and crisis times. In an environment when nominal interest rates reach their effective lower bound, optimal monetary policy is to keep the policy rate low for a longer period in time and to engage in asset purchases. Our results also point to a clear sequencing of the exit strategy, first stopping the asset purchases and later raising the policy rate. In terms of macroeconomic stabilisation, optimal asset purchase strategies deliver sizeable benefits and have the potential to largely offset the costs of the lower bound on the policy rate. |
| Keywords: | Zero Lower Bound,Optimal Monetary Policy,Banking,Quantitative Easing,DSGE |
| JEL: | C61 E52 G11 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:222017&r=dge |
| By: | Alok Johri; Terry Yip |
| Abstract: | The collapse in trade relative to GDP during 2008-09 was unusually large historically and puzzling relative to the predictions of canonical two-country models.In a calibrated dynamic general equilibrium two-country model where firms must build supply chain relationship in order to sell their product, we show that a tightening of credit can cause a sizable fall in the trade-GDP ratio (44 percent of the observed value) while productivity shocks cannot. The key mechanism underlying the sharper fall in trade relative to GDP involves an endogenous reallocation of scarce resources from international to domestic supply-chains, that are acquired and maintained at lower cost. |
| JEL: | E32 F41 F44 |
| Date: | 2017–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2017-11&r=dge |
| By: | Pengfei Wang (Hong Kong University of Science and Tech); Jianjun Miao (Boston University); Feng Dong (Shanghai Jiao Tong University) |
| Abstract: | We provide an infinite-horizon model of rational asset bubbles in a Dynamic New Keynesian framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade land as an asset, which also serves as collateral to borrow from banks with reserve requirements. Land commands a liquidity premium and a land bubble can emerge. Monetary policy can affect the condition for the existence of a bubble, its steady-state size, and its dynamics including the initial size. The `leaning against the wind' interest rate policy will reduce the bubble volatility, but it may come at the cost of raising the inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule adopted by the central bank and on the exogenous shocks hitting the economy. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:205&r=dge |
| By: | Stephen McKnight (El Colegio de México); Laura Povoledo (University of the West of England, Bristol) |
| Abstract: | We introduce equilibrium indeterminacy into a two-country incomplete asset model with imperfect competition and analyze whether self-fulfilling, belief-driven fluctuations (i.e., sunspot shocks) can help resolve the major puzzles of international business cycles. In contrast to the one-good models of the existing literature, we show that sunspot shocks alone cannot replicate the data. Next, we consider a combination of sunspot shocks and technology shocks, and find that the indeterminacy model can now account for the counter-cyclical behavior observed for the terms of trade and real net exports, while simultaneously increasing their volatilities relative to output. The empirical success of the model is due to an unconventional transmission mechanism, whereby the terms of trade appreciates, rather than depreciates, in response to a positive technology shock. This unconventional feature, when combined with sunspot shocks, helps to reconcile the model with the data. However, the major failure of the model is its inability to resolve the Backus-Smith puzzle without a strongly negative cross-country correlation for productivity shocks. |
| Keywords: | Indeterminacy; Sunspots; International Business Cycles; Net Exports; Terms of |
| JEL: | E32 F41 F44 |
| Date: | 2016–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:20161610&r=dge |
| By: | Pengfei Wang (Hong Kong University of Science and Tech); Jing Zhou (Fudan University); Jianjun Miao (Boston University) |
| Abstract: | We provide an inï¬ nite-horizon general equilibrium model of a small open economy with both domestic and international ï¬ nancial market frictions. Firms face credit constraints and use a bubble asset (land) as collateral to borrow. A land bubble can provide liquidity and relax credit constraints. Low foreign interest rates are conducive to bubble formation. A rise in foreign interest rate can cause the collapse of the asset bubble, which in turn causes an equilibrium regime shift and a sudden stop. Asset bubbles provide an important ampliï¬ cation mechanism. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:221&r=dge |
| By: | Joost Roettger (University of Cologne) |
| Abstract: | This paper studies the consequences of delegating monetary policy to an inflation conservative central banker as in Rogoff (1985) for an emerging economy that faces three frictions which might undermine the success of such a policy reform: (i) incomplete financial markets, (ii) risk of default and (iii) political distortions. To do so, a quantitative sovereign default model is developed in which monetary and fiscal policies are set by two different authorities that both cannot commit to future policies. Inflation conservatism tends to result in lower and more stable inflation as well as a higher average debt burden, more frequent default events and more volatile fiscal policy. Whether the economy benefits from the appointment of a conservative central banker depends on the degree of inflation conservatism, the amount of political distortions and the volatility of fiscal shocks. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:232&r=dge |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:eus:wpaper:ec2017_03&r=dge |
| By: | Marek Kapicka (UCSB) |
| Abstract: | I quantify the welfare gains from introducing history dependent income tax in an incomplete markets framework where individuals face uninsurable random walk idiosyncratic shocks. I assume that the income tax paid is a function of a geometrical weighted average of past incomes, and solve for the optimal weights. I find that the optimal weights on past incomes decline geometrically at a rate equal to the discount rate. The welfare gains from history dependence are large, about 1.77 percent of consumption. I decompose the total effect into an efficiency effect that increases labor supply, and an insurance effect that reduces volatility of consumption and find that, quantitatively, the insurance effect dominates the efficiency effect. The optimal tax increases consumption insurance by trading higher tax progressivity with repect to past incomes for a reduced tax progressivity with respect to the current income. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:271&r=dge |
| By: | Miguel Faria-e-Castro (New York University) |
| Abstract: | What is the impact of an extra dollar of government spending during a financial crisis? How important was U.S. fiscal policy during the Great Recession? I develop a macroeconomic model of fiscal policy with a financial sector that allows me to study the effects of fiscal policy tools such as government purchases and transfers, as well as of financial sector interventions such as bank recapitalizations and credit guarantees. Solving the model with nonlinear methods allows me to show how the linkages between household and bank balance sheets generate new channels through which fiscal policy can stimulate the economy, and study the state dependent effects of fiscal policy. I combine the model with data to assess the impact of the fiscal policy response during the financial crisis and Great Recession. My main findings are that: (i) the fall in consumption would have been 50% worse in the absence of fiscal interventions; and (ii) transfers to households and bank recapitalizations yielded the largest fiscal multipliers. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:300&r=dge |
| By: | Kanda Naknoi (University of Connecticut); Hanno Lustig (Stanford University); YiLi Chien (Federal Reserve Bank of St. Louis) |
| Abstract: | Empirical work on asset prices suggests that pricing kernels have to be almost perfectly correlated across countries. If they are not, real exchange rates are too smooth to be consistent with high Sharpe ratios in asset markets. However, the cross-country correlation of macro fundamentals is far from perfect. We reconcile these empirical facts in a two-country stochastic growth model with heterogeneous household portfolios. A large fraction of households either hold low risk portfolios and/or do not adjust their portfolio optimally, and these households drive down the cross-country correlation in aggregate consumption. Only a small fraction of households participate in international risk sharing by frequently trading domestic and foreign equities. These active traders are the marginal investors, who impute the almost perfect correlation in pricing kernels. In our calibrated economy, we show that this mechanism can quantitatively account for the excess smoothness of exchange rates in the presence of highly volatile stochastic discount factors. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:214&r=dge |
| By: | Yan Ji (Massachusetts Institute of Technology) |
| Abstract: | This paper evaluates the implication of student loan debt on labor market outcomes. I begin by developing a tractable theoretical framework to analytically demonstrate that individuals under the burden of debt tend to search less and end up with lower-paid jobs. I then develop and estimate a quantitative search model with risk-averse agents, on-the-job search, and vacancy creation using NLSY97 data to evaluate the proposed mechanism. My model suggests that, under the standard fixed repayment plan, borrowers’ consumption is reduced due to debt repayment and lower wage income. The latter indirect effect caused by inadequate job search is potentially larger and more persistent than the direct effect from debt repayment. The income-based repayment plan (IBR) alleviates this distortion; I analytically elucidate the channels and quantitatively evaluate the aggregate and distributional effects of IBR. The model implies that poorer and more indebted borrowers would benefit more from switching to IBR. On average, IBR alleviates the debt burden by about half, among which one-third is attributed to better job matches. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:222&r=dge |
| By: | Hakki Yazici (Sabanci University); Christopher Sleet (Carnegie Mellon University) |
| Abstract: | We analyze the implications of ex ante dispersion in worker talents and a frictional labor market for the design of tax and benefit systems. Our model features on and off the job search, job ladders and equilibrium income and profit dispersion within talent markets. In a baseline setting with no talent dispersion, the optimal system consists of an unemployment benefit financed out of a simple lump sum tax on workers. The benefit is high enough to suppress worker income and firm profit dispersion, deter worker poaching and collapse job ladders. With talent dispersion, high benefit levels drive less talented workers out of the market and are prohibitively costly. Active talent markets are frictional. Taxes impact the dispersion of worker incomes and firm profits within these markets. These effects shape and modify conventional optimal tax formulas. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:298&r=dge |
| By: | Joseph Steinberg (University of Toronto) |
| Abstract: | The United Kingdom has voted to leave the European Union but the trade policies that will replace E.U. membership are uncertain, and speculation abounds that this uncertainty will harm the U.K. economy until it is resolved. To assess the impact of uncertainty about post-Brexit trade policies, I study a dynamic general equilibrium model with endogenous export participation and uncertainty about whether future U.K.-E.U. trade costs will be high or low. I find that the total welfare cost of Brexit for U.K. households is between £7,000 and £18,000 per person, while uncertainty about Brexit costs less than £45 per person. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:216&r=dge |
| By: | Michał Brzoza-Brzezina (Narodowy Bank Polski; Warsaw School Economics); Marcin Kolasa (Narodowy Bank Polski; Warsaw School Economics); Krzysztof Makarski (Narodowy Bank Polski; Warsaw School Economics; Group for Research in Applied Economics (GRAPE)) |
| Abstract: | In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents' welfare. To this end we construct a small open economy model with financial frictions, where housing loans can be denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that the presence of FCLs negatively affects the transmission of monetary policy and deteriorates the output-inflation volatility trade-off it faces. The trade-off can be improved with macroprudential policy but the outcomes are still worse than under this same policy mix applied to an economy with domestic currency debt. We also demonstrate that a high share of FCLs is harmful for social welfare, even if financial stability considerations are not taken into account. Finally, we show that regulatory policies that discriminate against FCLs may have a negative impact on economic activity and discuss the redistributive consequences of forced currency conversion of household debt. |
| Keywords: | foreign currency loans, monetary policy, macroprudential policy, DSGE models |
| JEL: | E32 E44 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:19&r=dge |
| By: | Martin Kliem; Alexander Meyer-Gohde |
| Abstract: | We analyze an estimated stochastic general equilibrium model that replicates key macroeconomic and financial stylized facts during the Great Moderation of 1983-2007. Our model predicts a sizeable and volatile nominal term premium - comparable to recent reduced-form empirical estimates - with real risk two times more important than in ation risk for the average nominal term premia. The model enables us to address salient questions about the effects of monetary policy on the term structure of interest rates. We nd that monetary policy shocks can have differing effects on risk premia. Actions by the monetary authority with a persistent effect on households' expectations have substantial effects on nominal and real risk premia. Our model rationalizes many of the opposing ndings on the effects of monetary policy on term premia in the empirical literature. |
| Keywords: | DSGE model, Bayesian estimation, Term structure, Monetary policy |
| JEL: | E13 E31 E43 E44 E52 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2017-015&r=dge |
| By: | Qazi Haque (School of Economics, University of Adelaide) |
| Abstract: | This paper compares the empirical fit of a Taylor rule featuring constant versus time-varying inflation target by estimating a Generalized New Keynesian model under positive trend inflation while allowing for indeterminacy. The estimation is conducted over two different periods covering the Great Inflation and the Great Moderation. We find that the rule embedding time variation in target inflation turns out to be empirically superior and determinacy prevails in both sample periods. Counterfactual simulations point toward both `good policy' and `good luck' as drivers of the Great Moderation. We find that better monetary policy, both in terms of a more active response to inflation gap and a more anchored inflation target, has resulted in the decline in inflation gap volatility and predictability. In contrast, the reduction in output growth variability is mainly explained by reduced volatility of technology shocks. |
| Keywords: | Monetary policy; Great Inflation; Great Moderation; Equilibrium Indeterminacy; Generalized New Keynesian Phillips curve; Taylor rules; Time-varying inflation target; Good policy; Good luck; Sequential Monte Carlo |
| JEL: | C11 C52 C62 E31 E32 E52 E58 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2017-10&r=dge |
| By: | Asier Mariscal (U.Carlos III-Madrid); Dan Lu (the University of Rochester) |
| Abstract: | We uncover new dynamic patterns related to importers' age and the macroeconomic environment that static models cannot explain. Our patterns are related to imported input switching, i.e., the simultaneous adding and dropping of intermediates at the firm level. Three fact stand out. First, switching is pervasive and not a small fraction of firms’ imports. Second, conditional on age, larger firms are more likely to switch, whereas, conditional on size, younger firms switch more. Third, when import prices are high, fewer firms switch and switching shares fall. We propose a dynamic model where firms search for import suppliers and face a choice with heterogeneously productive intermediates. Through searching for suppliers, firms improve their productivity and grow over time. Empirically, we show that several key predictions of the model hold using within-firm regressions. Quantitatively, the unit cost bias from disregarding input heterogeneity is large and in a 15% tariff reduction policy experiment, we show the short-run gain from importing is 20% lower than the long-run gain for an average firm. Like capital accumulation and worker reallocation, supplier accumulation is important for firm dynamics and aggregate productivity. %In the context of the literature, we view our paper as complementary to those that emphasize capital accumulation and worker reallocation to be important for firm dynamics and aggregate productivity. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:263&r=dge |
| By: | Lorenzo Bretscher (London School of Economics); Alex Hsu (Georgia Institute of Technology); Andrea Tamoni (London School of Economics) |
| Abstract: | We estimate a New-Keynesian model with heterogeneous agents to study the impact of level and volatility shocks to fiscal policy on the term structure of interest rates and bond risk premia. We derive three key insights from the theoretical model. First, government spending level shocks generate positive covariance between marginal utility to consume and inflation, making nominal bonds poor hedges against consumption risk and result in positive risk premium. Second, variability in the nominal term premium is caused by variation in the real term premium while inflation risk premium is remarkably stable over time. Fluctuation of the real term premium is entirely driven by government spending volatility shocks. Third, at the zero lower bound (ZLB), impact of level and volatility shocks to government spending are amplified. This is especially pronounced for volatility shocks producing substantial bond risk premium when the ZLB is binding. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:258&r=dge |
| By: | Roine Vestman (Stockholm University); Ofer Setty (Tel Aviv University); Magnus Dahlquist (Stockholm School of Economics) |
| Abstract: | We characterize the optimal default fund in a defined contribution (DC) pension plan. Using detailed data on individuals' holdings inside and outside the pension system, we find substantial heterogeneity within and between passive and active investors in terms of labor income, financial wealth, and stock market participation. We build a life-cycle consumption-savings model with a DC pension account and an opt-out/default choice. The model produces realistic investor heterogeneity. We examine the optimal default asset allocation, which implies a welfare gain of 1.5% over a common age-based allocation. Most of the gain is attainable with a simple rule of thumb. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:255&r=dge |
| By: | George Economides (Athens University of Economics and Business); Anastasios Rizos |
| Abstract: | This paper studies the aggregate and distributional implications of introducing consumption taxes into an otherwise deterministic version of the standard neoclassical growth model with income taxes only and heterogeneity across agents. In particular, the economic agents differ among each other with respect to whether they are allowed to save (in physical capital) or not. Policy is optimally chosen by a benevolent Ramsey government. The main theoretical finding comes to confirm the widespread belief that the introduction of consumption taxes into a model with income taxes only, creates substantial efficiency gains for the economy as whole, but at the cost of higher income inequality. In other words, consumption taxes reduce the progressivity of the tax system, and maybe, from a normative point of view, this result justifies the design of a set of subsidies policies which will aim to outweigh the regressive effects of the otherwise more efficient consumption taxes. |
| Keywords: | Ramsey taxation, heterogeneity, efficiency, inequality |
| JEL: | H21 H23 E62 |
| Date: | 2017–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:aue:wpaper:1701&r=dge |
| By: | Saint-Paul, Gilles (Paris School of Economics) |
| Abstract: | Satiation of need is generally ignored by growth theory. I study a model where consumers may be satiated in any given good but new goods may be introduced. A social planner will never elect a trajectory with long-run satiation. Instead, he will introduce enough new goods to avoid such a situation. In contrast, the decentralized equilibrium may involve long run satiation. This, despite that the social costs of innovation are second order compared to their social benefits. Multiple equilibria may arise: depending on expectations, the economy may then converge to a satiated steady state or a non satiated one. In the latter equilibrium, capital and the number of varieties are larger than in the former, while consumption of each good is lower. This multiplicity comes from the following strategic complementary: when people expect more varieties to be introduced in the future, this raises their marginal utility of future consumption, inducing them to save more. In turn, higher savings reduces interest rates, which boosts the rate of innovation. When TFP grows exogenously and labor supply is endogenized, the satiated equilibrium generically survives. For some parameter values, its growth rate is positive while labor supply declines over time to zero. Its growth rate is then lower than that of the non satiated equilibrium. Hence, the economy may either coordinate on a high leisure, low growth, satiated "leisure society" or a low leisure, high growth, non satiated "consumption society". |
| Keywords: | growth, satiation, innovation, new products, consumer society, leisure society, labor supply, multiple equilibra, strategic complementarities |
| JEL: | E13 E14 E21 E22 E23 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10879&r=dge |
| By: | Marius Bickmann (TU Dortmund) |
| Abstract: | This paper provides a quantitative analysis of intra-European migration flows between Germany, Southern Europe and Poland along the demographic transition. Migration movements evolve endogenously as a reaction to changes in relative prices induced by population aging. Immigration from Southern Europe and Poland reduces wages in Germany slightly, but alleviates the distortions from social security significantly. This lower elasticity of wages is caused by a large inflow of capital accompanying immigration which counteracts the downward pressure on wages due to a higher labor supply. Welfare effects of endogenous migration flows depend crucially on the policy scenario. If contribution rates remain constant and the burden of adjustment lies on benefits, the negative wage effect dominates leading to moderate welfare losses for future generations in Germany. On the contrary, if tax rates adjust, welfare effects are both positive and larger since immigration serves to stabilize net wages. However, these positive welfare effects in Germany come at the expense of significant welfare losses in the sending regions. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:259&r=dge |
| By: | Jin Zhou (University of Chicago); Salvador Navarro (University of Western Ontario) |
| Abstract: | We adapt the insight of Cunha, Heckman, and Navarro (2005) to develop a methodology that distinguishes information unknown to the econometrician but forecastable by the agent from information unknown to both, at each point in an agent's lifecycle. Predictable variability and uncertainty have dierent implications in terms of welfare, especially when markets are incomplete. We apply our procedure in the context of an incomplete markets lifecycle model of consumption, labor supply, and schooling decisions, when borrowing limits arise from repayment constraints. Using microdata on earnings, hours worked, schooling choices, and consumption of white males in the US, we infer the agent's information set. We then estimate the model using the identied agent's information set. We find that 52% and 56% of the variance of college and high school log wages respectively are predictable by the agent at the time schooling choices are made. When we complete the market, college attendance increases from 48% to 59%, about half of this increase is due to uncertainty, and the other half because of the borrowing limits. To illustrate the importance of assumptions about what is forecastable by the agent, we simulate a minimum wage insurance policy under dierent assumptions about the information available to the agents in the model. When we allow for asymmetric information between the insurance institution and the individual, adverse selection turns prots negative. Consumer welfare, however, increases by about 28% when we give individuals access to their estimated information set regardless of asymmetries. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:277&r=dge |
| By: | Jeremy Lise (University of Minnesota); Guido Menzio (University of Pennsylvania and NBER); Gordon Phillips (Dartmouth University); Kyle Herkenhoff (University of Minnesota) |
| Abstract: | We develop a large-firm sorting model to study the way knowledge diffuses within and across firms. We build on \citet{shimer2000assortative} and allow for workers within a firm to influence each other's knowledge. In particular, we extend the framework to allow for a given worker's human capital to influence the future path of their coworker's human capital, and vice versa. In contrast to standard sorting models, a firm's type is no longer exogenous; it is given by the distribution of human capital of its workers. Firms are created by workers spinning off and recruiting their own employees which is an important driver of knowledge diffusion. We then use micro wage data and job mobility patterns from the LEHD (the LEHD covers all private sector jobs in the US), as well as startup patterns from the Integrated LBD, to separately estimate the knowledge diffusion process and the degree of worker complementarities in production. The data yield 5 new facts: (1) the number of coworkers has an [X] effect on an individual's wage, (2) the lowest wage coworker has an [X] effect on an individual's wage, (3) the highest wage coworker (superstar) has an [X] effect on an individual's wage, (4) workers with [X] individual wages and [X] coworker wages are more likely to start their own business (explicitly controlling for access to credit), and (5) there are [X] sorting patterns, i.e. workers with higher wages are more likely to move to firms that pay [X] average wages. We use fact (5) to estimate worker complementarities in production and we use facts (1) through (4) to discipline the knowledge diffusion process. We then use the estimated model to study various counterfactuals, including the way labor market distortions, such as firing taxes, impede mobility and affect the diffusion of knowledge. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:285&r=dge |
| By: | Chris Taber (Northwestern University); Nicolas Roys (University of Wisconsin Madison) |
| Abstract: | This paper proposes and estimates a model of occupational choice with time-varying skills prices and heterogeneous human capital to understand the evolution of the wage structure since 1979. A worker’s multi-dimensional skills are exploited differently across different occupations. We allow for a rich specification of technological change which has heterogenous effects on different occupations and different parts of the skill distribution. We estimate the model combining three datasets: (1) O’NET, to measure skill intensity across occupations, (2) NLSY, to identify life-cycle supply effects, and (3) CPS, to estimate the role of technology. The return to inter-personal skills has steadily increased while the returns to cognitive and physical skills have declined. The rise of wage inequality is driven by technological change that favors high-skilled’ individual within occupation. The rise of services and the decline of manual occupations cannot be understood with a competitive labor market model. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:208&r=dge |
| By: | Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas) |
| Abstract: | The open-economy dimension is central to the discussion of the trade-offs that monetary policy faces in an increasingly integrated world. I investigate the monetary policy transmission mechanism in a two-country workhorse New Keynesian model where policy is set according to Taylor (1993) rules. I find that a common monetary policy isolates the effects of trade openness on the cross-country dispersion, and that the establishment of a currency union as a means of deepening economic integration may lead to indeterminacy. I argue that the common (coordinated) monetary policy equilibrium is the relevant benchmark for policy analysis showing that in that case open economies tend to experience lower macro volatility, a flatter Phillips curve, and more accentuated trade-offs between inflation and slack. Moreover, I show that the trade elasticity often magnifies the effects of trade integration (globalization) beyond what conventional measures of trade openness would imply. I also discuss how other features such as the impact of a stronger anti-inflation bias, technological diffusion across countries, and the sensitivity of labor supply to real wages influence the quantitative effects of policy and openness in this context. Finally, I conclude that the theoretical predictions of the workhorse open-economy New Keynesian model are largely consistent with the stylized facts of the globalization era started in the 1960s and the Great Moderation period that followed. |
| JEL: | C11 C13 F41 |
| Date: | 2017–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:321&r=dge |
| By: | Srecko Zimic (European Central Bank); Romanos Priftis (European Commission) |
| Abstract: | We find that debt-financed government spending multipliers vary considerably depending on the location of the debt holder. In a sample of 59 countries we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to the case when government purchases are financed by issuing debt to home investors (residents). In a theoretical model we show that the location of the government debt holder produces these differential responses through the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, a prediction, which is also confirmed by the data. The share of rule-of-thumb workers, as well as the strength of the public good in the utility function play a key role in generating model-based fiscal multipliers, which are quantitatively comparable with those of the data. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:294&r=dge |
| By: | Ricardo Reyes-Heroles (Federal Reserve Board) |
| Abstract: | This paper shows that the decline in trade costs that underlies the increase in observed global bilateral gross trade flows has notably contributed to the surge in the size of net trade imbalances over the past four decades. To show this, I propose a framework that embeds a quantitative multi-country general equilibrium model of international trade based on Ricardian comparative advantages into a dynamic framework in which trade imbalances arise endogenously. I identify and describe two mechanisms through which declines in trade costs lead to larger imbalances in the model. By exploiting the information in bilateral trade flows, among other data, I calibrate the model and provide a decomposition that shows that 69 percent of the increase in the size of world trade imbalances can be explained by the decline in trade costs across countries. In other words, lower trade costs have not only allowed for more trade across countries in a particular point in time, but also for more trade over time. Moreover, the effect of lower trade costs on trade imbalances is heterogeneous across countries. In particular, trade imbalances in countries like the United States and China have been significantly affected by the decline in trade costs. I also show that the welfare gains from lower trade costs can differ substantially from those that are obtained when changes in trade imbalances are not taken into account. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:212&r=dge |
| By: | Kevin Lim (Dartmouth College) |
| Abstract: | This paper develops a structural model of trade between heterogeneous firms in which the network of firm-level input-output linkages is determined both dynamically and endogenously. Firms vary in the size of their customer and supplier bases, occupy heterogeneous positions in different supply chains, and adjust their sets of trade partners over time. Despite the rich heterogeneity and dynamics, the model remains computationally tractable. Using both cross-sectional and panel data on trading relationships between US firms, I estimate the model's key parameters via a simulated method of moments technique and assess its fit to the data. Simulations of the model are then used to study how the structure and dynamics of the production network matter for the propagation of firm-level supply and demand shocks and their translation into aggregate effects. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:280&r=dge |
| By: | Joseph Vavra (University of Chicago); Erik Hurst (University of Chicago); Andreas Fuster (Federal Reserve Bank of New York); Martin Beraja (MIT and Princeton University) |
| Abstract: | We argue that the time-varying regional distribution of housing equity shapes the aggregate consequences of monetary policy through its influence on mortgage refinancing. Using detailed loan-level data, we begin by showing that: (i) the refinancing response to interest rate cuts is strongly affected by regional differences in housing equity, and (ii) both regional differences in refinancing and overall refinancing vary over time with changes in the regional distribution of house price growth and unemployment. Then, we build a heterogeneous household model of refinancing in order to derive aggregate implications of monetary policy from our regional evidence. We find that the 2008 equity distribution made spending in depressed regions less responsive to interest rate cuts, thus dampening aggregate stimulus and increasing regional consumption inequality, whereas the opposite occurred in some earlier recessions. Taken together, our results strongly suggest that monetary policy makers should track the regional distribution of equity over time. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:270&r=dge |
| By: | Fabian Eckert (Yale University); Costas Arkolakis (Yale University) |
| Abstract: | Combinatorial problems are prevalent in economics but the large dimensionality of potential solutions substantially limits the scope of their applications. We define and characterize a general class that we term combinatorial discrete choice problems and show that it incorporates existing problems in economics and engineering. We prove that intuitive sufficient conditions guarantee the existence of simple recursive procedures that can be used to identify the global maximum. We propose such an algorithm and show how it can be used to revisit problems whose computation was deemed infeasible before. We finally discuss results for a class of games characterized by these sufficient conditions. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:249&r=dge |
| By: | Carlos Zarazaga (Federal Reserve Bank of Dallas); Ruiyang Hu (Southern Methodist University) |
| Abstract: | Fiscal imbalances predating the Great Recession but aggravated by it prompted the U.S. Congress to enact in 2011 legislation that, in the absence of other measures, would trigger two years later a so-called "budget sequestration" procedure that implied reducing government discretionary spending to unprecedented low levels over the following decade. For that reason, economic agents may not have expected this “fiscal stabilization measure of last resort†to be sustainable when it was put into effect in 2013 as scheduled. This is exactly the issue this paper set out to explore, on the grounds that sizing up the expectations that economic agents had about the budget sequestration can provide powerful insights on how fiscal stabilization is likely to proceed in the U.S. going forward. The paper makes inferences about the credibility enjoyed by the budget sequestration with an adapted version of the Business Cycle Accounting approach, originally developed for other purposes. The main finding is that the evidence favors a scenario in which spending cuts are half the size of those actually implied by the sequester. The paper takes this result as an indication that the U.S. is unlikely to address its unresolved fiscal imbalances with just austerity in discretionary spending, an interpretation consistent with existing literature that traces the seemingly anomalous behavior of economic variables during the Great Recession and its aftermath to alternative fiscal stabilization mechanisms. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:250&r=dge |