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on Dynamic General Equilibrium |
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Issue of 2017‒08‒13
seventeen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Sanches, Daniel R. (Federal Reserve Bank of Philadelphia) |
| Abstract: | This paper develops a dynamic general equilibrium model with an essential role for an illiquid banking system to investigate output dynamics in the event of a banking crisis. In particular, it considers the ex-post efficient policy response to a banking crisis as part of the dynamic equilibrium analysis. It is shown that the trajectory of real output following a panic episode crucially depends on the cost of converting long-term assets into liquid funds. For small values of the liquidation cost, the recession associated with a banking panic is protracted as a result of the premature liquidation of a large fraction of productive banking assets to respond to a panic. For intermediate values, the recession is more severe but short-lived. For relatively large values, the contemporaneous decline in real output in the event of a panic is substantial but followed by a vigorous rebound in real activity above the long-run level. |
| Keywords: | Banking panic; deposit contract; suspension of convertibility; time-consistent policies |
| JEL: | E32 E42 G21 |
| Date: | 2017–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:17-20&r=dge |
| By: | Giovanni Melina; Stefania Villa |
| Abstract: | Using an estimated dynamic stochastic general equilibrium model with banking, this paper first provides evidence that monetary policy reacted to bank loan growth in the US during the Great Moderation. It then shows that the optimized simple interest-rate rule features no response to the growth of bank credit. However, the welfare loss associated to the empirical responsiveness is small. The sources of business cycle fluctuations are crucial in determining whether a “leaning-against-the-wind” policy is optimal or not. In fact, the predominant role of supply shocks in the model gives rise to a trade-off between inflation and financial stabilization. |
| Date: | 2017–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/179&r=dge |
| By: | François Gourio; Anil K Kashyap; Jae Sim |
| Abstract: | Credit booms sometimes lead to financial crises which are accompanied with severe and persistent economic slumps. Does this imply that monetary policy should “lean against the wind” and counteract excess credit growth, even at the cost of higher output and inflation volatility? We study this issue quantitatively in a standard small New Keynesian dynamic stochastic general equilibrium model which includes a risk of financial crisis that depends on “excess credit”. We compare monetary policy rules that respond to the output gap with rules that respond to excess credit. We find that leaning against the wind may be attractive, depending on several factors, including (1) the severity of financial crises; (2) the sensitivity of crisis probability to excess credit; (3) the volatility of excess credit; (4) the level of risk aversion. |
| JEL: | E52 E58 G28 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23658&r=dge |
| By: | Wei Cui (Department of Economics University College London (UCL); Centre for Macroeconomics (CFM)) |
| Abstract: | This paper studies macroeconomic effects of financial shocks through the lens of delayed capital liquidation and reallocation among firms. I develop a model in which firms face idiosyncratic productivity risks, financial constraints, and random liquidation costs. Liquidation costs generate an option value of staying and a liquidation delay for unproductive firms. A novel feature arising from the delay is that unproductive firms have a higher debt-to-asset ratio than productive ones. I find that adverse financial shocks that tighten financial constraints can raise the option value. The financial shocks also have general equilibrium effects that further raise the option value and delay capital liquidation. Capital is thus persistently misallocated, leading to a long-lasting economic contraction. Using U.S. data from 1971-2015, I show that financial shocks can explain almost 67% of the variation in the capital liquidation-to-expenditures ratio and 72% of the variation in output |
| Keywords: | Financial constraints and financial shocks, Capital liquidation, Option value of staying |
| JEL: | E22 E32 E44 G11 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1719&r=dge |
| By: | Daniel Garcia-Macia |
| Abstract: | Why did the Great Recession lead to such a slow recovery? I build a model where heterogeneous firms invest in physical and intangible capital, and can default on their debt. In case of default, intangible assets are harder to seize by creditors. Hence, intangible capital faces higher financing costs. This differential is exacerbated in a financial crisis, when default is more likely and aggregate risk bears a higher premium. The resulting fall in intangible investment amplifies the crisis, and gradual intangible spillovers to other firms contribute to its persistence. Using panel data on Spanish manufacturing firms, I estimate the model matching firm-level moments regarding intangibles and financing. The model captures the extent and components of the Great Recession in Spanish manufacturing, whereas a standard model without endogenous intangible investment would miss more than half of the GDP fall. A policy of transfers conditional on firm age could speed up the recovery, as young firms tend to be more financially constrained, particularly regarding intangible investment. Conditioning transfers on firm size or subsidizing credit (as in current E.U. policy) appears to be less effective. |
| Date: | 2017–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/176&r=dge |
| By: | Pham, Ngoc-Sang |
| Abstract: | We consider an infinite-horizon general equilibrium model with heterogeneous agents and financial market imperfections. We investigate the role of dividend taxation on economic growth and asset price. The optimal dividend taxation is also studied. |
| Keywords: | Intertemporal equilibrium, recession, growth, R&D, dividend taxation, asset price bubbles. |
| JEL: | C62 D31 D91 E44 G10 |
| Date: | 2017–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80580&r=dge |
| By: | Akira Kamiguchi (School of Economics, Hokusei Gakuen University); Toshiki Tamai (Graduate School of Economics, Nagoya University) |
| Abstract: | This paper develops an overlapping generations model with debt-financed public investment. The model assumes that the government is subject to the golden rule of public finance and that households are Yaari-Blanchard type. It is shown that the growth-maximizing and utility-maximizing tax rates do not satisfy the Barro tax rule, which is equal to the output elasticity of public capital. Furthermore, we show that both tax rates positively depend on longevity, with an aging population increasing debt per GDP. This result captures a tendency of increasing debt per GDP under population aging in the real world. |
| Keywords: | Public capital, Golden rule of public finance, Economic growth |
| JEL: | H54 H60 O40 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:971&r=dge |
| By: | Thorsten Drautzburg; Jesús Fernández-Villaverde; Pablo Guerrón-Quintana |
| Abstract: | We argue that political distribution risk is an important driver of aggregate fluctuations. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output and asset prices. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output, unemployment, and sectoral asset prices. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector and we back up the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter . We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 34% of aggregate fluctuations. |
| JEL: | E32 E37 E44 J20 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23647&r=dge |
| By: | Robert J. Kurtzman; David Zeke |
| Abstract: | Central bank large-scale asset purchases, particularly the purchase of corporate bonds of nonfinancial firms, can induce a misallocation of resources through their heterogeneous effect on firms cost of capital. First, we analytically demonstrate the mechanism in a static model. We then evaluate the misallocation of resources induced by corporate bond buys and the associated output losses in a calibrated heterogeneous firm New Keynesian DSGE model. The calibrated model suggests misallocation effects from corporate bond buys can be large enough to make them less effective than government bond buys, which is not the case without accounting for misallocation effects. |
| Keywords: | QE ; LSAPs ; Misallocation |
| JEL: | E22 E51 E52 G21 |
| Date: | 2017–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-76&r=dge |
| By: | Carlos E. Posada; Alfredo Villca |
| Abstract: | Resumen: Teniendo como marco de referencia la “estrategia de inflación objetivo” es usual discutir lo que es m ?as conveniente para una sociedad en cuanto al grado de “dureza” o “agresividad” de una autoridad monetaria para defender su meta de inflación, y la credibilidad en esta entre los agentes económicos. En este documento utilizamos un modelo de equilibrio general dinámico estocástico (DSGE, por sus siglas en inglés) neo-keynesiano tanto con expectativas racionales como con adaptativas para analizar esta cuestión. Nuestros resultados sugieren que el problema que se puede derivar de una autoridad “blanda” es arriesgar la pérdida de credibilidad en su (supuesto) empeño para alcanzar una determinada meta de inflación. Además, presentamos y utilizamos una solución del modelo lo suficientemente simple como para permitir que sus simulaciones sean implementadas en una hoja de cálculo. Abstract: Within the framework of the so-called “inflation targeting” strategy there is a discussion about the convenience for a society as to the degree of “hardness” of a monetary authority looking to defend its inflation target, and the credibility that this authority enjoys between the private agents about it. In this paper we use a neo-Keynesian stochastic dynamic general equilibrium (DSGE) model with both rational and adaptive expectations to answer this question. Our results suggest that the social problem that can be derived from a “soft” authority is that it risks losing credibility in its effort to reach a certain inflation target. In addition, we present and use a solution of the rational expectations version of the model simple enough to allow its simulations to be performed using a spreadsheet. |
| Keywords: | Inflación, meta de inflación, autoridad monetaria, equilibrio general dinámico y estocástico, regla de Taylor, credibilidad. |
| JEL: | C63 C68 E31 E32 E37 E58 |
| Date: | 2017–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:000122:015673&r=dge |
| By: | Ahmed Jamal Pirzada |
| Abstract: | The standard New Keynesian model requires large degree of price stickiness to match observed inflation dynamics. This is contrary to micro-evidence on prices. This paper addresses this criticism of the standard model. Firstly, the price mark-up shock is replaced with a sector-specific intermediate input-price shock. Secondly, survey data on long-term inflation expectations are also used when estimating the new model. Estimation results show that marginal costs in the model with intermediate materials are stable unlike in the model without. As a result, the new model does not require a large degree of price stickiness to match marginal costs and observed inflation. The model is estimated for both the US and the Euro area, thus showing that this result is not specific to the US only. |
| Date: | 2017–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:17/686&r=dge |
| By: | Sanchez, Manuel (University of Bristol); Wellschmied, Felix (Universidad Carlos III de Madrid) |
| Abstract: | We study workers' idiosyncratic earnings risk over the life-cycle using a German administrative data set. Positive and negative earnings shocks both contain a highly persistent component. The variance and average size of positive persistent shocks is decreasing over the life-cycle. The (absolute) size of negative persistent shocks is increasing. The probability to experience either of these shocks is U-shaped in age; during prime-age it is around 35 percent. Negative transitory shocks are relatively larger and more dispersed than positive transitory shocks. Their size and variance are increasing over the life-cycle. Large persistent positive shocks early in life generate large wealth holdings for the top one percent of workers in an incomplete markets model. Moreover, age-varying risk implies a linear increase in consumption inequality late in working life. |
| Keywords: | life-cycle, earnings risk, wealth dispersion |
| JEL: | E21 E24 J31 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10925&r=dge |
| By: | Kawamura, Enrique |
| Abstract: | This paper presents the main set-up and long-run results from a simple deterministic version of a dynamic stochastic general equilibrium model of a small open economy in Kawamura (2017). The model assumes two types of households, one poor and the other non-poor. There are two types of energy used as both GDP input and consumption goods, one using a fossil-based resource (with a given international price) and another that uses public capital and that represents a non-standard, "clean" (i.e., non-fossil based) energy source. The paper reports the results from two types of policy makers. The .rst type corresponds to a benevolent and perfectly-committed government that sets complete plans of taxes, subsidies and public investment policies, including public infrastructure. The second type of policy maker is a politician that wins elections occurring in every period. Such politician implements policies promised at the electoral stage. This second policy-making process assumes that the politician can commit to policies only for the period in which she wins elections. The paper shows that a necessary condition for obtaining long-run growth in public capital, private capital, GDP and clean energy is that the international price of the resource increases steadily through time. Thus, both types of policy makers react to such increase by also steadily increasing the public investment. |
| Keywords: | Economía, Energía, Infraestructura, Investigación socioeconómica, Pobreza, Políticas públicas, |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:dbl:dblpap:1050&r=dge |
| By: | FUKUMURA Koichi; NAGAMACHI Kohei; SATO Yasuhiro; YAMAMOTO Kazuhiro |
| Abstract: | This paper constructs an overlapping generations model wherein people decide their number of children and levels of consumption for differentiated goods. We further assume that immigration takes place according to the difference between the utility inside and outside a country. We show that an improvement in longevity has three effects on the market size and welfare: First, it decreases the number of children. Second, it increases the per capita expenditure on consumption. Finally, it increases immigration. The first effect has negative impacts on market size and welfare whereas the latter two effects have positive impacts. We then calibrate our model to match Japanese and U.S. data from 1955 to 2014 and find that the negative effects dominate the positive ones. Moreover, our counterfactual analyses show that accepting immigration in Japan can be useful in overcoming population and market shrinkage caused by an aging population. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:17103&r=dge |
| By: | Alok Johri; Md Mahbubur Rahman |
| Abstract: | The behavior of the relative price of investment in India stands in fascinating contrast to its steady fall in the US. Relative to a world benchmark, the relative price of investment in India rose 55 percent from 1980 to 1991 and fell 26 percent from 1991 to 2006. The sudden shift is tantalizingly coincident with a period of rapid economic reform and increase in the growth rate of India's GDP. We build a simple DGE model calibrated to Indian data in order to explore the role played by capital import substitution policies and their removal post-1991 in accounting for the rise and fall of the relative price of investment. An interesting feature of the model is an endogenously rising policy distortion in the pre-reform period which increases with the growth of the economy. Quantitatively, our model delivers a 14 percent rise in the relative price of investment before reform and a 22 percent fall during the reform period. The calibration suggests that GDP per worker was 2 percent lower in 1991 compared to a decade earlier purely due to the rising distortion caused by import restrictions on capital goods. In addition the removal of import restrictions accompanied by a 64 percentage point reduction in capital import tariff rates raised GDP per worker permanently by 13.5 percent. These reform measures alone account for one- fth of the rise in the growth rate of GDP per worker observed between 1991 and 2006 in India. |
| JEL: | O11 E17 E2 |
| Date: | 2017–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2017-12&r=dge |
| By: | Yamaguchi, Masao |
| Abstract: | This paper argues how an increase in minimum wage affects employment, consumption, and social welfare with dynamic general equilibrium model without market frictions. The study demonstrates that a minimum wage hike reduces an actual unemployment rate and has positive effects on an employment rate under the demand-shortage economy whereas they do not under a non-demand shortage economy. The study also shows that optimal minimum wage which maximize social welfare and minimize an actual unemployment rate when the economy faces the demand-shortage initially. These findings imply that the minimum wage can be considered as one of the effective policy for overcoming deflation and stagnation although it increases the natural rate of unemployment. |
| Keywords: | Minimum wage, Unemployment, Natural rate of unemployment, Deflation, Stagnation, Demand shortage, Dynamic general equilibrium model |
| JEL: | E24 E31 J38 |
| Date: | 2017–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80359&r=dge |
| By: | Joël Machado (CREA, Université du Luxembourg) |
| Abstract: | This paper aims to assess the effects of two different policies dealing with undocumented immigrants on agents’ welfare: amnesties and deportations. I develop a two-period overlapping generations model which accounts for the ex-ante production by undocumented workers and their partial contribution and access to public transfers. Additional channels, such as the discrimination on the labor market and a different productivity of regularized workers are also discussed. The impact of a migration policy strongly depends on the wage effects of the legalized/ deported workers and their net fiscal contribution. The calibration of the model for the United States in 2014 allows to disentangle the importance of the different channels at work. Overall the impact of the two policies on natives’ welfare is quite limited (between -0.1% and +0.15%). Retired agents benefit from an amnesty and are harmed by a deportation. The effect on workers is ambiguous and depends on the wage and fiscal effects in addition to the change in the returns on savings. |
| Keywords: | undocumented immigration, amnesty, regularization, deportation, discrimination. |
| JEL: | F29 J61 J68 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:17-11&r=dge |