nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒08‒20
twelve papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Human Capital and Structural Change By Porzio, Tommaso; Santangelo, Gabriella
  2. Monetary Policy in a Low Interest Rate World By Michael T. Kiley; John M. Roberts
  3. Simulating Business Cash Flow Taxation: An Illustration Based on the “Better Way” Corporate Tax Reform By Seth G Benzell; Laurence J Kotlikoff; Guillermo LaGarda
  4. Goods and Factor Market Integration: A Quantitative Assessment of the EU Enlargement By Lorenzo Caliendo; Luca David Opromolla; Fernando Parro; Alessandro Sforza
  5. The IT Boom and Other Unintended Consequences of Chasing the American Dream - Working Paper 460 By Gaurav Khanna; Nicolas Morales
  6. Financial Regulation and Shadow Banking: A Small-Scale DSGE Perspective By Patrick Fève; Olivier Pierrard
  7. The Housing Boom and Bust: Model Meets Evidence By Kaplan, Greg; Mitman, Kurt; Violante, Giovanni L.
  8. Firm Entry, Excess Capacity and Aggregate Productivity By Savagar, Anthony; Dixon, Huw David
  9. Temperature shocks and welfare costs By Donadelli, Michael; Jüppner, Marcus; Riedel, Max; Schlag, Christian
  10. Financial fairness and conditional indexation By Kleinow, Torsten; Schumacher, Hans
  11. Incertidumbre acerca de la política fiscal y ciclo económico By Martha Elena Delgado-Rojas; Hernán Rincón-Castro
  12. Directed Technological Change & Cross Country Income Differences: A Quantitative Analysis By Jerzmanowski, Michal; Tamura, Robert

  1. By: Porzio, Tommaso; Santangelo, Gabriella
    Abstract: What explains labor reallocation out of agriculture? We propose an accounting framework that leverages observable variation across birth cohorts to study the role of human capital accumulation. We model a dynamic overlapping generations economy where heterogeneous individuals choose whether to stay in or move out of agriculture, subject to mobility frictions. The model shows analytically that labor reallocation within- and across-cohorts pins down the relative role of human capital vs. sectoral prices/productivities in labor reallocation. We apply the framework to micro data from 52 countries. We document novel empirical patterns on labor reallocation by cohort and use them, through the lens of our model, to discipline the size of mobility frictions and show two results: (i) human capital explains one third of labor reallocation, on average; but (ii) it has a minor role in explaining why some countries have faster reallocation than others. Furthermore, we use years of schooling as a direct measure of human capital to validate our main approach and we exploit a large-scale school construction program in Indonesia as a natural experiment to study the effects of an exogenous increase in human capital. We show that the program led to labor reallocation out of agriculture.
    Keywords: Social and Behavioral Sciences, Human Capital, Structural Change, Agriculture, Development, Schooling
    Date: 2017–08–16
  2. By: Michael T. Kiley; John M. Roberts
    Abstract: Nominal interest rates may remain substantially below the averages of the last half-century, as central bank’s inflation objectives lie below the average level of inflation and estimates of the real interest rate likely to prevail over the long run fall notably short of the average real interest rate experienced over this period. Persistently low nominal interest rates may lead to more frequent and costly episodes at the effective lower bound (ELB) on nominal interest rates. We revisit the frequency and potential costs of such episodes in a low-interest-rate world in a dynamic-stochastic-general-equilibrium (DSGE) model and large-scale econometric model, the FRB/US model. Several conclusions emerge. First, monetary policy strategies based on traditional policy rules lead to poor economic performance when the equilibrium interest rate is low, with economic activity and inflation more volatile and systematically falling short of desirable levels. Moreover, the frequency and length of ELB episodes under such policy approaches is significantly higher than in previous studies. Second, a risk-adjustment to a simple rule in which monetary policymakers are more accommodative, on average, than prescribed by the rule ensures that inflation achieves its 2 percent objective and requires that policymakers aim at inflation near 3 percent when the ELB is not binding. Third, commitment strategies in which monetary accommodation is not removed until either inflation or economic activity overshoot their long-run objectives are very effective in both the DSGE and FRB/US model. Finally, our results suggest that the adverse effects associated with the ELB may be substantial at inflation targets near 2 percent if r* is low and monetary policy follows a traditional policy approach. Whether such adverse effects could justify a higher inflation target depends on whether monetary policy strategies substantially different from traditional approaches are feasible and an assessment of the effects of the inflation target on economic welfare.
    Keywords: Interest rates ; Model comparison ; Monetary policy
    JEL: E52 E58
    Date: 2017–08–10
  3. By: Seth G Benzell; Laurence J Kotlikoff; Guillermo LaGarda
    Abstract: The U.S., according to some measures, has one of the highest marginal effective corporate tax rates (METRs) of any developed country. Yet the tax collects less than 2 percent of GDP. This paper studies the impact of replacing the U.S. corporate tax with a Business Cash Flow Tax (BCFT). Our paper studies BCFT reform with reference to a particular, but reasonably generic, proposal, namely the House Republican “Better Way” tax plan. We use the Global Gaidar Model – a 17-region, global, overlapping-generations model, calibrated to U.N. demographic and IMF fiscal data – to simulate the dynamic, general equilibrium impact of this reform. In the short run, the U.S. capital stock, pre-tax wage rates, and GDP rise by roughly 25 percent, 8 percent, and 9 percent, respectively. Over time, the capital stock and wage rates remain significantly above their baseline values. There is a smaller long-run increase in GDP as workers spend some of their higher wages on additional leisure. The tax reform produces enough additional revenues to permit a reduction in personal income tax rates while maintaining the economy's initial debt-to-GDP ratio. The beneficiaries of the House plan are today's and tomorrow's workers. We also simulate a matching METR cut by the rest of the world, which raises the world interest rate. The short-run increases in the capital stock, pre-tax wage rates, and GDP are smaller. However, along the transition path, all U.S. agents experience slightly higher welfare than under the House plan. This reflects the combination of a higher post-corporate tax world interest rate and Americans' disproportionately large holdings of global assets
    JEL: E02 F43 H2 H6
    Date: 2017–08
  4. By: Lorenzo Caliendo; Luca David Opromolla; Fernando Parro; Alessandro Sforza
    Abstract: The economic effects from labor market integration are crucially affected by the extent to which countries are open to trade. In this paper we build a multi-country dynamic general equilibrium model with trade in goods and labor mobility across countries to study and quantify the economic effects of trade and labor market integration. In our model trade is costly and features households of different skills and nationalities facing costly forward-looking relocation decisions. We use the EU Labour Force Survey to construct migration flows by skill and nationality across 17 countries for the period 2002-2007. We then exploit the timing variation of the 2004 EU enlargement to estimate the elasticity of migration flows to labor mobility costs, and to identify the change in labor mobility costs associated to the actual change in policy. We apply our model and use these estimates, as well as the observed changes in tariffs, to quantify the effects from the EU enlargement. We find that new member state countries are the largest winners from the EU enlargement, and in particular unskilled labor. We find smaller welfare gains for EU-15 countries. However, in the absence of changes to trade policy, the EU-15 would have been worse off after the enlargement. We study even further the interaction effects between trade and migration policies and the role of different mechanisms in shaping our results. Our results highlight the importance of trade for the quantification of the welfare and migration effects from labor market integration.
    Keywords: international trade, factor mobility, market integration, EU enlargement, welfare
    JEL: F16 F22 F13 J61 R13 E24
    Date: 2017–08
  5. By: Gaurav Khanna (Center for Global Development); Nicolas Morales (University of Michigan)
    Abstract: With the majority of all H-1B visas going to Indians, we study how US immigration policy coupled with the internet boom affected both the US and Indian economies, and in particular both countries’ IT sectors. The H-1B scheme led to a tech boom in both countries, inducing substantial gains in firm productivity and consumer welfare in both the United States and India. We find that the US-born workers gained $431 million in 2010 as a result of the H-1B scheme. In India, the H-1B program induced Indians to switch to computer science (CS) occupations, increasing the CS workforce and raising overall IT output in India by 5 percent. Indian students enrolled in engineering schools to gain employment in the rapidly growing US IT industry via the H-1B visa program. Those who could not join the US workforce, due to the H-1B cap, remained in India, and along with return-migrants, enabled the growth of an Indian IT sector, which led to the outsourcing of some production to India. The migration and rise in Indian exports induced a small number of US workers to switch to non-CS occupations, with distributional impacts. Our general equilibrium model captures firm-hiring across various occupations, innovation and technology diffusion, and dynamic worker decisions to choose occupations and fields of major in both the United States and India. Supported by a rich descriptive analysis of the changes in the 1990s and 2000s, we match data moments and show that our model captures levels and trends of key variables in validation tests. We perform counter-factual exercises and find that on average, workers in each country are better off because of high-skill migration.
    Keywords: High-skill immigration, H-1B visas, India, computer scientists, IT sector
    JEL: I25 J30 J61
    Date: 2017–08–08
  6. By: Patrick Fève; Olivier Pierrard
    Abstract: In this paper, we revisit the role of regulation in a small-scale dynamic stochastic general equilibrium (DSGE) model with interacting traditional and shadow banks. We estimate the model on US data and we show that shadow banking interferes with macro-prudential policies. More precisely, asymmetric regulation causes a leak towards shadow banking which weakens the expected stabilizing effect. A counterfactual experiment shows that a regulation of the whole banking sector would have reduced investment fluctuations by 10% between 2005 and 2015. Our results therefore suggest to base regulation on the economic functions of financial institutions rather than on their legal forms.
    Keywords: Shadow Banking, DSGE models, Macro-prudential Policy
    JEL: C32 E32
    Date: 2017–07
  7. By: Kaplan, Greg; Mitman, Kurt; Violante, Giovanni L.
    Abstract: We build a model of the U.S. economy with multiple aggregate shocks (income, housing finance conditions, and beliefs about future housing demand) that generate fluctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we find that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these findings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth effect through household balance sheets. Third, we find that a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.
    Keywords: Consumption; Credit Conditions; Expectations; foreclosures; great recession; home ownership; House Prices; leverage; Long-Term Mortgages; Rental Markets
    JEL: E21 E30 E40 E51
    Date: 2017–08
  8. By: Savagar, Anthony (University of Kent); Dixon, Huw David (Cardiff Business School)
    Abstract: Slow firm entry over the business cycle causes measured TFP to vary endogenously because incumbent firms bear shocks. Our main theorem states that imperfect competition and dynamic firm entry are necessary and sufficient conditions for these endogenous productivity fluctuations. The result focuses on the short-run absence of entry and incumbents' output response given this quasi-fixity. Quantitatively we show the endogenous productivity effect is as large as a traditional capital utilization effect.
    Keywords: dynamic entry, endogenous productivity, endogenous sunk costs, business stealing, business cycle, continuous time
    JEL: E32 D21 D43 L13 C62
    Date: 2017–08
  9. By: Donadelli, Michael; Jüppner, Marcus; Riedel, Max; Schlag, Christian
    Abstract: This paper examines the welfare implications of rising temperatures. Using a standard VAR, we empirically show that a temperature shock has a sizable, negative and statistically significant impact on TFP, output, and labor productivity. We rationalize these findings within a production economy featuring long-run temperature risk. In the model, macro-aggregates drop in response to a temperature shock, consistent with the novel evidence in the data. Such adverse effects are long-lasting. Over a 50-year horizon, a one-standard deviation temperature shock lowers both cumulative output and labor productivity growth by 1.4 percentage points. Based on the model, we also show that temperature risk is associated with non-negligible welfare costs which amount to 18.4% of the agent's lifetime utility and grow exponentially with the size of the impact of temperature on TFP. Finally, we show that faster adaptation to temperature shocks results in lower welfare costs. These welfare benefits become substantially higher in the presence of permanent improvements in the speed of adaptation.
    Keywords: temperature shocks,long-run growth,asset prices,welfare costs,adaptation
    JEL: E30 G12 Q0
    Date: 2017
  10. By: Kleinow, Torsten; Schumacher, Hans (Tilburg University, School of Economics and Management)
    Abstract: Collective pension contracts can generate advantages for their participants by implementing forms of risk sharing. To ensure the continuity of a collective scheme, it has to be monitored whether the contracts offered to participants are financially fair in terms of their market value. When risk sharing is implemented by means of optionalities such as conditional indexation, the analysis of financial fairness is not straightforward. In this paper, we use a stylised overlapping generations model to study financial fairness for a conditional indexation scheme. We find that financial fairness for all participants at all times is not feasible within a scheme of this type, unless the nature of indexation is such that the scheme is reduced to DC. However, financial fairness for incoming generations at the moment of entry can be realised. We show how to compute the fair contribution rate as a function of the current nominal asset/liability ratio for a given level of nominal entitlements. At low levels of the ratio, the fair contribution for incoming generations is also relatively low; nevertheless, the joining of a new generation still has a positive effect on the asset/liability ratio.
    Date: 2016
  11. By: Martha Elena Delgado-Rojas (Banco de la República de Colombia); Hernán Rincón-Castro (Banco de la República de Colombia)
    Abstract: El estudio de los efectos de la incertidumbre sobre la actividad económica de economías avanzadas es reciente, aunque copioso, pero el de economías pequeñas es aún escaso. Este documento analiza los efectos de una perturbación inesperada y temporal de la incertidumbre acerca de la política fiscal sobre el ciclo económico de una economía pequeña (Colombia). Para cumplir este objetivo, primero, construye tasas efectivas de tributación sobre el consumo y los ingresos de los factores de producción, trabajo y capital, más un indicador de la política de gasto. Luego, introduce reglas fiscales para cada uno de los instrumentos, y modela y estima una medida de la incertidumbre fiscal. Por último, estima el impacto de perturbaciones de dicha incertidumbre sobre el ciclo económico. El modelo econométrico es un SVAR que se identifica mediante restricciones de signo, derivadas de las predicciones de un modelo DSGE neokeynesiano. La estimación se realiza por métodos bayesianos. Los resultados muestran que la incertidumbre acerca del comportamiento de los instrumentos fiscales distorsiona las decisiones de los agentes económicos y repercute de manera negativa sobre el ciclo económico. La principal implicación de política es que la autoridad fiscal debe mantener una política tributaria y de gasto estable, predecible y que responda a objetivos de largo plazo. Classification JEL: E32, E62, H3, C32, C51
    Keywords: incertidumbre, política fiscal, ciclo económico, GARCH, SVAR, métodos bayesianos.
    Date: 2017–08
  12. By: Jerzmanowski, Michal; Tamura, Robert
    Abstract: Research aimed at understanding cross-country income differences finds that inputs of human and physical capital play a limited role in explaining those differences. However, most of this work assumes workers with different education levels are perfect substitutes. Does moving away from this assumption affect our conclusions about the causes of long run development? To answer this question we construct measures of skill-specific productivity and barriers to innovation for a large sample of countries over the period 1910-2010. We use a model of endogenous directed technological change together with a new data set on output and labor force composition across countries. We find that rich countries use labor of all skill categories more efficiently, however, in the absence or barriers to entry, poor countries would actually be more efficient at using low-skill labor. Our estimates imply that after 1950 the world technology frontier expanded much faster for college-educated workers than for those with lower skill sets. This technology diffused to many countries, allowing even poorer countries to experience relatively robust growth of high-skill-specific productivity. Their GDP growth failed to reflect that because of their labor composition; they have very few workers in the higher skilled category. Finally, we investigate the relative importance of factor endowments versus barriers to technology in explaining the current disparities of standards of living and find it to depend crucially on the value of the elasticity of substitution between skill-types. Under a lower value of 1.6, our model yields barrier estimates that are lower and relatively less important in explaining cross-country income differences: in this scenario physical and human capital account almost 70% of variance in 2010 GDP per worker in our sample. Using elasticity of 2.6, we find barriers that are higher and explain most of the variation in output. We provide some evidence that the higher value of elasticity is preferred.
    Keywords: endogenous directed technology, heterogeneous labor, cross country income differences
    JEL: E1 J0 O1
    Date: 2017–08–01

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.