nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒09‒10
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Firms' Choices of Wage-Setting Protocols in the Presence of Minimum Wages By Christopher Flinn; James Mabli; Joseph Mullins
  2. Asymmetric Unemployment Fluctuations and Monetary Policy Trade-offs By Antoine Lepetit
  3. Employment, Wages and Optimal Monetary Policy By Martin Bodenstein; Junzhu Zhao
  4. Modelling a complex world: Improving macro-models By Warwick J. McKibbin; Andrew Stoeckel
  5. Monetary-Fiscal Interactions and the Euro Area's Malaise By Marek Jarociński; Bartosz Maćkowiak
  6. Tractable likelihood-based estimation of non- linear DSGE models By Robert Kollmann
  7. A Note on Risk Sharing versus Instability in International Financial Integration: When Obstfeld Meets Stiglitz By Raouf Boucekkine; Benteng Zou
  8. Public-infraestructure and energy-subsidy policies, energy access by the poor and long-term macroeconomic performance By Kawamura, Enrique
  9. Global banking and the conduct of macroprudential policy in a monetary union By Jean-Christophe Poutineau; Gauthier Vermandel
  10. Optimal Population Growth as an Endogenous Discounting Problem: The Ramsey Case By Raouf Boucekkine; Blanca Martínez; José Ramón Ruiz-Tamarit
  11. Price Rigidities and the Granular Origins of Aggregate Fluctuations By Ernesto Pasten; Raphael Schoenle; Michael Weber
  12. Household Labour Supply and the Marriage Market in the UK, 1991-2008 By Marion Goussé; Nicolas Jacquemet; Jean-Marc Robin
  13. The puzzle of older workers' employment: Distance to retirement and health effects By Bérangère Legendre; Mareva Sabatier
  14. A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables By Chatelain, Jean-Bernard; Ralf, Kirsten

  1. By: Christopher Flinn (New York University); James Mabli (Mathematica Policy Research); Joseph Mullins (University of Western Ontario)
    Abstract: We study the formation of wages in a frictional search market where firms can choose either to bargain with workers or post non-negotiable wage offers. Workers can secure wage increases for themselves by engaging in on-the-job search and either moving to firms that offer higher wages or, when possible, leveraging an outside offer into a higher wage at the current firm. We characterize the optimal wage posting strategy of non-negotiating firms and how this decision is influenced by the presence of renegotiating firms. We quantitatively examine the model's unique implications for efficiency, wage dispersion, and worker welfare by estimating it using data on the wages and employment spells of low-skill workers in the United States. In the estimated steady state of the model, we find that more than 10% of job acceptance decisions made while on the job are socially sub-optimal. We also find that, relative to a benchmark case without renegotiation, the presence of even a small number of these firms increases the wage dispersion attributable to search frictions, deflates wages, and reduces worker welfare. Moving to a general equilibrium setting, we use the estimated model to study the impact of a minimum wage increase on firm bargaining strategies and worker outcomes. Our key finding is that binding minimum wages lead to an increase in the equilibrium fraction of renegotiating firms which, relative to a counterfactual in which this fraction is fixed, significantly dampens the reduction in wage dispersion and gains in worker welfare that can typically be achieved with moderate minimum wage increases. Indeed, the presence of endogenous bargaining strategies reverses the sign of the average welfare effect of a $15 minimum wage from positive to negative.
    Keywords: wage posting, wage bargaining, minimum wage, worker mobility
    JEL: J31 J63 J68
    Date: 2017–09
  2. By: Antoine Lepetit (Banque de France - Banque de France - Banque de France)
    Abstract: I show that a trade-off between inflation volatility and average unemployment arises in a New Keynesian model with search and matching frictions in the labor market. In this environment, unemployment rises more and faster in a recession than it decreases in an expansion. A strong focus on inflation stabilization in response to technology shocks comes at the cost of larger labor market volatility. Because unemployment fluctuations are asymmetric, it also results in higher average unemployment. The optimal policy responds strongly to both inflation and employment and stabilizes labor market fluctuations. Adopting this policy rather than a policy of price stability yields sizeable welfare gains. These gains are mostly accounted for by the increase in average employment relative to the price stability case.
    Keywords: Optimal monetary policy,Unemployment fluctuations,Matching frictions
    Date: 2016–04
  3. By: Martin Bodenstein; Junzhu Zhao
    Abstract: We study optimal monetary policy when the empirical evidence leaves the policymaker uncertain whether the true data-generating process is given by a model with sticky wages or a model with search and matching frictions in the labor market. Unless the policymaker is almost certain about the search and matching model being the correct data-generating process, the policymaker chooses to stabilize wage inflation at the expense of price inflation, a policy resembling the policy that is optimal in the sticky wage model, regardless of the true model. This finding reflects the greater sensitivity of welfare losses to deviations from the model-specific optimal policy in the sticky wage model. Thus, uncertainty about important aspects of the structure of the economy does not necessarily translate into uncertainty about the features of good monetary policy.
    Keywords: Model uncertainty ; Optimal monetary policy ; Optimal targeting rules ; Search and matching ; Sticky wages
    JEL: E52
    Date: 2017–08–29
  4. By: Warwick J. McKibbin; Andrew Stoeckel
    Abstract: Macro models have come under criticism for their ability to understand or predict major economic events such as the global financial crisis and its aftermath. Some of that criticism is warranted; but, in our view, much is not. This paper contributes to the debate over the adequacy of benchmark DSGE models by showing how three extensions, which are features that have characterized the global economy since the early 2000s, are necessary to improve our understanding of global shocks and policy insights. The three extensions are to acknowledge and model the entire global economy and the linkage through trade and capital flows; to allow for a wider range of relative price variability by moving to multiple sector models rather than a single good model; and to allow for changes in risk perceptions which propagate through financial markets and adjustments in the real economy. These extensions add some complexity to large scale macromodels, but without them policy models can oversimplify things, allowing misinterpretations of shocks and therefore costly policy mistakes to occur. Using oversimplified models to explain a complex world makes it more likely there will be “puzzles”. The usefulness of these extensions is demonstrated in two ways; first, by briefly revisiting some historical shocks to show how outcomes can be interpreted that make sense within a more complex DSGE framework; then, by making a contemporary assessment of the implications from the proposed large fiscal stimulus and the bans on immigration by the Trump administration which have both sectoral and macroeconomic implications that interact.
    Keywords: Macroeconomics; Models; Risk, Relative Prices, Sectors, DSGE
    JEL: C02 C5 C68 D58 D9 E17 E62 F4
    Date: 2017–08
  5. By: Marek Jarociński; Bartosz Maćkowiak
    Abstract: When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB's objective.
    JEL: E31 E32 E63
    Date: 2017–08
  6. By: Robert Kollmann
    Abstract: This paper presents a simple and fast maximum likelihood estimation method for nonlinear DSGE models that are solved using a second- (or higher-) order accurate approximation. The method requires that the number of observables equals the number of exogenous shocks. Exogenous innovations are extracted recursively by inverting the observation equation, which allows easy computation of the likelihood function.
    Keywords: Estimation of non-linear DSGE models, observation equation inversion
    JEL: C51 C63 C68 E37
    Date: 2017–09
  7. By: Raouf Boucekkine (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique - ECM - Ecole Centrale de Marseille, IMéRA - Institute for Advanced Studies - Aix-Marseille University); Benteng Zou (CREA - Center for Research in Economic Analysis - - Université du Luxembourg)
    Abstract: International risk sharing is one of the main arguments in favor of financial liberalization. The pure risk sharing mechanism highlighted by Obstfeld (1994) implies that liberalization is growth enhancing for all countries as it allows the world portfolio to shift from safe low-yield capital to riskier high yield capital. This result is obtained under the assumption that the volatility figures for risky assets prevailing under autarky are not altered after liberalization. This note relaxes this assumption within the standard two-country model with intertemporal portfolio choices, formally incorporating the instability effect invoked by Stiglitz (2000). We show that putting together the pure risk sharing and instability effects in the latter set-up enriches the analysis and delivers predictions more consistent with the contrasted related empirical literature.
    Keywords: optimal growth,financial liberalization,risk sharing,volatility
    Date: 2017–08
  8. 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
  9. By: Jean-Christophe Poutineau (CREM - Centre de Recherche en Economie et Management - UNICAEN - Université Caen Normandie - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: This paper questions the role of cross-border lending in the definition of national macroprudential policies in the European Monetary Union. We build and estimate a two-country DSGE model with corporate and interbank cross-border loans, Core-Periphery diverging financial cycles and a national implementation of coordinated macroprudential measures based on Countercyclical Capital Buffers. We get three main results. First, targeting a national credit-to-GDP ratio should be favored to federal averages as this rule induces better stabilizing performances in front of important divergences in credit cycles between core and peripheral countries. Second, policies reacting to the evolution of national credit supply should be favored as the transmission channel of macroprudential policy directly impacts the marginal cost of loan production and, by so, financial intermediaries. Third, the interest of lifting up macroprudential policymaking to the supra-national level remains questionable for admissible value of international lending between Eurozone countries. Indeed, national capital buffers reacting to the union-wide loan-to-GDP ratio only lead to the same stabilization results than the one obtained under the national reaction if cross-border lending reaches 45%. However, even if cross-border linkages are high enough to justify the implementation of a federal adjusted solution, the reaction to national lending conditions remains remarkably optimal.
    Keywords: Macroprudential policy, Global banking, International business cycles, Euro area
    Date: 2017
  10. By: Raouf Boucekkine (IMéRA - Institute for Advanced Studies - Aix-Marseille University, GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique - ECM - Ecole Centrale de Marseille); Blanca Martínez (Department of Economics, Universidad Complutense de Madrid, ICAE - Instituto Complutense de Analisis Economico); José Ramón Ruiz-Tamarit (Department of Economic Analysis, Universitat de Valencia - Universitat de València, IRES Department of Economics, Université Catholique de Louvain)
    Abstract: This paper revisits the optimal population size problem in a continuous time Ramsey setting with costly child rearing and both intergenerational and intertemporal altruism. The social welfare functions considered range from the Millian to the Benthamite. When population growth is endogenized, the associated optimal control problem involves an endogenous effective discount rate depending on past and current population growth rates, which makes preferences intertemporally dependent. We tackle this problem by using an appropriate maximum principle. Then we study the stationary solutions (balanced growth paths) and show the existence of two admissible solutions except in the Millian case. We prove that only one is optimal. Comparative statics and transitional dynamics are numerically derived in the general case.
    Keywords: optimal population size,population ethics,optimal growth,endogenous discounting,optimal demographic transitions
    Date: 2017–08
  11. By: Ernesto Pasten; Raphael Schoenle; Michael Weber
    Abstract: We study the aggregate implications of sectoral shocks in a multi-sector New Keynesian model featuring sectoral heterogeneity in price stickiness, sector size, and input-output linkages. We calibrate a 341 sector version of the model to the United States. Both theoretically and empirically, sectoral heterogeneity in price rigidity (i) generates sizable GDP volatility from sectoral shocks, (ii) amplifies both the "granular" and the "network" effects, (iii) alters the identity and relative contributions of the most important sectors for aggregate fluctuations, (iv) can change the sign of fluctuations, (v) invalidates the Hulten Theorem, and (vi) generates a frictional origin of aggregate fluctuations.
    JEL: E31 E32 O40
    Date: 2017–08
  12. By: Marion Goussé (Département d'Economique, Université Laval - Université Laval); Nicolas Jacquemet (PSE - Paris School of Economics); Jean-Marc Robin (ECON - Département d'économie - Sciences Po)
    Abstract: We document changes in labour supply, wage and education by gender and marital status using the British Household Panel Survey, 1991-2008, and seek to disentangle the main channels behind these changes. To this end, we use a version of Goussé, Jacquemet, and Robin (2016)'s search-matching model of the marriage market with labour supply, which does not use information on home production time inputs. We derive conditions under which the model is identified. We estimate different parameters for each year. This allows us to quantify how much of the changes in labour supply, wage and education by gender and marital status depends on changes in the preferences for leisure of men and women and how much depends on changes in homophily.
    Keywords: structural estimation, collective labour supply, assortative matching, sorting,Search-matching
    Date: 2017–06–01
  13. By: Bérangère Legendre (IREGE - Institut de Recherche en Gestion et en Economie - USMB [Université de Savoie] [Université de Chambéry] - Université Savoie Mont Blanc); Mareva Sabatier (IREGE - Institut de Recherche en Gestion et en Economie - USMB [Université de Savoie] [Université de Chambéry] - Université Savoie Mont Blanc)
    Abstract: This article investigates the extent to which the distance to retirement affects low employment rates among European older workers, taking into account a key but often neglected determinant: health status. To begin, the study amends McCall's job search model, in which the job search behavior is treated as age dependent. Agents are heterogeneous according to two attributes: distance to retirement and health. This model leads to clear predictions, such that the closer the retirement, the greater the reservation wage and the lower people's search effort. Older workers also exhibit lower exit rates from unemployment , an effect that gets enhanced by health problems. This empirical work, based on a French survey, confirms the existence of a distance effect but also puts the greater impact of health status into perspective. The distance effect explains only part of the puzzle of older workers' employment.
    Keywords: distance to retirement,older workers' employment,health
    Date: 2017
  14. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: This algorithm extends Ljungqvist and Sargent (2012) algorithm of Stackelberg dynamic game to the case of dynamic stochastic general equilibrium models including exogenous forcing variables. It is based Anderson, Hansen, McGrattan, Sargent (1996) discounted augmented linear quadratic regulator. It adds an intermediate step in solving a Sylvester equation. Forward-looking variables are also optimally anchored on forcing variables. This simple algorithm calls for already programmed routines for Ricatti, Sylvester and Inverse matrix in Matlab and Scilab. A final step using a change of basis vector computes a vector auto regressive representation including Ramsey optimal policy rule function of lagged observable variables, when the exogenous forcing variables are not observable.
    Keywords: Stackelberg dynamic game,Ramsey optimal policy,Augmented linear quadratic regulator,Algorithm
    JEL: C61 C62 E47 E52 E58
    Date: 2017

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