nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒09‒17
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Pricing sovereign debt in resource rich economies By Thomas McGregor
  2. On the Marginal Excess Burden of Taxation in an Overlapping Generations Model By Chung Tran; Sebastian Wende
  3. Long-Term Finance and Economic Development: The Role of Liquidity in Corporate Debt Markets By Julian Kozlowski
  4. The future of macroeconomics: Macro theory and models at the Bank of England By David Hendry; John Muellbauer
  5. Weather Shocks, Climate Change and Business Cycles By Gallic, Ewen; Vermandel, Gauthier
  6. Patents and Growth in OLG Economy with Physical Capital By Bharat Diwakar; Gilad Sorek; Michael Stern
  7. Does rental housing market stabilize the economy? A micro and macro perspective. By Michal Rubaszek; Margarita Rubio
  8. Firm Dynamics, Dynamic Reallocation, Variable Markups, and Productivity Behaviour By Anthony Savagar
  9. Credit Crunch and Downward Nominal Wage Rigidities By Jean-François Rouillard
  10. Government Spending and the Term Structure of Interest Rates in a DSGE Model By Ales Marsal; Lorant Kaszab; Roman Horvath
  11. Fiscal consolidation in an open economy with sovereign premia and without monetary policy independence By Philippopoulos, Apostolis; Varthalitis, Petros; Vassilatos, Vanghelis
  12. Tarnishing the Golden and Empire States: Land-Use Restrictions and the U.S. Economic Slowdown By Kyle F. Herkenhoff; Lee E. Ohanian; Edward C. Prescott
  13. Dynamic Financial Constraints: Which Frictions Matter for Corporate Policies? By Roberto Steri; Lukas Schmid; Boris Nikolov
  14. Weather and Climate Change in a Real Business Cycle Model By Marcelo Arbex; Michael Batu
  15. Wage rigidity and workers’ flows during recessions By Anete Pajuste; Hernán Ruffo
  16. Knowledge Diffusion and Trade across Countries and Sectors By Nan Li; Jie Cai; Ana Maria Santacreu
  17. Firing the Wrong Workers: Financing Constraints and Labor Misallocation By Vicente Cunat; Daniel Metzger; Andrea Caggese
  18. Effectiveness of macroprudential policies under borrower heterogeneity By Punzi, Maria Teresa; Rabitsch, Katrin
  19. The Employment and Output Effects of Short-Time Work in Germany By Russell Cooper
  20. Re-use of Collateral: Leverage, Volatility, and Welfare By Michael Grill; Karl Schmedders; Felix Kubler; Johannes Brumm
  21. A time varying parameter structural model of the UK economy By Petrova, Katerina; Kapetanios, George; Masolo, Riccardo; Waldron, Matthew
  22. Tax Evasion, Firm Dynamics and Growth By Emmanuele Bobbio
  23. Sunspot-Driven Business Cycles: An Overview By Kazuo Mino
  24. Can Learning Explain Boom-Bust Cycles in Asset Prices? An Application to the US Housing Boom By Colin Caines
  25. Extreme Events and Optimal Monetary Policy By Francisco Ruge-Murcia; Jinill Kim
  26. The Redistributive Effects of Inflation and the Shape of Money Demand By Paola Boel

  1. By: Thomas McGregor
    Abstract: This paper investigates the link between commodity price movements and risk premiums in resource-dependent,developing economies. I develop a stochastic general equilibrium model of a small open economy that receives a stream of resourc erevenues.The government sells bonds to foreign investors which it can renege on in the future, at some cost, whilst international investors form expectations on the likelihood of sovereign default. This delivers an endogenous risk premium which is inversely related to the price of oil.The model is able to explain a large proportion of the business cycle fl uctuations in interest-rate spreads in resource dependent developing economies. I then ask how specific structural features of developing economies affect the relationship between commodity prices and the optimal price of sovereig ndebt, including:a higher dependence on natural resource revenues, impatient consumers and governments,a higher degree of risk-aversion, and a lower ability to substitute consumption inter-temporally. Including them in the model significantly improves the ability of the model to explain the key macroeconomic co-movements in a resource rich, developing economy context. Model simulations reveal an interesting policy insight. An endogenous risk premium that is driven by falling oil prices, provides an additional rationale for a volatility fund in which liquidity buffers are accumulated to manage debt repayments. These buffers should be larger the stronger the link between oil prices and the domestic economy is, the more impatient policymakers are and the more willing they are to substitute current for future consumption.
    Keywords: Pricing sovereign debt, default, natural resources, BBC, volatility fund
    JEL: E13 E32 E44 F34 O11 O13 O16 H63
    Date: 2017
  2. By: Chung Tran; Sebastian Wende
    Abstract: We quantify marginal excess burden, defined as the change in deadweight loss for an additional dollar of tax revenue, for different taxes. We use a dynamic general equilibrium, overlapping generations model featured with heterogeneous agents and a realistic structure of corporate finance and taxes. Our main results, based on an economy calibrated to Australian data, indicate that company taxes are more distorting than personal income and consumption taxes. Specifically, the marginal excess burden for the company income tax is 83 cents per dollar of tax revenue raised, compared to 34 cents and 24 cents for the personal income and consumption taxes, respectively. A broader analysis of more tax instruments confrim that the relatively larger excess burden of company taxes ultimately falls on households. Importantly, the marginal excess burden is distributed unevenly across skill types, generations and ages. This highlights political challenges when obtaining popular support for raising taxes. Hence, our analysis demonstrates that marginal excess burden can be an useful tool for evaluating both eciency and distributional implications of a tax increase at the margin.
    Keywords: Taxation, scal distortion, overlapping generations, skill hetero-geneity, corporate nance, deadweight loss, dynamic general equilibrium, welfare
    JEL: E62 H21 H22 H24 H25
    Date: 2017–09
  3. By: Julian Kozlowski (New York University)
    Abstract: What are the linkages between maturity of corporate debt, liquidity of financial markets and the real economy? Firms in developing countries borrow at shorter maturities and those assets are traded in less liquid markets, relative to advance economies. To understand these facts, this paper studies how firms choose and finance investment projects in a production economy subject to an over-the-counter trading friction in financial markets and a time-to-build constraint on investment. Long-term assets rely on the possibility of being traded in secondary markets. Hence, the credit spread due to liquidity increases with the maturity of the asset, which generates an upward sloping yield curve. As a result, an improvement in market liquidity flattens the yield curve and benefits long-term borrowing. On the other hand, investment choices depend on financial costs. The time-to-build constraint implies that in order to produce a more profitable firm, an entrepreneur needs borrowing for a longer period of time. Hence, when borrowing costs at longer horizons decline, firms invest in more profitable longer-term projects. To evaluate the quantitative importance of this mechanism, I calibrate the model to match the US corporate debt market. Counterfactual exercises show that the liquidity of the secondary market can account for variations in maturity choices of 30.
    Date: 2017
  4. By: David Hendry; John Muellbauer
    Abstract: Abstract The adoption as policy models by central banks of representative agent New Keynesian dynamic stochastic general equilibrium models has been widely criticised, including for their simplistic micro-foundations. At the Bank of England, the previous generation of policy models is seen in its 1999 medium-term macro model (MTMM). Instead of improving that model to correct its considerable flaws, many shared by other non-DSGE policy models such as the Federal Reserve’s FRB/US, it was replaced in 2004 by the DSGE-based BEQM. Though this clearly failed during and after the global financial crisis, it was replaced in 2011 by the DSGE COMPASS, complemented by a ‘suite of models’. We provide a general critique of DSGE models for explaining, forecasting and policy analyses at central banks, and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory, rather than seeking to impose simplistic and unrealistic theory.
    Keywords: DSGE, central banks, macroeconomic policy models, finance and the real economy, financial crisis, consumption, credit constraints, household portfolios, asset prices
    JEL: E17 E21 E44 E51 E52 E58 G01
    Date: 2017–09–05
  5. By: Gallic, Ewen; Vermandel, Gauthier
    Abstract: How much do weather shocks matter? This paper analyzes the role of weather shocks in the generation and propagation of business cycles. We develop and estimate an original DSGE model with a weather-dependent agricultural sector. The model is estimated using Bayesian methods and quarterly data for New Zealand over the sample period 1994:Q2 to 2016:Q4. Our model suggests that weather shocks play an important role in explaining macroeconomic fluctuations over the sample period. A weather shock -- as measured by a drought index -- acts as a negative supply shock characterized by declining output and rising relative prices in the agricultural sector. Increasing the variance of weather shocks in accordance with forthcoming climate change leads to a sizable increase in the volatility of key macroeconomic variables and causes significant welfare costs up to 0.58% of permanent consumption.
    Keywords: Business Cycles; Climate Change; Weather Shocks; DSGE
    JEL: C11 C13 E32 E37 Q54
    Date: 2017–08–26
  6. By: Bharat Diwakar; Gilad Sorek; Michael Stern
    Abstract: We study the implications of patents in an overlapping-generations model with horizontal innovation of differentiated physical capital. We show that within this demographic structure of finitely lived agents, weakening patent protection generates two contradicting effects on innovation and growth. Weakening patent protection lowers the (average) price of patented machines, thereby increasing machine utilization, output, aggregate saving, and investment. However, a higher demand for machines shifts investment away from the R&D activity aimed at inventing new machine varieties, toward the formation of physical capital. The growth maximizing level of patent protection is incomplete and we show that shortening patent length is more effective than loosening patent breadth in spurring growth. Shorter patent length has an additional positive effect on growth by decreasing investment in old patents. Finally, we show that the welfare implications of shortening patent breadth depend on consumer time preference and the degree of machine specialization.
    Keywords: IPR, Patents, Physical Capital, Growth, OLG
    Date: 2017–09
  7. By: Michal Rubaszek; Margarita Rubio
    Abstract: The size of the rental housing market in most countries around the globe is low. In this article we claim that this may be detrimental for macroeconomic stability. Toward this aim we, determine the reasons behind rental market underdevelopment by conducting an original survey among a representative group of 1005 Poles, a country that is characterized by high homeownership ratio. We find that households' preferences are strongly influenced by economic and psychological factors. Next, we propose a DSGE model in which households satisfy housing needs both by owning and renting. We use it to show that reforms enhancing the rental housing market contribute to macroeconomic stability. This micro-macro approach allows us to dig into the causes of rental market underdevelopment and design appropriate policy recommendations.
    Keywords: Rental housing market; survey data; DSGE model
    Date: 2017
  8. By: Anthony Savagar
    Abstract: I analyze two opposing effects of firm dynamics on productivity over the business cycle. Consider net exit, on the one hand it reallocates resources to incumbents whose productivity improves through scale economies, on the other hand it reduces the competitive pressure incumbents face which depresses productivity. Contrarily net entry strengthens competition, thus increasing productivity, but worsens incumbents' scale economies, thus decreasing productivity. I outline a theory that focuses on two industrial features (1) slow firm entry/exit and (2) firm pricing that depends on the number of competitors. In this environment a negative shock strikes incumbents due to slow exit responses. This weakens their scale thus worsening productivity but the effect recedes as exit occurs which reallocates resources to incumbents. However, the remaining firms face fewer competitors and thus charge higher markups which damages productivity. I analyze this trade-off between productivity improving resource reallocation and productivity degrading market power, by developing a continuous time, analytically tractable DGE model of endogenous firm entry/exit and endogenous markups.
    Keywords: Endogenous markups; Entry; Endogenous Productivity; Imperfect product markets; dynamical systems
    JEL: E32 D21 D43 L13 C62
    Date: 2017–08
  9. By: Jean-François Rouillard (Département d'économique, Université de Sherbrooke)
    Abstract: Through the lens of a dynamic model that features financial frictions and downward nominal wage rigidities (DNWR), I simulate a credit crunch similar to the one experienced by the US during the 2007-09 recession. Since the constraint on nominal wage infl ation binds, this induces important cutbacks in hours worked. For a 2% infl ation- target regime, the minimal deviation of hours worked is 2.72 greater with DNWR than with flexible wages. Total losses in hours worked are also 43% lower when the infl ation target is elevated from 2% to 4%. Moreover, the model can account for a large part of the upward shift in the labor wedge that occurred during the recession. This result arises because the marginal rate of substitution of consumption for leisure signi cantly deviates from real wages with DNWR.
    Keywords: borrowing constraints, monetary policy, in flation target, labor wedge.
    JEL: E24 E32 E44 E52
    Date: 2017–09
  10. By: Ales Marsal (National Bank of Slovakia); Lorant Kaszab (Central Bank of Hungary); Roman Horvath (Charles University)
    Abstract: We explore asset pricing implications of productive, wasteful and utility enhancing government expenditures in a New Keynesian macro-finance model with Epstein-Zin preferences. We decompose the pricing kernel into four underlying macroeconomic factors (consumption growth, inflation, time preference shocks, long run risks for consumption and leisure) and design novel method to quantify the contribution of each factor to bond prices. Our methodology extends the performance attribution analysis typically used in finance literature on portfolio analysis. Using this framework, we show that bonds can serve as an insurance vehicle against the fluctuations in investors wealth induced by government spending. Increase in uncertainty surrounding government spending rises the demand for bonds leading to decrease in yields over the whole maturity profile. Bonds insure investors by i) providing buffer against bad times, ii) hedging inflation risk and iii) hedging real risks by putting current consumption gains against future losses. In a special case where the central bank does not respond to changes in output bonds leverage inflation risk. Spending reversals strongly reduce the sensitivity of bond prices to changes in government spending.
    Keywords: Macro-finance, New Keynesian model, Government expenditures, Bond prices
    JEL: C12 C22 C52
    Date: 2017–09
  11. By: Philippopoulos, Apostolis; Varthalitis, Petros; Vassilatos, Vanghelis
    Abstract: We welfare rank various tax-spending-debt policies in a New Keynesian model of a small open economy featuring sovereign interest-rate premia and loss of monetary policy independence. When we compute optimized state-contingent policy rules, our results are: (a) Debt consolidation comes at a short-term pain but the medium- and long-term gains can be substantial. (b) In the early phase of pain, the best fiscal policy mix is to cut public consumption spending to address the debt problem, and, at the same time, to cut income tax rates to mitigate the recessionary effects of debt consolidation. (c) In the long run, the best way of using the fiscal space created is to reduce capital taxes.
    Keywords: Feedback policy, New Keynesian, Sovereign premia, Debt consolidation
    JEL: E6 F3 H6
    Date: 2016
  12. By: Kyle F. Herkenhoff; Lee E. Ohanian; Edward C. Prescott
    Abstract: This paper studies the impact of state-level land-use restrictions on U.S. economic activity, focusing on how these restrictions have depressed macroeconomic activity since 2000. We use a variety of state-level data sources, together with a general equilibrium spatial model of the United States to systematically construct a panel dataset of state-level land-use restrictions between 1950 and 2014. We show that these restrictions have generally tightened over time, particularly in California and New York. We use the model to analyze how these restrictions affect economic activity and the allocation of workers and capital across states. Counterfactual experiments show that deregulating existing urban land from 2014 regulation levels back to 1980 levels would have increased US GDP and productivity roughly to their current trend levels. California, New York, and the Mid-Atlantic region expand the most in these counterfactuals, drawing population out of the South and the Rustbelt. General equilibrium effects, particularly the reallocation of capital across states, accounts for much of these gains.
    JEL: E24 E3 E6 R11 R12
    Date: 2017–09
  13. By: Roberto Steri (University of Lausanne - Swiss Finance Institute); Lukas Schmid (Duke University); Boris Nikolov (University of Lausanne and Swiss Finance Institute)
    Abstract: We build, solve, and estimate a range of dynamic models of corporate investment and financing. We focus on limited enforcement, moral hazard, and tradeoff models. All models share a common technology structure, but differ in the friction generating financial constraints. Using panel data on Compustat firms for the period 1980-2015 and a more recent dataset on private firms from Orbis, we determine which features of the observed data allow to distinguish among the models, and we assess which model performs best at rationalizing observed corporate investment and financing policies across various samples. Our tests, based on empirical policy function benchmarks, favor limited commitment models for larger compustat firms, and moral hazard models for private firms.
    Date: 2017
  14. By: Marcelo Arbex (Department of Economics, University of Windsor); Michael Batu (Department of Economics, University of Windsor)
    Abstract: We introduce temperature shocks and environmental preferences in a real business cycle model with natural resources. Our findings suggest that permanent and temporary weather shocks propagation and their welfare implications depend crucially on whether agents exhibit environmental preferences.
    Keywords: Business Cycles; Temperature Shocks; Climate Change.
    JEL: E32 Q54
    Date: 2017–09
  15. By: Anete Pajuste (Stockholm School of Economics in Riga (SSE Riga)); Hernán Ruffo (UTDT)
    Abstract: Wage rigidity generates higher unemployment volatility in matching mod- els. By comparing the wage dynamics and workers’ mobility during the period 2004-11 in Spain and Latvia we provide empirical evidence to this effect. We find that wages in Spain were rigid even during periods of ris- ing and high unemployment. In contrast, Latvian wages were reduced by about 10 percent and wage cuts affected 60 percent of jobs. At the same time, the elasticity of finding and separation rates to productivity shocks was four times higher in Spain than in Latvia, and that these responses were more persistent in Spain. We use finding and separation conditions from a matching model to show that these empirical results are in line with what a model would predict. We also emphasize that separations are very responsive to shocks, more so in a rigid-wage economy, a fact that has not been highlighted in theoretical literature.
    Date: 2017–04
  16. By: Nan Li (International Monetary Fund); Jie Cai (Shanghai University of Finance and Economics); Ana Maria Santacreu (St. Louis Fed)
    Abstract: Countries and sectors interact through knowledge spillovers and international trade flows. These interactions drive differences in income per capita and innovation not only across countries, but also across sectors within a country. We develop and quantify a model of innovation, knowledge diffusion and trade that can explain these differences. Using data on intersectoral patent citations, R&D expenditures and international trade flows, we calibrate the model and perform several counterfactual exercises. Decreases in trade costs or increases in the speed of diffusion reallocate resources across countries and sectors, generating a distributional effect on aggregate innovation and growth.
    Date: 2017
  17. By: Vicente Cunat (London School of Economics); Daniel Metzger (Stockholm School of Economics); Andrea Caggese (Pompeu Fabra University)
    Abstract: This paper studies the effect of firms’ financing constraints on the decision of which workers to fire. Firms need to consider wages, current and expected productivity as well as firing and hiring costs when firing a worker. Financing constraints distort this inter-temporal trade-off leading firms to sub-optimal firing decisions. In particular, financially constrained firms may fire the wrong type of workers (e.g., workers with steeper productivity profiles or lower firing costs) relative to unconstrained firms. We provide empirical evidence of this distortion using matched employer-employee data from the Swedish population between 1990 and 2010. Financing constraints are identified using a regression discontinuity approach on the determination of a public discrete credit rating and a within firm-year estimator. Negative firm shocks are identified from firm-specific trade patterns and exchange rate fluctuations. Our empirical results reveal an important new misallocation effect of financial frictions that operates within firms across different types of workers.
    Date: 2017
  18. By: Punzi, Maria Teresa; Rabitsch, Katrin
    Abstract: We study the impact of macroprudential policies using a novel model which takes into account households´ ability to borrow under different loan-to-value ratios which are tied to their collateral values. Such model generates a larger amplification in real and financial variables, compared to standard models that assume homogeneity in the leveraging and deleveraging process. Conditional on this model, we consider the implications of macroprudential policies that aim to lean against an excessive credit cycle. In particular, we allow macroprudential authorities to tighten excessive lending to higher leveraged households, whose riskiness had been evaluated too optimistically. We find thata policy that targets only the group of households that most strongly deleveraged after an adverse idiosyncratic housing investment risk shock, is welfare-improving at social and individual levels, relative to a macroprudential policy which targets all households in the economy.
    Keywords: Endogenous Loan-to-Value ratio, Heterogeneity, Macroprudential Policy
    Date: 2017–09
  19. By: Russell Cooper (Penn State University)
    Abstract: We study the employment and output effects of the short-time work (STW) policy in Ger- many between 2009 and 2010. This intervention facilitated reductions in hours worked per employee with the goal of preventing layoffs. Using confidential German micro-level data we estimate a search model with heterogeneous multi-worker firms. Our findings suggest that STW can prevent increases in unemployment during a recession. However, the policy leads to a decrease in the allocative efficiency of the labor market, resulting in significant output losses.
    Date: 2017
  20. By: Michael Grill (European Central Bank); Karl Schmedders (University of Zurich); Felix Kubler (University of Zurich); Johannes Brumm (University of Zurich)
    Abstract: We assess the quantitative implications of the re-use of collateral on financial market leverage, volatility, and welfare within an infinite-horizon asset-pricing model with heterogeneous agents. In our model, the ability of agents to re-use frees up collateral that can be used to back more transactions. Re-use thus contributes to the build-up of leverage and significantly increases volatility in financial markets. When introducing limits on re-use, we find that volatility is strictly decreasing as these limits become tighter, yet the impact on welfare is non-monotone. In the model, allowing for some re-use can improve welfare as it enables agents to share risk more effectively. Allowing re-use beyond intermediate levels, however, can lead to excessive leverage and lower welfare. So the analysis in this paper provides a rationale for limiting, yet not banning, re-use in financial markets.
    Date: 2017
  21. By: Petrova, Katerina (University of St Andrews); Kapetanios, George (School of Management and Business, Kings College, London); Masolo, Riccardo (Bank of England); Waldron, Matthew (Bank of England)
    Abstract: e estimate a time varying parameter structural macroeconomic model of the UK economy, using a Bayesian local likelihood methodology. This enables us to estimate a large open-economy DSGE model over a sample that comprises several different regimes and an incomplete set of data. Our estimation identifies a gradual shift to a monetary policy regime characterised by a marked increase in the responsiveness of monetary policy to inflation alongside a decrease in the level of trend inflation down to the 2% target level. The time varying model also performs remarkably well in forecasting and delivers statistically significant accuracy improvements for most variables and horizons in both point and density forecast performance compared to the standard fixed parameter version.
    Keywords: DSGE models; Bayesian methods; local likelihood; time varying parameters; forecasting
    JEL: C11 C53 E27
    Date: 2017–09–08
  22. By: Emmanuele Bobbio (Bank of Italy)
    Abstract: Italy's growth performance has been lacklustre in the last two decades. The economy has low R&D intensity; firms are smaller and less likely to grow or exit than firms in other advanced countries; the shadow economy is large. I show how these features arise simultaneously in a Schumpeterian growth model with heterogeneous firms where the tax auditing probability increases with firm size. Tax evasion confers a cost advantage over competitors. In equilibrium, small firms invest less in innovation because growing entails a (shadow) cost of fiscal regularization. Unfair competition forces other firms to lower the mark-up they charge for their new products, reducing the incentive to innovate. Market selection is hampered, further lowering the aggregate growth rate along the extensive margin. I calibrate the model on Italian firm-level data for the period 1995-2006 and find that enforcing taxes would have increased the long-run growth rate from 0.9% to 1.1%. The market share of high type firms would have been 8 percentage points higher and average firm size 25% higher. Also, I find that lowering the tax burden can have a significant impact on growth when the shadow economy is large, while the effect is negligible when taxes are enforced.
    Date: 2017
  23. By: Kazuo Mino (Faculty of Economics, Doshisha University)
    Abstract: This paper reviews the real the real business cycle models that display equilibrium indeterminacy. We first summarize the main fi ndings in the seminal contributions by Benhabib and Farmer (1994) and Farmer and Guo (1994). We then discuss the relevant extinctions of the baseline model explored in the last two decades. We also refer to the recent development in the fi eld after the global financial crisis of 2007-2008.
    Keywords: equilibrium indeterminacy, business cycles, sunspots, extrinsic uncertainty
    JEL: E21 E32 O41
    Date: 2017–06
  24. By: Colin Caines (Federal Reserve Board)
    Abstract: Explaining asset price booms poses a difficult question for researchers in macroeconomics: how can large and persistent price growth be explained in the absence large and persistent variation in fundamentals? This paper argues that boom-bust behavior in asset prices can be explained by a model in which boundedly-rational agents learn the process for prices. The key feature of the model is that learning operates in both the demand for assets and the supply of credit. Interactions between agents on either side of the market create complementarities in their respective beliefs, providing an additional source of propagation. In contrast, the paper shows why learning involving only one side on the market, which has been the focus of most of the literature, cannot plausibly explain persistent and large price booms. Quantitatively, the model explains recent experiences in US housing markets. A single unanticipated mortgage rate drop generates 20 quarters of price growth whilst capturing the full appreciation in US house prices in the early 2000s. The model is able to generate endogenous liberalizations in household lending conditions during price booms, consistent with US data, and replicates key volatilities of housing market variables at business cycle frequencies.
    Date: 2017
  25. By: Francisco Ruge-Murcia (McGill University); Jinill Kim (Korea University)
    Abstract: This paper studies the positive and normative implication of extreme shocks for monetary policy. The analysis is based on a small-scale New Keynesian model with sticky prices and wages where shocks are drawn from asymmetric generalized extreme value (GEV) distributions. A nonlinear perturbation of the model is estimated by the simulated method of moments. Under both the Taylor and Ramsey policies, the central bank responds non-linearly and asymmetrically to shocks. The trade-off between targeting a gross inflation rate above $1$ as insurance against extreme shocks, and strict price stability is unambiguously solved in favour of the latter.
    Date: 2017
  26. By: Paola Boel
    Abstract: I quantify the redistributive effects of expected inflation in a sample of OECD countries using a microfounded model of money where agents differ in their consumption risk. The model is calibrated using harmonized wealth microdata from the Luxembourg Wealth Study. I find that inflation acts as a regressive tax in all countries considered. The magnitude of inflation’s redistributive impact, however, depends not only on wealth distribution but also, and importantly, on the shape of the money demand curve. A higher and less elastic money demand leads to more regressive effects of inflation, thus implying such effects are not necessarily stronger in a country with a more unequal wealth distribution.
    Keywords: Money,Heterogeneity,Calibration,Welfare Cost of Inflation
    JEL: E4 E5
    Date: 2017–07

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